-----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, QBIT5EXy65juAOyo7qsOuln9X/Ypl2pYu4Jd9S+8uEHoXwd9wvUllcSp64pcx36a Zn9arssVHKnNraukBCBN4w== 0001038222-02-000002.txt : 20020415 0001038222-02-000002.hdr.sgml : 20020415 ACCESSION NUMBER: 0001038222-02-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLSFORD REAL PROPERTIES INC CENTRAL INDEX KEY: 0001038222 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133926898 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12917 FILM NUMBER: 02582427 BUSINESS ADDRESS: STREET 1: 535 MADISON AVENUE STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128383400 MAIL ADDRESS: STREET 1: 535 MADISON AVENUE STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 main-10k_123101.txt FORM 10-K 12/31/2001 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 - -------------------------------------------------------------------------------- FORM 10-K - -------------------------------------------------------------------------------- |X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 001-12917 --------- WELLSFORD REAL PROPERTIES, INC. ------------------------------- (Exact name of registrant as specified in its charter) MARYLAND 13-3926898 -------- ---------- (State of organization) (I.R.S. employer identification number) 535 MADISON AVENUE, NEW YORK, NY 10022 -------------------------------- ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (212) 838-3400 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- Common Stock American Stock Exchange $.02 par value SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None ---- 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 and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $134,300,000 based on the closing price on the American Stock Exchange for such shares on March 13, 2002. THE NUMBER OF THE REGISTRANT'S SHARES OF COMMON STOCK OUTSTANDING WAS 6,409,281 AS OF MARCH 13, 2002 (INCLUDING 169,903 SHARES OF CLASS A-1 COMMON STOCK). DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement for the Annual Shareholders' Meeting to be held on May 28, 2002 are incorporated by reference into Part III. 1 - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- FORM 10-K ITEM REPORT NO. PAGE --- ---- PART I 1. Business................................................................3 2. Properties.............................................................16 3. Legal Proceedings......................................................20 4. Submission of Matters to a Vote of Security Holders....................20 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters..21 6. Selected Consolidated Financial Data...................................22 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................23 7a. Quantitative and Qualitative Disclosures about Market Risk.............36 8. Consolidated Financial Statements and Supplementary Data...............37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................37 PART III 10. Directors and Executive Officers of the Registrant.....................38 11. Executive Compensation.................................................38 12. Security Ownership of Certain Beneficial Owners and Management.........38 13. Certain Relationships and Related Transactions.........................38 PART IV 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K........39 FINANCIAL STATEMENTS 14a. Consolidated Balance Sheets as of December 31, 2001 and 2000..........F-4 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999...............................F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999...................F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999...............................F-7 Notes to Consolidated Financial Statements............................F-8 Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes..........................................F-48 FINANCIAL STATEMENT SCHEDULES III. Real Estate and Accumulated Depreciation..............................S-1 IV. Mortgage Loans on Real Estate.........................................S-3 All other schedules have been omitted because the required information for such other schedules is not present, is not present in amounts sufficient to require submission of the schedule or is included in the consolidated financial statements. 2 PART I ITEM 1. BUSINESS Wellsford Real Properties, Inc. and subsidiaries, (collectively, the "Company") was formed as a Maryland corporation on January 8, 1997, as a corporate subsidiary of Wellsford Residential Property Trust (the "Trust"). On May 30, 1997, the Trust merged (the "Merger") with Equity Residential Properties Trust ("EQR"). Immediately prior to the Merger, the Trust contributed certain of its assets to the Company and the Company assumed certain liabilities of the Trust. Immediately after the contribution of assets to the Company and immediately prior to the Merger, the Trust distributed to its common shareholders all of the outstanding shares of the Company owned by the Trust (the "Spin-off"). On June 2, 1997, the Company sold 6,000,000 shares of its common stock in a private placement (the "Private Placement") to a group of institutional investors at $20.60 per share, the Company's then book value per share. The Company is a real estate merchant banking firm headquartered in New York City which acquires, develops, finances and operates real properties and organizes and invests in private and public real estate companies. The Company's operations are organized into three Strategic Business Units ("SBUs") within which it executes its business plan. The portfolio of investments held in each SBU at December 31, 2001 includes: Commercial Property Operations--Wellsford/Whitehall Group, L.L.C. A 32.58% interest in a private joint venture that owned and operated 35 properties (primarily office properties) totaling approximately 3,905,000 square feet (including approximately 598,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland. Debt and Equity Activities--Wellsford Capital o Approximately $34,785,000 of direct debt investments which bore interest at an average yield of 11.38% during 2001 and had an average remaining term to maturity of 4.3 years; o Approximately $31,233,000 in companies which were organized to invest in debt instruments including $27,803,000 in Second Holding Company, L.L.C., a company which was organized to purchase investment and non-investment grade rated real estate debt instruments and investment grade rated other asset-backed securities; o Venture capital investments of approximately $6,784,000 in a real estate information and database company and another real estate-related venture; and o Two commercial properties totaling approximately 175,000 square feet located in Salem, New Hampshire and Philadelphia, Pennsylvania. Property Development and Land Operations--Wellsford Development An 85.85% interest as managing owner in Palomino Park, a five phase, 1,800 unit multifamily residential development in Highlands Ranch, a south suburb of Denver, Colorado. Two phases containing 760 units are completed and operational. The 264 unit third phase is being converted into condominiums. The Company has sold 105 units as of December 31, 2001 and 136 of the unsold units are available for rent and included in operations until the sales inventory needs to be replenished. The 424 unit fourth phase is in lease-up. The land for the remaining approximate 352 unit fifth phase is being prepared for sale or possible future development. See the accompanying consolidated financial statements for certain financial information regarding the Company's industry segments. As announced in December 2001, Rodney Du Bois, the Company's Vice Chairman, retired on December 31, 2001 and Edward Lowenthal, the Company's co-founder, Chief Executive Officer and President will retire on March 31, 2002. Jeffrey H. Lynford, currently Chairman of the Board, will also assume the positions and duties of Chief Executive Officer and President upon Mr. Lowenthal's retirement. Mr. Lynford's employment agreement has been modified and extended through December 31, 2004. 3 Messrs. Lowenthal and Du Bois will continue as members of the Board of Directors of the Company. Additionally, Mr. Lowenthal will be available to provide consulting services at the request of the Company through December 31, 2004 for which he will be paid $100,000 per annum. On June 9, 2000, the shareholders of the Company approved a reverse stock split whereby every two outstanding shares of common stock and class A-1 common stock were converted into one share of outstanding common stock and class A-1 common stock. The par value of both classes of stock increased from $0.01 per share to $0.02 per share and the number of authorized shares was halved from 197,650,000 to 98,825,000 for common shares and from 350,000 to 175,000 for class A-1 common shares. The reverse split was effective for trading beginning June 12, 2000. Resulting fractional shares were redeemed for cash. All share and per share amounts in this filing, including the financial statements and the notes thereto, have been adjusted for the impact of the split, for all periods presented. The Company's executive offices are located at 535 Madison Avenue, New York, New York, 10022; telephone, (212) 838-3400; e-mail, wrpny@wellsford.com. The Company has 19 employees on December 31, 2001. COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL - ---------------------------------------------------- The Company's commercial property operations consist solely of its interest in Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall"), a joint venture among the Company, various entities affiliated with the Whitehall Funds ("Whitehall"), private real estate funds sponsored by The Goldman Sachs Group, Inc. ("Goldman Sachs"), as well as a family based in New England. The Company had a 32.58% interest in Wellsford/Whitehall as of December 31, 2001. The manager of the joint venture is a Whitehall affiliate. At December 31, 2001, Wellsford/Whitehall owned and operated 35 properties (primarily office properties) totaling approximately 3,905,000 square feet (including approximately 598,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland. Wellsford/Whitehall leases and re-leases space, performs construction for tenant improvements, expands buildings, re-develops properties and based on general and local economic conditions and specific conditions in the real estate industry, may from time to time sell properties for an appropriate price. It is not expected that Wellsford/Whitehall will purchase any new assets, except in limited cases. The Company's investment in Wellsford/Whitehall, which is accounted for on the equity method, was approximately $57,790,000 and $82,820,000 at December 31, 2001 and 2000, respectively. In 1997, at the time of the Spin-off, the Company owned six commercial office buildings, five of which were then vacant, containing an aggregate of approximately 949,400 square feet which were acquired for an aggregate of approximately $47,600,000 (the "WRP Commercial Properties"). In August 1997, the Company, in a joint venture with Whitehall formed a private real estate operating company, Wellsford/Whitehall. The Company contributed the WRP Commercial Properties and Whitehall contributed four commercial properties upon formation of Wellsford/Whitehall. Initial capital aggregating $150,000,000 was committed by the partners including the net amount of contributed properties, net of assumed debt. Prior to December 31, 2000, the Company managed Wellsford/Whitehall on a day-to-day basis. In December 2000, the Company and Whitehall executed definitive agreements modifying the terms of the joint venture, effective January 1, 2001 (the "Amendments"). The Amendments, which, among other items, provided for the Company and Whitehall to extend their existing capital commitments to Wellsford/Whitehall for one year to December 31, 2001 and to provide an aggregate of $10,000,000 of additional financing or preferred equity to Wellsford/Whitehall through December 2003, if required. As a result of the Amendments, an affiliate of Whitehall replaced the Company as the managing member of Wellsford/Whitehall. All employees working on Wellsford/Whitehall business were transferred from the Company to WP Commercial, L.L.C. ("WP Commercial"), the new management company, which is owned by affiliates of Whitehall and senior management of WP Commercial. WP Commercial is providing management, construction, development and leasing services to 4 Wellsford/Whitehall based upon an agreed upon fee schedule. WP Commercial is also providing similar services to a new venture formed by Whitehall (the "New Venture") as well as to third parties, including tenants of Wellsford/Whitehall and new owners of properties sold by Wellsford/Whitehall. Wellsford/Whitehall, pursuant to the terms of the Amendments, discontinued payment of a $600,000 annual administrative fee to the Company as of December 31, 2000; however, Whitehall has agreed to pay the Company fees with respect to assets sold by Wellsford/Whitehall equal to 25 basis points of the sales proceeds and up to 60 basis points (30 basis points are deferred pending certain return on investment hurdles being reached) for each purchase of real estate made by certain other affiliates of Whitehall, until such purchases aggregate $400,000,000. Also, as part of the Amendments, warrants to purchase 2,128,099 of the Company's common stock, which had previously been issued to Whitehall, were returned and cancelled. The Amendments included a buy/sell agreement between the Company and Whitehall effective after December 31, 2003 with respect to any remaining assets. During the years ended December 31, 2001, 2000 and 1999, Wellsford/Whitehall participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts) 2001 ACTIVITY Purchases (1): Gross Leasable Number of Purchase Price Month Location Square Feet Properties Purchase Price per Square Foot Occupancy ----- -------- ----------- ---------- -------------- --------------- --------- April Various 54,000 5 $ 18.7 $ 342.20 100% October Decatur, GA 10,000 1 2.3 231.51 100% ------ - ------- 64,000 6 $ 21.0 324.91 100% ====== = ======= Sales: Gross Leasable Number of Sales Price per Month Location Square Feet Properties Sales Price Square Foot Gain (Loss) ----- -------- ----------- ---------- ----------- ----------- ----------- February Newton, MA 102,000 5 $ 18.0 $ 176.47 $ 3.5 April Portland, ME 24,000 1 1.6 66.67 -- May Parsippany, NJ 257,000 1 61.5 239.30 17.9 August Andover, MA 63,000 1 9.2 146.03 1.5 September Wayne, NJ (Pointview) 564,000 1 35.5 62.94 --(2) November Wayne, NJ 56,000 1 8.2 146.43 2.4 November Chatham, NJ 63,000 1 12.0 190.48 2.0 --------- -- -------- ------- 1,129,000 11 $ 146.0 129.32 $ 27.3 ========= == ======== ======= - ---------- (1) Acquisitions of these six properties completed the purchase requirements with respect to properties sold in February and April 2001 as part of a tax-free exchange pursuant to the rules of the Internal Revenue Code. (2) Loss reflected as part of impairment provision (see below). 2000 ACTIVITY Purchases: Purchases that were made during the year ended December 31, 2000, were transferred to the New Venture, pursuant to the Amendments. Sale: Gross Leasable Number of Sales Price Month Location Square Feet Properties Sales Price per Square Foot Gain ----- -------- ----------- ---------- ----------- --------------- ---- August Columbia, MD 38,000 1 $ 4.9 $ 128 $ 0.2 ====== = ========= ========= ====== 5 1999 ACTIVITY Purchases: Gross Leasable Number of Purchase Purchase Price Month Type Location Square Feet Properties Price (1) per Square Foot ----- ---- -------- ----------- ---------- --------- --------------- May Office/Flex Warren, NJ 129,000 1 $ 8.0 $ 62 June Office Boston, MA 64,000 1 10.2 159 June Office Boston, MA 68,000 1 13.1 193 July Office/Land Columbia, MD 97,000 1 10.7 110 July Office Owings Mills, MD 32,000 1 3.9 122 August Land Hanover, NJ 19.2 acres 1 2.0 -- August Office Hanover, NJ 96,000 1 13.3 139 September Flex Columbia, MD 144,000 1 3.8 26 November Office Rockville, MD 236,000 1 19.9 84 ------- - ------- Total purchases 866,000 9 $ 84.9 -- ======= = ======= Total, excluding land 866,000 8 $ 82.9 96 ======= = ======= Sales: Gross Leasable Number of Sales Price per Month Location Square Feet Properties Sales Price Square Foot Gain ----- -------- ----------- ---------- ----------- ----------- ---- February Wayne, NJ 2.58 acres (2) 1 $ 0.3 $ -- $ 0.2 May Boston, MA 65,000 1 8.1 125 2.3 August Needham, MA 261,000 1 26.0 100 5.6 November Washington, D.C. 225,000 1 43.4 193 7.5 ------- - ------- ------- Total sales 551,000 4 $ 77.8 -- $ 15.6 ======= = ======= ======= Total, excluding land 551,000 3 $ 77.5 141 $ 15.4 ======= = ======= ======= - ---------- (1) The 1999 Wellsford/Whitehall acquisitions described above were funded with proceeds from a first mortgage financing on five of the properties and seller financing in the form of a second mortgage on one of the properties in the aggregate amount of $43,401,000 and additional capital contributions by the Company and Whitehall. (2) Sale of vacant land.
During July 2001, Wellsford/Whitehall entered into a contract to sell the Pointview property, a 194 acre complex with two buildings totaling approximately 564,000 square feet, located in Wayne, New Jersey. This property, which was a major development project of Wellsford/Whitehall, had been unoccupied since its purchase in 1997. In anticipation of the consummation of the sale, Wellsford/Whitehall recorded a $15,561,000 impairment provision at June 30, 2001, of which the Company's allocable share was approximately $5,908,000. This impairment arose from the change in the intended mixed-use of the property from office space, a conference center and residential development to an available for sale headquarters complex. The sale was completed in September 2001. As a result of a sales price adjustment and cost savings during the third and fourth quarters of 2001, Wellsford/Whitehall recorded an additional impairment provision of $178,000, of which the Company's share was $64,000. Aggregate impairment provisions recorded during 2001, including the Pointview provision noted above, was $16,545,000, of which the Company's share was $6,256,000. During June 2001, Wellsford/Whitehall obtained a three-year, $353,000,000 revolving credit facility from General Electric Capital Corporation ("Wellsford/Whitehall GECC Facility") with an initial funding of approximately $273,000,000 before transaction costs. The remaining balance will be available to be drawn to fund certain capital expenditures and upon achieving certain operating results from six properties. The facility bears interest at LIBOR + 2.90% per annum (4.78% at December 31, 2001) and matures in June 2004 with two 12-month extension options, subject to meeting certain operating and valuation covenants. The facility was secured by interests in twenty-four commercial office properties in the Wellsford/Whitehall portfolio upon its initial funding. This facility replaces the previously existing facility which was due to mature in December 2001. The outstanding balance of this facility was $258,060,000 at December 31, 2001, the reduction resulting from paydowns of $14,852,000 from two asset sales; such assets were released from the collateral pool. This financing was arranged by Goldman Sachs, to whom Wellsford/Whitehall paid a fee of approximately $2,644,500. 6 In July 2001, Wellsford/Whitehall entered into an interest rate protection contract at a cost of $1,780,000 (the "Cap"), which limits Wellsford/Whitehall's LIBOR exposure to 5.83% until June 2003 and 6.83% for the following year to June 2004 on $285,000,000 of debt. At December 31, 2001 the market value of the Cap was approximately $1,089,000. This Cap was purchased from Goldman Sachs. In September 2000, Wellsford/Whitehall obtained a $8,150,000 loan from Provident Bank of Maryland, of which $4,649,000 was drawn upon at December 31, 2001. The non-recourse loan, which will be used to rehabilitate the property, is secured by the leasehold interest in the 144,000 square foot Oakland Ridge office park, a four building office complex located in Columbia, Maryland, has a term of 2.5 years, plus one twelve-month extension at Wellsford/Whitehall's option and bears interest at LIBOR + 2.00% per annum (3.88% at December 31, 2001), which is capitalized into the loan. The Company made temporary advances to Wellsford/Whitehall during 2000 and 1999 which bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid in full by December 31, 2000 and 1999, respectively. The Company earned approximately $703,000 and $517,000 of interest income during 2000 and 1999, respectively from such advances. In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank Facility with a predecessor of Fleet National Bank ("Wellsford/Whitehall Fleet Facility"). Under the terms, $300,000,000 represented a senior secured credit facility which bore interest at LIBOR + 1.65% per annum and $75,000,000 represented a second mezzanine facility which bore interest at LIBOR + 3.20% per annum. As of December 31, 2000, approximately $244,250,000 was outstanding under the Wellsford/Whitehall Fleet Facility (approximately $181,728,000 of which was under the senior facility). At March 31, 2000, the ability to draw on this facility expired. Wellsford/Whitehall exercised its right under the agreements to have the due date of both facilities extended for one year to December 15, 2001. In June 2001, the Wellsford/Whitehall Fleet Facility was repaid in full, terminated and replaced with the Wellsford/Whitehall GECC Facility. The Company is entitled to receive incentive compensation payable out of distributions made by Wellsford/Whitehall (the "Promote") after return of capital and minimum annual returns of at least 15% to 17.5% on such capital balances to the Company and Whitehall. Pursuant to the Amendments, the Company will be entitled to earn 53.3% to 57.5% of the Promote. To date, the Company has not earned or received any distribution of the Promote and there can be no assurance that such Promote will be earned or received. In June 1999, the capital commitment requirements of Wellsford/Whitehall were modified from an aggregate of $150,000,000 ($75,000,000 by each partner) to an aggregate of $250,000,000. The Company's total portion of $85,000,000 and Whitehall's total portion of $165,000,000 were fully funded as of December 31, 2001. In connection with the formation of Wellsford/Whitehall, the Company issued warrants (the "Whitehall Warrants") to Whitehall to purchase 2,066,115 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until August 28, 2002 and payable in cash or membership units in Wellsford/Whitehall. As part of the new capital commitment from Whitehall in 1999, the Company issued additional warrants to purchase an additional 61,984 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until May 28, 2004 and payable in cash or membership units of Wellsford/Whitehall. Pursuant to the Amendments, all 2,128,099 Whitehall Warrants were returned and cancelled. In addition, Whitehall's right to convert $25,000,000 of membership units in Wellsford/Whitehall for shares of the Company's common stock, or cash at the Company's election, was terminated. As a condition to the formation of Wellsford/Whitehall in 1997, the Company had agreed with Whitehall to conduct its business and activities relating to office properties (but not other types of commercial properties) located in North America solely through its interest in Wellsford/Whitehall. Whitehall has agreed to waive this condition in connection with the Amendments. 7 DEBT AND EQUITY ACTIVITIES - WELLSFORD CAPITAL - ---------------------------------------------- The Company, through the Wellsford Capital SBU, makes loans directly, or through joint ventures, predominantly in real estate related senior, junior or otherwise subordinated debt instruments and also in investment grade rated other asset-backed securities. The debt instruments may be unsecured or secured by liens on real estate or various other assets including, but not limited to, leases on aircraft, truck or car fleets, leases on equipment, consumer receivables, pools of corporate bonds and loans and sovereign debt, as well as interests in such assets or their economic benefits. Junior and subordinated loans and investments generally have the potential for high yields or returns more characteristic of equity ownership. They may include debt that is acquired at a discount, mezzanine financing, commercial mortgage-backed securities, secured and unsecured lines of credit, distressed loans, tax exempt bonds secured by real estate and loans previously made by foreign and other financial institutions. The Company believes that there are opportunities to acquire real estate and other debt, especially in the low or below investment grade tranches, at significant returns as a result of inefficiencies in pricing, while utilizing both our and our joint venture partners' expertise to analyze the underlying assets and thereby effectively minimizing risk. At December 31, 2001, the Company had the following investments: (i) approximately $34,785,000 of direct debt investments which bore interest at an average yield of approximately 11.38% for the year ended December 31, 2001 and had an average remaining term to maturity of approximately 4.3 years; (ii) approximately $31,233,000 in companies which were organized to invest in debt instruments, including $27,803,000 in Second Holding Company, L.L.C., a company which was organized to purchase investment and non-investment grade rated real estate debt instruments and investment grade rated other asset-backed securities ("Second Holding"); and (iii) approximately $6,784,000 in a real estate information and database company and another real estate-related venture. In addition, the Company owned and operated two commercial properties with a net book value of approximately $5,560,000, totaling approximately 175,000 square feet located in Salem, New Hampshire and Philadelphia, Pennsylvania. DEBT INVESTMENTS 277 PARK LOAN In April 1997, the Company and a predecessor of Fleet National Bank originated an $80,000,000 loan (the "277 Park Loan") to entities which own substantially all of the equity interests (the "Equity Interests") in the entity which owns a 1,750,000 square foot office building located in New York City (the "277 Park Property"). The Company has advanced $25,000,000 pursuant to the 277 Park Loan. The 277 Park Loan is secured primarily by a pledge of the Equity Interests owned by the borrowers and thus is junior to a 10-year $345,000,000 (amortized balance of $320,994,000 at December 31, 2001) first mortgage loan (the "REMIC Loan") on the 277 Park Property. The 277 Park Loan bears interest at the rate of 12.00% per annum for the first nine years of its term and at a floating rate during the tenth year equal to LIBOR + 5.15% per annum or the Fleet National Bank base rate plus 5.15% per annum, as elected by the borrowers. The principal amount of the 277 Park Loan and all accrued interest will be payable in May 2007; the REMIC Loan is also due in May 2007. The Company earned approximately $3,042,000, $3,050,000 and $3,042,000 per year of interest income from the 277 Park Loan during 2001, 2000 and 1999, respectively, or 7.3%, 12.2% and 10.1% of its total non-joint venture revenues during such periods. PATRIOT LOAN In September 1999, the Company and Fleet National Bank originated a $10,000,000 second mortgage loan. Pursuant to this second mortgage loan, the Company advanced $5,000,000 (its 50% share) which is subordinate to a $75,000,000 first mortgage with Fleet National Bank (amortized balance of approximately $72,514,000 at December 31, 2001). The loan bears interest at LIBOR + 4.75% per annum (6.89% at December 31, 2001) with 8 payments of interest only through August 2001 and thereafter, principal and interest based on a 25-year amortization through the loan's maturity in July 2002 (the "Patriot Loan"). The Patriot Loan is secured by a second mortgage lien on a 608,000 square foot mixed-use property in Boston, Massachusetts. The loan balance due to the Company on December 31, 2001 was approximately $4,973,000. The Company earned approximately $449,000, $564,000 and $189,000 of interest income from the Patriot Loan during 2001, 2000 and 1999, respectively, or 1.1%, 2.3% and 0.6% of its total non-joint venture revenues during such periods. THE ABBEY COMPANY CREDIT FACILITY In August 1997, the Company and a predecessor of J.P. Morgan Chase ("JPMC") originated a $70,000,000 credit facility secured by first mortgages (the "Abbey Credit Facility") to affiliates of The Abbey Company, Inc. ("Abbey"). In May 1998, the Company and JPMC expanded the Abbey Credit Facility to $120,000,000. In December 1998, Abbey repaid $20,000,000, thereby reducing the total available balance to $100,000,000. In September 1999, an additional $83,500,000 was repaid, thereby reducing the total available balance to $16,500,000. Advances under the Abbey Credit Facility were made for up to 65% of the value of the borrowing base collateral which consisted of first mortgage loans on office, industrial and retail properties, all cross collateralized, totaling approximately 250,000 square feet. The Company's portion of the outstanding balance was approximately $4,300,000 at December 31, 1999. In August 2000, the remaining balance was repaid and the Abbey Credit Facility was terminated. The Company was entitled to interest on its advances under the Abbey Credit Facility at LIBOR + 4.00% per annum. The Company earned approximately $295,000 and $2,941,000 of interest income from the Abbey Credit Facility during 2000 and 1999, respectively, or 1.2% and 9.8% of its total non-joint venture revenues during such periods. SAFEGUARD CREDIT FACILITY In December 1998, the Company and JPMC originated a $90,000,000 credit facility secured by cross-collateralized first mortgages on nine properties (the "Safeguard Credit Facility") to Safeguard Capital Fund, L.P. ("Safeguard"). The Safeguard Credit Facility which was made available to Safeguard until April 2001 was terminated on January 30, 2001 when the outstanding balance of $2,900,000 was repaid. Advances under the facility were made for up to 75% of the value of the borrowing base collateral which consisted of nine self-storage properties totaling approximately 608,000 square feet. The Company was entitled to interest on its advances under the Safeguard Credit Facility at LIBOR + 4.00% per annum. Approximately $5,900,000 had been advanced by the Company under the Safeguard Credit Facility at December 31, 1998, with additional advances made of approximately $2,200,000 through March 1999, at which time, the loan with a balance of $8,100,000 was contributed to the Company's joint venture investment, Second Holding. This venture also assumed the first $25,000,000 of the Company's commitment to fund additional advances under the Safeguard Credit Facility (including amounts advanced through December 31, 1999). The Company retained the remaining $20,000,000 commitment, of which $2,900,000 was advanced to Safeguard in September 1999 and was outstanding at December 31, 2000 and 1999, respectively. The Safeguard Credit Facility was repaid in full in January 2001. The Company earned approximately $25,000, $306,000 and $292,000 of interest income from the Safeguard Credit Facility during 2001, 2000 and 1999, respectively, or 0.1%, 1.2% and 1.0% of its total non-joint venture revenues during such periods. DEBARTOLO LOAN In July 1998, the Company, Bank One, N.A. and several other financial institutions originated a $175,000,000 loan, in which the Company had an $18,000,000 participation (the "DeBartolo Loan"), to entities owned by Simon DeBartolo Group, L.P. The DeBartolo Loan was secured by partnership units in Simon DeBartolo Group, L.P., the operating partnership of a real estate investment trust which owns shopping malls nationwide. The DeBartolo Loan bore interest at 8.547% per annum, was payable quarterly, paid principal based on a 20-year amortization schedule and was due in July 2008. In March 1999, the amortized loan balance of 9 approximately $17,600,000 was contributed to Second Holding. The DeBartolo Loan was sold at par during 2001. The Company earned approximately $360,000 of interest income from the DeBartolo Loan during 1999, or 1.2% of its total non-joint venture revenues during the period. WOODLANDS LOAN In December 1997, the Company, a predecessor of Fleet National Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders made available to the owners and developers of a 25,000 acre master-planned residential community located north of Houston, Texas (the "Woodlands Property"), loans in the aggregate principal amount of $369,000,000 (the "Woodlands Loan"). The Woodlands Loan consisted of a revolving credit loan in the principal amount of $179,000,000 (the "Revolving Loan"), a secured term loan in the principal amount of $130,000,000 (the "Secured Loan"), and a second secured term loan in the principal amount of $60,000,000 (the "Second Secured Loan"). The Company advanced $15,000,000 pursuant to the Second Secured Loan. The Second Secured Loan was subordinate to the Revolving Loan and the Secured Loan and bore interest equal to LIBOR + 4.40% per annum. The principal amount of the Woodlands Second Secured Loan was repaid in full prior to December 31, 1999. The Company earned approximately $1,295,000 of interest income from the Woodlands Second Secured Loan during 1999, or 4.3% of its total non-joint venture revenues during the period. REIT BRIDGE LOAN In August 1998, the Company, Deutsche Bank, N.A. and certain other lenders originated a $100,000,000 unsecured loan in which the Company had a $15,000,000 participation (the "REIT Bridge Loan") to a publicly traded real estate investment trust which owned 22 regional malls, eight multifamily apartment properties and five office properties nationwide. This loan bore interest at 9.875% per annum and was due in February 1999, with two three-month extensions available to the borrower. In January 1999, the REIT Bridge Loan was modified to extend the maturity date to August 1999 and increased the interest rate to 12.00% per annum. The borrower paid a 1.50% loan fee at origination and a 1.00% loan fee upon modification. This loan was repaid in full in July 1999. The Company earned approximately $1,050,000 of interest income from the REIT Bridge Loan during 1999, or 3.5% of its total non-joint venture revenues during the period. BROOMFIELD LOAN In January 1999, the Company acquired a parcel of land in Broomfield, Colorado for approximately $7,200,000 pursuant to an outstanding standby commitment issued in 1998. In connection with this transaction, the Company collected approximately $401,000 of fees in 1998. In July 1999, the Company sold this land for $7,200,000 to a third party ("Buyer") and simultaneously collected an additional $1,100,000 in fees. The Company then purchased $11,740,000 of tax-exempt notes, bearing interest at 6.25% per annum and due in December 1999. These notes were issued by a quasi-governmental agency partially controlled by the Buyer and were guaranteed by a AA rated bank. The notes were repaid in full in December 1999. The Company earned approximately $1,555,000 on the Broomfield transaction during 1999, or 5.2% of its total non-joint venture revenues during the period. SECOND HOLDING The Company contributed approximately $24,200,000 and $4,900,000 in 1999 and 1998, respectively, to a 51% owned joint venture special purpose finance company ("SPFC"), Second Holding, with The Liberty Hampshire Company, L.L.C. ("Liberty Hampshire") owning 10% and another unrelated entity owning the remaining 39%. The 1999 contribution was comprised of two of the Company's debt investments, the $17,600,000 DeBartolo Loan and the $8,100,000 outstanding balance of the Safeguard Credit Facility, net of $1,500,000 of cash received back from Second Holding. The other partners contributed their respective shares of their capital contributions in cash. During the latter part of 2000, an additional partner was admitted to the venture, who received a share of income, as defined, pursuant to a cumulative preference on earnings in return for providing credit enhancement to certain debt issued by Second Holding. 10 Effective January 1, 2002, the owners of Second Holding modified the terms of how income is allocated among the partners to remove the cumulative preference on earnings to the aforementioned partner. This one partner is entitled to 35% of net income as defined by the agreement, while the other partners, including the Company, share in the remaining 65%. The Company's allocation of income is approximately 51% of the remaining 65%. The Company's investment in Second Holding, which is accounted for on the equity method, was approximately $27,803,000 and $27,868,000 at December 31, 2001 and 2000, respectively. Second Holding has been organized to purchase investment and non-investment grade rated real estate debt instruments and investment grade rated other asset-backed securities. These other asset-backed securities that Second Holding may purchase may be secured by, but not limited to, leases on aircraft, truck or car fleets, leases on equipment, consumer receivables, pools of corporate bonds and loans and sovereign debt. At December 31, 2001, Second Holding had real estate debt and other asset-backed securities investments of approximately $926,453,000 and also had approximately $25,000,000 invested in commercial paper. The investment-grade assets and commercial paper investments are variable rate based and earn interest at a weighted average annual interest rate of 2.75% at December 31, 2001. Second Holding utilizes funds from the issuance of bonds and medium term notes to make investments. At December 31, 2001, Second Holding had total debt of approximately $962,465,000 which is primarily comprised of (i) a privately placed ten-year $150,000,000 junior subordinated bond issue maturing April 2010 with a fair value of $163,531,000 at December 31, 2001 and an effective annual interest rate of LIBOR + 0.90% (3.29% at December 31, 2001), (ii) approximately $745,000,000 of medium term notes with a weighted average annual interest rate of 1.91% and (iii) approximately $58,858,000 of commercial paper with a weighted average annual interest rate of 2.07%, all of which are offset by unamortized issuance costs and discounts of approximately $4,924,000. The weighted average annual interest rate on Second Holding's debt was 2.14% at December 31, 2001. In August 2001, Second Holding purchased an aggregate of $24,825,000 in two classes of Mortgage Pass-Through Certificates, Series 2001--WTC (the "WTC Certificates") (the Company's share of which is $12,683,000). The WTC Certificates, rated AA and A at issuance, were part of a total bond offering of $563,000,000 which was used to finance the acquisition of the leasehold interest in towers 1 and 2 and buildings 4 and 5 of the World Trade Center in New York City. Subsequent to the events of September 11, 2001 which resulted in the destruction of these buildings, the Company has been informed by GMAC Commercial Mortgage Corporation, the master and special servicer, that the WTC Certificates are not in default. The property casualty and business interruption insurance obtained in connection with the WTC Certificates does not exclude acts of terrorism and such insurance is from a consortium of 22 insurers. As of December 31, 2001, the rating agencies did not change their ratings on the WTC Certificates. The Company believes that the insurance coverage is sufficient to cover Second Holding's investment and that an impairment reserve is not required. Both Second Holding and the Company will continue to evaluate the ultimate collectibility of the principal and interest. LIBERTY HAMPSHIRE In July and August 1998, the Company invested a total of approximately $2,100,000 for an approximate 4.20% equity interest in Liberty Hampshire, a venture which structures, establishes and provides management and services for SPFCs formed to invest in financial assets. In December 2000, the Company sold this interest to the majority owner of Liberty Hampshire for $5,160,000 and recorded a gain of approximately $2,500,000. The Company received $1,032,000 of cash and a note for the remaining balance of $4,128,000 which bears interest at 8.25% per annum, is due in December 2005 and has scheduled annual principal and interest payments (the "Guggenheim Loan"). The balance of the Guggenheim Loan was $3,612,000 at December 31, 2001. The Company earned approximately $345,000 of interest income from the Guggenheim Loan during 2001 or 0.8% of its total non-joint venture revenues during the period. 11 REIS, INC. The Company has direct and indirect investments in a real estate information and database company, Reis, Inc. ("Reis"), a leading provider of real estate market information to institutional investors. At December 31, 2001 and 2000, the Company's aggregate investment in Reis, which is accounted for under the cost method, was approximately $6,575,000, or 22% of Reis' equity on an as converted basis. The primary shareholder of Reis is the brother of Mr. Lynford, Chairman of the Company. The Company's President was appointed to the board of directors of Reis during the third quarter of 2000. The Chairman, President and certain directors of the Company who have invested directly in Reis have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis. CREAMER VITALE WELLSFORD/CLAIRBORNE INVESTORS In January 1998, the Company formed Creamer Vitale Wellsford, L.L.C. ("CVW") in which it had a 49% interest and acquired the same percentage interest in a related real estate advisory and consulting firm. CVW, together with Prudential Real Estate Investors ("PREI"), an affiliate of Prudential Life Insurance Company, established the Clairborne Investors Mortgage Investment Program ("Clairborne") to make opportunistic investments and to provide liquidity to lenders and participants in mortgage loan transactions. The parties agreed to contribute up to $150,000,000 to fund acquisitions approved by the parties, of which PREI would fund 90% and a subsidiary of the Company would fund 10%. CVW was to originate, co-invest and manage the investments of the program. The Company's original investment in these entities was $1,250,000 of cash and 74,000 five-year warrants to purchase the Company's common shares at $30.35 per share, valued at approximately $750,000 at that time. In September 2000, one of the two principals of CVW left CVW to pursue other employment and the venture was terminated. In July 2001, the warrants issued to the CVW partners were repurchased for $80,000 and cancelled. The Company may continue to conduct business through CVW in certain circumstances. In November 1998, Clairborne acquired an approximate $17,000,000 participation in a $56,000,000 mortgage, which bore interest at LIBOR + 1.75% per annum and due in 3.5 years, at a significant discount to face value. The Company funded approximately $1,400,000 of the cost of this participation, which was prepaid entirely at the face amount during 1999 by the borrower. FORDHAM TOWER In October 2000, the Company and PREI organized a new venture which provided an aggregate of $34,000,000 of mezzanine financing for the construction of Fordham Tower, a 50-story, 244 unit, luxury condominium apartment project to be built on Chicago's near northside ("Fordham Tower"). Construction is in process and delivery of initial units is projected for November 2002. As of December 31, 2001, the project was approximately 90% presold. The Company fully funded its share of the loan of $3,400,000. The loan, which matures in October 2003, bears interest at a fixed rate of 10.50% per annum with provisions for additional interest to PREI and the Company and fees to the Company and the two former principals of CVW, based upon certain levels of returns on the project and is secured by a lien on equity interests in the property. Such additional interest has not been earned or accrued by the Company. The Company's investment in the Fordham Tower venture is accounted for on the equity method. The Company's share of income from Fordham Tower was approximately $361,000 and $85,000 for the years ended December 31, 2001 and 2000, respectively. OTHER INVESTMENTS VALUE PROPERTY TRUST In February 1998, the Company completed the merger with Value Property Trust ("VLP") (the "VLP Merger") for total consideration of approximately $169,000,000, which was accounted for as a purchase. Thirteen of the 12 twenty VLP properties, which were under contract to an affiliate of Whitehall, were subsequently sold for an aggregate of approximately $64,000,000. The Company retained seven of the VLP properties with an allocated value upon purchase of approximately $38,300,000, aggregating approximately 597,000 square feet with one property located in California and the remaining six properties located in the northeastern United States. VLP had cash of $60,800,000 and other net assets of $5,900,000 at the close of the transaction. In October 1998, the Company obtained a $28,000,000 loan, which was cross-collateralized by the seven VLP properties, bore interest at LIBOR + 2.75% per annum and was scheduled to mature in October 2001. During the fourth quarter of 2000, the Company made the strategic decision to sell the seven VLP properties. One of the properties was sold in December 2000 and four other properties were sold during 2001, leaving two properties unsold at December 31, 2001. The Company recorded a gain of approximately $4,943,000 on the December 2000 transaction which was offset by a provision for impairment of $4,725,000, also recorded in 2000, attributable to expected sales proceeds being less than the respective carrying amounts on four of the remaining six unsold VLP properties at December 31, 2000. The Company repaid in full the $28,000,000 loan in December 2000 and expensed all of the remaining unamortized deferred loan costs associated with the financing. The net book value of the two unsold properties was approximately $5,560,000 at December 31, 2001, net of the remaining impairment reserve of $2,175,000. The Company determined that no additional impairment provision was required at December 31, 2001. PROPERTY DEVELOPMENT AND LAND OPERATIONS - WELLSFORD DEVELOPMENT - ---------------------------------------------------------------- The Company, through the Wellsford Development SBU, engages in selective development activities as opportunities arise and when justified by expected returns. The Company believes that by pursuing selective development activities, it can achieve returns which are greater than returns which could be achieved by acquiring stabilized properties. Certain development activities may be conducted in joint ventures with local developers who may bear the substantial portion of the economic risks associated with the construction, development and initial rent-up of properties. As part of its strategy, the Company may seek to issue tax-exempt bond financing authorized by local governmental authorities which generally bears interest at rates substantially below rates available from conventional financing. PALOMINO PARK At present, the Company's Wellsford Development activities consist solely of an interest in a five phase 1,800 unit class A multifamily development ("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado. At December 31, 2001, the Company had an 85.85% interest as the managing owner in this project and an affiliate of EQR had the remaining 14.15% interest. Effective October 1, 2000, EQR elected not to make a capital contribution attributable to the last three phases of Palomino Park and its ownership interest was reduced from 20.00% to 14.15%. In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to provide additional collateral for the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit. In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed at a cost of approximately $41,500,000. At that time, the Company obtained a $34,500,000 permanent loan (the "Blue Ridge Mortgage") secured by a first mortgage on Blue Ridge. The Blue Ridge Mortgage matures in January 2008 and bears interest at a fixed rate of 6.92% per annum. Principal payments are based on a 30-year amortization schedule. In November 1998, Phase II, the 304 unit phase known as Red Canyon, was completed at a cost of approximately $33,900,000. At that time, the Company acquired the Red Canyon improvements and the related construction loan was repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon Mortgage") secured by a first mortgage on Red Canyon. The Red Canyon Mortgage matures in December 2008 and bears interest at a fixed rate of 6.68% per annum. Principal payments are based on a 30-year amortization schedule. 13 In October 2000, Phase III, the 264 unit phase known as Silver Mesa was completed at a cost of approximately $44,200,000. The Company made the strategic decision to convert Silver Mesa into condominium units and sell them to individual buyers. In conjunction with this decision, the Company has prepared certain units to be sold and will continue to rent certain of the remaining unsold units during the sellout period until the available for sale inventory has been significantly reduced and additional units need to be prepared for sale. In conjunction with this decision, the Company made a payment of $2,075,000 to reduce the outstanding balance on the tax-exempt bonds in order to obtain the release of the Silver Mesa phase from the Palomino Park Bond collateral. The allocable cost associated with the units being rented and the units available for sale was approximately $21,438,000 and $5,401,000 at December 31, 2001 and $22,129,000 and $21,850,000 at December 31, 2000, respectively. In December 2000, the Company obtained a $32,000,000 loan from KeyBank National Association (the "Silver Mesa Conversion Loan") which bears interest at LIBOR + 2.00% per annum (4.14% at December 31, 2001), is collateralized by the unsold units, matures in December 2003 and provides for one six-month extension at the Company's option. Generally, 90% of net sales proceeds per unit is applied to principal repayments until the loan is paid in full. The balance of the Silver Mesa Conversion Loan was $13,352,000 and $32,000,000 at December 31, 2001 and 2000, respectively. In February 2001, the Company commenced sales of units at Silver Mesa. The Company sold 105 units through December 31, 2001, for gross proceeds of approximately $21,932,000, approximately $18,648,000 of which was used to pay down principal on the Silver Mesa Conversion Loan. At December 31, 2001, there were 23 units in available for sale inventory. The Company anticipates releasing 28 units from the rental pool to increase the available for sale inventory during the first quarter of 2002. In December 2001, Phase IV, the 424 unit phase known as Green River, was completed at a cost of approximately $56,400,000. Effective December 31, 2001, the Company (i) became obligated for the construction loan, (ii) released the developer of the economic risks it bore during construction and initial lease-up as the developer carried the construction loan and a significant portion of the costs incurred on its balance sheet and (iii) the developer no longer participated in any positive operating income generated during the period. Accordingly, the Company acquired the improvements and assumed the related construction loan, which had a balance of $36,747,000 at December 31, 2001, bears interest at LIBOR + 1.75% per annum (3.76% at December 31, 2001), matures in January 2003 and is extendable for six months for a fee of 0.375% (the "Green River Construction Loan"). Additional interest of $861,000 can be accrued into the principal balance of the loan, after which time, payments of interest only are required until maturity (it is anticipated that the Company will commence interest payments during the third quarter of 2002). Green River is in the lease-up phase and was 52% occupied at December 31, 2001. On December 31, 2001, Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known as Gold Peak, had a cost basis of approximately $5,400,000. The Company has not determined if it will construct this phase or sell the improved land. SONTERRA AT WILLIAMS CENTRE ("SONTERRA") From the time of the Spin-off, the Company held a $17,800,000 mortgage on, and option to purchase, a 344-unit class A residential apartment complex located in Tucson, Arizona. In January 1998, the Company exercised its option and acquired Sonterra for approximately $20,500,000, including satisfaction of the mortgage. In February 1998, the Company closed on $16,400,000 of first mortgage financing (the "Sonterra Mortgage") on this property, bearing interest at 6.87% and maturing in March 2008. Principal payments were based on a 30-year amortization schedule. In November 2000, the Company sold the Sonterra property for $22,550,000 and recorded a pre-income tax gain of approximately $3,500,000. The buyer assumed the Sonterra Mortgage, which had an unamortized balance of approximately $15,971,000, and paid the balance of the purchase price in cash. 14 SEGMENT FINANCIAL INFORMATION See Note 12 to the Company's consolidated financial statements for additional information regarding the Company's industry segments. FUTURE INVESTMENTS The Company may in the future make equity investments in entities owned and/or operated by unaffiliated parties which may engage in real estate-related businesses and activities or businesses that service the real estate industry. Some of the entities in which the Company may invest may be start-up companies or companies in need of additional capital. The Company may also manage and lease properties owned by it or in which it has an equity or debt investment. Some investments may be in entities which make investments in non-real estate assets, such as certain of the investments that Second Holding engages in. 15 ITEM 2. PROPERTIES. The following property information is presented by SBU. WELLSFORD/WHITEHALL As of December 31, 2001, Wellsford/Whitehall owned and operated 35 properties (primarily office properties), totaling approximately 3,905,000 square feet. The following table sets forth certain information related to these properties at December 31, 2001:
LEASABLE BUILDING YEAR NUMBER SQUARE CONSTRUCTED/ OF PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY -------- ---- -------- ---- ------------- ------- --------- OPERATING PROPERTIES - OFFICE Greenbrook Corporate Center .... Office Fairfield, NJ 201,000 1987 14 97% 300 Atrium Drive ............... Office Somerset, NJ 147,000 1983 5 100% 400 Atrium Drive** ............. Office Somerset, NJ 355,000 1985 2 59% 500 Atrium Drive ............... Office Somerset, NJ 169,000 1984 4 95% 700 Atrium Drive ............... Office Somerset, NJ 181,000 1985 1 100% Mountain Heights Center #1 ..... Office Berkeley Hts, NJ 183,000 1968/1986/1998 14 97% Mountain Heights Center #2 ..... Office Berkeley Hts, NJ 123,000 1968/1998/2000 1 100% Garden State Exhibit Center .... Flex Somerset, NJ 82,000 1968/1989 N/A N/A 60/74 Turner Street ............ Office/Land Waltham, MA 16,000 1970 1 100% 333 Elm Street ................. Office Dedham, MA 48,000 1983 7 69% Dedham Place ................... Office Dedham, MA 160,000 1987 4 14% 128 Technology Center** ........ Office Waltham, MA 218,000 1986 -- 0% 201 University Avenue .......... Office Westwood, MA 82,000 1982 1 100% 7/57 Wells Avenue .............. Office Newton, MA 88,000 1982 14 93% 75/85/95 Wells Avenue .......... Office Newton, MA 242,000 1976/1986 9 92% 180/188 Mt Airy Road ........... Office Basking Ridge, NJ 104,000 1980 11 95% 377/379 Campus Drive** ......... Office Franklin Twp, NJ 199,000 1984 -- 0% 105 Challenger Road ............ Office Ridgefield Park, NJ 147,000 1992 3 100% 150 Mt. Bethel Road ............ Office/Flex Warren, NJ 129,000 1981 5 59% One Mall North ................. Office Columbia, MD 97,000 1978/1998 27 77% Crossroads ..................... Office Owings Mills, MD 32,000 1988 2 45% Oakland Ridge .................. Flex Columbia, MD 144,000 1972 1 18% Airport Park ................... Office Hanover Twp, NJ 96,000 1979 12 86% --------- --- --- SUBTOTAL--OPERATING PROPERTIES - OFFICE 3,243,000 138 69% --------- --- --- BASE ESCALATED MARKET RENT PER RENT PER RENT PER PRINCIPAL LEASE SQUARE SQUARE SQUARE PROPERTY TENANTS EXPIRATION FOOT FOOT FOOT * ENCUMBRANCES -------- ------- ---------- ---- ---- ------ ------------ OPERATING PROPERTIES - OFFICE Greenbrook Corporate Center .... Information Resources December 2003 & 2008 $ 21.29 $ 23.50 $ 23.25 (A) 300 Atrium Drive ............... AT&T March 2004 20.39 22.88 23.50 (A) 400 Atrium Drive** ............. Merrill Lynch (B) December 2003 18.55 20.80 23.50 (A) 500 Atrium Drive ............... Computer Science December 2003 20.01 24.36 23.50 (A) 700 Atrium Drive ............... Merck June 2005 17.39 20.76 23.50 (A) Mountain Heights Center #1 ..... The Santa Cruz Org. September 2006 24.26 26.31 29.25 (A) Mountain Heights Center #2 ..... Compaq August 2010 28.50 30.84 29.25 (A) Garden State Exhibit Center .... N/A N/A 24.58 24.58 24.50 (A) 60/74 Turner Street ............ Brandeis University June 2002 8.00 8.00 10.00 (A) 333 Elm Street ................. RNK, Inc. June 2006 25.66 28.80 27.00 (C) Dedham Place ................... ARC Advisory Group November 2006 18.64 19.78 29.25 (C) 128 Technology Center** ........ -- -- -- 35.50 (C) 201 University Avenue .......... RCN Corp. December 2009 18.00 20.28 18.00 (C) 7/57 Wells Avenue .............. GEO Centers November 2004 25.84 27.72 30.00 (C) 75/85/95 Wells Avenue .......... Wonderware Corp. April 2005 28.90 30.56 30.00 (C) 180/188 Mt Airy Road ........... Avaya Comm. October 2004 25.61 27.82 28.25 (A) 377/379 Campus Drive** ......... (D) December 2001 11.90 11.90 15.25 (A) 105 Challenger Road ............ Samsung America, Inc. December 2003 26.88 30.99 28.50 (A) 150 Mt. Bethel Road ............ GMAC March 2008 14.58 16.64 16.00 (E) One Mall North ................. GSA November 2005 20.92 22.27 25.00 (E) Crossroads ..................... Kiddie Academy February 2006 17.85 19.57 19.50 (E) Oakland Ridge .................. Wells Fargo (F) 17.00 17.75 19.35 (E) Airport Park ................... Gemini Consulting January 2006 21.34 25.52 27.00 (E) ---------- --------- --------- SUBTOTAL--OPERATING PROPERTIES - OFFICE 22.43 23.90 25.01 ---------- --------- --------- 16 LEASABLE BUILDING YEAR NUMBER SQUARE CONSTRUCTED/ OF PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY -------- ---- -------- ---- ------------- ------- --------- OPERATING PROPERTIES - RETAIL Essex .......................... Retail Essex, MD 10,000 2000 1 100% Pennsauken ..................... Retail Pennsauken, NJ 12,000 2001 1 100% Runnemeade ..................... Retail Runnemeade, NJ 12,000 2001 1 100% Wetumpa ........................ Retail Wetumpa, AL 10,000 2000 1 100% Richmond ....................... Retail Richmond, VA 10,000 2001 1 100% Decauter ....................... Retail Decauter, GA 10,000 2001 1 100% --------- --- --- SUBTOTAL--OPERATING PROPERTIES - RETAIL 64,000 6 100% --------- --- --- SUBTOTAL--OPERATING PROPERTIES 3,307,000 144 69% --------- --- --- BASE ESCALATED MARKET RENT PER RENT PER RENT PER PRINCIPAL LEASE SQUARE SQUARE SQUARE PROPERTY TENANTS EXPIRATION FOOT FOOT FOOT * ENCUMBRANCES -------- ------- ---------- ---- ---- ------ ------------ OPERATING PROPERTIES - RETAIL Essex .......................... CVS January 2024 36.86 36.86 36.86 (E) Pennsauken ..................... CVS January 2024 24.75 24.75 24.75 (E) Runnemeade ..................... CVS January 2024 25.96 25.96 25.96 (E) Wetumpa ........................ CVS January 2024 20.38 20.38 20.38 (E) Richmond ....................... CVS January 2024 24.30 24.30 24.30 (E) Decauter ....................... CVS April 2019 17.48 17.48 17.48 (G) ----- ----- ----- SUBTOTAL--OPERATING PROPERTIES - RETAIL 24.98 24.98 24.98 ----- ----- ----- SUBTOTAL--OPERATING PROPERTIES 22.49 23.92 25.01 ----- ----- ----- LEASABLE BUILDING YEAR NUMBER SQUARE CONSTRUCTED/ OF PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY -------- ---- -------- ---- ------------- ------- --------- PROPERTIES UNDER RENOVATION 117 Kendrick Street ............. Office Needham, MA 211,000 1963/2000 3 84% 600 Atrium Drive ................ Land Somerset, NJ N/A N/A (H) -- Airport Park .................... Land Hanover Twp, NJ N/A N/A (H) -- 401 North Washington ............ Office Rockville, MD 248,000 1972 5 70% 79 Milk Street .................. Office Boston, MA 65,000 1920/1998 11 54% 24 Federal Street ............... Office Boston, MA 74,000 1921/1997 9 67% --------- --- -- SUBTOTAL--PROPERTIES UNDER RENOVATION 598,000 28 73% --------- --- -- 2001 TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2001 3,905,000 172 70% ========= === == BASE ESCALATED MARKET RENT PER RENT PER RENT PER PRINCIPAL LEASE SQUARE SQUARE SQUARE PROPERTY TENANTS EXPIRATION FOOT FOOT FOOT * ENCUMBRANCES -------- ------- ---------- ---- ---- ------ ------------ PROPERTIES UNDER RENOVATION 117 Kendrick Street ............. Key3 Media September 2008 30.12 30.32 31.00 (A) 600 Atrium Drive ................ -- -- -- -- -- (G) Airport Park .................... -- -- -- -- -- (G) 401 North Washington ............ ADP February 2009 19.90 20.58 27.00 (A) 79 Milk Street .................. IDG February 2009 39.73 41.13 41.75 (A) 24 Federal Street ............... IDG February 2009 45.07 45.38 41.75 (A) --------- --------- ------- SUBTOTAL--PROPERTIES UNDER RENOVATION 28.78 29.32 31.84 --------- --------- ------- 2001 TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2001 $ 23.57 $ 24.85 $ 26.06 ========= ========= ======= - ---------- (A) Encumbered by the Wellsford/Whitehall GECC Bank Facility. (B) Leases for approximately 142,000 square feet expired on December 31, 2001; such expiration is reflected in the 59% occupancy rate. (C) Encumbered by a $66,189,000 mortgage. (D) AT&T leased 100% of space and paid rent through December 31, 2001, at which time the lease was terminated. Wellsford/Whitehall received a payment from AT&T for this early termination of $3,700,000. (E) Encumbered by other mortgages. (F) Expected lease commencement in mid-2002. (G) Unencumbered. (H) Land zoned for office development. * Wellsford/Whitehall's internal judgment as to specific property market rent per square foot as of December 31, 2001. ** Wellsford/Whitehall plans to convert building from single to multi-tenant.
17 The following table sets forth historical Wellsford/Whitehall portfolio information by year: SQUARE FEET OF OCCUPANCY TOTAL BUILDING OPERATING OF OPERATING AT DECEMBER 31, SQUARE FEET PROPERTIES PROPERTIES --------------- ----------- ---------- ---------- 2001 .............. 3,905,000 3,307,000 69% 2000 .............. 4,953,000 3,431,000 87% 1999 .............. 4,920,000 3,469,000 92% 1998 .............. 4,605,000 3,219,000 92% 1997 .............. 2,412,000 1,330,000 89% The average lease term of the tenants' leases is approximately 7.7 years. Leases typically provide for step-ups in base rent periodically over the term of a lease and pass throughs to tenants of their pro rata share of increases in certain expenses (real estate taxes and operating expenses) over a base year. Leases may also provide for improvement allowances for all or a portion of the tenant's initial construction of its premises. The following table sets forth as of December 31, 2001 lease expirations for each of the next ten years, assuming tenants do not exercise any renewal options:
LEASABLE ANNUAL BASE RENT OF EXPIRING LEASES NUMBER OF SQUARE FEET PERCENTAGE OF ----------------------------------- EXPIRING OF EXPIRING TOTAL LEASED PER SQUARE YEAR LEASES LEASES SQUARE FEET TOTAL FOOT ---- ------ ------ ----------- ----- ---- 2002 ........... 55 306,822 11% $ 5,693,000 $ 18.55 2003 ........... 35 485,588 17% 10,908,000 22.46 2004 ........... 17 273,153 10% 5,365,000 19.64 2005 ........... 29 480,782 17% 10,788,000 22.44 2006 ........... 30 322,373 12% 9,183,000 28.49 2007 ........... 20 234,615 8% 6,963,000 29.68 2008 ........... 11 229,418 8% 7,514,000 32.75 2009 ........... 5 131,351 5% 3,066,000 23.34 2010 ........... 2 124,643 4% 3,674,000 29.47 2011 ........... 5 45,919 2% 1,826,000 39.76
No tenant in the Wellsford/Whitehall portfolio accounted for more than 8% and 11% of rental revenues of Wellsford/Whitehall for the years ended December 31, 2001 and 2000, respectively. 18 WELLSFORD CAPITAL Wellsford Capital owned the following commercial properties at December 31, 2001; both properties are available for sale:
LEASABLE BUILDING YEAR NUMBER SQUARE CONSTRUCTED/ OF PRINCIPAL LEASE PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY TENANTS EXPIRATION -------- ---- -------- ---- ------------- ------- --------- ------- ---------- Chestnut Street ...... Office Philadelphia, PA 49,953 1857/1990 5 77% A December 2001 Keewaydin Drive ...... Industrial Salem, NH 125,230 1973 4 57% B January 2004 ------- -- TOTAL/AVERAGE AT DECEMBER 31, 2001 ......... 175,183 9 62% ======= == == 2000 ......... 482,270 53 74% ======= == == 1999 ......... 596,645 74 76% ======= == == 1998 ......... 596,645 80% ======= == ESCALATED MARKET RENT BASE RENT PER RENT PER RENT PER PROPERTY SQUARE FOOT SQUARE FOOT SQUARE FOOT* -------- ----------- ----------- ------------ Chestnut Street ...... $ 14.20 $ 15.42 $ 16.00 Keewaydin Drive ...... 6.43 8.13 6.70 TOTAL/AVERAGE AT DECEMBER 31, 2001 ......... $ 9.16 $ 10.69 ========= ========= 2000 ......... $ 10.49 $ 11.98 ========= ========= 1999 ......... $ 10.70 $ 13.40 ========= ========= 1998 ......... $ 9.51 $ 11.33 ========= ========= A...... Kittredge Donley (14,449 square feet) B...... New Hampshire University (27,555 square feet) * The Company's internal judgment as to specific property market rent per square foot as of December 31, 2001.
19 No tenant in the Wellsford Capital portfolio accounts for more than 2.2% and 2.3% of consolidated rental revenues for the years ended December 31, 2001 and 2000, respectively. WELLSFORD DEVELOPMENT The Company owned the following multifamily properties at December 31, 2001:
YEAR EFFECTIVE RENT PROPERTY LOCATION UNITS CONSTRUCTED OCCUPANCY PER UNIT ENCUMBRANCE (A) -------- -------- ----- ----------- --------- -------- --------------- Stabilized phases: Blue Ridge ............... Denver, CO 456 1997 80% $ 1,123 $ 32,916,492 Red Canyon ............... Denver, CO 304 1998 82% 1,294 26,034,695 Silver Mesa (B) .......... Denver, CO 136 2000 60% 1,827 13,351,966 ----- ------------ Total stabilized phases ..... 896 77% 1,288 72,303,153 ----- ------------ Phases in lease-up: Green River .............. Denver, CO 424 2001 52% 1,224 36,747,451 ----- ------------ Total phases in lease-up .... 424 52% 1,224 36,747,451 ----- ------------ TOTAL/AVERAGE AT DECEMBER 31, 2001 ......... 1,320 77% (C) $ 1,267 $109,050,604 ===== == ======== ============ 2000 ......... 896 93% $ 1,224 $ 91,723,970 ===== == ======== ============ 1999 ......... 1,104 89% $ 1,001 $ 76,559,929 ===== == ======== ============ 1998 ......... 1,104 92% $ 984 $ 77,421,790 ===== == ======== ============ - ---------- (A) Encumbrance balances exclude the Palomino Park Bonds which are secured by each phase. The balance of the Palomino Park Bonds was $12,680,000 at December 31, 2001 and 2000 and $14,755,000 for each prior year presented. (B) The Silver Mesa phase information excludes units which are available for sale. The occupancy and average rent per unit reflects the status of only the 136 rental units. At December 31, 2001, there were 23 units in available for sale inventory. The Company anticipates releasing 28 units from the rental pool to increase the available for sale inventory during the first quarter of 2002. The encumbrance is on all of the unsold units, including rentals in the phase (aggregating 159 units at December 31, 2001). As individual units are sold, they are released from the Silver Mesa Conversion Loan collateral. (C) Phases in lease-up not included in 2001 Total/Average occupancy.
The average lease term of the tenants' leases range from six to fourteen months. Security deposits are generally required for all leases. On December 31, 2001, Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known as Gold Peak, had a cost basis of approximately $5,400,000. The Company has not determined if it will construct this phase or sell the improved land. ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor Wellsford/Whitehall are presently defendants in any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company or its other equity investments. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not applicable. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. MARKET INFORMATION - ------------------ The Company's common shares are traded on the American Stock Exchange under the symbol "WRP". The high and low closing sales prices for the common shares on the American Stock Exchange and the dividends declared for the years ended December 31, 2001 and 2000 are as follows: COMMON SHARES --------------------------------- 2001 HIGH LOW DIVIDENDS - --------------------- ---- --- --------- 1st Quarter.......... $17.50 $15.50 None 2nd Quarter.......... $19.35 $15.80 None 3rd Quarter.......... $20.00 $17.90 None 4th Quarter.......... $19.60 $18.05 None COMMON SHARES --------------------------------- 2000 HIGH LOW DIVIDENDS - --------------------- ---- --- --------- 1st Quarter.......... $18.13 $15.00 None 2nd Quarter.......... $18.13 $15.13 None 3rd Quarter.......... $19.75 $15.75 None 4th Quarter.......... $19.63 $15.31 None HOLDERS - ------- The approximate number of holders of record of the common shares and class A-1 common shares (collectively, "Common Shares" or "Common Stock") were 4,200 and 1, respectively, as of December 31, 2001. DIVIDENDS - --------- The Company did not declare or distribute any dividends during 2001 or 2000. The Company does not plan to distribute dividends for the foreseeable future, which will permit it to accumulate, for reinvestment, cash flow from investments, disposition of investments and other business activities. 21 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements included elsewhere in this Form 10-K. Prior to the Company's May 1997 investments, the Company's operations consisted of earning interest income on a mortgage and the initial phase of construction development activity with respect to Palomino Park.
SUMMARY CONSOLIDATED STATEMENT OF OPERATIONS DATA (A) FOR THE YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues ................................ $ 41,493 $ 25,624 $ 30,770 $ 26,316 $ 9,170 Costs and expenses (B) .................. (46,420) (26,181) (29,526) (17,606) (3,919) Income from joint ventures .............. 4,564 3,247 9,622 3,523 15 Gain on sale of assets, net of impairment provision of $4,725 in 2000 .......... -- 6,135 -- 139 -- Minority interest ....................... (283) (66) (55) (78) -- --------- --------- --------- --------- --------- (Loss) income before taxes and Convertible Trust Preferred Securities (646) 8,759 10,811 12,294 5,266 Income tax expense ...................... (699) (1,430) (1,950) (2,850) (2,213) Convertible Trust Preferred Securities distributions, net of tax benefit of $720 and $510 ........................ (1,380) (861) -- -- -- --------- --------- --------- --------- --------- Net (loss) income ....................... $ (2,725) $ 6,468 $ 8,861 $ 9,444 $ 3,053 ========= ========= ========= ========= ========= Net (loss) income per common share, basic ................................ $ (0.38) $ 0.76 $ 0.86 $ 0.95 $ 0.36 ========= ========= ========= ========= ========= Net (loss) income per common share, diluted .............................. $ (0.38) $ 0.76 $ 0.86 $ 0.93 $ 0.35 ========= ========= ========= ========= ========= Cash dividends declared per common Share ................................ $ -- $ -- $ -- $ -- $ -- ========= ========= ========= ========= ========= Weighted average number of common shares outstanding, basic ............ 7,213 8,508 10,321 9,943 8,461 ========= ========= ========= ========= ========= Weighted average number of common shares outstanding, diluted .......... 7,213 8,516 10,329 10,190 8,674 ========= ========= ========= ========= ========= SUMMARY CONSOLIDATED BALANCE SHEET DATA DECEMBER 31, ---------- ---------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (IN THOUSANDS) Real estate, at cost .................... $ 170,963 $ 167,279 $ 166,166 $ 153,030 $ 58,741 Accumulated depreciation ................ (9,873) (8,248) (6,584) (2,707) -- Notes receivable ........................ 34,785 37,824 37,260 124,706 105,632 Cash and cash equivalents ............... 36,149 36,369 34,740 10,122 29,895 Investment in joint ventures ............ 95,807 120,969 114,390 80,776 44,780 Total assets ............................ 345,838 375,770 366,331 384,971 249,974 Mortgage notes payable .................. 121,731 104,404 119,315 120,177 49,255 Credit facility ......................... -- 12,000 -- 17,000 7,500 Convertible Trust Preferred Securities .. 25,000 25,000 -- -- -- Shareholders' equity .................... 178,079 215,982 229,691 231,625 181,158 - ---------- (A) See Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations for significant changes in revenues and expenses of the Company. (B) Includes a restructuring charge of $3,527 during the year ended December 31, 2001, with no similar charges in other periods presented.
The earnings per share amounts conform with Statement of Financial Accounting Standards No. 128 "Earnings Per Share". For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW - -------- The following discussion should be read in conjunction with the "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-K. SELECTED SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------- Management has selected the following accounting policies which it believes are significant in order to understand the Company's activities, financial position and operating results. PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION. The consolidated financial statements include the accounts of Wellsford Real Properties, Inc. and its majority-owned and controlled subsidiaries. Investments in entities where the Company does not have a controlling interest are accounted for under the equity method of accounting. These investments are initially recorded at cost and are subsequently adjusted for the Company's proportionate share of the investment's income (loss), additional contributions or distributions. Investments in entities where the Company does not have the ability to exercise significant influence are accounted for under the cost method. All significant inter-company accounts and transactions among Wellsford Real Properties, Inc. and its subsidiaries have been eliminated in consolidation. The consolidated financial statements include the assets and liabilities contributed to and assumed by the Company from the Trust, from the time such assets and liabilities were acquired or incurred, respectively, by the Trust. Such financial statements have been prepared using the historical basis of the assets and liabilities and the historical results of operations related to the Company's assets and liabilities. REAL ESTATE AND DEPRECIATION AND AMORTIZATION. Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Ordinary repairs and maintenance are expensed as incurred. Tenant improvements and leasing commissions related to commercial properties are capitalized and amortized over the terms of the related leases. Costs incurred to acquire investments in joint ventures are capitalized and amortized over the expected life of the related assets. Additional amortization is charged as assets are sold in cases where the joint venture would cease to exist when all assets are sold or otherwise disposed of. Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis, principally 27.5 years for residential buildings and improvements, 40 years for commercial properties and three to twelve years for furnishings and equipment. The Company reviews its real estate assets, investments in joint ventures and other investments (collectively its "long-lived assets") for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. REAL ESTATE - RESIDENTIAL UNITS AVAILABLE FOR SALE. The Company's residential units available for sale are recorded at the lower of historical cost or market value based upon current conditions. As units are sold, the cost of each unit is charged to cost of sales based upon its relative sales value. MORTGAGE NOTE RECEIVABLE IMPAIRMENT. The Company considers a note impaired if, based on current information and events, it is probable that all amounts due, including future interest, payable under the note agreement are not collectable. Impairment is measured based upon the fair value of the underlying collateral. INCOME RECOGNITION. Commercial properties are leased under operating leases. Rental revenue is recognized on a straight-line basis over the terms of the respective leases. Residential communities are leased under operating leases with terms of generally six to 14 months. Rental revenue is recognized monthly as it is earned. Interest 23 income is recorded on an accrual basis over the life of the loan. Sales of real estate assets are recognized at closing, subject to receipt of down payments and other requirements in accordance with applicable accounting guidelines. INCOME TAXES. The Company accounts for income taxes under SFAS 109 "Accounting for Income Taxes." Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are estimated to be in effect when the differences are expected to reverse. Valuation allowances with respect to deferred income tax assets are recorded when deemed appropriate and adjusted based upon periodic evaluations. ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RESULTS OF OPERATIONS - --------------------- The accompanying consolidated financial statements include the assets and liabilities contributed to and assumed by the Company from the Trust, from the time such assets and liabilities were acquired or incurred, respectively, by the Trust. Such financial statements have been prepared using the historical basis of the assets and liabilities and the historical results of operations related to the Company's assets and liabilities. COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31, 2000 Rental revenue decreased $4,913,000. This decrease is primarily due to the sale of five properties that were in operations for substantially the full year of 2000 offset by a new operational rental phase at Palomino Park. Reductions from the sale of one of the VLP properties in December 2000, two during January 2000 and one during May 2001 (a fifth property was sold in December 2001 but was in operations for the full year) resulted in a reduction in rental revenue of $4,078,000. These properties are part of the Wellsford Capital SBU. The disposition of the Sonterra at Williams Centre property ("Sonterra") in the Wellsford Development SBU during November 2000 accounted for a decrease of $2,395,000. These reductions were offset by the commencement of operations of the Silver Mesa rental units, which were included in operations for the full year in 2001 and only three months during 2000 (an increase of $1,632,000). Revenues from the sales of 105 Silver Mesa condominium units and the related cost of sales from such units were $21,932,000 and $19,364,000, respectively. Sales commenced in February 2001. Interest revenue decreased by $1,082,000. This decrease is primarily due to interest earned on loans outstanding for all or a portion of 2000 and repaid in the latter part of 2000 or during 2001 ($1,279,000), lower interest revenue earned on cash due to lower interest rates and lower average cash balances during 2001 ($206,000) and lower interest earned on variable rate based mortgages receivable due to the reduction of interest rates over the course of 2001 ($115,000). Such amounts are partially offset by new loans made in late 2000 and during 2001 ($528,000). Fee revenue decreased $68,000. Of this balance, fees from Wellsford/Whitehall related activities decreased $298,000 as the 2000 period includes $600,000 of fees for the Company's role as managing member under the prior Wellsford/Whitehall Operating Agreement. Under the Amendments, the Company now earns fees payable by Whitehall from sales by Wellsford/Whitehall and certain asset purchases by the New Venture. Such amended fees were $388,000 during 2001 and $86,000 during 2000. Additionally, the Company earned $217,000 of management fees for its role in the Second Holding investment and $13,000 from fees earned on the modification of the Patriot Loan, both of which are in the Wellsford Capital SBU. Property operating and maintenance expense decreased $559,000. This decrease is due to the sale of Sonterra ($659,000) and four of the VLP properties as noted above ($608,000), offset by full year operations from the Silver Mesa rental units ($361,000), increased operating expenses at the other operational properties principally from 24 increased insurance costs ($263,000) and increased period costs for the available for sale Silver Mesa units ($84,000). Real estate taxes decreased $559,000. This decrease is due to the sale of four VLP properties noted above ($434,000) and the sale of Sonterra ($283,000), offset by full year operations from the Silver Mesa rental units ($90,000) and increases at the other Palomino Park phases ($68,000). Depreciation and amortization expense increased ($340,000). This increase is primarily due to additional amortization of deferred costs attributable to asset sales at Wellsford/Whitehall ($1,431,000), full year depreciation of the Silver Mesa rental units ($518,000) and additional depreciation of corporate furniture, fixtures and equipment ($185,000), offset by no current year depreciation expense on the VLP properties, as they are held for sale ($1,101,000), no depreciation on Sonterra in 2001 as it was sold in 2000 ($556,000) and amortization in the prior period attributable to one of the two principals leaving Creamer Vitale Wellsford to pursue other employment and the subsequent wind-down of the venture ($145,000). Property management expenses decreased $242,000. This decrease is primarily attributable to the sale of the four VLP properties ($213,000) and Sonterra ($74,000), partially offset by full year operations from the Silver Mesa rental units ($49,000). Interest expense decreased $2,720,000. This decrease is attributable to the repayment of the $28,000,000 loan in December 2000, which was cross-collateralized by the VLP properties ($3,083,000), the sale of Sonterra ($982,000), reduced interest rates on other variable rate based debt ($239,000) and declines in the Blue Ridge and Red Canyon mortgage interest from lower outstanding debt balances ($49,000), partially offset by interest incurred on the Silver Mesa Conversion Loan in excess of the prior year ($1,115,000), decreased capitalized interest ($379,000) and interest on draws under the Company's line of credit ($137,000). General and administrative expenses increased $1,090,000. This increase is due to additional amortization of deferred stock compensation issued during December 2000 and on December 31, 2001 ($671,000) plus increases in wages, health insurance, incentive compensation and general insurance costs. The restructuring charge in 2001 of $3,527,000 is for costs incurred pursuant to the early retirement of the Company's President and other personnel changes. Such costs are comprised of severance arrangements including the repurchase of stock options and the write-off of unamortized deferred stock compensation. Of the expected aggregate cash payments of $3,466,000, the Company anticipates payments of approximately $2,800,000 by the end of the first quarter 2002 with the remaining accrued balance expected to be paid during the first quarter of 2003. The Company expects general and administrative expenses to be reduced by approximately $800,000 annually as a result of the restructuring. Gain on sale of investments in 2000 results from the sale of (i) the Sonterra property for a gain of $3,500,000, (ii) the investment in Liberty Hampshire for a gain of $2,492,000 and (iii) a net gain of $218,000 from the sale of one of the VLP properties ($4,943,000) offset by the impairment recorded on certain of the then remaining VLP assets available for sale ($4,725,000). There were no corresponding gains recorded in the 2001 period, and no additional impairment provision was required. Income from joint ventures increased $1,318,000. This increase is primarily the result of (i) net gains on the sales of properties of $4,065,000 in the current period from Wellsford/Whitehall (the Company's share of gains of $10,321,000 is offset by the Company's share of impairment provisions of $6,256,000) which was in excess of gains in the prior year's period of $92,000, (ii) increased income from the Fordham Tower construction loan of $276,000 through the Clairborne Prudential program (the Company made this investment in the fourth quarter of 2000) and (iii) prior year net management fee expense related to the Company's role in the Second Holding venture ($182,000). The impairment provision adjustment is the Company's allocable share arising from the change in intended mixed-use of the property from office space, a conference center and residential development to an available for sale headquarters complex in June 2001 and its ultimate sale in September 2001. These increases were partially offset by (i) decreased operating income at Wellsford/Whitehall of $1,281,000, 25 (ii) a current period loss of $164,000 from Second Holding which had income in the prior period of $1,432,000 (as a partner was admitted into the venture in the latter part of 2000 whom is entitled to a cumulative preference on earnings) and (iii) $241,000 of income in the prior period from the investment in The Liberty Hampshire Company, L.L.C. which the Company sold in December 2000. The Wellsford/Whitehall investment is in the Commercial Property Investments SBU and the other ventures are in the Debt and Equity Investments SBU. Minority interest expense increased $216,000, primarily attributable to income from the sale of residential units at Silver Mesa, with no corresponding sales during 2000. Income tax expense decreased $731,000 because of the Company incurring a loss in the current year. Such loss did not result in a tax benefit because the tax benefit attributable to certain costs of the Company's deferred compensation program, including a portion of the restructuring charge, has been fully reversed because of the long-term ultimate tax deductibility of such items. This resulted in income tax expense of $699,000 in 2001. Accrued distributions and amortization of costs on Convertible Trust Preferred Securities, net of income tax benefit, increased $519,000, as these securities were issued in May 2000 and were outstanding for the entire year of 2001. The decrease in net income per share - basic and diluted of $1.14 per share is attributable to a current year net loss of $2,725,000 whereas in the 2000 period, the Company reported income of $6,468,000, offset by the effect of a lower weighted average number of common shares outstanding in the current period from the repurchase of approximately 1,319,000 shares of common stock during 2000 and 2,021,000 shares of common stock during 2001. The effect of the 2001 share repurchases resulted in a $0.05 per share increase in net loss per share, basic and diluted, excluding the impact of lost interest income on cash used for such repurchases. COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31, 1999 Rental revenue increased by $807,000. This increase is primarily due to three months of operations during 2000 for the Silver Mesa rental phase which was put into service on October 1, 2000 ($592,000) and increased rental revenues on the VLP properties ($552,000), partially offset by a reduction in the rental income on the Sonterra property from 10.5 months of income in 2000 as it was sold in November 2000 ($224,000). Interest revenue decreased by $6,039,000. This decrease is primarily the result of decreased lending activity by the Wellsford Capital SBU starting in the second half of 1999 and continuing in 2000 with loans being repaid in part or in full during 1999 and 2000 ($7,063,000) and decreased interest income from investments contributed to Second Holding in 1999 ($653,000), partially offset by new investments in 2000 and investments held for a longer period during 2000 than in 1999 ($1,384,000) and increased income on cash and cash equivalents in 2000 from higher interest rates and greater outstanding balances ($229,000). Fee revenue increased by $86,000. This increase is a result of fees payable to the Company from the purchase of two office properties by a Whitehall affiliate. Property operating and maintenance expense increased by $323,000. This increase is primarily due to three months of operations for an asset put into service during 2000 (Silver Mesa) plus an increase in Denver office overhead costs directly charged to operations in 2000. Real estate taxes increased by $64,000. This increase is primarily due to three months of operations for an asset put into service during 2000 (Silver Mesa) and an increase in taxes at certain properties during 2000. Depreciation and amortization decreased by $1,187,000. This decrease is due to (i) the write-down of the CVW asset by $912,000 to its then estimated fair value in 1999, (ii) increased amortization during 1999 associated with the Company's deferred financing costs of $680,000 and (iii) 10.5 months of depreciation on the Sonterra property, which was sold, of $76,000, partially offset by additional depreciation on the VLP properties of $225,000, increased amortization of $145,000 attributable to one of the two principals leaving CVW to pursue other 26 employment and the subsequent wind-down of the venture in 2000, and three months of depreciation on an asset put into service during 2000 (Silver Mesa) of $173,000. Property management expense increased $125,000. This increase is primarily due to three months of operations for an asset put in service during 2000 (Silver Mesa) and additional fees on the VLP properties during 2000. Interest expense decreased by $2,323,000. This decrease is primarily due to (i) interest on higher average borrowing balances under the Company's credit facilities in 1999 than in 2000 ($2,038,000), (ii) additional capitalized interest due to a higher average construction in progress balance in 2000 ($919,000) and (iii) only 10.5 months of interest on the Sonterra property mortgage before it was assumed by the buyer at the time the property was sold ($151,000), partially offset by an increase in expense from variable rate debt ($462,000), the write-off of unamortized deferred financing costs on the VLP debt in December 2000 ($247,000) when the related debt was prepaid and three months of interest for an asset put into service during 2000 (Silver Mesa) ($122,000). General and administrative expenses decreased by $349,000. This decrease is primarily due to a decrease in professional fees of $264,000, charitable contributions of $232,000 and other corporate expenses across all expense categories of $194,000, offset by increases in compensation and benefits of $341,000. Gain on sale of investments in 2000 results from the sale of (i) the Sonterra property for a gain of $3,500,000, (ii) the investment in Liberty Hampshire for a gain of $2,492,000 and (iii) a net gain of $218,000 from the sale of one of the VLP properties ($4,943,000) offset by the impairment recorded on certain of the remaining VLP assets available for sale ($4,725,000). Income from joint ventures decreased by $6,375,000. This decrease is primarily due to the Company's proportionate share of gains of $6,806,000 on the sale of assets from Wellsford/Whitehall in 1999, which was in excess of the 2000 share of gains of $92,000, plus decreases from the Liberty Hampshire/Second Holding Joint Venture investments ($496,000) and CVW ($456,000), offset by an increase in the Company's proportionate share of Wellsford/Whitehall operating income ($1,206,000) and income from the Fordham Tower construction loan during the fourth quarter of 2000 ($85,000). The income tax provision decreased $520,000. This decrease is primarily the result of lower pretax income and the utilization of state and local income tax carryforwards. During the year ended December 31, 2000, the Company repurchased 1,318,732 shares of its outstanding common stock. The effect of these repurchases resulted in a $0.09 per share increase in net income per share--basic and diluted, excluding the impact of lost interest income on cash used for such repurchases. INCOME TAXES The Company has recorded a net deferred tax asset of $5,081,000 as of December 31, 2001 which is included in prepaid and other assets in the accompanying consolidated balance sheets. Such amount is net of a valuation allowance of $18,765,000 and $17,472,000 at December 31, 2001 and 2000, respectively, established with respect to the uncertainty of realizing the benefit of existing net operating loss carryforwards and future tax deductions under deferred compensation arrangements. At December 31, 2001, the Company has available net operating loss carryforwards of $64,700,000, which will expire between 2007 and 2012. The Company has recorded a deferred tax asset of approximately $7,722,000 or 76% of the total recorded deferred tax asset of $10,085,000 at December 31, 2001, attributable to the tax benefit, after reserves, of a portion of such net operating loss carryforwards. As a result of certain limitations under Section 382 of the Internal Revenue Code, as it applies to the VLP acquisition, the Company may only use $6,200,000 of such loss carryforwards each year. Any amounts not utilized in a year may be carried forward to subsequent years. The deferred tax asset associated with the deferred compensation deductions has been fully reserved because of the expected timing of the deductibility of such items. The majority of the remaining 27 $2,263,000 asset is expected to be realized in 2002 or 2003 upon the sale of the remaining two VLP assets and the scheduled payments of certain severance accruals. During the year, the Company increased its valuation allowance by $1,292,000 principally as a result of additional deferred compensation costs, the tax benefit of which was fully reserved. In order to realize the recorded deferred tax asset, the Company would have to realize approximately $28,500,000 of taxable income by 2007 and 2012 when the majority of the net operating loss carryforwards expire. The Company expects to be able to meet these amounts based upon the expected taxable income levels from recognition of existing deferred taxable income and from gains on the sales of properties and other assets. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company expects to meet its short-term liquidity requirements generally through its available cash, sales of properties and distributions of cash from Wellsford/Whitehall, sales of properties in the Wellsford Capital SBU, sales of residential units in the Wellsford Development SBU, cash flow provided by operations and repayments of notes receivable. The Company expects to meet its long-term liquidity requirements such as refinancing mortgages, financing acquisitions and development, financing capital improvements and joint venture loan requirements, through the use of available cash, repayments of notes receivable at maturity, sales of properties in the Wellsford/Whitehall SBU, the issuance of debt and the offering of additional debt and equity securities. The Company considers its ability to generate cash to be adequate and expects it to continue to be adequate to meet operating requirements both in the short and long terms. Wellsford/Whitehall expects to meet its liquidity requirements, such as financing additional renovations to its properties and acquisitions of new properties, if any, with available cash, operating cash flow from its properties, financing available under the Wellsford/Whitehall GECC Facility, proceeds from any asset sales and draws from the $10,000,000 commitment of additional financing or preferred equity from the principal owners of Wellsford/Whitehall, if required. At December 31, 2001, the Company and Whitehall each had funded their entire respective capital commitments. The loan commitment, of which the Company's share is $4,000,000, is fully available to Wellsford/Whitehall until December 31, 2003. Cash and cash equivalents were approximately $32,723,000 at December 31, 2001, of which approximately $4,200,000 was distributed to the partners on February 8, 2002 from previously closed sales transactions. Wellsford/Whitehall has agreed to maintain certain tax indemnities for one of the joint venture partners relating to assets acquired from this partner in 1998. This indemnity was preserved during 2001 as the acquisitions of six properties related to the completion of the purchase requirements with respect to properties sold in February and April 2001 as part of tax-free exchanges. Wellsford/Whitehall and the Company will continue to monitor asset sales and debt levels with respect to these tax indemnities. Second Holding expects to meet its liquidity requirements for purchases of investments with proceeds from the issuance of bonds and medium term notes. In August 2001, Second Holding purchased an aggregate of $24,825,000 in two classes of Mortgage Pass-Through Certificates, Series 2001--WTC (the "WTC Certificates") (the Company's share of which is $12,683,000). The WTC Certificates, rated AA and A at issuance, were part of a total bond offering of $563,000,000 which was used to finance the acquisition of the leasehold interest in towers 1 and 2 and buildings 4 and 5 of the World Trade Center in New York City. Subsequent to the events of September 11, 2001 which resulted in the destruction of these buildings, the Company has been informed by GMAC Commercial Mortgage Corporation, the master and special servicer, that the WTC Certificates are not in default. The property casualty and business interruption insurance obtained in connection with the WTC Certificates does not exclude acts of terrorism and such insurance is from a consortium of 22 insurers. As of December 31, 2001, the rating agencies did not change their ratings on the WTC Certificates. The Company believes that the insurance coverage is 28 sufficient to cover Second Holding's investment and that an impairment reserve is not required. Both Second Holding and the Company will continue to evaluate the ultimate collectibility of the principal and interest. The Company's retained earnings included approximately $1,823,000 of undistributed retained earnings at December 31, 2001 from Second Holding, as such distributions are limited to 48% of earnings. RECURRING AND NON-RECURRING CAPITAL EXPENDITURES WELLSFORD DEVELOPMENT Regarding the Company's Blue Ridge, Red Canyon, Silver Mesa and Green River rental phases, the Company expects to incur approximately $140 per unit in apartment preparation costs from turnover of tenant leases during the year ending December 31, 2002, which will be charged to property operations. On December 31, 2001, Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known as Gold Peak, had a cost basis of approximately $5,400,000. The Company has not determined if it will construct this phase or sell the improved land. WELLSFORD CAPITAL The Company expects to incur approximately $1,583,000 of total capital expenditures with respect to the two remaining VLP properties during 2002. Of this amount $1,154,000 is for required base building work at both properties. Recurring capital expenditures of $429,000 are as follows: PER AMOUNT SQUARE FOOT ------ ----------- Tenant improvements........... $ 266,000 $ 6.03 Leasing commissions........... 163,000 3.70 ---------- $ 429,000 ========== WELLSFORD/WHITEHALL Wellsford/Whitehall expects to incur approximately $63,300,000 of capital expenditures during the year ending December 31, 2002. Of that amount, Wellsford/Whitehall expects to incur approximately $25,215,000 of non-recurring capital expenditures. This work includes new building developments, asset repositioning through significant upgrades to the base building and amenities and the conversion of three single-tenant structures to multi-tenant use properties. Recurring capital expenditures of $38,085,000 are as follows: AMOUNT PER SQUARE FOOT* ------ ---------------- Maintenance capital $ 5,867,000 $ 2.75 Tenant improvements 23,549,000 27.37 Leasing commissions 8,669,000 10.07 ----------- $38,085,000 =========== - ---------- * Per square foot amount represents applicable cost by category for expected square footage to be maintained or leased during the year. To the extent that available cash, cash flows from operations, sales and borrowings from financial institutions are not available to finance such capital projects, the Company and Whitehall will be required to provide up to $4,000,000 and $6,000,000, respectively, under the existing agreement with Whitehall. 29 OTHER USES RESTRUCTURING CHARGE The Company anticipates payments of approximately $2,800,000 by the end of the first quarter of 2002 in connection with restructuring charges, with the remaining accrued balance expected to be paid during the first quarter of 2003. The Company expects to utilize available cash for these payments. CAPITAL COMMITMENTS At December 31, 2001, the Company had capital commitments to certain joint venture investments. The Company may make additional equity investments subject to board approval if deemed prudent to do so to protect or enhance its existing investment. At December 31, 2001, capital commitments are as follows: COMMITMENT AMOUNT ---------- ------ Wellsford/Whitehall............... $ 4,000,000 (A) Clairborne Prudential equity...... 10,208,000 (B) - ---------- (A) Pursuant to the Agreement, the Company could provide for up to 40% of a $10,000,000 loan to, or preferred equity in, the venture with its joint venture partner. Whitehall committed to fund the remaining $6,000,000. (B) Capital calls are subject to the Company's approval of such investments. STOCK REPURCHASE PROGRAM In April 2000, the Company's Board of Directors authorized the repurchase of up to 1,000,000 additional shares of its outstanding common stock. The Company intends to repurchase the shares, from time to time, by means of open market purchases depending on availability of shares, the Company's cash position, the price per share and other corporate matters. No minimum number or value of shares to be repurchased has been fixed. Pursuant to this program, 29,837 shares have been repurchased as of December 31, 2001; none during the year ended December 31, 2001. In addition, during June 2001, the Board of Directors authorized the repurchase of 2,020,784 shares of the Company's common stock at $18.10 per share (aggregating approximately $36,576,000) from an institutional shareholder. Cash used to repurchase such shares came from available working capital. RESOURCES In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park. The Palomino Park Bonds have an outstanding balance of $12,680,000 at December 31, 2001 and 2000. In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to secure the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit. During October 2001, the Company and Commerzbank AG amended the letter of credit agreement to include the $25,000,000 of Convertible Trust Preferred Securities in shareholders' equity in the determination of the minimum shareholders' equity covenant. As of December 31, 2001, the Company was in compliance with the covenants under the letter of credit agreement. In January 1999, a wholly-owned subsidiary of the Company obtained a $35,000,000 loan facility (the "Wellsford Finance Facility") from a predecessor of Fleet National Bank. In June 2000, the Company modified the terms of the Wellsford Finance Facility and reduced the maximum borrowing amount to $20,000,000. The Wellsford Finance Facility was secured by a $25,000,000 note receivable, bore interest at LIBOR + 2.75% per annum and expired in January 2002. The Company paid an origination fee of $75,000 and is obligated to pay a fee equal to 0.25% per annum on the average daily amount of the unused portion of the facility until maturity. At 30 December 31, 2000, the outstanding balance under the Wellsford Finance Facility was $12,000,000. There was no balance outstanding at December 31, 2001. In December 2000, the Company obtained a $32,000,000 loan from KeyBank National Association (the "Silver Mesa Conversion Loan") which bears interest at LIBOR + 2.00% per annum (4.14% at December 31, 2001), is collateralized by the unsold units, matures in December 2003 and provides for one six-month extension at the Company's option. Generally, 90% of net sales proceeds per unit is applied to principal repayments until the loan is paid in full. The balance of the Silver Mesa Conversion Loan was $13,352,000 and $32,000,000 at December 31, 2001 and 2000, respectively. In December 2001, Phase IV, the 424 unit phase known as Green River, was completed at a cost of approximately $56,400,000. Effective December 31, 2001, the Company (i) became obligated for the construction loan, (ii) released the developer of the economic risks it bore during construction and initial lease-up as the developer carried the construction loan and a significant portion of the costs incurred on its balance sheet and (iii) the developer no longer participated in any positive operating income generated during the period. Accordingly, the Company acquired the improvements and assumed the Green River Construction Loan, which had a balance of $36,747,000 at December 31, 2001, bears interest at LIBOR + 1.75% per annum (3.76% at December 31, 2001), matures in January 2003 and is extendable for six months for a fee of 0.375%. Additional interest of $861,000 can be accrued into the principal balance of the loan, after which time, payments of interest only are required until maturity (it is anticipated that the Company will commence interest payments during the third quarter of 2002). Green River is in the lease-up phase and was 52% occupied at December 31, 2001. The Company sold four of the VLP properties during the year ended December 31, 2001 and received proceeds, net of selling costs, of $18,553,000. During the year ended December 31, 2001, 105 residential units were sold and the Company received net proceeds of approximately $1,681,000, after the repayment of principal on the Silver Mesa Conversion Loan of approximately $18,648,000 and selling costs. Net proceeds received by the Company from the above sales are available for working capital purposes. CASH FLOWS - ---------- 2001 CASH FLOWS Cash flow provided by operating activities of $26,602,000 consists of (i) the recovery of $16,449,000 of costs from the sales of residential units, (ii) depreciation and amortization of $5,126,000, (iii) a decrease in restricted cash of $2,368,000, (iv) an increase in accrued expenses and other liabilities of $2,363,000, (v) amortization of deferred compensation of $1,578,000, (vi) a decrease in prepaid and other assets of $855,000, (vii) undistributed minority interest of $283,000, (viii) distributions received in excess of joint venture income of $164,000, (ix) shares issued for director compensation of $80,000 and (x) non-cash charges included in the restructuring charge of $61,000, offset by a net loss of $2,725,000. Cash flow provided by investing activities of $4,647,000 consists of returns of capital from joint venture investments of $31,617,000, proceeds from the sale of real estate assets of $18,553,000 and repayments of notes receivables of $3,589,000, partially offset by investments in real estate assets of $40,047,000 capital contributions to joint ventures of $8,566,000 and investments in notes receivable of $500,000. Cash flow used in financing activities of $31,469,000 consists of (i) the repurchase of common shares from an institutional investor of $36,576,000, (ii) repayments of the Wellsford Finance Facility of $24,000,000, (iii) principal payments of mortgage notes payable of $19,421,000 (including $18,648,000 for the Silver Mesa Conversion Loan), (iv) registration statement costs of $123,000, (v) costs incurred to repurchase warrants of $80,000 and (vi) distribution to minority interests of $16,000, partially offset by borrowings from mortgage notes payable of $36,747,000 and the Wellsford Finance Facility of $12,000,000. 31 2000 CASH FLOWS Cash flow provided by operating activities of $10,023,000 primarily consists of net income of $6,468,000 plus (i) depreciation and amortization of $4,980,000, (ii) an increase in accrued expenses and other liabilities of $2,662,000, (iii) distributions received in excess of joint venture income of $1,493,000, (iv) amortization of deferred compensation of $907,000 and (v) decreases in restricted cash of $506,000, partially offset by the gain on sale of assets (net of impairment provision of $4,725,000) of $6,135,000 and increases in prepaid and other assets of $1,003,000. Cash flow used in investing activities of $22,778,000 consists of (i) investments in real estate assets of $39,026,000, (ii) investments in notes receivable of $28,833,000 and (iii) capital contributions to joint venture investments of $12,895,000 partially offset by repayments of notes receivables of $32,408,000, $21,650,000 of proceeds from the sales of real estate assets, returns of capital from joint venture investments of $2,886,000 and proceeds from the sale of joint venture interests of $1,032,000. Cash flow provided by financing activities of $14,383,000 primarily consists of (i) proceeds from the Silver Mesa Conversion Loan of $32,000,000, (ii) proceeds from the issuance of Convertible Trust Preferred Securities of $25,000,000 and (iii) proceeds from draws on the Company's credit facility of $12,000,000, partially offset by the repayment of mortgage notes payable of $30,940,000, repurchases of the Company's common stock of $21,119,000, the establishment of an interest reserve for the Silver Mesa Conversion Loan of $1,960,000 and deferred financing costs principally associated with the issuance of the Convertible Trust Preferred Securities of $544,000. 1999 CASH FLOWS Cash flow provided by operating activities of $13,857,000 primarily consists of net income of $8,861,000 plus (i) depreciation and amortization of $5,937,000 and (ii) amortization of deferred compensation of $848,000, offset by undistributed joint venture income of $675,000, increases in restricted cash of $459,000 and prepaid and other assets of $498,000 and a decrease in accrued expenses and other liabilities of $297,000. Cash flow provided by investing activities of $40,834,000 consists of repayments of notes receivable of $112,741,000, the proceeds from sale of real estate assets of $7,238,000 and returns of capital from joint ventures of $6,091,000, offset by additional investments in (i) notes receivable of $49,295,000, (ii) real estate assets of $18,975,000 and (iii) capital contributions to joint ventures of $16,968,000. Cash flow used in financing activities of $30,072,000 primarily consists of (i) repayment of credit facilities of $54,000,000, (ii) the repurchase of common shares of $12,209,000 and (iii) repayment of mortgage notes payable of $862,000, offset by borrowings from credit facilities of $37,000,000. See the accompanying consolidated statements of cash flows included in the consolidated financial statements for a reconciliation of the Company's cash position for the years described therein. ENVIRONMENTAL - ------------- In December 2001, the Company submitted a report to the New Hampshire Department of Environmental Services ("NHDES") that summarized the findings of an environmental testing firm engaged by the Company with respect to groundwater and surface water monitoring and testing which took place during 2001 on one of its owned properties. The NHDES responded in January 2002 with concerns about surface water contamination, volatile organic chemical ("VOC") migration off of the property and air quality. The NHDES mandated further testing before a remediation action plan is considered. Further preliminary testing conducted by the environmental testing firm since the NHDES response suggests that the surface water contamination is caused by the groundwater contamination and that the VOC contamination may be migrating off of the property. Once the Company's "Scope of Work" plans have been approved, the Company will conduct further testing to address 32 the NHDES's concerns. Following that testing, the Company will present the findings and a recommended plan of remediation to the NHDES. At this time, it is too early to conclude the form of remediation that will be required, or the cost thereof, but in all likelihood, the remediation required will be a more aggressive one than natural attenuation. During 2001, the Company incurred approximately $48,000 of costs principally for its environmental testing firm, with respect to this matter. TERRORISM INSURANCE - ------------------- The Company is covered under its all risk property insurance policies for acts of terrorism on its consolidated real estate assets through June 30, 2002. Terrorism coverage is available for the Wellsford/Whitehall portfolio through June 30, 2002 as well. The Company and Wellsford/Whitehall expect that similar coverage will not be available in connection with an all risk policy and will need to make an assessment of the cost benefit of obtaining terrorism insurance on such assets at that time. The underwriting procedures utilized by the Company and Second Holding have been modified to evaluate the impact of the lack of, or inability to obtain terrorism insurance by property owners on single assets or small collateral pools for its debt investments. Most real estate collateralizing such investments is currently not insured for acts of terrorism or is expected to lose such coverage as current policies expire and asset owners evaluate the cost of obtaining new policies. INFLATION - --------- Substantially all of Wellsford Capital's and Wellsford/Whitehall's leases with their tenants provide for separate escalations of real estate taxes and operating expenses over a base amount. In addition, many of the office leases provide for fixed base rent increases or indexed escalations (based on the CPI or other measures). The Company believes that inflationary increases in expenses will generally be offset by the expense reimbursements and contractual rent increases described above. A substantial majority of the leases at the Company's multifamily properties are for a term of one year or less which may enable the Company to seek increased rents upon renewal or re-letting of apartment units. Such short-term leases generally minimize the risk to the Company of the adverse effects of inflation. TRENDS - ------ The markets in which the Company owns and operates its assets (or has investments in entities which own and operate assets) are subjected to general and local economic business conditions. Based upon the current economic environment, these conditions may negatively impact the occupancy levels and amount of concessions at properties in the Wellsford Development and Wellsford Capital SBUs or negatively impact 2002 property sales in the Wellsford Capital SBU and the sale of residential units at Silver Mesa in the Wellsford Development SBU. Wellsford/Whitehall would be similarly impacted by such conditions. NET CASH FLOW - ------------- The Company considers Net Cash Flow to be an important measure of its performance, to be considered in addition to Net Income, predicated on Generally Accepted Accounting Principles. Net Cash Flow, for the Company's purposes, represents Net Income as prescribed by Generally Accepted Accounting Principles, plus depreciation and amortization on real estate assets, the provision for impairment, share of depreciation and amortization from unconsolidated partnerships and joint ventures, offset by accumulated depreciation and recovery of impairment provisions on assets sold. Included in such cash flow is the Company's share of undistributed cash retained by the unconsolidated partnerships and joint ventures for continuing investment in lieu of future fundings as well as cash obtained from gains on sales of properties. Net Cash Flow should not be considered a replacement for Net Income as an indicator of the Company's operating performance and is not necessarily indicative of cash available to fund cash needs. 33 The following table reconciles Net Income and Net Cash Flow:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Net (loss) income ......................... $ (2,724,616) $ 6,468,045 $ 8,860,801 Add/(deduct): Depreciation and amortization .......... 5,016,125 4,855,778 5,384,782 Provision for impairment (A) ........... -- 4,725,000 -- Accumulated depreciation and recovery of impairment provision on assets sold . (3,991,414) (2,533,737) -- Share of joint venture depreciation and amortization, net ................... 5,026,532 5,292,254 5,238,357 ------------ ------------ ------------ Net cash flow ............................. $ 3,326,627 $ 18,807,340 $ 19,483,940 ============ ============ ============ Weighted average number of common shares outstanding for net cash flow, basic ... 7,213,029 8,507,631 10,321,012 ============ ============ ============ Weighted average number of common shares outstanding for net cash flow, diluted . 7,238,334 8,516,321 10,328,744 ============ ============ ============ - ---------- (A) The Company recorded a provision for impairment of $4,725,000 in 2000, attributable to expected sales proceeds being less than the respective carrying amounts on four of the six unsold VLP properties at December 31, 2000.
Below are the Company's cash flows provided by operating activities as disclosed in the Consolidated Statements of Cash Flows: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Operating activities .... $26,601,838 $10,023,485 $13,856,594 =========== =========== =========== 34 RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This Form 10-K, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following, which are discussed in greater detail in the "Risk Factors" section of the Company's registration statement on Form S-3 (file No. 333-73874) filed with the Securities and Exchange Commission ("SEC") on December 14, 2001, as may be amended, which is incorporated herein by reference: general and local economic and business conditions, which will, among other things, affect demand for commercial and residential properties, availability and credit worthiness of prospective tenants, lease rents and the availability and cost of financing; ability to find suitable investments; competition; risks of real estate acquisition, development, construction and renovation including construction delays and cost overruns; ability to comply with zoning and other laws; vacancies at commercial and multifamily properties; dependence on rental income from real property; adverse consequences of debt financing including, without limitation, the necessity of future financings to repay debt obligations; inability to meet financial and valuation covenants; inability to repay financings; risks of investments in debt instruments, including possible payment defaults and reductions in the value of collateral; uncertainty pertaining to the WTC Certificates, including scheduled interest payments, the ultimate repayment of principal, adequate insurance coverages, the ability of insurers to pay claims and effects of changes in ratings from Standard & Poor's and Fitch; risks of subordinate loans; risks of leverage; risks associated with equity investments in and with third parties; availability and cost of financing; interest rate risks; demand by prospective buyers of condominium and commercial properties; inability to realize gains from the real estate assets held for sale; lower than anticipated sales prices; inability to close on sales of properties under contract; illiquidity of real estate investments; environmental risks; and other risks listed from time to time in the Company's reports filed with the SEC. Therefore, actual results could differ materially from those projected in such statements. 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's primary market risk exposure is to changes in interest rates. The Company manages this risk by offsetting its investments and financing exposures as well as by strategically timing and structuring its transactions. The following table presents the effect of a 1.00% increase in the base rates on all variable rate notes receivable and debt and its impact on annual net income:
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) EFFECT OF 1% EFFECT OF 1% BALANCE AT INCREASE IN BASE BALANCE AT INCREASE IN BASE DECEMBER 31, RATE ON INCOME DECEMBER 31, RATE ON INCOME 2001 (EXPENSE) 2000 (EXPENSE) ---- --------- ---- --------- Consolidated assets and liabilities: Notes receivable: Variable rate .............................. $ 4,973 $ 50 $ 7,996 $ 80 Fixed rate ................................. 29,812 -- 29,828 -- --------- --------- --------- --------- $ 34,785 50 $ 37,824 80 ========= --------- ========= --------- Mortgage notes payable: Variable rate .............................. $ 62,780 (628) $ 56,680 (567) Fixed rate ................................. 58,951 -- 59,724 -- --------- --------- --------- --------- $ 121,731 (628) $ 116,404 (567) --------- --------- --------- --------- Convertible Trust Preferred Securities: Fixed rate ................................. $ 25,000 -- $ 25,000 -- ========= --------- ========= --------- Proportionate share of assets and liabilities from investments in joint ventures: Second Holding: Investments: Variable rate ........................... $ 486,174 4,862 $ 115,953 1,160 Fixed rate .............................. -- -- 1,047 -- --------- --------- --------- --------- $ 486,174 4,862 $ 117,000 1,160 ========= ========= Debt: Variable rate ........................... $ 487,335 (4,873) $ 127,727 (1,277) ========= --------- ========= --------- Net effect from Second Holding ................ (11) (117) --------- --------- Wellsford/Whitehall: Debt: Variable rate ........................... $ -- -- $ 900 (9) Variable rate, with LIBOR cap (A) (B) ... 91,162 (912) 119,100 (810) Fixed rate .............................. 29,424 -- 31,154 -- --------- --------- --------- --------- $ 120,586 $ 151,154 ========= ========= Effect from Wellsford/Whitehall ............... (912) (819) --------- --------- Net decrease in annual income, before income tax benefit ....................................... (1,501) (1,423) Income tax benefit ............................... 600 569 --------- --------- Net decrease in annual net income ................ $ (901) $ (854) ========= ========= Per share, basic and diluted ..................... $ (0.12) $ (0.10) ========= ========= - ---------- (A) In July 2001, Wellsford/Whitehall entered into an interest rate protection contract for a notional amount of $285,000, which limits Wellsford/Whitehall's LIBOR exposure to 5.83% until June 2003 and 6.83% for the following year to June 2004. The above calculation assumes exposure of 1.00% on the Company's proportionate share of debt based upon 30-day LIBOR of 1.88% at December 31, 2001. (B) In May 2000, Wellsford/Whitehall entered into an interest rate protection agreement which caps LIBOR at 7.50% on $300,000 until March 15, 2001 and is reduced to $200,000 for the period March 16, 2001 to May 15, 2001. Calculation assumes exposure of 0.68% on the Company's proportionate share of $300,000 based on LIBOR of 6.82% at December 31, 2000.
36 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The response to this Item 8 is included as a separate section of this annual report on Form 10-K (see page F-1). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers and directors of the Company, their ages and their positions are as follows: NAME AGE POSITIONS AND OFFICES HELD ---- --- -------------------------- Jeffrey H. Lynford.... 54 Chairman of the Board, Secretary and Director* Edward Lowenthal...... 57 President, Chief Executive Officer and Director*** James J. Burns........ 62 Senior Vice President, Chief Financial Officer David M. Strong....... 43 Vice President for Development Mark P. Cantaluppi.... 31 Vice President, Chief Accounting Officer Martin Bernstein...... 64 Director** Douglas Crocker II.... 61 Director* Rodney F. Du Bois..... 66 Director*** Richard S. Frary...... 54 Director** Meyer S. Frucher...... 55 Director** Mark S. Germain....... 51 Director* - ---------- * Term expires 2002. ** Term expires 2003. *** Term expires 2004. The information contained in the sections captioned "Nominees for Election as Directors", "Other Directors", "Executive Officers", and "Key Employees" of the Company's definitive proxy statement for the 2002 annual meeting of shareholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information contained in the sections captioned "Executive Compensation", "Compensation of Directors", "Board Committees", "Employment Agreements", and "Management Incentive Plans" of the Company's definitive proxy statement for the 2002 annual meeting of shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Company's definitive proxy statement for the 2002 annual meeting of shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information contained in the section captioned "Certain Transactions" of the Company's definitive proxy statement for the 2002 annual meeting of shareholders is incorporated herein by reference. 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) FINANCIAL STATEMENTS The following consolidated financial information is included as a separate section of this annual report on Form 10-K: Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes. (2) FINANCIAL STATEMENT SCHEDULES III. Real Estate and Accumulated Depreciation IV. Mortgage Loans on Real Estate All other schedules have been omitted because the required information of such other schedules is not present, is not present in amounts sufficient to require submission of the schedule or is included in the consolidated financial statements. (3) EXHIBITS (a) EXHIBIT NO. DESCRIPTION+++ ----------- -------------- 3.1 Articles of Amendment and Restatement of the Company. **** 3.2 Articles Supplementary Classifying 350,000 Shares of Common Stock as Class A Common Stock. **** 3.3 Articles Supplementary Classifying 2,000,000 Shares of Common Stock as Series A 8% Convertible Redeemable Preferred Stock. **** 3.4 Bylaws of the Company. **** 4.1 Specimen certificate for Common Stock. *** 4.2 Specimen certificate for Class A Common Stock. **** 4.3 Specimen certificate for Series A 8% Convertible Redeemable Preferred Stock. **** 4.4 Warrant Sale Agreement, dated as of December 21, 2000, between Wellsford and W/W Group Holdings, L.L.C. ("Holding Co.") relating to the transfer to Wellsford of warrants issued by Wellsford to Holding Co. pursuant to that certain Warrant Agreement dated as of May 28, 1999, by and between Wellsford and United States Trust Company of New York (the "Warrant Agent"). ++++++ 39 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 4.5 Warrant Sale Agreement, dated as of December 21, 2000, between Wellsford and Holding Co. relating to the transfer to Wellsford of warrants issued by Wellsford to Holding Co. pursuant to that certain Warrant Agreement dated as of August 28, 1997, by and between Wellsford and the Warrant Agent, as amended on July 16, 1998, and as further amended on May 28, 1999. ++++++ 4.6 Agreement, dated as of December 21, 2000, terminating the Registration Rights Agreement between Wellsford and Holding Co., dated as of May 28, 1999. ++++++ 10.1 Operating Agreement of Red Canyon at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of April 17, 1996, relating to Red Canyon. * 10.2 First Amendment to Operating Agreement of Red Canyon at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of May 19, 1997, relating to Red Canyon. **** 10.3 Second Amendment to Operating Agreement of Red Canyon at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of November 16, 1998. 10.4 Second Amended and Restated Vacant Land Purchase and Sale Agreement between Mission Viejo Company and The Feld Company dated March 23, 1995, as amended by First Amendment, dated May 1, 1996, relating to the land underlying Palomino Park. * 10.5 Trust Indenture, dated as of December 1, 1995, between Palomino Park Public Improvements Corporation ("PPPIC") and United States Trust Company of New York, as trustee, securing Wellsford Residential Property Trust's Assessment Lien Revenue Bonds Series 1995 - $14,755,000. ** 10.6 Amendment to Wellsford Reimbursement Agreement by and between PPPIC, Wellsford Residential Property Trust and the Company, dated as of May 30, 1997. **** 10.7 Assignment and Assumption Agreement by and between Wellsford Residential Property Trust and the Company, dated as of May 30, 1997. **** 10.8 Credit Enhancement Agreement by and between the Company and ERP Operating Limited Partnership, dated as of May 30, 1997, relating to Palomino Park. **** 10.9 Reimbursement and Indemnification Agreement by and between the Company and ERP Operating Limited Partnership, dated as of May 30, 1997, relating to Palomino Park. **** 10.10Common Stock and Preferred Stock Purchase Agreement by and between the Company and ERP Operating Limited Partnership dated as of May 30, 1997. **** 10.11Registration Rights Agreement by and between the Company and ERP Operating Limited Partnership dated as of May 30, 1997. **** 10.12Credit Agreement, dated as of April 25, 1997, by and among Park Avenue Financing Company LLC, PAMC Co-Manager Inc., PAFC Management, Inc., Stanley Stahl, The First National Bank of Boston, the Company, other banks that may become parties to the Agreement and The First National Bank of Boston, as Agent, relating to 277 Park Avenue. ** 10.13Assignment of Member's Interest, dated as of April 25, 1997, by PAFC Management, Inc. and Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to interests in the Park Avenue Financing Company, LLC). ** 40 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 10.14Assignment of Member's Interest, dated as of April 25, 1997, by PAMC Co-Manager Inc. and Park Avenue Financing, LLC to The First National Bank of Boston, relating to 277 Park Avenue (relating to interests in 277 Park Avenue, LLC). ** 10.15Stock Pledge Agreement, dated as of April 25, 1997, by Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to stock in Park Avenue Management Corporation). ** 10.16Stock Pledge Agreement, dated as of April 25, 1997, by Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to stock in PAMC Co-Manager Inc.). ** 10.17Stock Pledge Agreement, dated as of April 25, 1997, by Stanley Stahl to The First National Bank of Boston, relating to 277 Park Avenue (relating to stock in PAFC Management, Inc.). ** 10.18Conditional Guaranty of Payment and Performance, dated as of April 25, 1997, by Stanley Stahl, relating to 277 Park Avenue. ** 10.19Cash Collateral Account Security, Pledge and Assignment Agreement, dated as of April 25, 1997, by and among 277 Park Avenue, LLC, Park Avenue Management Corporation, Park Avenue Financing Company LLC, PAMC Co-Manager Inc., Stanley Stahl and The First National Bank of Boston, relating to 277 Park Avenue. ** 10.20Recognition Agreement, dated as of April 25, 1997, by and among The First National Bank of Boston, the Company, Column Financial, Inc., Park Avenue Financing Company LLC, PAMC Co-Manager, Inc. and 277 Park Avenue, LLC, relating to 277 Park Avenue. ** 10.21Intercreditor Agreement, dated as of April 25, 1997, between the Company and The First National Bank of Boston, as Agent, relating to 277 Park Avenue. ** 10.22Assignment and Acceptance Agreement, dated June 19, 1997, between BankBoston, N.A. (formerly known as The First National Bank of Boston) ("BankBoston") and the Company, relating to 277 Park Avenue. **** 10.23Revolving Credit Agreement by and among the Company, BankBoston, Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), other banks which may become parties and BankBoston, as agent, and Morgan Guaranty, as co-agent dated as of May 30, 1997. **** 10.24Agreement Regarding Common Stock and Preferred Stock Purchase Agreement, dated as of May 30, 1997, among ERP Operating Limited Partnership, the Company and BankBoston, as agent. **** 10.25Assignment of Common Stock Agreements, dated as of May 30, 1997, between the Company and BankBoston, as agent. **** 10.26Collateral Assignment of Documents, Rights and Claims (including Collateral Assignment of Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing), made as of May 30, 1997, by the Company to BankBoston, as agent. **** 10.27First Amended and Restated Loan Agreement, dated as of July 16, 1998 (the "First Amended and Restated Loan Agreement"), among Wellsford/Whitehall Holdings, L.L.C., as Borrower, and BankBoston, Goldman Sachs Mortgage Company, and other banks, as Banks, and BankBoston, as Administrative Agent and Co-Arranger and Co-Syndication Agent, and Goldman Sachs Mortgage Company, as Co-Arranger and Co-Syndication Agent. ++ 10.28Form of promissory note payable to the order of eight lenders by Wellsford/Whitehall Properties, L.L.C. under the First Amended and Restated Loan Agreement. ++ 41 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 10.29Amended and Restated Assignment of Member's Interest under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford/Whitehall Holdings, L.L.C. to BankBoston, as Agent. ++ 10.30Amended and Restated Cash Collateral Agreement under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by and among Wellsford/Whitehall Holdings, L.L.C., WASH Manager L.L.C., Wells Avenue Holdings L.L.C. and BankBoston, as Agent. ++ 10.31Indemnity Agreement Regarding Hazardous Materials under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford/Whitehall Holdings, L.L.C., Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership for the benefit of BankBoston. ++ 10.32Conditional Guaranty of Payment under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, the Company, Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII and Whitehall Street Real Estate Limited Partnership VIII in favor of BankBoston and Goldman Sachs Mortgage Company. ++ 10.33Indemnity and Guaranty Agreement under the First Amended and Restated Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership in favor of BankBoston, Goldman Sachs Mortgage Company and Other Banks. ++ 10.34Mezzanine Loan Agreement, dated as of July 16, 1998 (the "Mezzanine Loan Agreement"), among Wellsford/Whitehall Holdings II, L.L.C., as Borrower, and BankBoston, Goldman Sachs Mortgage Company, and other banks, as Banks, and BankBoston, as Administrative Agent and Co-Arranger and Co-Syndication Agent, and Goldman Sachs Mortgage Company, as Co-Arranger and Co-Syndication Agent. ++ 10.35Form of promissory note payable to the order of five lenders by Wellsford/Whitehall Properties II, L.L.C. under the Mezzanine Loan Agreement. ++ 10.36Assignment of Member's Interest under the Mezzanine Loan Agreement, dated as of July 16, 1998, between Wellsford/Whitehall Properties II, L.L.C. and BankBoston, as Agent. ++ 10.37Indemnity Agreement Regarding Hazardous Materials under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford/Whitehall Properties II, L.L.C., Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership for the benefit of BankBoston. ++ 10.38Nomura Conditional Guaranty of Payment under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, the Company, Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII and Whitehall Street Real Estate Limited Partnership VIII in favor of BankBoston and Goldman Sachs Mortgage Company. ++ 42 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 10.39Conditional Guaranty of Payment under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, the Company, Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII and Whitehall Street Real Estate Limited Partnership VIII in favor of BankBoston and Goldman Sachs Mortgage Company. ++ 10.40Indemnity and Guaranty Agreement under the Mezzanine Loan Agreement, dated as of July 16, 1998, by Wellsford Commercial Properties Trust and WHWEL Real Estate Limited Partnership in favor of BankBoston, Goldman Sachs Mortgage Company and other banks. ++ 10.401 First Amendment to Mezzanine Loan Agreement, dated as of May 28, 1999 by and among Wellsford/Whitehall Properties II, L.L.C., Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, Wellsford Real Properties, Inc., Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII, Whitehall Street Real Estate Limited Partnership VIII, Wells Avenue Holdings, L.L.C., Wash Manager L.L.C., BankBoston, N.A., Goldman Sachs Mortgage Company, BHF-Bank Aktiengesellschaft, Morgan Stanley Senior Funding Inc., and PAM Capital Funding LP. +++ 10.402 Contribution Agreement, dated as of February 12, 1998, among Saracen Properties, Inc., Saraceno Holding Trust General Partnership, Dominic J. Saraceno, 150 Wells Avenue Realty Trust, River Park Realty Trust, Seventy Wells Avenue LLC, Newton Acquisition LLC I, Saracen Portland L.L.C., KSA Newton Acquisition Limited Partnership II and KSA Newton Limited Partnership I, as Contributor, and Wellsford/Whitehall Properties, L.L.C., as Contributee. ++++ 10.41$50 million Revolving Credit Agreement, dated as of January 12, 1999, among Wellsford Finance, Inc., as Borrower, and BankBoston and other banks, as Lender, and BankBoston, as Agent. ++ 10.42$50 million promissory note, dated January 12, 1999, payable to BankBoston by Wellsford Finance, Inc. ++ 10.43Amended and Restated Revolving Credit Agreement, dated as of June 28, 2000, among Wellsford Finance, LLC, as Borrower and Fleet National Bank and other lenders which may become parties to this agreement, as Lenders and Fleet National Bank, as Agent. # 10.44Collateral Assignment of Documents, Rights and Claims, dated January 12, 1999, from Wellsford Finance, Inc. to BankBoston, as Agent. ++ 10.441 Limited Liability Company Operating Agreement of Wellsford/Whitehall Group, L.L.C., dated as of May 28, 1999. +++ 10.442 First Amendment to the Limited Liability Company Operating Agreement of WWG, dated as of December 21, 2000, among WHWEL Real Estate Limited Partnership, Wellsford Commercial Properties Trust, WXI/WWG Realty, L.L.C., Holding Co. and WP Commercial, L.L.C., dated as of May 28, 1999 (excluding exhibits and schedules). ++++++ 10.45First Amendment of Fixed Rate Loan Agreement, dated as of January 8, 1999, among First Union Real Estate Equity and Mortgage Investments, as Borrower, Bankers Trust Company, Wellsford Capital and BankBoston, as Lenders, and Bankers Trust Company, as Agent. ++ 43 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 10.46Letter dated January 8, 1999, among First Union Real Estate Equity and Mortgage Investments, as Borrower, Bankers Trust Company, Wellsford Capital and BankBoston, as Lenders, and Bankers Trust Company, as Agent. ++ 10.47Revolving Credit Agreement, dated as of March 28, 1998, among Safeguard Capital Fund, L.P., as Borrower, and Morgan Guaranty Trust Company of New York, as Lender. ++ 10.48$90 million promissory note, dated March 28, 1998, payable to Morgan Guaranty Trust Company of New York by Safeguard Capital Fund, L.P. ++ 10.49Loan Participation Agreement, dated as of December 1, 1998, between Morgan Guaranty Trust Company of New York and Wellsford Capital. ++ 10.50Program Agreement for Clairborne Investors Mortgage Program between Creamer Realty Consultants and The Prudential Investment Corporation, dated as of December 10, 1997. + 10.51$34,500,000 Multifamily Note, dated December 24, 1997, payable to the order of GMAC Commercial Mortgage Corporation by Park at Highlands L.L.C. + 10.52Multifamily Deed of Trust, Assignment of Rents and Security Agreement, dated December 24, 1997, by Park at Highlands L.L.C. in favor of GMAC Commercial Mortgage Corporation. + 10.53 1998 Management Incentive Plan of the Company. ++ 10.54 1997 Management Incentive Plan of the Company. ** 10.55 Rollover Stock Option Plan of the Company. ** 10.56Employment Agreement between the Company and Jeffrey H. Lynford. **** 10.57Employment Agreement between the Company and Edward Lowenthal. **** 10.58Employment Agreement between the Company and David M. Strong. **** 10.59Employment Agreement between the Company and Rodney F. Du Bois. +++ 10.60Employment Agreement between the Company and James J. Burns. 10.61Employment Agreement between the Company and Mark P. Cantaluppi. 10.62Certificate of Trust of WRP Convertible Trust I, as filed with the Secretary of State of the State of Delaware on May 5, 2000. +++++ 10.63Declaration of Trust of WRP Convertible Trust I, dated as of May 5, 2000, by and among Rodney F. Du Bois and James J. Burns as Regular Trustees, Wilmington Trust Company as both Delaware Trustee and Institutional Trustee and Wellsford Real Properties, Inc., as Sponsor. +++++ 10.64Indenture for 8.25% Convertible Junior Subordinated Debentures, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and Wilmington Trust Company, as Trustee. +++++ 10.65Preferred Securities Purchase Agreement, dated as of May 5, 2000, by and among Wellsford Real Properties, Inc., WRP Convertible Trust I and ERP Operating Limited Partnership. +++++ 10.66Preferred Securities Guarantee, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and Wilmington Trust Company, as Trustee. +++++ 10.67Common Securities Guarantee, dated as of May 5, 2000, by Wellsford Real Properties, Inc. +++++ 10.68Amendment to Registration Rights Agreement, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and ERP Operating Limited Partnership. +++++ 10.69Articles Supplementary reclassifying and designating 350,000 shares of unissued Common Stock as Class A-1 Common Stock, dated as of May 5, 2000. +++++ 44 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 10.70Bond Pledge and Security Agreement, dated June 16, 2000, among Palomino Park Public Improvements Corporation, as Bond Issuer, Wellsford Real Properties, Inc., together with Bond Issuer, as Pledgor, Commerzbank AG, as Bank, and United States Trust Company of New York, as Bond Trustee. # 10.71Letter of Credit Reimbursement Agreement, dated June 16, 2000, among Palomino Park Public Improvements Corporation, as Bond Issuer, Wellsford Real Properties, Inc., together with Bond Issuer, as Account Parties, and Commerzbank AG, as Bank. # 10.72Unconditional Guaranty of Payment and Performance, dated June 28, 2000, between Wellsford Real Properties, Inc., as Guarantor, and Fleet National Bank, as Lender. # 10.73Promissory Note, dated June 16, 2000, between Wellsford Real Properties, Inc. and Commerzbank AG. # 10.74Letter Agreement dated September 30, 2000, between Wellsford Real Properties, Inc. and Creamer Vitale Wellsford L.L.C. relating to the sale and subsequent assignment of SX Advisors, LLC's interest in Creamer Vitale Wellsford L.L.C. to Wellsford Real Properties, Inc. ## 10.75Assignment of Membership Interest, dated as of October 1, 2000, between SX Advisors, LLC and Wellsford Fordham Tower, L.L.C., whereby SX Advisors, LLC assigned its interest in Creamer Vitale Wellsford L.L.C. to Wellsford Real Properties, Inc. ## 10.76Memorandum of Understanding, dated October 25, 2000, among Wellsford Real Properties, Inc., Wellsford Commercial Properties Trust, WHWEL Real Estate Limited Partnership, WXI/WWG Realty, L.L.C. and W/W Group Holdings, L.L.C., relating to Wellsford/Whitehall Group, L.L.C. ## 10.77Operating Agreement of Silver Mesa at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of December 10, 1998. 10.78First Amendment to the Operating Agreement of Silver Mesa at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of December 19, 2000. 10.79Loan Agreement dated as of December 20, 2000, between Silver Mesa at Palomino Park LLC and KeyBank National Association. ++++ 10.80$32,000,000 Promissory Note dated as of December 20, 2000, payable to KeyBank National Association by Silver Mesa at Palomino Park LLC. ++++ 10.81Guaranty dated December 20, 2000, by Wellsford Capital for the benefit of KeyBank National Association. ++++ 10.82Sale-Purchase Agreement and Joint Escrow Instructions dated as of December 8, 2000, between Wellsford Capital Properties, L.L.C. and Dial Advisory Group, Inc. for the sale of properties located at 1651 Sixteenth Street and 900 Colorado Avenue, Santa Monica, California. ++++ 10.83Sale-Purchase Agreement dated as of December 4, 2000, between Wellsford Capital Properties, L.L.C. and CRC Communities, Inc. for the sale of 501 Hoes Lane, Piscataway, New Jersey. ++++ 10.84Sale-Purchase Agreement dated as of November 27, 2000, between Wellsford Capital Properties, L.L.C. and Windswept Development, LLC for the sale of the Bradford Plaza Shopping Center, West Chester, Pennsylvania. ++++ 10.85Amendment to Employment Agreement between the Company and Rodney F. Du Bois. ### 10.86Sale-Purchase Agreement dated as of December 5, 2000 between Wellsford Capital Properties, L.L.C. and Keystone Real Estate Management, Inc. for the sale of Two Executive Campus, Cherry Hill, New Jersey. ### 45 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 10.87Letter Agreement, dated as of June 7, 2001 between Wellsford Real Properties, Inc. and Mutual Beacon Fund, Mutual Qualified Fund and Mutual Beacon Fund (Canada). #### 10.88Loan Agreement (including Joinder Agreement signed by the Company), dated as of June 25, 2001, between General Electric Capital Corporation and Wellsford/Whitehall Holdings, L.L.C. ^ 10.89Promissory Note, dated June 25, 2001, between General Electric Capital Corporation and Wellsford/Whitehall Holdings, L.L.C. ^ 10.90Guaranty, dated as of June 25, 2001, made by WWG 401 North Washington LLC in favor of General Electric Capital Corporation. ^ 10.91Hazardous Substances Indemnity Agreement, dated as of June 25, 2001, by Wellsford/Whitehall Holdings, L.L.C., WWG 401 North Washington LLC, Wellsford/Whitehall Group, L.L.C. and Wellsford/Whitehall Properties II, L.L.C. for the benefit of General Electric Capital Corporation. ^ 10.92Indemnification Agreement, dated as of June 25, 2001, between Whitehall Street Real Estate Limited Partnership V, Whitehall Street Real Estate Limited Partnership VI, Whitehall Street Real Estate Limited Partnership VII, Whitehall Street Real Estate Limited Partnership VIII, Whitehall Street Real Estate Limited Partnership XI, Whitehall Street Real Estate Limited Partnership XII and Wellsford Real Properties, Inc. in favor of General Electric Capital Corporation. ^ 10.93Indemnity Regarding Guaranty Obligations, dated as of June 25, 2001, between Wellsford/Whitehall Holdings, L.L.C. and WWG 401 North Washington LLC. ^ 10.94October 2001 Amendment to the Letter of Credit Reimbursement Agreement, dated October 26, 2001 among PPPIC, Wellsford Real Properties, Inc. and Commerzbank AG. ^^ 10.95Employment Separation Agreement dated as of December 7, 2001 by and between Wellsford Real Properties, Inc. and Edward Lowenthal. ^^^ 10.96Amended and Restated Employment Agreement dated as of December 7, 2001 by and between Wellsford Real Properties, Inc. and Jeffrey H. Lynford. ^^^ 10.97Sale-Purchase Agreement dated as of November 5, 2001 between Wellsford Capital Properties, L.L.C. and The Judge Rotenberg Educational Center, Inc. for the sale of 250 Turnpike Street, Canton, Massachusetts. 10.98Indemnity Agreement dated as of December 31, 2001 by and between Wellsford Park Highlands Corp., Wellsford Real Properties, Inc. and Al Feld for the Green River Construction Loan. 10.99Operating Agreement of Green River at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of January 5, 2000. 10.100 First Amendment to the Operating Agreement of Green River at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of February 11, 2002. 10.101 $27,000,000 Multifamily Note, dated November 20, 1998, payable to the order of GMAC Commercial Mortgage Corporation by Red Canyon at Palomino Park LLC. 10.102 Multifamily Deed of Trust, Assignment of Rents and Security Agreement, dated November 20, 1998, by Red Canyon at Palomino Park LLC in favor of GMAC Commercial Mortgage Corporation. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of KPMG LLP. 46 EXHIBIT NO. DESCRIPTION+++ (CONTINUED) ----------- -------------------------- 99.1 "Risk Factors" section of the Company's Registration Statement on Form S-3 (file no. 333-73874), as may be amended. - ---------- * Previously filed as an exhibit to the Form 10 filed on April 23, 1997. ** Previously filed as an exhibit to the Form 10/A Amendment No. 1 filed on May 21, 1997. *** Previously filed as an exhibit to the Form 10/A Amendment No. 2 filed on May 28, 1997. **** Previously filed as an exhibit to the Form S-11 filed on July 30, 1997. *****Previously filed as an exhibit to Amendment No. 1 to Form S-11 filed on November 14, 1997. + Previously filed as an exhibit to the Form 8-K filed on September 11, 1997. ++ Previously filed as an exhibit to the Form 8-K filed on September 23, 1997. +++ Wellsford acquired its interest in a number of these documents by assignment. ++++ Previously filed as an exhibit to the Form 8-K filed on April 28, 1998. +++++ Previously filed as an exhibit to the Form 8-K filed on May 11, 2000. ++++++ Previously filed as an exhibit to the Form 8-K filed on January 11, 2001. + Previously filed as an exhibit to the Form 10-K filed on March 31, 1998. ++ Previously filed as an exhibit to the Form 10-K filed on March 31, 1999. +++ Previously filed as an exhibit to the Form 10-K filed on March 29, 2000. ++++ Previously filed as an exhibit to the Form 10-K filed on March 22, 2001. # Previously filed as an exhibit to the Form 10-Q filed on August 2, 2000. ## Previously filed as an exhibit to the Form 10-Q filed on November 3, 2000. ### Previously filed as an exhibit to the Form 10-Q filed on May 4, 2001. #### Previously filed as an exhibit to the Form 8-K filed on June 14, 2001. ^ Previously filed as an exhibit to the Form 10-Q filed on August 10, 2001. ^^ Previously filed as an exhibit to the Form 10-Q filed on November 6, 2001. ^^^ Previously filed as an exhibit to the Form 8-K filed on December 10, 2001. (b) During the last quarter of the period covered by this report, the Company filed the following reports on Form 8-K: Date of Report (Date of Earliest Event) Items Reported Date Filed - ------------------------ -------------- ---------- December 10, 2001 Senior management changes at December 10, 2001 (December 7, 2001) Wellsford Real Properties, Inc. (c) The following exhibits are filed as exhibits to this Form 10-K: See Item 14 (a) (3) above. (d) The following documents are filed as a part of this report: None. 47 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. WELLSFORD REAL PROPERTIES, INC. By: /s/ James J. Burns ---------------------- James J. Burns Senior Vice President, Chief Financial Officer By: /s/ Mark P. Cantaluppi ---------------------- Mark P. Cantaluppi Vice President, Chief Accounting Officer Dated: March 12, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Jeffrey H. Lynford Chairman of the Board, Secretary and Director March 12, 2002 - ------------------------- Jeffrey H. Lynford /s/ Edward Lowenthal President, Chief Executive Officer and Director March 12, 2002 - ------------------------- (Principal Executive Officer) Edward Lowenthal /s/ Martin Bernstein Director March 12, 2002 - ------------------------- Martin Bernstein /s/ Douglas Crocker II Director March 12, 2002 - ------------------------- Douglas Crocker II /s/ Rodney F. Du Bois Director March 12, 2002 - ------------------------- Rodney F. Du Bois /s/ Richard S. Frary Director March 12, 2002 - ------------------------- Richard S. Frary /s/ Meyer S. Frucher Director March 12, 2002 - ------------------------- Meyer S. Frucher /s/ Mark S. Germain Director March 12, 2002 - ------------------------- Mark S. Germain
48 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The following is a list of subsidiaries of the registrant with the respective state of organization as of December 31, 2001: SUBSIDIARY STATE ---------- ----- Wellsford Real Properties, Inc.............. Maryland Wellsford Capital........................... Maryland Wellsford Capital Properties, L.L.C......... Delaware Wellsford Capital Corporation............... Maryland Wellsford Finance, L.L.C.................... Delaware Second Holding Company, LLC................. Delaware Belford Capital Management, L.L.C........... Delaware Belford ZMTN Company, L.L.C................. Delaware Wellsford CRC Holding Corp.................. Maryland Clairborne Fordham Tower, LLC............... Delaware Creamer Vitale Wellsford L.L.C.............. Delaware Clairborne North Capital, L.L.C............. Delaware Wellsford Fordham Tower, L.L.C.............. Delaware Wellsford Park Highlands Corp............... Colorado Park at Highlands L.L.C..................... Colorado Red Canyon at Palomino Park L.L.C........... Colorado Silver Mesa at Palomino Park L.L.C.......... Colorado Green River at Palomino Park L.L.C.......... Colorado Gold Peak at Palomino Park L.L.C............ Colorado Palomino Park Telecom L.L.C................. Colorado Parkside Cafe at Palomino Park, Inc......... Colorado Palomino Park Owners Assoc.................. Colorado Silver Mesa Homeowners Assoc................ Colorado Wellsford Commercial Properties Trust....... Maryland Wellsford/Whitehall Group, L.L.C............ Delaware Wellsford Ventures, Inc..................... Maryland WRP Convertible Trust I..................... Delaware 49 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-73874) of Wellsford Real Properties, Inc. and in the related Prospectus of our report dated March 8, 2002, with respect to the consolidated financial statements and schedules of Wellsford Real Properties, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ ERNST & YOUNG LLP New York, New York March 22, 2002 50 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT To the Board of Directors Wellsford Real Properties, Inc.: We consent to the incorporation by reference in the registration statement on Form S-3, No. 333-73874, of Wellsford Real Properties, Inc., of our report dated February 21, 2002, with respect to the consolidated balance sheets of Second Holding Company, LLC and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, members' equity and cash flows for the years then ended, which report appears in the December 31, 2001 annual report on Form 10-K of Wellsford Real Properties, Inc. /s/ KPMG LLP Chicago, Illinois March 20, 2002 51 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE NO. IN FORM 10-K --------- Report of Independent Auditors...........................................F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000.............F-4 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999..........F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999..........F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999..........F-7 Notes to Consolidated Financial Statements...............................F-8 Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes.....................................................F-48 FINANCIAL STATEMENT SCHEDULES III - Real Estate and Accumulated Depreciation...........................S-1 IV - Mortgage Loans on Real Estate.......................................S-3 All other schedules have been omitted because the required information for such other schedules is not present, is not present in amounts sufficient to require submission of the schedule or because the required information is included in the consolidated financial statements. F-1 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Wellsford Real Properties, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Wellsford Real Properties, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of Second Holding Company, LLC, a 51% owned joint venture of the Company, for which the Company's net investment is $27,862,508 and $27,867,597 as of December 31, 2001 and 2000, respectively, and equity in (loss) earnings of $(162,933) and $1,431,835, respectively, for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the data included for Second Holding Company, LLC, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellsford Real Properties, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ERNST & YOUNG LLP New York, New York March 8, 2002 F-2 INDEPENDENT AUDITORS' REPORT The Board of Managers Second Holding Company, LLC: We have audited the consolidated balance sheet of Second Holding Company, LLC and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, members' equity and cash flows for the years then ended (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Second Holding Company, LLC and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois February 21, 2002 F-3 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------ 2001 2000 ---- ---- ASSETS Real estate assets, at cost: Land ....................................................................... $ 23,113,670 $ 17,519,701 Buildings and improvements ................................................. 139,223,965 110,405,567 ------------- ------------- 162,337,635 127,925,268 Less: Accumulated depreciation ................................................ (9,873,232) (8,248,184) Impairment reserve relating to assets held for sale ..................... (2,174,853) (4,725,000) ------------- ------------- 150,289,550 114,952,084 Residential units available for sale ....................................... 5,400,951 21,849,581 Construction in progress ................................................... 5,399,631 22,229,368 ------------- ------------- 161,090,132 159,031,033 Notes receivable .............................................................. 34,784,727 37,824,291 Investment in joint ventures .................................................. 95,806,509 120,969,017 ------------- ------------- Total real estate and investments ............................................. 291,681,368 317,824,341 Cash and cash equivalents ..................................................... 36,148,529 36,368,706 Restricted cash and investments ............................................... 7,553,159 9,921,506 Prepaid and other assets ...................................................... 10,455,101 11,655,024 ------------- ------------- Total assets .................................................................. $ 345,838,157 $ 375,769,577 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable ..................................................... $ 121,730,604 $ 104,403,970 Credit facility ............................................................ -- 12,000,000 Accrued expenses and other liabilities, including the liability for deferred compensation of $6,604,106 and $7,008,336 ............................... 17,532,211 15,152,759 ------------- ------------- Total liabilities ............................................................. 139,262,815 131,556,729 ------------- ------------- Company-obligated, mandatorily redeemable, convertible preferred securities of WRP Convertible Trust I, holding solely 8.25% junior subordinated debentures of Wellsford Real Properties, Inc. ("Convertible Trust Preferred Securities") ............................................... 25,000,000 25,000,000 Minority interest ............................................................. 3,496,640 3,230,499 Commitments and contingencies Shareholders' equity: Series A 8% convertible redeemable preferred stock, $.01 par value per share, 2,000,000 shares authorized, no shares issued and outstanding .... -- -- Common stock, 98,825,000 shares authorized, $.02 par value per share - 6,235,338 and 8,180,475 shares issued and outstanding ................... 124,707 163,610 Class A-1 common stock, 175,000 shares authorized, $.02 par value per share - 169,903 shares issued and outstanding ........................... 3,398 3,398 Paid in capital in excess of par value ..................................... 162,083,959 196,282,360 Retained earnings .......................................................... 23,989,504 26,714,120 Accumulated other comprehensive income (loss); share of unrealized loss on interest rate protection contract purchased by joint venture investment, net of income tax benefit ................................... (102,736) -- Deferred compensation ...................................................... (1,520,996) (1,788,005) Treasury stock, 317,997 and 257,935 shares ................................. (6,499,134) (5,393,134) ------------- ------------- Total shareholders' equity .................................................... 178,078,702 215,982,349 ------------- ------------- Total liabilities and shareholders' equity .................................... $ 345,838,157 $ 375,769,577 ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-4 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- REVENUES Rental revenue ......................................... $ 13,768,411 $ 18,681,250 $ 17,874,272 Revenue from sales of residential units ................ 21,932,050 -- -- Interest revenue ....................................... 5,175,162 6,256,739 12,295,771 Fee revenue ............................................ 617,376 685,800 600,000 ------------ ------------ ------------ Total revenues ...................................... 41,492,999 25,623,789 30,770,043 ------------ ------------ ------------ COSTS AND EXPENSES Cost of sales of residential units ..................... 19,363,647 -- -- Property operating and maintenance ..................... 3,791,740 4,351,150 4,027,842 Real estate taxes ...................................... 1,051,060 1,609,649 1,545,822 Depreciation and amortization .......................... 5,307,394 4,967,821 6,154,549 Property management .................................... 557,255 798,761 673,726 Interest ............................................... 4,355,864 7,076,122 9,398,630 General and administrative ............................. 8,466,948 7,377,168 7,725,876 Restructuring charge ................................... 3,526,772 -- -- ------------ ------------ ------------ Total costs and expenses ............................ 46,420,680 26,180,671 29,526,445 Gain on sale of assets, net of impairment provision of $4,725,000 in 2000 ..................................... -- 6,134,851 -- Income from joint ventures ................................ 4,564,406 3,246,758 9,621,952 ------------ ------------ ------------ (Loss) income before minority interest, income taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities ................. (363,275) 8,824,727 10,865,550 Minority interest ......................................... (282,526) (66,221) (54,749) ------------ ------------ ------------ (Loss) income before taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities .......................................... (645,801) 8,758,506 10,810,801 Income tax expense ........................................ 699,000 1,430,000 1,950,000 ------------ ------------ ------------ (Loss) income before accrued distributions and amortization of costs on Convertible Trust Preferred Securities .. (1,344,801) 7,328,506 8,860,801 Accrued distributions and amortization of costs on Convertible Trust Preferred Securities, net of income tax benefit of $720,000 and $510,000 ................ 1,379,815 860,461 -- ------------ ------------ ------------ Net (loss) income ......................................... $ (2,724,616) $ 6,468,045 $ 8,860,801 ============ ============ ============ Net (loss) income per common share, basic ................. $ (0.38) $ 0.76 $ 0.86 ============ ============ ============ Net (loss) income per common share, diluted ............... $ (0.38) $ 0.76 $ 0.86 ============ ============ ============ Weighted average number of common shares outstanding, basic ............................................... 7,213,029 8,507,631 10,321,012 ============ ============ ============ Weighted average number of common shares outstanding, diluted ............................................. 7,213,029 8,516,321 10,328,744 ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-5 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED COMMON SHARES* OTHER -------------- PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL** EARNINGS INCOME (LOSS) ------ ------ --------- -------- ------------- BALANCE, JANUARY 1, 1999 ............. 10,375,206 $ 207,504 $ 223,272,068 $ 11,385,274 $ -- Director and employee share grants ... 17,306 346 334,987 -- -- Shares repurchased from former officer and cancellation of share grants ............................ (43,115) (862) (853,810) -- -- Amortization of deferred compensation ...................... -- -- -- -- -- Issuance of warrants ................. -- -- 480,992 -- -- Shares repurchased and cancelled ..... (738,247) (14,765) (12,119,645) -- -- Net income ........................... -- -- -- 8,860,801 -- --------- ------------- ------------- ------------- ------------- BALANCE, DECEMBER 31, 1999 ........... 9,611,150 192,223 211,114,592 20,246,075 -- Director and employee share grants ... 57,960 1,159 911,841 -- -- Amortization of deferred compensation ...................... -- -- -- -- -- Shares repurchased and cancelled ..... (1,318,732) (26,374) (21,137,207) -- -- Net income ........................... -- -- -- 6,468,045 -- --------- ------------- ------------- ------------- ------------- BALANCE, DECEMBER 31, 2000 ........... 8,350,378 167,008 190,889,226 26,714,120 -- Director and employee share grants ... 75,647 1,513 1,434,487 -- -- Amortization of deferred Compensation*** ................... -- -- -- -- -- Shares repurchased and cancelled ..... (2,020,784) (40,416) (36,535,776) -- -- Registration costs ................... -- -- (123,112) -- -- Warrants repurchased and cancelled ... -- -- (80,000) -- -- Share of unrealized loss on interest rate protection contract purchased by joint venture investment, net of income tax benefit of $68,491 ..... -- -- -- -- (102,736) Net loss ............................. -- -- -- (2,724,616) -- --------- ------------- ------------- ------------- ------------- BALANCE, DECEMBER 31, 2001 ........... 6,405,241 $ 128,105 $ 155,584,825 $ 23,989,504 $ (102,736) ========= ============= ============= ============= ============= TOTAL DEFERRED SHAREHOLDERS' COMPREHENSIVE COMPENSATION EQUITY INCOME (LOSS) ------------ ------ ------------- BALANCE, JANUARY 1, 1999 ............. $ (3,240,023) $ 231,624,823 $ -- Director and employee share grants ... (250,000) 85,333 -- Shares repurchased from former officer and cancellation of share grants ............................ 780,003 (74,669) -- Amortization of deferred compensation ...................... 848,343 848,343 -- Issuance of warrants ................. -- 480,992 -- Shares repurchased and cancelled ..... -- (12,134,410) -- Net income ........................... -- 8,860,801 8,860,801 ------------- ------------- ------------- BALANCE, DECEMBER 31, 1999 ........... (1,861,677) 229,691,213 $ 8,860,801 ============= Director and employee share grants ... (833,000) 80,000 $ -- Amortization of deferred compensation ...................... 906,672 906,672 -- Shares repurchased and cancelled ..... -- (21,163,581) -- Net income ........................... -- 6,468,045 6,468,045 ------------- ------------- ------------- BALANCE, DECEMBER 31, 2000 ........... (1,788,005) 215,982,349 $ 6,468,045 ============= Director and employee share grants ... (1,356,000) 80,000 $ -- Amortization of deferred Compensation*** ................... 1,623,009 1,623,009 -- Shares repurchased and cancelled ..... -- (36,576,192) -- Registration costs ................... -- (123,112) -- Warrants repurchased and cancelled ... -- (80,000) -- Share of unrealized loss on interest rate protection contract purchased by joint venture investment, net of income tax benefit of $68,491 ..... -- (102,736) (102,736) Net loss ............................. -- (2,724,616) (2,724,616) ------------- ------------- ------------- BALANCE, DECEMBER 31, 2001 ........... $ (1,520,996) $ 178,078,702 $ (2,827,352) ============= ============= ============= - ---------- * Includes 169,903 Class A-1 Common Shares. ** Net of treasury stock. *** Includes $45,000 charged to the restructuring charge related to early retirement.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ............................................. $ (2,724,616) $ 6,468,045 $ 8,860,801 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... 5,126,018 4,979,927 5,936,944 Amortization of deferred compensation ................... 1,578,009 906,672 848,343 Non-cash charges in restructuring charge ................ 61,081 -- -- Undistributed joint venture income ...................... -- -- (674,788) Distributions received in excess of joint venture income 163,695 1,493,056 -- Undistributed minority interest ......................... 282,526 66,221 54,749 Shares issued for director compensation ................. 80,000 80,000 85,333 Gain on sale of assets, net of impairment provision of $4,725,000 in 2000 ................................... -- (6,134,851) -- Changes in assets and liabilities: Restricted cash and investments ...................... 2,368,347 506,338 (459,242) Residential units available for sale ................. 16,448,630 -- -- Prepaid and other assets ............................. 855,258 (1,003,471) (498,434) Accrued expenses and other liabilities ............... 2,362,890 2,661,548 (297,112) ------------- ------------- ------------- Net cash provided by operating activities ............... 26,601,838 10,023,485 13,856,594 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in real estate assets ............................. (40,046,696) (39,026,039) (18,974,593) Investments in joint ventures: Capital contributions .................................... (8,565,877) (12,895,201) (16,967,948) Returns of capital ....................................... 31,616,900 2,886,017 6,091,481 Investments in notes receivable ............................... (500,000) (28,833,000) (49,295,088) Repayments of notes receivable ................................ 3,589,255 32,408,296 112,741,492 Proceeds from sale of joint venture investment ................ -- 1,032,000 -- Proceeds from sale of real estate assets ...................... 18,553,458 21,650,257 7,238,329 ------------- ------------- ------------- Net cash (used in) provided by investing activities ...... 4,647,040 (22,777,670) 40,833,673 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Convertible Trust Preferred Securities ............ -- 25,000,000 -- Deferred financing costs ...................................... -- (544,360) -- Borrowings from credit facilities ............................. 12,000,000 12,000,000 37,000,000 Repayment of credit facilities ................................ (24,000,000) -- (54,000,000) Borrowings from mortgage notes payable ........................ 36,747,451 32,000,000 -- Interest reserve from mortgage note proceeds .................. -- (1,960,752) -- Repayment of mortgage notes payable ........................... (19,420,817) (30,939,713) (861,861) Distributions to minority interest ............................ (16,385) (8,569) (1,498) Costs incurred for reverse stock split ........................ -- (44,364) -- Costs to repurchase warrants .................................. (80,000) -- -- Registrations costs ........................................... (123,112) -- -- Repurchase of common shares ................................... (36,576,192) (21,119,217) (12,209,079) ------------- ------------- ------------- Net cash (used in) provided by financing activities ..... (31,469,055) 14,383,025 (30,072,438) ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents ............. (220,177) 1,628,840 24,617,829 Cash and cash equivalents, beginning of year ..................... 36,368,706 34,739,866 10,122,037 ------------- ------------- ------------- Cash and cash equivalents, end of year ........................... $ 36,148,529 $ 36,368,706 $ 34,739,866 ============= ============= ============= SUPPLEMENTAL INFORMATION: Cash paid during the year for interest, including amounts capitalized of $1,610,359, $2,347,000 and $1,071,000, respectively ............................................... $ 5,849,094 $ 9,044,373 $ 10,410,110 ============= ============= ============= Cash paid during the year for income taxes, net of tax refunds $ 1,154,461 $ (107,095) $ 4,229,164 ============= ============= ============= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Warrants issued in connection with joint venture investments .. $ 480,992 Notes receivable contributed for joint venture interest ....... $ 24,218,113 Note received upon sale of joint venture interest ............. $ 4,128,000 Mortgage note payable assumed upon sale of real estate asset .. $ 15,971,245 Other comprehensive loss; share of unrealized loss on interest rate protection contract purchased by joint venture investment, net of tax benefit ............................. $ 102,736
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Wellsford Real Properties, Inc. (and subsidiaries, collectively the "Company") was formed as a Maryland corporation on January 8, 1997, as a corporate subsidiary of Wellsford Residential Property Trust (the "Trust"). On May 30, 1997, the Trust merged (the "Merger") with Equity Residential Properties Trust ("EQR"). Immediately prior to the Merger, the Trust contributed certain of its assets to the Company and the Company assumed certain liabilities of the Trust. Immediately after the contribution of assets to the Company and immediately prior to the Merger, the Trust distributed to its common shareholders all the outstanding shares of the Company owned by the Trust (the "Spin-off"). On June 2, 1997, the Company sold 6,000,000 shares of its common stock in a private placement (the "Private Placement") to a group of institutional investors at $20.60 per share, the Company's then book value per share. The Company is a real estate merchant banking firm headquartered in New York City which acquires, develops, finances and operates real properties and organizes and invests in private and public real estate companies. The Company has established three strategic business units ("SBUs") within which it executes its business plan: (i) commercial property operations which are held in the Company's subsidiary, Wellsford Commercial Properties Trust, through its ownership interest in Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall"); (ii) debt and equity activities through the Wellsford Capital SBU; and (iii) property development and land operations through the Wellsford Development SBU. In December 2000, the Company and various entities affiliated with the Whitehall Funds ("Whitehall"), private real estate funds sponsored by The Goldman Sachs Group, Inc. ("Goldman Sachs"), executed definitive agreements modifying the terms of the Wellsford/Whitehall joint venture effective January 1, 2001 (the "Amendments"). The key features of the Amendments provide for the Company to retain its economic interest in Wellsford/Whitehall, while an affiliate of Whitehall will become responsible for day-to-day operations. The Company will maintain its current membership on Wellsford/Whitehall's management committee and must agree to specified "Major Decisions." Also, as part of the Amendments, warrants to purchase 2,128,099 of the Company's stock, which had previously been issued to Whitehall, were returned and cancelled. Whitehall has also agreed to pay the Company certain specified fees when Wellsford/Whitehall assets are sold as well as when certain new assets are acquired by Whitehall affiliates in a newly formed entity. See Note 12 for additional information regarding the Company's industry segments. As announced in December 2001, Rodney Du Bois, the Company's Vice Chairman, retired on December 31, 2001 and Edward Lowenthal, the Company's co-founder, Chief Executive Officer and President will retire on March 31, 2002. Jeffrey H. Lynford, currently Chairman of the Board, will also assume the positions and duties of Chief Executive Officer and President upon Mr. Lowenthal's retirement. Mr. Lynford's employment agreement has been modified and extended through December 31, 2004. Messrs. Lowenthal and Du Bois will continue as members of the Board of Directors of the Company. Additionally, Mr. Lowenthal will be available to provide consulting services at the request of the Company through September 30, 2004. F-8 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION. The accompanying consolidated financial statements include the accounts of Wellsford Real Properties, Inc. and its majority-owned and controlled subsidiaries. Investments in entities where the Company does not have a controlling interest are accounted for under the equity method of accounting. These investments are initially recorded at cost and are subsequently adjusted for the Company's proportionate share of the investment's income (loss), additional contributions or distributions. Investments in entities where the Company does not have the ability to exercise significant influence are accounted for under the cost method. All significant inter-company accounts and transactions among Wellsford Real Properties, Inc. and its subsidiaries have been eliminated in consolidation. The accompanying consolidated financial statements include the assets and liabilities contributed to and assumed by the Company from the Trust, from the time such assets and liabilities were acquired or incurred, respectively, by the Trust. Such financial statements have been prepared using the historical basis of the assets and liabilities and the historical results of operations related to the Company's assets and liabilities. CASH AND CASH EQUIVALENTS. The Company considers all demand and money market accounts and short term investments in government funds with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. REAL ESTATE AND DEPRECIATION AND AMORTIZATION. Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Ordinary repairs and maintenance are expensed as incurred. Tenant improvements and leasing commissions related to commercial properties are capitalized and amortized over the terms of the related leases. Costs incurred to acquire investments in joint ventures are capitalized and amortized over the expected life of the related assets. Additional amortization is charged as assets are sold in cases where the joint venture would cease to exist when all assets are sold or otherwise disposed of. Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis, principally 27.5 years for residential buildings and improvements, 40 years for commercial properties and three to twelve years for furnishings and equipment. Depreciation and amortization expense was approximately $5,307,000, $4,968,000 and $6,155,000 in 2001, 2000 and 1999, respectively, and included approximately $1,950,000, $664,000 and $1,510,000 of amortization of certain costs capitalized to the Company's Investment in Joint Ventures in 2001, 2000 and 1999, respectively. F-9 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company reviews its real estate assets, investments in joint ventures and other investments (collectively its "long-lived assets") for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the fourth quarter of 2000, the Company made the strategic decision to sell the seven assets which were originally acquired as part of the 1998 merger with Value Property Trust ("VLP"). The Company sold one property in December 2000 and four other properties during 2001. The Company determined that the aggregate carrying amount of certain of the assets was less than the amounts expected to be ultimately realized upon sale, less selling expenses. Accordingly, the Company recorded an impairment provision in the fourth quarter of 2000 of $4,725,000 which is reflected in the accompanying consolidated statements of operations as an offset to the gain on the property sold in December 2000 of approximately $4,943,000. At December 31, 2001, approximately $2,175,000 of the provision was remaining on the two unsold assets, both of which the Company expects to sell during 2002. The net book value of the two unsold properties was approximately $5,560,000 at December 31, 2001. The Company determined that no additional impairment provision is required at December 31, 2001. During the year ended December 31, 1999, the Company determined that one of its joint venture investments, Creamer Vitale Wellsford, L.L.C. ("CVW") was impaired due to lower than expected operating results and accordingly wrote the asset down by approximately $912,000 to its then estimated fair value by recording additional depreciation and amortization expense in the accompanying consolidated financial statements. Fair value was based on estimated future cash flows to be generated by the long-lived asset, discounted at a market rate. In September 2000, the Company recorded additional depreciation and amortization expense of $145,000 as one of the two principals left CVW to pursue other employment and the venture was terminated. REAL ESTATE - RESIDENTIAL UNITS AVAILABLE FOR SALE. The Company's residential units available for sale are recorded at the lower of historical cost or market value based upon current conditions. As units are sold, the cost of each unit is charged to cost of sales based upon its relative sales value. DEFERRED FINANCING COSTS. Deferred financing costs consist of costs incurred to obtain financing or financing commitments, including the issuance of the Convertible Trust Preferred Securities. Such costs are amortized over the expected term of the respective agreements. MORTGAGE NOTE RECEIVABLE IMPAIRMENT. The Company considers a note impaired if, based on current information and events, it is probable that all amounts due, including future interest, payable under the note agreement are not collectable. Impairment is measured based upon the fair value of the underlying collateral. No impairment has been recorded during the years ended December 31, 2001, 2000 and 1999. INCOME RECOGNITION. Commercial properties are leased under operating leases. Rental revenue is recognized on a straight-line basis over the terms of the respective leases. Residential communities are leased under operating leases with terms of generally six to 14 months. Rental revenue is recognized monthly as it is earned. Interest income is recorded on an accrual basis over the life of the loan. Sales of real estate assets are recognized at closing, subject to receipt of down payments and other requirements in accordance with applicable accounting guidelines. F-10 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHARE BASED COMPENSATION. Statement of Financial Accounting Standard ("SFAS") 123 "Accounting for Stock-Based Compensation" establishes a fair value based method of accounting for share based compensation plans, including share options. However, registrants may elect to continue accounting for share option plans under Accounting Principles Board Opinion ("APB") 25, but are required to provide pro forma net income and earnings per share information "as if" the new fair value approach had been adopted. Because the Company has elected to continue to account for its share based compensation plans under APB 25, there has been no impact on the Company's consolidated financial statements resulting from SFAS 123. Shares issued pursuant to the Company's deferred compensation plan are recorded at the market price on the date of issuance and amortized over the respective vesting periods. INCOME TAXES. The Company accounts for income taxes under SFAS 109 "Accounting for Income Taxes." Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are estimated to be in effect when the differences are expected to reverse. Valuation allowances with respect to deferred income tax assets are recorded when deemed appropriate and adjusted based upon periodic evaluations. DERIVATIVE AND HEDGING ACTIVITIES. In June 1998, SFAS No. 133--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES was issued. In June 1999, SFAS No. 137--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 (AN AMENDMENT OF FASB STATEMENT NO. 133) was issued. SFAS No. 137 extended the required date of adoption of SFAS No. 133 to the fiscal year beginning June 15, 2000. The Company and its joint venture investments have adopted SFAS No. 133 effective January 1, 2001. SFAS No. 133 requires the Company and its joint venture investments to recognize all derivatives on the balance sheet at fair value. The Company's derivative investments are currently made by its joint venture investments and are primarily interest rate hedges where changes in the fair value of the derivative are offset against the changes in the fair value of the hedged debt or a cash flow hedge which limits the base rate of variable rate debt. For a cash flow hedge, the ineffective portion of a derivative's change in fair value is immediately recognized in earnings, if applicable and the effective portion of the fair value difference of the derivative is reflected separately in shareholders' equity as accumulated other comprehensive income (loss), net of income tax benefit (cost). F-11 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PER SHARE DATA. Basic earnings per common share are computed based upon the weighted average number of common shares outstanding during the period, including class A-1 common shares. Diluted earnings per common share are based upon the increased number of common shares that would be outstanding assuming the exercise of dilutive common share options, warrants and Convertible Trust Preferred Securities. The following table details the computation of earnings per share, basic and diluted:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Numerator for net (loss) income per common share, basic and diluted ................................................ $(2,724,616) $ 6,468,045 $ 8,860,801 =========== =========== =========== Denominator: Denominator for net income per common share, basic-- Weighted average common shares .................... 7,213,029 8,507,631 10,321,012 Effect of dilutive securities: Employee stock options ............................ -- 8,690 7,732 Convertible Trust Preferred Securities ............ -- -- -- Warrants .......................................... -- -- -- ----------- ----------- ----------- Denominator for net income per common share, diluted-- Weighted average common shares .................... 7,213,029 8,516,321 10,328,744 =========== =========== =========== Net (loss) income per common share, basic ................. $ (0.38) $ 0.76 $ 0.86 =========== =========== =========== Net (loss) income per common share, diluted ............... $ (0.38) $ 0.76 $ 0.86 =========== =========== ===========
ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENTLY ISSUED PRONOUNCEMENTS NOT YET ADOPTED. In August 2001, SFAS No. 144--ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OR LONG-LIVED ASSETS was issued. SFAS No. 144 supersedes SFAS No. 121--ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not anticipate that the adoption of SFAS No. 144 will have a material effect on its results of operations or financial position. RECLASSIFICATION. Amounts in certain accounts have been reclassified to conform to the current year presentation. Fees of $600,000 received from Wellsford/Whitehall in 2000 and 1999 have been reflected as revenues compared to the previous treatment as an offset to general and administrative expenses in the accompanying Consolidated Statements of Operations. F-12 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. RESTRICTED CASH AND INVESTMENTS Restricted cash and investments primarily consists of deferred compensation arrangement deposits and debt service and construction reserve balances. At December 31, 2001 and 2000, deferred compensation arrangement deposits amounted to approximately $6,604,000 and $7,008,000, respectively, and reserve balances amounted to approximately $949,000 and $2,913,000, respectively. Deferred compensation arrangement deposits, are made in cash, but can be directed to be used to purchase other investments including equity securities, bonds and partnership interests. 4. NOTES RECEIVABLE At December 31, 2001 and 2000, notes receivable consisted of the following:
INTEREST BALANCE AT DECEMBER 31, STATED RATE IN PAYMENT ----------------------- NOTES RECEIVABLE (A) INTEREST RATE EFFECT (B) MATURITY DATE TERMS 2001 2000 -------------------- ------------- ---------- ------------- ----- ---- ---- 277 Park Loan ............. 12.00% 12.00% May 2007 Interest only $25,000,000 $25,000,000 Patriot Loan .............. LIBOR + 4.75% 6.89% July 2002 (C) 4,972,727 5,000,000 Guggenheim ................ 8.25% 8.25% December 2005 (D) 3,612,000 4,128,000 Safeguard Credit Facility . LIBOR + 4.00% -- April 2001 Interest only -- 2,900,000 Other ..................... Various -- Various Various (E) 1,200,000 796,291 ----------- ----------- $34,784,727 $37,824,291 =========== =========== - ---------- (A) For additional information regarding notes receivable, see Footnote 12, "Segment Information, Debt and Equity Investments." (B) At December 31, 2001 based upon then in effect fixed rates and LIBOR contracts. (C) Principal amortization commenced August 2001 based on a 25-year amortization schedule. Prior to August 2001, payments were interest only. (D) Provides for annual principal paydowns and interest from the sale of equity interests in The Liberty Hampshire Company, L.L.C. ("Liberty Hampshire"). (E) On January 18, 2002, the $1,200,000 balance was repaid in full.
F-13 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DEBT At December 31, 2001 and 2000, the Company's debt consisted of the following:
BALANCE AT DECEMBER 31, ----------------------- DEBT/PROJECT MATURITY DATE STATED INTEREST RATE 2001 2000 ------------ ------------- -------------------- ---- ---- Wellsford Finance Facility .............. January 2002 LIBOR + 2.75% (A) $ -- $ 12,000,000 ============ ============ Mortgage and notes payable: Palomino Park Bonds (B) .............. December 2035 Variable (C) $ 12,680,000 $ 12,680,000 Blue Ridge Mortgage .................. January 2008 6.92% (D) 32,916,492 33,354,235 Red Canyon Mortgage .................. December 2008 6.68% (D) 26,034,695 26,369,735 Silver Mesa Conversion Loan .......... December 2003 LIBOR + 2.00% (E) 13,351,966 32,000,000 Green River Construction Loan ........ January 2003 LIBOR + 1.75% (F) 36,747,451 -- ------------ ------------ Total mortgage notes payable ............ $121,730,604 $104,403,970 ============ ============ Total debt .............................. $121,730,604 $116,403,970 ============ ============ Carrying amount of real estate assets collateralizing mortgage notes payable $155,530,004 $135,448,371 ============ ============ - ---------- (A) Effective interest rate approximated 6.82% at December 31, 2000. (B) Tax-exempt bonds are secured by liens on four of the five phases of Palomino Park. (C) Rate approximates the Standard & Poor's / J.J. Kenney index for short-term high grade tax-exempt bonds (average annual rate was approximately 2.72% and 4.15% for 2001 and 2000, respectively). (D) Principal payments are made based on a 30-year amortization schedule. (E) Effective interest rates approximated 4.14% and 8.68% at December 31, 2001 and 2000, respectively. Principal payments are based on approximately 90% of net sales proceeds from condominium sales. Loan is extendable for six months for a 0.25% extension fee. (F) Effective interest rate was 3.76% at December 31, 2001. Additional interest of $861,000 can be accrued into the principal balance of the loan. Loan is extendable for six months for a 0.375% extension fee.
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to secure the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. The Company will incur an annual fee of approximately $142,000 related to this enhancement and paid an origination fee of approximately $158,000 upon closing. The letter of credit agreement provides for the Company to meet certain financial operating and balance sheet covenants. The agreement requires the Company to maintain minimum shareholders' equity of $180,000,000, as defined. During October 2001, the Company and Commerzbank AG amended the letter of credit agreement to include the $25,000,000 of Convertible Trust Preferred Securities in shareholders' equity in the determination of the minimum shareholders' equity covenant. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit. The Company incurred aggregate fees of $226,000, $392,000 and $246,000 for the years ended December 31, 2001, 2000 and 1999 respectively, related to all of the credit enhancements for the Palomino Park Bonds. In November 2000, in conjunction with the conversion of the Silver Mesa phase to a condominium project, the Company made a repayment of $2,075,000 of bond principal. F-14 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEBT (CONTINUED) In January 1999, a wholly-owned subsidiary of the Company obtained a $35,000,000 loan facility (the "Wellsford Finance Facility") from a predecessor of Fleet National Bank. In June 2000, the Company modified the terms of the Wellsford Finance Facility and reduced the maximum borrowing amount to $20,000,000. The Wellsford Finance Facility was secured by a $25,000,000 note receivable, bore interest at LIBOR + 2.75% per annum and expired in January 2002. The Company paid an origination fee of $75,000 and is obligated to pay a fee equal to 0.25% per annum on the average daily amount of the unused portion of the facility until maturity. At December 31, 2000, the outstanding balance under the Wellsford Finance Facility was $12,000,000. There was no balance outstanding at December 31, 2001. The Company's long-term mandatory maturities of debt for the next five years and thereafter are as follows:
SILVER MESA GREEN RIVER WELLSFORD FOR THE YEARS ENDED CONVERSION CONSTRUCTION FINANCE DECEMBER 31, MORTGAGES LOAN (A) LOAN FACILITY (B) TOTAL ------------ --------- -------- ---- ------------ ----- 2002 ..... $ 827,000 $ -- $ -- $ -- $ 827,000 2003 ..... 885,000 13,352,000 37,608,000 -- 51,845,000 2004 ..... 948,000 -- -- -- 948,000 2005 ..... 1,014,000 -- -- -- 1,014,000 2006 ..... 1,086,000 -- -- -- 1,086,000 Thereafter 54,191,000 -- -- -- 54,191,000 - ---------- (A) Approximately 90% of net sales proceeds per unit goes toward principal repayments. The Company expects such payments to exceed the above required minimum principal repayments in each year. (B) The Wellsford Finance Facility expired on January 12, 2002.
The Company capitalizes interest related to buildings and condominiums under construction and renovation to the extent such assets qualify for capitalization. Total interest capitalized on consolidated assets during the years ended December 31, 2001, 2000 and 1999 was approximately $1,610,000, $2,347,000 and $1,071,000, respectively. 6. CONVERTIBLE TRUST PREFERRED SECURITIES In May 2000, the Company privately placed with a subsidiary of EQR 1,000,000 8.25% Convertible Trust Preferred Securities, representing beneficial interests in the assets of WRP Convertible Trust I, a Delaware statutory business trust which is a consolidated subsidiary of the Company ("WRP Trust I"), with an aggregate liquidation amount of $25,000,000 (the "Convertible Trust Preferred Securities"). WRP Trust I also issued 31,000 8.25% Convertible Trust Common Securities to the Company, representing beneficial interests in the assets of WRP Trust I, with an aggregate liquidation amount of $775,000. The proceeds from both transactions were used by WRP Trust I to purchase $25,775,000 of the Company's 8.25% Convertible Junior Subordinated Debentures ("Convertible Debentures"), which mature on May 4, 2022. The transactions between WRP Trust I and the Company are eliminated in the consolidated financial statements of the Company. The Company incurred approximately $450,000 of costs in connection with the issuance of the securities which are being amortized through May 2012. F-15 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONVERTIBLE TRUST PREFERRED SECURITIES (CONTINUED) The Convertible Trust Preferred Securities are convertible into 1,123,696 common shares at $22.248 per share and are redeemable in whole or in part by the Company on or after May 30, 2002. EQR can require redemption on or after May 30, 2012 unless the Company exercises one of its two five-year extensions (subject to an interest adjustment to the then prevailing market rates if higher than 8.25% per annum). The redemption rights are subject to certain other terms and conditions contained in the related agreements. 7. INCOME TAXES The components of the income tax provision are as follows: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Current federal tax (A) .... $ (633,000) $ 3,005,000 $ 700,000 Current state and local tax (171,000) 905,000 930,000 Deferred federal tax ....... 1,353,000 (1,820,000) 240,000 Deferred state and local tax 150,000 (660,000) 80,000 ----------- ----------- ----------- $ 699,000 $ 1,430,000 $ 1,950,000 =========== =========== =========== The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense is as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 2001 2000 1999 -------------------- ----------------------- ----------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Tax (benefit) at U.S. statutory rate (A) $ (226,000) (35.00%) $ 3,065,000 35.00% $ 3,785,000 35.00% State taxes, net of federal benefit .... 150,000 23.22% 335,000 3.82% 660,000 6.11% State and local tax operating loss carryforwards, net of federal taxes . (171,000) (26.48%) (175,000) (1.99%) -- -- Change in valuation allowance, net ..... 806,000 124.81% (1,742,000) (19.89%) (2,425,000) (22.43%) Non-deductible/non-taxable items, net .. 131,000 20.28% 35,000 0.39% (70,000) (0.64%) Effect of difference in tax rate ....... 9,000 1.39% (88,000) (1.00%) -- -- ----------- ------ ----------- ----- ----------- ----- $ 699,000 108.24% $ 1,430,000 16.33% $ 1,950,000 18.04% =========== ====== =========== ===== =========== ===== - ---------- (A) The aforementioned income tax expense for 2001 and 2000 is prior to the tax benefit aggregating $720,000 and $510,000, respectively, attributable to the Convertible Trust Preferred Securities distributions and amortization.
The Company has net operating loss ("NOL") carryforwards, for Federal income tax purposes, resulting from the Company's merger with VLP in 1998. The NOLs aggregate $64,700,000 at December 31, 2001, expire in the years 2007 through 2012 and are subject to an annual and aggregate limit on utilization of NOLs after an ownership change, pursuant to Section 382 of the Internal Revenue Code. Any annual amounts not used in one year can be carried forward to future years. F-16 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------ 2001 2000 ---- ---- Deferred Tax Assets - ------------------- Net operating loss ............................... $ 22,000,950 $ 22,000,950 Deferred compensation and severance arrangements . 5,176,437 3,193,971 Value Property Trust asset basis differences ..... 1,235,355 1,253,478 Other ............................................ 437,121 418,558 ------------ ------------ 28,849,863 26,866,957 Valuation allowance .............................. (18,764,516) (17,472,331) ------------ ------------ Total deferred tax assets ........................ 10,085,347 9,394,626 ------------ ------------ Deferred Tax Liabilities - ------------------------ Palomino Park asset basis differences ............ 2,402,269 (846,397) Wellsford/Whitehall net income in excess of taxable income ............................. 1,525,303 (1,874,731) Deferred gain on sale of Liberty Hampshire Company 1,040,342 -- Other ............................................ 36,211 (89,558) ------------ ------------ Total deferred tax liabilities ................... 5,004,125 (2,810,686) ------------ ------------ Net deferred tax asset ........................... $ 5,081,222 $ 6,583,940 ============ ============
SFAS 109 requires a valuation allowance to reduce the deferred tax assets if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, management has determined that a $18,764,516 and $17,472,331 valuation allowance at December 31, 2001 and 2000, respectively, is necessary. The valuation allowance relates to the NOL carryforwards and certain deferred compensation and severance arrangements. The Company's net deferred tax asset is included in prepaid and other assets in the accompanying consolidated balance sheets. F-17 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. TRANSACTIONS WITH AFFILIATES The following table details revenues and costs for transactions with affiliates for the years ended December 31, 2001, 2000 and 1999: (amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- REVENUES Wellsford/Whitehall: Interest revenue ................. $ -- $ 703 $ 517 Management fee revenue ........... -- 600 600 WP Commercial: Asset acquisition fee revenue .... 23 86 -- Asset disposition fee revenue .... 365 -- -- Second Holding fees, net of fees to Reis of $180,000 per annum ....... 217 (182) (179) ------- ------- ------- $ 605 $ 1,207 $ 938 ======= ======= ======= COSTS* Whitehall affiliates: Management fees for VLP properties $ 142 $ 242 $ 140 EQR: Credit enhancement ............... 81 92 79 ------- ------- ------- $ 223 $ 334 $ 219 ======= ======= ======= - ---------- * The term cost is used as certain items are expensed directly to operations such as the management fees and portions of the other items may be capitalized into the basis of development projects. As part of the terms of the Merger, two of the Company's executive officers are on the board of directors of EQR. In addition, the president of EQR is a member of the Company's board of directors. EQR had a 14.15% interest in the Company's residential project in Denver, Colorado at December 31, 2001 and 2000, respectively. The Company has direct and indirect investments in a real estate information and database company, Reis, Inc. ("Reis"), a leading provider of real estate market information to institutional investors. At December 31, 2001 and 2000, the Company's aggregate investment in Reis, which is accounted for under the cost method, was approximately $6,575,000, or 22% of Reis' equity on an as converted basis. The primary shareholder of Reis is the brother of Mr. Lynford, Chairman of the Company. The Company's President was appointed to the board of directors of Reis during the third quarter of 2000. The Chairman, President and certain directors of the Company who have invested directly in Reis have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis. See Note 12 for additional related party information. F-18 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SHAREHOLDERS' EQUITY On June 9, 2000, shareholders of the Company approved a reverse stock split whereby every two outstanding shares of common stock and class A-1 common stock were converted into one share of outstanding common stock and class A-1 common stock. The par value of both classes of stock increased from $0.01 per share to $0.02 per share and the number of authorized shares was halved from 197,650,000 to 98,825,000 for common shares and from 350,000 to 175,000 for class A-1 common shares. The reverse split was effective for trading beginning June 12, 2000. Resulting fractional shares were redeemed for cash. All share and per share amounts in the financial statements and the notes thereto have been adjusted for the impact of the split, for all periods presented. The Company may repurchase shares from time to time by means of open market purchases depending on availability of shares, the Company's cash position, the price per share and other corporate matters. No minimum number or value of shares to be repurchased has been fixed. The following table summarizes the stock repurchase activity by the Company and approvals by the Company's Board of Directors during the years ended December 31, 2001, 2000 and 1999:
PURCHASE AGGREGATE REPURCHASES ACTUAL NUMBER OF PRICE PER PURCHASE PURCHASED FROM APPROVED REPURCHASES TRANSACTIONS SHARE PRICE (A) -------------- -------- ----------- ------------ ----- --------- 2001 June ..... Institutional shareholder 2,020,784 2,020,784 1 $ 18.10 $ 36,576,000 --------- --------- ------------- 2000 January .. Open market -- 2,079 Various 17.74 37,000 February . Institutional shareholder 1,286,816 1,286,816 1 16.00 20,589,000 April .... 1,000,000 -- -- -- -- Various .. Open market purchases -- 29,837 Various 16.28 486,000 --------- --------- ------------- 2,286,816 1,318,732 16.01 21,112,000 --------- --------- ------------- 1999 November . 1,000,000 -- -- -- -- November/ Open market/ December Odd lot holders (B) -- 738,247 Various 16.44 12,134,000 --------- --------- ------------- 1,000,000 738,247 12,134,000 --------- --------- ------------- TOTAL ....... 5,307,600 4,077,763 $ 17.12 $ 69,822,000 ========= ========= ========= ============= - ---------- (A) Excluding expenses. (B) The odd-lot share program approved in 1999 offered identified eligible shareholders owning fewer than 50 shares the opportunity to sell all of their shares back to the Company. In July 1999, the Company purchased 3,598 common shares at the current market price of $20.75 per share from an officer who resigned.
F-19 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAREHOLDERS' EQUITY (CONTINUED) The Company has issued shares to executive officers and other employees through annual bonus and/or deferred compensation awards, as well as certain shares issued at the date of the Merger, pursuant to the Company's non-qualified deferred compensation plan. At December 31, 2001, an aggregate of 317,977 shares, which had an aggregate market value of approximately $6,112,000 at the respective dates of issuance, have been classified as Treasury Stock in the Company's consolidated financial statements. Such shares are generally held in a Rabbi Trust and are accounted for pursuant to existing accounting literature. The bonus awards vest immediately and the deferred compensation awards vest over various periods ranging from two to five years or sooner based upon certain change in control provisions, as long as the officer or employee is still employed by the Company. A summary of activity for the three years ended December 31, 2001 follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------- ------------------------- NUMBER VALUE AT NUMBER VALUE AT NUMBER VALUE AT OF DATE OF OF DATE OF OF DATE OF SHARES ISSUANCE SHARES ISSUANCE SHARES ISSUANCE ------ -------- ------ -------- ------ -------- Shares issued pursuant to plan, January 1 ................... 257,935 208,380 244,836 Shares issued as deferred compensation awards ......... 71,087 $19.08 53,305 $15.69 12,941 $20.00/$15.88 Shares re-acquired at termination of employment ............... -- -- (39,517) $17.75/$31.50 Shares released under terms of agreements .................. (11,025) $ 20.00/$15.69 (3,750) $20.00 (9,880) $17.75/$31.50 ------- ------- ------- Balance at December 31 .......... 317,997 257,935 208,380 ======= ======= ======= Shares vested at December 31 .... 231,297 155,084 110,492 ======= ======= =======
During the years ended December 31, 2001, 2000 and 1999, the Company recorded costs approximating $1,578,000, $907,000 and $848,000, respectively, pursuant to the issuances under the deferred compensation arrangements. Such amounts are included in General and Administrative expenses in the Company's consolidated financial statements. The Company issued an aggregate of 4,560 and 4,655 common shares during 2001 and 2000, as part of the non-cash compensation arrangements to the non-employee members of the Company's Board of Directors, which were valued in the aggregate at $80,000 in each period. In prior years, the Company had issued a total of 2,202,099 warrants (including 61,984 issued during 1999), to purchase shares of common stock to certain joint venture partners, including 2,128,099 to Whitehall and 74,000 to its partners in CVW. Pursuant to the December 2000 Amendments, the Whitehall Warrants were returned and cancelled. The warrants issued to the CVW partners were repurchased in July 2001 for $80,000 and cancelled. In May 2000, the Company exchanged the 169,903 shares of class A common stock held by EQR for a like number of shares of the Company's class A-1 common stock. The class A-1 common stock's par value is $0.02 per share and has rights substantially similar to the class A common stock. The Company's retained earnings included approximately $1,823,000 of undistributed retained earnings at December 31, 2001 from Second Holding, as such distributions are limited to 48% of earnings. The Company did not declare or distribute any dividends during 2001, 2000 or 1999. F-20 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHARE OPTION PLANS The Company has adopted certain incentive plans (the "Incentive Plans") for the purpose of attracting and retaining the Company's directors, officers and employees under which it has reserved 2,538,118 common shares for issuance. Options granted under the Incentive Plans expire ten years from the date of grant, vest over periods ranging generally from six months to five years, and generally contain the right to receive reload options under certain conditions. The following table presents the changes in options outstanding by year, as well as other plan data:
2001 2000 1999 ----------------------- ----------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- ----- ------- ----- ------- ----- Outstanding at January 1 ............. 1,761,655 $ 24.20 1,794,680 $ 24.16 1,779,305 $ 25.58 Granted .............................. 12,500 19.25 19,250 16.15 206,125 17.33 Exercised ............................ -- -- -- -- -- -- Forfeited/cancelled (A) .............. (633,531) (28.92) (52,275) (21.00) (190,750) (30.08) Expired .............................. -- -- -- -- -- -- --------- --------- --------- Outstanding at December 31 ........... 1,140,624 21.52 1,761,655 24.20 1,794,680 24.16 ========= ========= ========= Options exercisable at December 31 ... 922,261 $ 21.48 1,234,096 $ 23.51 672,825 $ 24.22 ========= ========= ========= ========= ========= ========= Weighted average fair value of options granted (per option) ............ $ 10.72 $ 9.57 $ 10.28 ========= ========= ========= Weighted average remaining contractual life at December 31 .. 6.0 years 6.9 years 7.9 years - ---------- (A) 2001 amount primarily includes 284,551 options repurchased and cancelled in connection with Mr. Lowenthal's separation arrangements from the Company and 290,000 options cancelled pursuant to Mr. Lynford's amended employment agreement.
Pursuant to SFAS 123, described in Note 2, the pro forma net (loss) income available to common shareholders as if the fair value approach to accounting for share-based compensation had been applied (as well as the assumptions to calculate fair value using the Black-Scholes option pricing model) is as follows:
(amounts in thousands, except per share amounts) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Net (loss) income - as reported......................... $ (2,725) $ 6,468 $ 8,861 Expense................................................. 1,677 2,045 2,112 ----------- -------------- -------------- Net (loss) income - pro forma........................... $ (4,402) $ 4,423 $ 6,749 =========== ============== ============== Net (loss) income per common share, basic and diluted: As reported......................................... $ (0.38) $ 0.76 $ 0.86 =========== ============== ============== Pro forma........................................... $ (0.61) $ 0.52 $ 0.66 =========== ============== ============== Assumptions: Expected volatility ranges.......................... 34% 37% to 38% 36% to 37% Expected life....................................... 10 years 10 years 10 years Risk-free interest rate ranges...................... 5.17% 5.45% to 6.24% 4.68% to 6.08% Expected dividend yield............................. -- -- --
F-21 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHARE OPTION PLANS (CONTINUED) The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected share price volatility. Because the Company's employee share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee share options. 11. COMMITMENTS AND CONTINGENCIES The Company has entered into employment agreements with six of its officers and employees. Such agreements are for terms which expire between 2002 and 2004, and provide for aggregate minimum annual fixed payments of approximately $1,994,000, $1,624,000 and $643,000 in 2002, 2003 and 2004, respectively. In connection with his retirement, Mr. Lowenthal and the Company entered into an employment separation agreement which, among other benefits, provides for (a) a severance payment to him on March 31, 2002 of $1,650,000, (b) the Company's repurchase of 284,551 of his stock options during 2002 at $2.3827 per option, or an aggregate of $678,000 and (c) the Company's repurchase, at Mr. Lowenthal's option, of his remaining 284,551 stock options on or after January 2, 2003, for the same amount per option as the initial stock option repurchase. Upon entering the employment separation agreement, the 569,102 options had an average remaining term of six years and a Black-Scholes valuation of approximately $3,300,000. For the consulting services to be performed by Mr. Lowenthal after his retirement, he will receive payments at the rate of $100,000 per annum through December 31, 2004. In connection with these arrangements and other personnel changes, the Company recorded a non-recurring charge of approximately $3,527,000 in the fourth quarter of 2001. Mr. Lynford's employment arrangement has been modified pursuant to an Amended and Restated Employment Agreement (the "Restated Agreement") and provides, among other things, for the maintenance of his current base salary of $318,000 per year and an annual minimum bonus of $325,000 throughout the term of the agreement through December 31, 2004. In addition, Mr. Lynford will be entitled to receive a severance payment of $1,929,000 in the event (a) he terminates his employment by reason of a change in control of the Company (as defined in the Restated Agreement), (b) the Company terminates his employment other than for proper cause (as defined in the Restated Agreement) or (c) his employment is terminated by reason of his death or disability. The provisions in the prior employment agreement providing for the reimbursement to Mr. Lynford of excise and certain income taxes with respect to the severance payments have been eliminated. On December 31, 2001, the Company issued $1,356,000 of restricted shares of common stock (which equates to 71,087 shares at $19.075 per share), one third of which are to vest on each of December 31, 2001, June 30, 2002 and January 1, 2003. Mr. Lynford has also agreed to the cancellation of 290,000 of the 569,102 options to acquire the Company's common stock held by him. The 290,000 options had a Black-Scholes valuation of approximately $1,400,000 at the date of cancellation. F-22 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMITMENTS AND CONTINGENCIES (CONTINUED) As commercial real estate owners, the Company and its principal joint venture are subject to potential environmental costs. In December 2001, the Company submitted a report to the New Hampshire Department of Environmental Services ("NHDES") that summarized the findings of an environmental testing firm engaged by the Company with respect to groundwater and surface water monitoring and testing which took place during 2001 on one of its owned properties. The NHDES responded in January 2002 with concerns about surface water contamination, volatile organic chemical ("VOC") migration off of the property and air quality. The NHDES mandated further testing before a remediation action plan is considered. Further preliminary testing conducted by the environmental testing firm since the NHDES response suggests that the surface water contamination is caused by the groundwater contamination and that the VOC contamination may be migrating off of the property. Once the Company's "Scope of Work" plans have been approved, the Company will conduct further testing to address the NHDES's concerns. Following that testing, the Company will present the findings and a recommended plan of remediation to the NHDES. At this time, it is too early to conclude the form of remediation that will be required, or the cost thereof, but in all likelihood, the remediation required will be a more aggressive one than natural attenuation. During 2001, the Company incurred approximately $48,000 of costs principally for its environmental testing firm, with respect to this matter. From time-to-time, legal actions are brought against the Company in the ordinary course of business. In the opinion of management, such matters will not have a material effect on the Company's financial condition, results of operations or cash flows. In 1997 the Company adopted a defined contribution savings plan pursuant to Section 401 of the Internal Revenue Code. Under such a plan there are no prior service costs. All employees are eligible to participate in the plan after three months of service. Employer contributions are made based on a discretionary amount determined by the Company's management. Employer contributions, if any, are based upon the amount contributed by an employee. During the years ended December 31, 2001, 2000 and 1999, the Company made contributions of approximately $43,000, $35,000 and $43,000, respectively. The Company is a tenant under operating leases for its New York and Denver offices. Rent expense was approximately $866,000, $853,000 and $812,000 for the years ended December 31, 2001, 2000 and 1999, respectively, which includes base rent plus other charges. Future minimum lease payments under operating leases at December 31, 2001 are as follows: FOR THE YEARS ENDED DECEMBER 31, AMOUNT -------------------------------- ------ 2002..................................... $ 758,000 2003..................................... 753,000 2004..................................... 815,000 2005..................................... 815,000 2006..................................... 815,000 Thereafter............................... 1,495,000 F-23 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMITMENTS AND CONTINGENCIES (CONTINUED) At December 31, 2001, the Company had capital commitments to certain joint venture investments. The Company may make additional equity investments subject to board approval if deemed prudent to do so to protect or enhance its existing investment. At December 31, 2001, capital commitments are as follows: COMMITMENT AMOUNT ---------- ------ Wellsford/Whitehall.................. $ 4,000,000 (A) Clairborne Prudential equity......... 10,208,000 (B) - ---------- (A) Pursuant to the Amendments, the Company could provide for up to 40% of a $10,000,000 loan to, or preferred equity investment in, the venture with its joint venture partner. Whitehall committed to fund the remaining $6,000,000. (B) Capital calls are subject to the Company's approval of such investments. Wellsford/Whitehall has agreed to maintain certain tax indemnities for one of the joint venture partners relating to assets acquired from this partner in 1998. This indemnity was preserved during 2001 as the acquisitions of six properties related to the completion of the purchase requirements with respect to properties sold in February and April 2001 as part of tax-free exchanges. Wellsford/Whitehall and the Company will continue to monitor asset sales and debt levels with respect to these tax indemnities. See Note 12 for additional commitments and contingencies. F-24 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SEGMENT INFORMATION The Company's operations are organized into three SBUs. The following table presents condensed balance sheet and operating data for these SBUs for 2001, 2000 and 1999:
(amounts in thousands) COMMERCIAL DEBT AND DEVELOPMENT PROPERTY EQUITY AND LAND INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED ----------- ----------- ----------- ------ ------------ DECEMBER 31, 2001 ----------------- Investment properties: Real estate held for investment, net .. $ -- $ -- $ 150,129 $ -- $ 150,129 Real estate held for sale** ........... -- 5,560 -- -- 5,560 Residential units available for sale .. -- -- 5,401 -- 5,401 --------- --------- --------- --------- --------- Real estate, net ......................... -- 5,560 155,530 -- 161,090 Notes receivable ......................... -- 34,785 -- -- 34,785 Investment in joint ventures ............. 57,790 38,017 -- -- 95,807 Cash and cash equivalents ................ 11 8,217 442 27,479 36,149 Restricted cash and investments .......... -- -- 949 6,604 7,553 Other assets ............................. -- 9,331 2,066 (943) 10,454 --------- --------- --------- --------- --------- Total assets ............................. $ 57,801 $ 95,910 $ 158,987 $ 33,140 $ 345,838 ========= ========= ========= ========= ========= Mortgage notes payable ................... $ -- $ -- $ 121,731 $ -- $ 121,731 Credit facility .......................... -- -- -- -- -- Accrued expenses and other liabilities ... -- 3,641 3,942 9,949 17,532 Convertible Trust Preferred Securities ... -- -- -- 25,000 25,000 Minority interest ........................ 21 -- 3,475 -- 3,496 Equity ................................... 57,780 92,269 29,839 (1,809) 178,079 --------- --------- --------- --------- --------- Total liabilities and equity ............. $ 57,801 $ 95,910 $ 158,987 $ 33,140 $ 345,838 ========= ========= ========= ========= ========= FOR THE YEAR ENDED DECEMBER 31, 2001 ------------------------------------ Rental revenue ........................... $ -- $ 2,019 $ 11,750 $ -- $ 13,769 Revenue from sales of residential units .. -- -- 21,932 -- 21,932 Interest revenue ......................... -- 4,166 -- 1,009 5,175 Fee revenue .............................. -- 283 (54) 388 617 --------- --------- --------- --------- --------- Total revenues ........................... -- 6,468 33,628 1,397 41,493 --------- --------- --------- --------- --------- Cost of sales of residential units ....... -- -- 19,364 -- 19,364 Operating expenses ....................... -- 1,403 3,997 -- 5,400 Depreciation and amortization ............ 1,947 7 3,066 287 5,307 Interest ................................. -- 300 4,027 29 4,356 General and administrative ............... -- 65 -- 8,402 8,467 Restructuring charge ..................... -- -- -- 3,527 3,527 --------- --------- --------- --------- --------- Total costs and expenses ................. 1,947 1,775 30,454 12,245 46,421 --------- --------- --------- --------- --------- Income from joint ventures ............... 4,367 197 -- -- 4,564 Minority interest ........................ -- -- (282) -- (282) --------- --------- --------- --------- --------- Income (loss) before taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities ............................ $ 2,420 $ 4,890 $ 2,892 $ (10,848) $ (646) ========= ========= ========= ========= ========= - ---------- * Includes corporate cash, restricted cash and investments, other assets, accrued expenses and other liabilities, general and administrative expenses, restructuring charge, interest income and interest expense that has not been allocated to the operating segments. ** Real estate held for sale in the Debt and Equity Investments SBU is net of the remaining impairment reserve of $2,175.
F-25 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED)
(amounts in thousands) COMMERCIAL DEBT AND DEVELOPMENT PROPERTY EQUITY AND LAND INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED ----------- ----------- ----------- ------ ------------ DECEMBER 31, 2000 ----------------- Investment properties: Real estate held for investment, net . $ -- $ -- $ 113,598 $ -- $ 113,598 Real estate held for sale, at expected net sales value** .................. -- 23,583 -- -- 23,583 Residential units available for sale . -- -- 21,850 -- 21,850 --------- --------- --------- --------- --------- Real estate, net ........................ -- 23,583 135,448 -- 159,031 Notes receivable ........................ -- 37,824 -- -- 37,824 Investment in joint venture ............. 82,820 38,149 -- -- 120,969 Cash and cash equivalents ............... 93 9,830 168 26,278 36,369 Restricted cash and investments ......... -- 445 2,468 7,009 9,922 Other assets ............................ -- 10,437 1,109 109 11,655 --------- --------- --------- --------- --------- Total assets ............................ $ 82,913 $ 120,268 $ 139,193 $ 33,396 $ 375,770 ========= ========= ========= ========= ========= Mortgage notes payable .................. $ -- $ -- $ 104,404 $ -- $ 104,404 Credit facilities ....................... -- 12,000 -- -- 12,000 Accrued expenses and other liabilities ......................... -- 4,380 2,124 8,649 15,153 Convertible Trust Preferred Securities .......................... -- -- -- 25,000 25,000 Minority interest ....................... 37 -- 3,193 -- 3,230 Equity .................................. 82,876 103,888 29,472 (253) 215,983 --------- --------- --------- --------- --------- Total liabilities and equity ............ $ 82,913 $ 120,268 $ 139,193 $ 33,396 $ 375,770 ========= ========= ========= ========= ========= FOR THE YEAR ENDED DECEMBER 31, 2000 ------------------------------------ Rental revenue .......................... $ -- $ 6,096 $ 12,585 $ -- $ 18,681 Interest revenue ........................ -- 4,436 -- 1,821 6,257 Fee revenue ............................. -- -- -- 686 686 --------- --------- --------- --------- --------- Total revenues .......................... -- 10,532 12,585 2,507 25,624 --------- --------- --------- --------- --------- Operating expenses ...................... -- 2,658 4,102 -- 6,760 Depreciation and amortization ........... 409 1,355 3,097 107 4,968 Interest ................................ -- 3,118 4,858 (900) 7,076 General and administrative .............. -- 171 -- 7,206 7,377 --------- --------- --------- --------- --------- Total expenses .......................... 409 7,302 12,057 6,413 26,181 --------- --------- --------- --------- --------- Gain on sale of assets, net of impairment provision of $4,725*** ... -- 2,710 3,425 -- 6,135 Income from joint ventures .............. 1,674 1,573 -- -- 3,247 Minority interest ....................... -- -- (66) -- (66) --------- --------- --------- --------- --------- Income (loss) before taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities ........................... $ 1,265 $ 7,513 $ 3,887 $ (3,906) $ 8,759 ========= ========= ========= ========= ========= - ---------- * Includes corporate cash, restricted cash and investments, other assets, accrued expenses and other liabilities, general and administrative expenses, interest income and interest expense that has not been allocated to the operating segments. ** Real estate held for sale in the Debt and Equity Investments SBU is net of a $4,725 impairment reserve. *** Impairment provision pertains to assets in the Debt and Equity Investments SBU.
F-26 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED)
(amounts in thousands) COMMERCIAL DEBT AND DEVELOPMENT PROPERTY EQUITY AND LAND INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED ----------- ----------- ----------- ------ ------------ DECEMBER 31, 1999 ----------------- Real estate, net ..................... $ -- $ 38,103 $ 121,479 $ -- $ 159,582 Notes receivable ..................... -- 37,260 -- -- 37,260 Investment in joint ventures ......... 79,688 34,702 -- -- 114,390 Cash and cash equivalents ............ 67 28,694 172 5,807 34,740 Restricted cash and investments ...... -- 1,072 1,059 6,335 8,466 Other assets ......................... -- 7,070 822 4,001 11,893 --------- --------- --------- --------- --------- Total assets ......................... $ 79,755 $ 146,901 $ 123,532 $ 16,143 $ 366,331 ========= ========= ========= ========= ========= Mortgage notes payable ............... $ -- $ 28,000 $ 91,315 $ -- $ 119,315 Accrued expenses and other liabilities -- 1,908 1,396 10,587 13,891 Minority interest .................... 46 -- 3,388 -- 3,434 Equity ............................... 79,709 116,993 27,433 5,556 229,691 --------- --------- --------- --------- --------- Total liabilities and equity ......... $ 79,755 $ 146,901 $ 123,532 $ 16,143 $ 366,331 ========= ========= ========= ========= ========= FOR THE YEAR ENDED DECEMBER 31, 1999 - ------------------------------------ Rental revenue ....................... $ -- $ 5,545 $ 12,329 $ -- $ 17,874 Interest revenue ..................... -- 11,707 -- 589 12,296 Fee revenue .......................... -- -- -- 600 600 --------- --------- --------- --------- --------- Total revenues ....................... -- 17,252 12,329 1,189 30,770 --------- --------- --------- --------- --------- Operating expenses ................... -- 2,561 3,686 -- 6,247 Depreciation and amortization ........ 337 2,509 2,999 309 6,154 Interest ............................. -- 4,346 4,827 226 9,399 General and administrative ........... -- 1,131 -- 6,595 7,726 --------- --------- --------- --------- --------- Total expenses ....................... 337 10,547 11,512 7,130 29,526 --------- --------- --------- --------- --------- Gain on sale of assets ............... -- -- -- -- -- Income from joint ventures ........... 7,183 2,439 -- -- 9,622 Minority interest .................... -- (1) (54) -- (55) --------- --------- --------- --------- --------- Income (loss) before taxes ........... $ 6,846 $ 9,143 $ 763 $ (5,941) $ 10,811 ========= ========= ========= ========= ========= - ---------- * Includes corporate cash, restricted cash and investments, other assets, accrued expenses and other liabilities, general and administrative expenses, interest income and interest expense that has not been allocated to the operating segments.
COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL ---------------------------------------------------- The Company's commercial property operations currently consist solely of its interest in Wellsford/Whitehall, a joint venture among the Company, various entities affiliated with Whitehall, private real estate funds sponsored by Goldman Sachs, as well as a family based in New England. The Company had a 32.58% interest in Wellsford/Whitehall as of December 31, 2001. The manager of the joint venture is a Whitehall affiliate. At December 31, 2001, Wellsford/Whitehall owned and operated 35 properties (primarily office properties) totaling approximately 3,905,000 square feet (including approximately 598,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland. Wellsford/Whitehall leases and re-leases space, performs construction for tenant improvements, expands buildings, re-develops properties and based on general and local economic conditions and specific conditions in the real estate industry, may from time to time sell properties for an appropriate price. It is not expected that Wellsford/Whitehall will purchase any new assets, except in limited cases. F-27 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The Company's investment in Wellsford/Whitehall, which is accounted for on the equity method, was approximately $57,790,000 and $82,820,000 at December 31, 2001 and 2000, respectively. The following table details the changes in the Company's investment in Wellsford/Whitehall: (amounts in thousands) 2001 2000 ---- ---- Investment balance at January 1,............... $ 82,820 $ 79,688 Contributions............................... 8,468 3,763 Income from operations...................... 302 1,583 Gains from asset sales...................... 10,321 92 Impairment provision........................ (6,256) -- Amortization................................ (1,778) (409) Distributions............................... (35,984) (1,897) Accumulated other comprehensive income...... (103) -- --------- --------- Investment balance at December 31,............. $ 57,790 $ 82,820 ========= ========= In 1997, at the time of the Spin-off, the Company owned six commercial office buildings, five of which were then vacant, containing an aggregate of approximately 949,400 square feet which were acquired for an aggregate of approximately $47,600,000 (the "WRP Commercial Properties"). In August 1997, the Company, in a joint venture with Whitehall formed a private real estate operating company, Wellsford/Whitehall. The Company contributed the WRP Commercial Properties and Whitehall contributed four commercial properties upon formation of Wellsford/Whitehall. Initial capital aggregating $150,000,000 was committed by the partners including the net amount of contributed properties, net of assumed debt. Prior to December 31, 2000, the Company managed Wellsford/Whitehall on a day-to-day basis. In December 2000, the Company and Whitehall executed definitive agreements modifying the terms of the joint venture, effective January 1, 2001 (the "Amendments"). The Amendments, which, among other items, provided for the Company and Whitehall to extend their existing capital commitments to Wellsford/Whitehall for one year to December 31, 2001 and to provide an aggregate of $10,000,000 of additional financing or preferred equity to Wellsford/Whitehall through December 2003, if required. As a result of the Amendments, an affiliate of Whitehall replaced the Company as the managing member of Wellsford/Whitehall. All employees working on Wellsford/Whitehall business were transferred from the Company to WP Commercial, L.L.C. ("WP Commercial"), the new management company, which is owned by affiliates of Whitehall and senior management of WP Commercial. WP Commercial is providing management, construction, development and leasing services to Wellsford/Whitehall based upon an agreed upon fee schedule. WP Commercial is also providing similar services to a new venture formed by Whitehall (the "New Venture") as well as to third parties, including tenants of Wellsford/Whitehall and new owners of properties sold by Wellsford/Whitehall. During the year ended December 31, 2001, Wellsford/Whitehall paid the following fees to WP Commercial: Administrative management..................... $ 6,850,000 =========== Construction, construction management, development and leasing.................... $ 1,787,000 =========== F-28 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) WP Commercial leases space at three buildings owned by Wellsford/Whitehall at each of its geographic regions for management and administration, including one building sold in November 2001. Aggregate rent received during 2001 by Wellsford/Whitehall amounted to $542,000 for the period of ownership. Wellsford/Whitehall, pursuant to the terms of the Amendments, discontinued payment of a $600,000 annual administrative fee to the Company as of December 31, 2000; however, Whitehall has agreed to pay the Company fees with respect to assets sold by Wellsford/Whitehall equal to 25 basis points of the sales proceeds and up to 60 basis points (30 basis points are deferred pending certain return on investment hurdles being reached) for each purchase of real estate made by certain other affiliates of Whitehall, until such purchases aggregate $400,000,000. Also, as part of the Amendments, warrants to purchase 2,128,099 of the Company's common stock, which had previously been issued to Whitehall, were returned and cancelled. The Amendments included a buy/sell agreement between the Company and Whitehall effective after December 31, 2003 with respect to any remaining assets. The following table presents a condensed balance sheet and operating data for the Wellsford/Whitehall segment:
(amounts in thousands) DECEMBER 31, ------------ CONDENSED BALANCE SHEET DATA 2001 2000 ---------------------------- ---- ---- Real estate, net ........................... $ 511,648 $ 589,154 Cash and cash equivalents .................. 32,723 6,161 Other assets (A) ........................... 27,740 26,821 Total assets ............................... 572,111 622,136 Mortgages payable .......................... 111,949 136,490 Credit facility ............................ 258,060 244,250 Preferred equity (B) ....................... -- 18,323 Common equity .............................. 183,815 201,044 Other comprehensive loss ................... (526) -- FOR THE YEARS ENDED DECEMBER 31, -------------------------------- CONDENSED OPERATING DATA 2001 2000 1999 ------------------------ ---- ---- ---- Rental revenue (C) ......................... $ 78,459 $ 77,087 $ 73,356 Interest and other income (D) .............. 5,051 5,363 1,320 --------- --------- --------- Total revenues ............................. 83,510 82,450 74,676 --------- --------- --------- Operating expenses ......................... 30,328 28,774 27,432 Depreciation and amortization .............. 17,323 13,215 11,702 Interest ................................... 26,559 25,994 25,586 General and administration ................. 7,345 9,598 8,142 --------- --------- --------- Total expenses ............................. 81,555 77,581 72,862 Gain on sale of assets ..................... 27,336 239 15,642 Impairment provisions ...................... (16,545) -- -- --------- --------- --------- Income before preferred equity distributions $ 12,746 $ 5,108 $ 17,456 ========= ========= ========= - ---------- (A) Includes the marked to market value of an interest rate protection contract of $1,089 at December 31, 2001. (B) Preferred equity converted to common equity in September 2001. (C) Includes a reduction in income of $262 and an increase in income of $1,271 and $1,218 from the straight-lining of tenant rents for the years ended December 31, 2001, 2000 and 1999, respectively. (D) Includes lease cancellation income of $4,012, $4,037, and $395 for the years ended December 31, 2001, 2000 and 1999, respectively.
F-29 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) During July 2001, Wellsford/Whitehall entered into a contract to sell the Pointview property, a 194 acre complex with two buildings totaling approximately 564,000 square feet, located in Wayne, New Jersey. This property, which was a major development project of Wellsford/Whitehall, had been unoccupied since its purchase in 1997. In anticipation of the consummation of the sale, Wellsford/Whitehall recorded a $15,561,000 impairment provision at June 30, 2001, of which the Company's allocable share was approximately $5,908,000. This impairment arose from the change in the intended mixed-use of the property from office space, a conference center and residential development to an available for sale headquarters complex. The sale was completed in September 2001. As a result of a sales price adjustment and cost savings during the third and fourth quarters of 2001, Wellsford/Whitehall recorded an additional net impairment provision of $178,000, of which the Company's share was $64,000. Aggregate impairment provisions recorded during 2001, including the Pointview provision noted above, was $16,545,000, of which the Company's share was $6,256,000. The following table presents property information summarized by geographic region:
NUMBER OF PROPERTIES ------------------------------------------------------ TOTAL LAND PORTFOLIO UNDEPRECIATED TOTAL PARCELS OFFICE RETAIL SQUARE FEET COST BASIS ----- ------- ------ ------ ----------- ---------- As of December 31, 2001 New Jersey ........... 17 2 13 2 2,140,000 $272,851,000 Boston, MA ........... 10 -- 10 -- 1,203,000 209,551,000 Maryland/Washington DC 5 -- 4 1 531,000 65,578,000 Other ................ 3 -- -- 3 31,000 8,219,000 -- -- -- -- --------- ------------ 35 2 27 6 3,905,000 $556,199,000 == == == == ========= ============ As of December 31, 2000 New Jersey ........... 19 2 17 -- 3,059,000 $353,268,000 Boston, MA ........... 16 -- 16 -- 1,361,000 221,225,000 Maryland/Washington DC 4 -- 4 -- 509,000 43,002,000 Other ................ 1 -- 1 -- 24,000 2,158,000 -- -- -- -- --------- ------------ 40 2 38 -- 4,953,000 $619,653,000 == == == == ========= ============
F-30 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) During the years ended December 31, 2001, 2000 and 1999, Wellsford/Whitehall participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts) 2001 ACTIVITY Purchases (1): Gross Leasable Number of Purchase Price Month Location Square Feet Properties Purchase Price per Square Foot Occupancy ----- -------- ----------- ---------- -------------- --------------- --------- April Various 54,000 5 $ 18.7 $ 342.20 100% October Decatur, GA 10,000 1 2.3 231.51 100% ------ - ------- 64,000 6 $ 21.0 324.91 100% ====== = ======= Sales: Gross Leasable Number of Sales Price per Month Location Square Feet Properties Sales Price Square Foot Gain (Loss) ----- -------- ----------- ---------- ----------- ----------- ----------- February Newton, MA 102,000 5 $ 18.0 $ 176.47 $ 3.5 April Portland, ME 24,000 1 1.6 66.67 -- May Parsippany, NJ 257,000 1 61.5 239.30 17.9 August Andover, MA 63,000 1 9.2 146.03 1.5 September Wayne, NJ (Pointview) 564,000 1 35.5 62.94 --(2) November Wayne, NJ 56,000 1 8.2 146.43 2.4 November Chatham, NJ 63,000 1 12.0 190.48 2.0 --------- -- -------- ------- 1,129,000 11 $ 146.0 129.32 $ 27.3 ========= == ======== ======= - ---------- (1) Acquisitions of these six properties completed the purchase requirements with respect to properties sold in February and April 2001 as part of a tax-free exchange pursuant to the rules of the Internal Revenue Code. (2) Loss reflected as part of impairment provision (see above). 2000 ACTIVITY Purchases: Purchases that were made during the year ended December 31, 2000, were transferred to the New Venture, pursuant to the Amendments. Sale: Gross Leasable Number of Sales Price Month Location Square Feet Properties Sales Price per Square Foot Gain ----- -------- ----------- ---------- ----------- --------------- ---- August Columbia, MD 38,000 1 $ 4.9 $ 128 $ 0.2 ====== = ========= ========= ====== F-31 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 1999 ACTIVITY Purchases: Gross Leasable Number of Purchase Purchase Price Month Type Location Square Feet Properties Price (1) per Square Foot ----- ---- -------- ----------- ---------- --------- --------------- May Office/Flex Warren, NJ 129,000 1 $ 8.0 $ 62 June Office Boston, MA 64,000 1 10.2 159 June Office Boston, MA 68,000 1 13.1 193 July Office/Land Columbia, MD 97,000 1 10.7 110 July Office Owings Mills, MD 32,000 1 3.9 122 August Land Hanover, NJ 19.2 acres 1 2.0 -- August Office Hanover, NJ 96,000 1 13.3 139 September Flex Columbia, MD 144,000 1 3.8 26 November Office Rockville, MD 236,000 1 19.9 84 ------- - ------- Total purchases 866,000 9 $ 84.9 -- ======= = ======= Total, excluding land 866,000 8 $ 82.9 96 ======= = ======= Sales: Gross Leasable Number of Sales Price per Month Location Square Feet Properties Sales Price Square Foot Gain ----- -------- ----------- ---------- ----------- ----------- ---- February Wayne, NJ 2.58 acres (2) 1 $ 0.3 $ -- $ 0.2 May Boston, MA 65,000 1 8.1 125 2.3 August Needham, MA 261,000 1 26.0 100 5.6 November Washington, D.C. 225,000 1 43.4 193 7.5 ------- - ------- ------- Total sales 551,000 4 $ 77.8 -- $ 15.6 ======= = ======= ======= Total, excluding land 551,000 3 $ 77.5 141 $ 15.4 ======= = ======= ======= - ---------- (1) The 1999 Wellsford/Whitehall acquisitions described above were funded with proceeds from a first mortgage financing on five of the properties and seller financing in the form of a second mortgage on one of the properties in the aggregate amount of $43,401,000 and additional capital contributions by the Company and Whitehall. (2) Sale of vacant land.
During June 2001, Wellsford/Whitehall obtained a three-year, $353,000,000 revolving credit facility from General Electric Capital Corporation with an initial funding of approximately $273,000,000 before transaction costs. The remaining balance will be available to be drawn to fund certain capital expenditures and upon achieving certain operating results from six properties. The facility bears interest at LIBOR + 2.90% per annum (4.78% at December 31, 2001) and matures in June 2004 with two 12-month extension options, subject to meeting certain operating and valuation covenants. The facility was secured by interests in twenty-four commercial office properties in the Wellsford/Whitehall portfolio upon its initial funding. This facility replaces the previously existing facility which was due to mature in December 2001. The outstanding balance of this facility was $258,060,000 at December 31, 2001, the reduction resulting from paydowns of $14,852,000 from two asset sales; such assets were released from the collateral pool. This financing was arranged by Goldman Sachs, to whom Wellsford/Whitehall paid a fee of approximately $2,644,500. In July 2001, Wellsford/Whitehall entered into an interest rate protection contract at a cost of $1,780,000 (the "Cap"), which limits Wellsford/Whitehall's LIBOR exposure to 5.83% until June 2003 and 6.83% for the following year to June 2004 on $285,000,000 of debt. At December 31, 2001 the market value of the Cap was approximately $1,089,000. This Cap was purchased from Goldman Sachs. F-32 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) In September 2000, Wellsford/Whitehall obtained a $8,150,000 loan from Provident Bank of Maryland, of which $4,649,000 was drawn upon at December 31, 2001. The non-recourse loan, which will be used to rehabilitate the property, is secured by the leasehold interest in the 144,000 square foot Oakland Ridge office park, a four building office complex located in Columbia, Maryland, has a term of 2.5 years, plus one twelve-month extension at Wellsford/Whitehall's option and bears interest at LIBOR + 2.00% per annum (3.88% at December 31, 2001), which is capitalized into the loan. The Company made temporary advances to Wellsford/Whitehall during 2000 and 1999 which bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid in full by December 31, 2000 and 1999, respectively. The Company earned approximately $703,000 and $517,000 of interest income during 2000 and 1999, respectively from such advances. In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank Facility with a predecessor of Fleet National Bank ("Wellsford/Whitehall Fleet Facility"). Under the terms, $300,000,000 represented a senior secured credit facility which bore interest at LIBOR + 1.65% per annum and $75,000,000 represented a second mezzanine facility which bore interest at LIBOR + 3.20% per annum. As of December 31, 2000, approximately $244,250,000 was outstanding under the Wellsford/Whitehall Fleet Facility (approximately $181,728,000 of which was under the senior facility). At March 31, 2000, the ability to draw on this facility expired. Wellsford/Whitehall exercised its right under the agreements to have the due date of both facilities extended for one year to December 15, 2001. In June 2001, the Wellsford/Whitehall Fleet Facility was repaid in full, terminated and replaced with the Wellsford/Whitehall GECC Facility. The Company is entitled to receive incentive compensation payable out of distributions made by Wellsford/Whitehall (the "Promote") after return of capital and minimum annual returns of at least 15% to 17.5% on such capital balances to the Company and Whitehall. Pursuant to the Amendments, the Company will be entitled to earn 53.3% to 57.5% of the Promote. To date, the Company has not earned or received any distribution of the Promote and there can be no assurance that such Promote will be earned or received. In June 1999, the capital commitment requirements of Wellsford/Whitehall were modified from an aggregate of $150,000,000 ($75,000,000 by each partner) to an aggregate of $250,000,000. The Company's total portion of $85,000,000 and Whitehall's total portion of $165,000,000 were fully funded as of December 31, 2001. In connection with the formation of Wellsford/Whitehall, the Company issued warrants (the "Whitehall Warrants") to Whitehall to purchase 2,066,115 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until August 28, 2002 and payable in cash or membership units in Wellsford/Whitehall. As part of the new capital commitment from Whitehall in 1999, the Company issued additional warrants to purchase an additional 61,984 shares of the Company's common stock at an exercise price of $24.20 per share, exercisable until May 28, 2004 and payable in cash. Pursuant to the Amendments, all 2,128,099 Whitehall warrants were returned and cancelled. In addition, Whitehall's right to convert $25,000,000 of membership units in Wellsford/Whitehall for shares of the Company's common stock, or cash at the Company's election, was eliminated. As a condition to the formation of Wellsford/Whitehall in 1997, the Company had agreed with Whitehall to conduct its business and activities relating to office properties (but not other types of commercial properties) located in North America solely through its interest in Wellsford/Whitehall. Whitehall has agreed to waive this condition in connection with the Amendments. F-33 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL --------------------------------------------- At December 31, 2001, the Company had the following investments: (i) approximately $34,785,000 of direct debt investments which bore interest at an average yield of approximately 11.38% for the year ended December 31, 2001 and had an average remaining term to maturity of approximately 4.3 years; (ii) approximately $31,233,000 in companies which were organized to invest in debt instruments, including $27,803,000 in Second Holding Company, L.L.C., a company which was organized to purchase investment and non-investment grade rated real estate debt instruments and investment grade rated other asset-backed securities ("Second Holding"); and (iii) approximately $6,784,000 in a real estate information and database company and another real estate-related venture. In addition, the Company owned and operated two commercial properties with a net book value of approximately $5,560,000, totaling approximately 175,000 square feet located in Salem, New Hampshire and Philadelphia, Pennsylvania at December 31, 2001. DEBT INVESTMENTS 277 PARK LOAN In April 1997, the Company and a predecessor of Fleet National Bank originated an $80,000,000 loan (the "277 Park Loan") to entities which own substantially all of the equity interests (the "Equity Interests") in the entity which owns a 1,750,000 square foot office building located in New York City (the "277 Park Property"). The Company has advanced $25,000,000 pursuant to the 277 Park Loan. The 277 Park Loan is secured primarily by a pledge of the Equity Interests owned by the borrowers and thus is junior to a 10-year $345,000,000 (amortized balance of $320,994,000 at December 31, 2001) first mortgage loan (the "REMIC Loan") on the 277 Park Property. The 277 Park Loan bears interest at the rate of 12.00% per annum for the first nine years of its term and at a floating rate during the tenth year equal to LIBOR + 5.15% per annum or the Fleet National Bank base rate plus 5.15% per annum, as elected by the borrowers. The principal amount of the 277 Park Loan and all accrued interest will be payable in May 2007; the REMIC Loan is also due in May 2007. The Company earned approximately $3,042,000, $3,050,000 and $3,042,000 per year of interest income from the 277 Park Loan during 2001, 2000 and 1999, respectively, or 7.3%, 12.2% and 10.1% of its total non-joint venture revenues during such periods. PATRIOT LOAN In September 1999, the Company and Fleet National Bank originated a $10,000,000 second mortgage loan. Pursuant to this second mortgage loan, the Company advanced $5,000,000 (its 50% share) which is subordinate to a $75,000,000 first mortgage with Fleet National Bank (amortized balance of approximately $72,514,000 at December 31, 2001). The loan bears interest at LIBOR + 4.75% per annum (6.89% at December 31, 2001) with payments of interest only through August 2001 and thereafter, principal and interest based on a 25-year amortization through the loan's maturity in July 2002 (the "Patriot Loan"). The Patriot Loan is secured by a second mortgage lien on a 608,000 square foot mixed-use property in Boston, Massachusetts. The loan balance due to the Company on December 31, 2001 was approximately $4,973,000. The Company earned approximately $449,000, $564,000 and $189,000 of interest income from the Patriot Loan during 2001, 2000 and 1999, respectively, or 1.1%, 2.3% and 0.6% of its total non-joint venture revenues during such periods. F-34 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) THE ABBEY COMPANY CREDIT FACILITY In August 1997, the Company and a predecessor of J.P. Morgan Chase ("JPMC") originated a $70,000,000 credit facility secured by first mortgages (the "Abbey Credit Facility") to affiliates of The Abbey Company, Inc. ("Abbey"). In May 1998, the Company and JPMC expanded the Abbey Credit Facility to $120,000,000. In December 1998, Abbey repaid $20,000,000, thereby reducing the total available balance to $100,000,000. In September 1999, an additional $83,500,000 was repaid, thereby reducing the total available balance to $16,500,000. Advances under the Abbey Credit Facility were made for up to 65% of the value of the borrowing base collateral which consisted of first mortgage loans on office, industrial and retail properties, all cross collateralized, totaling approximately 250,000 square feet. The Company's portion of the outstanding balance was approximately $4,300,000 at December 31, 1999. In August 2000, the remaining balance was repaid and the Abbey Credit Facility was terminated. The Company was entitled to interest on its advances under the Abbey Credit Facility at LIBOR + 4.00% per annum. The Company earned approximately $295,000 and $2,941,000 of interest income from the Abbey Credit Facility during 2000 and 1999, respectively, or 1.2% and 9.8% of its total non-joint venture revenues during such periods. SAFEGUARD CREDIT FACILITY In December 1998, the Company and JPMC originated a $90,000,000 credit facility secured by cross-collateralized first mortgages on nine properties (the "Safeguard Credit Facility") to Safeguard Capital Fund, L.P. ("Safeguard"). The Safeguard Credit Facility which was made available to Safeguard until April 2001 was terminated on January 30, 2001 when the outstanding balance of $2,900,000 was repaid. Advances under the facility were made for up to 75% of the value of the borrowing base collateral which consisted of nine self-storage properties, totaling approximately 608,000 square feet. The Company was entitled to interest on its advances under the Safeguard Credit Facility at LIBOR + 4.00% per annum. Approximately $5,900,000 had been advanced by the Company under the Safeguard Credit Facility at December 31, 1998, with additional advances made of approximately $2,200,000 through March 1999, at which time, the loan with a balance of $8,100,000 was contributed to the Company's joint venture investment, Second Holding. This venture also assumed the first $25,000,000 of the Company's commitment to fund additional advances under the Safeguard Credit Facility (including amounts advanced through December 31, 1999). The Company retained the remaining $20,000,000 commitment, of which $2,900,000 was advanced to Safeguard in September 1999 and was outstanding at December 31, 2000 and 1999, respectively. The Safeguard Credit Facility was repaid in full in January 2001. The Company earned approximately $25,000, $306,000 and $292,000 of interest income from the Safeguard Credit Facility during 2001, 2000 and 1999, respectively, or 0.1%, 1.2% and 1.0% of its total non-joint venture revenues during such periods. F-35 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) DEBARTOLO LOAN In July 1998, the Company, Bank One, N.A. and several other financial institutions originated a $175,000,000 loan, in which the Company had an $18,000,000 participation (the "DeBartolo Loan"), to entities owned by Simon DeBartolo Group, L.P. The DeBartolo Loan was secured by partnership units in Simon DeBartolo Group, L.P., the operating partnership of a real estate investment trust which owns shopping malls nationwide. The DeBartolo Loan bore interest at 8.547% per annum, was payable quarterly, paid principal based on a 20-year amortization schedule and was due in July 2008. In March 1999, the amortized loan balance of approximately $17,600,000 was contributed to Second Holding. The DeBartolo Loan was sold at par during 2001. The Company earned approximately $360,000 of interest income from the DeBartolo Loan during 1999, or 1.2% of its non-joint venture revenues during the period. WOODLANDS LOAN In December 1997, the Company, a predecessor of Fleet National Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders made available to the owners and developers of a 25,000 acre master-planned residential community located north of Houston, Texas (the "Woodlands Property"), loans in the aggregate principal amount of $369,000,000 (the "Woodlands Loan"). The Woodlands Loan consisted of a revolving credit loan in the principal amount of $179,000,000 (the "Revolving Loan"), a secured term loan in the principal amount of $130,000,000 (the "Secured Loan"), and a second secured term loan in the principal amount of $60,000,000 (the "Second Secured Loan"). The Company advanced $15,000,000 pursuant to the Second Secured Loan. The Second Secured Loan was subordinate to the Revolving Loan and the Secured Loan and bore interest equal to LIBOR + 4.40% per annum. The principal amount of the Woodlands Second Secured Loan was repaid in full prior to December 31, 1999. The Company earned approximately $1,295,000 of interest income from the Woodlands Second Secured Loan during 1999, or 4.3% of its total non-joint venture revenues during the period. REIT BRIDGE LOAN In August 1998, the Company, Deutsche Bank, N.A. and certain other lenders originated a $100,000,000 unsecured loan in which the Company had a $15,000,000 participation (the "REIT Bridge Loan") to a publicly traded real estate investment trust which owned 22 regional malls, eight multifamily apartment properties and five office properties nationwide. This loan bore interest at 9.875% per annum and was due in February 1999, with two three-month extensions available to the borrower. In January 1999, the REIT Bridge Loan was modified to extend the maturity date to August 1999 and increased the interest rate to 12.00% per annum. The borrower paid a 1.50% loan fee at origination and a 1.00% loan fee upon modification. This loan was repaid in full in July 1999. The Company earned approximately $1,050,000 of interest income from the REIT Bridge Loan during 1999, or 3.5% of its total non-joint venture revenues during the period. F-36 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) BROOMFIELD LOAN In January 1999, the Company acquired a parcel of land in Broomfield, Colorado for approximately $7,200,000 pursuant to an outstanding standby commitment issued in 1998. In connection with this transaction, the Company collected approximately $401,000 of fees in 1998. In July 1999, the Company sold this land for $7,200,000 to a third party ("Buyer") and simultaneously collected an additional $1,100,000 in fees. The Company then purchased $11,740,000 of tax-exempt notes, bearing interest at 6.25% per annum and due in December 1999. These notes were issued by a quasi-governmental agency partially controlled by the Buyer and were guaranteed by a AA rated bank. The notes were repaid in full in December 1999. The Company earned approximately $1,555,000 on the Broomfield transaction during 1999, or 5.2% of its total non-joint venture revenues during the period. SECOND HOLDING The Company contributed approximately $24,200,000 and $4,900,000 in 1999 and 1998, respectively, to a 51% owned joint venture special purpose finance company ("SPFC"), Second Holding, with Liberty Hampshire owning 10% and another unrelated entity owning the remaining 39%. The 1999 contribution was comprised of two of the Company's debt investments, the $17,600,000 DeBartolo Loan and the $8,100,000 outstanding balance of the Safeguard Credit Facility, net of $1,500,000 of cash received back from Second Holding. The other partners contributed their respective shares of their capital contributions in cash. During the latter part of 2000, an additional partner was admitted to the venture, who received a share of income, as defined, pursuant to a cumulative preference on earnings in return for providing credit enhancement to certain debt issued by Second Holding. Effective January 1, 2002, the owners of Second Holding modified the terms of how income is allocated among the partners to remove the cumulative preference on earnings to the aforementioned partner. This one partner is entitled to 35% of net income, as defined by the agreement, while the other partners, including the Company, share in the remaining 65%. The Company's allocation of income is approximately 51% of the remaining 65%. The Company's investment in Second Holding, which is accounted for on the equity method, was approximately $27,803,000 and $27,868,000 at December 31, 2001 and 2000, respectively. Second Holding has been organized to purchase investment and non-investment grade rated real estate debt instruments and investment grade other asset-backed securities. These other asset-backed securities that Second Holding may purchase may be secured by, but not limited to, leases on aircraft, truck or car fleets, leases on equipment, consumer receivables, pools of corporate bonds and loans and sovereign debt. F-37 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The following table presents a condensed balance sheet and operating data for Second Holding: (amounts in thousands) DECEMBER 31, ------------ CONDENSED BALANCE SHEET DATA 2001 2000 ---------------------------- ---- ---- Cash and cash equivalents ............ $ 76,487 $ 73,136 Investments .......................... 926,453 229,003 Other assets (A) ..................... 19,943 4,795 Total assets ......................... 1,022,883 306,934 Debt ................................. 962,465 244,867 Total equity ......................... 54,581 54,492 FOR THE YEARS ENDED DECEMBER 31, -------------------------------- CONDENSED OPERATING DATA 2001 2000 1999 ------------------------ ---- ---- ---- Interest ............................. $ 30,528 $ 7,383 $ 3,243 Interest from Reis ................... -- 169 506 ---------- ---------- ---------- Total revenue ........................ 30,528 7,552 3,749 ---------- ---------- ---------- Interest expense ..................... 28,017 3,665 -- Fees and other ....................... 2,422 1,084 812 ---------- ---------- ---------- Total expenses ....................... 30,439 4,749 812 ---------- ---------- ---------- Net income attributable to members (B) $ 89 $ 2,803 $ 2,937 ========== ========== ========== - ---------- (A) Other assets includes an interest rate swap asset with a fair value of $13,531 at December 31, 2001. (B) A partner which was admitted in the latter part of 2000 is entitled to a cumulative preference on earnings; accordingly all fiscal 2001 income is allocable to this partner. At December 31, 2001, Second Holding had real estate debt and other asset-backed securities investments of approximately $926,453,000 and also had approximately $25,000,000 invested in commercial paper which was included in cash and cash equivalents in the Condensed Balance Sheet Data. The investment-grade assets and commercial paper investments are variable rate based and have a weighted average annual interest rate of 2.75% at December 31, 2001. Second Holding utilizes funds from the issuance of bonds and medium term notes to make investments. At December 31, 2001, Second Holding had total debt of approximately $962,465,000 which is primarily comprised of (i) a privately placed ten-year $150,000,000 junior subordinated bond issue maturing April 2010 with a fair value of $163,531,000 at December 31, 2001 and an effective annual interest rate of LIBOR + 0.90% (3.29% at December 31, 2001), (ii) approximately $745,000,000 of medium term notes with a weighted average annual interest rate of 1.91% and (iii) approximately $58,858,000 of commercial paper with a weighted average annual interest rate of 2.07%, all of which are offset by unamortized issuance costs and discounts of approximately $4,924,000. The weighted average annual interest rate on Second Holding's debt was 2.14% at December 31, 2001. F-38 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The following table details the allocation of investments at December 31, 2001 and 2000 for Second Holding: DECEMBER 31, ------------ 2001 2000 ---- ---- SECURITY FOR INVESTMENTS (A) ---------------------------- Real estate............................... $ 334,601,000 $ 146,954,000 Corporate debt............................ 135,686,000 -- Sovereign debt............................ 73,000,000 -- Bank deposits............................. 70,000,000 -- Aircraft leases........................... 70,000,000 30,000,000 Fuel/oil receivables...................... 35,000,000 -- Consumer receivables...................... 33,500,000 -- Other asset-backed securities............. 174,666,000 52,049,000 ------------- ------------- $ 926,453,000 $ 229,003,000 ============= ============= STANDARD & POOR'S RATINGS OF INVESTMENTS ---------------------------------------- AAA....................................... $ 759,241,000 $ 150,000,000 AA........................................ 42,750,000 40,000,000 AA-....................................... 28,000,000 -- A......................................... 60,210,000 -- A-........................................ 34,441,000 -- Other..................................... 1,811,000 39,003,000 ------------- ------------- $ 926,453,000 $ 229,003,000 ============= ============= - ---------- (A) Investments may be secured by the assets, interests in such assets or their respective economic benefit. In August 2001, Second Holding purchased an aggregate of $24,825,000 in two classes of Mortgage Pass-Through Certificates, Series 2001--WTC (the "WTC Certificates") (the Company's share of which is $12,683,000). The WTC Certificates, rated AA and A at issuance, were part of a total bond offering of $563,000,000 which was used to finance the acquisition of the leasehold interest in towers 1 and 2 and buildings 4 and 5 of the World Trade Center in New York City. Subsequent to the events of September 11, 2001 which resulted in the destruction of these buildings, the Company has been informed by GMAC Commercial Mortgage Corporation, the master and special servicer, that the WTC Certificates are not in default. The property casualty and business interruption insurance obtained in connection with the WTC Certificates does not exclude acts of terrorism and such insurance is from a consortium of 22 insurers. As of December 31, 2001, the rating agencies did not change their ratings on the WTC Certificates. The Company believes that the insurance coverage is sufficient to cover Second Holding's investment and that an impairment reserve is not required. Both Second Holding and the Company will continue to evaluate the ultimate collectibility of the principal and interest. F-39 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) LIBERTY HAMPSHIRE In July and August 1998, the Company invested a total of approximately $2,100,000 for an approximate 4.20% equity interest in Liberty Hampshire, a venture which structures, establishes and provides management and services for SPFCs formed to invest in financial assets. In December 2000, the Company sold this interest to the majority owner of Liberty Hampshire for $5,160,000 and recorded a gain of approximately $2,500,000. The Company received $1,032,000 of cash and a note for the remaining balance of $4,128,000 which bears interest at 8.25% per annum, is due in December 2005 and has scheduled annual principal and interest payments (the "Guggenheim Loan"). The balance of the Guggenheim Loan was $3,612,000 at December 31, 2001. The Company earned approximately $345,000 of interest income from the Guggenheim Loan during 2001, or 0.8% of its total non-joint venture revenues during the period. REIS The Company has direct and indirect investments in a real estate information and database company, Reis, a leading provider of real estate market information to institutional investors. At December 31, 2001 and 2000 the Company's aggregate investment in Reis, which is accounted for under the cost method, was $6,575,000, or 22% of Reis' equity on an as converted basis. A portion of the investment is held directly by the Company and the remainder is held by Reis Capital Holdings, LLC ("Reis Capital"), a company which was organized to hold this investment (the Reis Capital investment was transferred from Second Holding). The Company has an approximate 51.1% non-controlling interest in Reis Capital at December 31, 2001. A summary of the Company's direct and indirect investments in Reis follows:
REIS CAPITAL DIRECT AND ------------------------------ INDIRECT AMOUNTS COMPANY INVESTED BY TOTAL OWNERSHIP OTHER PARTNERS INVESTMENT --------- -------------- ---------- Notes purchased through Reis Capital during 1999 converted to Series A Preferred shares in April 2000 (A) $2,555,000 $2,445,000 $5,000,000 Notes purchased through Reis Capital during 1999 converted to Series B Preferred shares in April 2000 (B) 766,000 734,000 1,500,000 Accrued interest on above notes converted to Series C Preferred shares in April 2000 (C) ..................... 466,000 447,000 913,000 Series C Preferred shares purchased directly in April 2000 (D) ............................................... 2,022,000 Series C Preferred shares purchased through Reis Capital in April 2000 (E) ...................................... 766,000 734,000 1,500,000 ---------- ---------- ---------- Total investment .......................................... $6,575,000 $4,360,000 $8,913,000 ========== ========== ========== - ---------- All preferred series have an 8% cumulative dividend; no dividends have been declared or paid since issuance. (A) Issued 50,000 shares at $100 per share; convertible into common shares at $1.76 per share. (B) Issued 15,000 shares at $100 per share; convertible into common shares at $3.00 per share. (C) Issued 9,120 shares at $100 per share; convertible into common shares at $4.00 per share. (D) Issued 20,220 shares at $100 per share; convertible into common shares at $4.00 per share. (E) Issued 15,000 shares at $100 per share; convertible into common shares at $4.00 per share.
F-40 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The Company's Chairman is the brother of the president of Reis. The Company's President was appointed to the board of directors of Reis during the third quarter of 2000. At the time of the April 2000 investments noted above, the management of Reis offered certain persons the opportunity to make an individual investment in Reis, including, but not limited to, certain directors and officers of the Company who purchased an aggregate of $410,000 of Series C Preferred shares. The investments of the Company's officers and directors together with shares of common stock previously held by the Company's Chairman represent approximately 3.5% of Reis' equity, on an as converted basis. Additionally, a company controlled by the Chairman of EQR purchased Series C Preferred shares with a 4.5% converted interest for a cost of $2,000,000. The president of EQR is a director of the Company. The Chairman, President and directors whom have invested directly in Reis have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis. All of the above transactions of preferred shares took place on the same date upon the completion of a capital restructuring of Reis. The following is a summary of investments in Reis made during 1999 and 2000: Company: Direct .............................. $ 2,022,000 Through Reis Capital ................ 4,553,000 ----------- Total Company investment ......... 6,575,000 Others: Partners in Reis Capital ............ 4,360,000 Officers and directors of the Company 410,000* Institutional companies ............. 4,500,000* Individuals ......................... 420,000* ----------- Total 1999 and 2000 investments .. $16,265,000 =========== - ---------- * All investments are in Series C Preferred shares. The aggregate amounts raised have been utilized by Reis to carry out its business plan to expand the number of real estate markets covered by its services, move to an internet-based delivery system to its customers and to increase marketing of its products to expand its customer base. Since the April 2000 capital raise, it has introduced a new product line, utilizing its database information to meet underwriting and valuation requirements of real estate professionals for multi-asset transactions. Reis is currently in the process of attempting to raise up to an additional $2,000,000 from the same institutional investors holding the Series C Preferred shares including the Company. The purpose is to accelerate the introduction of its new product line, develop a new product related to its existing business and for general corporate purposes. Second Holding uses the services of Reis in making investment decisions. Second Holding incurred fees of $360,000 in connection with such services for each of the years ended December 31, 2001, 2000 and 1999. The Company pays one-half of such fees. For 2002, the fees will be reduced to $240,000 per year, with the Company continuing to pay one-half. F-41 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) CREAMER VITALE WELLSFORD/CLAIRBORNE INVESTORS In January 1998, the Company formed CVW in which it had a 49% interest and acquired the same percentage interest in a related real estate advisory and consulting firm. CVW, together with Prudential Real Estate Investors ("PREI"), an affiliate of Prudential Life Insurance Company, established the Clairborne Investors Mortgage Investment Program ("Clairborne") to make opportunistic investments and to provide liquidity to lenders and participants in mortgage loan transactions. The parties agreed to contribute up to $150,000,000 to fund acquisitions approved by the parties, of which PREI would fund 90% and a subsidiary of the Company would fund 10%. CVW was to originate, co-invest and manage the investments of the program. The Company's original investment in these entities was $1,250,000 of cash and 74,000 five-year warrants to purchase the Company's common shares at $30.35 per share, valued at approximately $750,000 at that time. In September 2000, one of the two principals of CVW left CVW to pursue other employment and the venture was terminated. In July 2001, warrants issued to the CVW partners were repurchased for $80,000 and cancelled. The Company may continue to conduct business through CVW in certain circumstances. In November 1998, Clairborne acquired an approximate $17,000,000 participation in a $56,000,000 mortgage, which bore interest at LIBOR + 1.75% per annum and due in 3.5 years, at a significant discount to face value. The Company funded approximately $1,400,000 of the cost of this participation, which was prepaid entirely at the face amount during 1999 by the borrower. FORDHAM TOWER LOAN In October 2000, the Company and PREI organized a new venture which provided an aggregate of $34,000,000 of mezzanine financing for the construction of Fordham Tower, a 50-story, 244 unit, luxury condominium apartment project to be built on Chicago's near northside ("Fordham Tower"). Construction is in process and delivery of initial units is projected for November 2002. As of December 31, 2001, the project was approximately 90% presold. The Company fully funded its share of the loan of $3,400,000. The loan, which matures in October 2003, bears interest at a fixed rate of 10.50% per annum with provisions for additional interest to PREI and the Company and fees to the Company and the two former principals of CVW, based upon certain levels of returns on the project and is secured by a lien on equity interests in the property. Such additional interest has not been earned or accrued by the Company. The Company's investment in the Fordham Tower venture is accounted for on the equity method. The Company's share of income from Fordham Tower was approximately $361,000 and $85,000 for the years ended December 31, 2001 and 2000, respectively. F-42 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) OTHER INVESTMENTS VALUE PROPERTY TRUST In February 1998, the Company completed the merger with Value Property Trust ("VLP") (the "VLP Merger") for total consideration of approximately $169,000,000, which was accounted for as a purchase. Thirteen of the twenty VLP properties, which were under contract to an affiliate of Whitehall, were subsequently sold for an aggregate of approximately $64,000,000. The Company retained seven of the VLP properties with an allocated value upon purchase of approximately $38,300,000 aggregating approximately 597,000 square feet with one property located in California and the remaining six properties located in the northeastern United States. VLP had cash of $60,800,000 and other net assets of $5,900,000 at the close of the transaction. In October 1998, the Company obtained a $28,000,000 loan, which was cross-collateralized by the seven VLP properties, bore interest at LIBOR + 2.75% per annum and was scheduled to mature in October 2001. During the fourth quarter of 2000, the Company made the strategic decision to sell the seven VLP properties. One of the properties was sold in December 2000 and four other properties were sold during 2001, leaving two properties unsold at December 31, 2001. The Company recorded a gain of approximately $4,943,000 on the December 2000 transaction which was offset by a provision for impairment of $4,725,000, also recorded in 2000, attributable to expected sales proceeds being less than the respective carrying amounts on four of the remaining six unsold VLP properties at December 31, 2000. The Company repaid in full the $28,000,000 loan in December 2000 and expensed all of the remaining unamortized deferred loan costs associated with the financing. The net book value of the two unsold properties was approximately $5,560,000 at December 31, 2001, net of the remaining impairment reserve of $2,175,000. The Company determined that no additional impairment provision was required at December 31, 2001. PROPERTY DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT --------------------------------------------------------------- PALOMINO PARK At present, the Company's Wellsford Development activities consist solely of an interest in a five phase 1,800 unit class A multifamily development ("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado. At December 31, 2001, the Company had an 85.85% interest as the managing owner in this project and an affiliate of EQR had the remaining 14.15% interest. Effective October 1, 2000, EQR elected not to make a capital contribution attributable to the last three phases of Palomino Park and its ownership interest was reduced from 20.00% to 14.15%. In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). In June 2000, the Company obtained a five-year AAA rated letter of credit from Commerzbank AG to provide additional collateral for the Palomino Park Bonds. This letter of credit replaced an expiring letter of credit. An affiliate of EQR has guaranteed Commerzbank AG's letter of credit. In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed at a cost of approximately $41,500,000. At that time, the Company obtained a $34,500,000 permanent loan (the "Blue Ridge Mortgage") secured by a first mortgage on Blue Ridge. The Blue Ridge Mortgage matures in January 2008 and bears interest at a fixed rate of 6.92% per annum. Principal payments are based on a 30-year amortization schedule. F-43 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) In November 1998, Phase II, the 304 unit phase known as Red Canyon, was completed at a cost of approximately $33,900,000. At that time, the Company acquired the Red Canyon improvements and the related construction loan was repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon Mortgage") secured by a first mortgage on Red Canyon. The Red Canyon Mortgage matures in December 2008 and bears interest at a fixed rate of 6.68% per annum. Principal payments are based on a 30-year amortization schedule. In October 2000, Phase III, the 264 unit phase known as Silver Mesa was completed at a cost of approximately $44,200,000. The Company made the strategic decision to convert Silver Mesa into condominium units and sell them to individual buyers. In conjunction with this decision, the Company has prepared certain units to be sold and will continue to rent certain of the remaining unsold units during the sellout period until the available for sale inventory has been significantly reduced and additional units need to be prepared for sale. In conjunction with this decision, the Company made a payment of $2,075,000 to reduce the outstanding balance on the tax-exempt bonds in order to obtain the release of the Silver Mesa phase from the Palomino Park Bond collateral. The allocable cost associated with the units being rented and the units available for sale was approximately $21,438,000 and $5,401,000 at December 31, 2001 and $22,129,000 and $21,850,000 at December 31, 2000, respectively. In December 2000, the Company obtained a $32,000,000 loan from KeyBank National Association (the "Silver Mesa Conversion Loan") which bears interest at LIBOR + 2.00% per annum (4.14% at December 31, 2001), is collateralized by the unsold units, matures in December 2003 and provides for one six-month extension at the Company's option. Generally 90% of net sales proceeds per unit is applied to principal repayments until the loan is paid in full. The balance of the Silver Mesa Conversion Loan was $13,352,000 and $32,000,000 at December 31, 2001 and 2000, respectively. In February 2001, the Company commenced sales of units at Silver Mesa. The Company sold 105 units through December 31, 2001 for gross proceeds of approximately $21,932,000, approximately $18,648,000 of which was used to pay down principal on the Silver Mesa Conversion Loan. At December 31, 2001, there were 23 units in available for sale inventory. The Company anticipates releasing 28 units from the rental pool to increase the available for sale inventory during the first quarter of 2002. In December 2001, Phase IV, the 424 unit phase known as Green River, was completed at a cost of approximately $56,400,000. Effective December 31, 2001, the Company (i) became obligated for the construction loan, (ii) released the developer of the economic risks it bore during construction and initial lease-up as the developer carried the construction loan and a significant portion of the costs incurred on its balance sheet and (iii) the developer no longer participated in any positive operating income generated during the period. Accordingly, the Company acquired the improvements and assumed the related construction loan, which had a balance of $36,747,000 at December 31, 2001, bears interest at LIBOR + 1.75% per annum (3.76% at December 31, 2001), matures in January 2003 and is extendable for six months for a fee of 0.375%. Additional interest of $861,000 can be accrued into the principal balance of the loan, after which time, payments of interest only are required until maturity (it is anticipated that the Company will commence interest payments during the third quarter of 2002). Green River is in the lease-up phase and was 52% occupied at December 31, 2001. On December 31, 2001, Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known as Gold Peak, had a cost basis of approximately $5,400,000. The Company has not determined if it will construct this phase or sell the improved land. F-44 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) SONTERRA AT WILLIAMS CENTRE ("SONTERRA") From the time of the Spin-off, the Company held a $17,800,000 mortgage on, and option to purchase, a 344-unit class A residential apartment complex located in Tucson, Arizona. In January 1998, the Company exercised its option and acquired Sonterra for approximately $20,500,000, including satisfaction of the mortgage. In February 1998, the Company closed on $16,400,000 of first mortgage financing (the "Sonterra Mortgage") on this property, bearing interest at 6.87% and maturing in March 2008. Principal payments were based on a 30-year amortization schedule. In November 2000, the Company sold the Sonterra property for $22,550,000 and recorded a pre-income tax gain of approximately $3,500,000. The buyer assumed the Sonterra Mortgage which had an unamortized balance of approximately $15,971,000 and paid the balance of the purchase price in cash. F-45 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the historical cost and fair value of the Company's financial instruments at December 31, 2001 and 2000:
(AMOUNTS IN THOUSANDS) HISTORICAL COST AT DECEMBER 31, FAIR VALUE AT DECEMBER 31, ------------------------------- -------------------------- NOTES RECEIVABLE (A) 2001 2000 2001 2000 -------------------- ---- ---- ---- ---- Fixed rate: 277 Park Loan ............... $ 25,000 $ 25,000 $ 25,900 (C) $ 25,900 (C) Guggenheim .................. 3,612 4,128 3,692 (C) 4,128 (D) Other ....................... 1,200 700 1,200 (E) 700 (D) -------- -------- -------- -------- Total fixed rate notes ......... 29,812 29,828 30,792 30,728 -------- -------- -------- -------- Floating rate: Patriot Loan ................ 4,973 5,000 4,973 (F) 5,000 (F) Safeguard Loan .............. -- 2,900 -- 2,900 (F) Other ....................... -- 96 -- 96 (F) -------- -------- -------- -------- Total floating rate notes ...... 4,973 7,996 4,973 7,996 -------- -------- -------- -------- Total notes receivable ......... $ 34,785 $ 37,824 $ 35,765 $ 38,724 ======== ======== ======== ======== DEBT (B) -------- Floating rate: Wellsford Finance Facility .. $ -- $ 12,000 $ -- $ 12,000 (G) Palomino Park Bonds ......... 12,680 12,680 12,680 (G) 12,680 (G) Silver Mesa Conversion Loan . 13,352 32,000 13,352 (G) 32,000 (G) Green River Construction Loan 36,748 -- 36,748 (G) -- -------- -------- -------- -------- Total floating rate debt ....... 62,780 56,680 62,780 56,680 -------- -------- -------- -------- Fixed rate: Blue Ridge Mortgage ......... 32,916 33,354 33,648 (H) 33,164 (H) Red Canyon Mortgage ......... 26,035 26,370 26,143 (H) 25,801 (H) -------- -------- -------- -------- Total fixed rate debt .......... 58,951 59,724 59,791 58,965 -------- -------- -------- -------- Total debt ..................... $121,731 $116,404 $122,571 $115,645 ======== ======== ======== ======== - --------- (A) For more information regarding the Company's note receivables, see Footnote 5. (B) For more information regarding the Company's debt, see Footnote 6. (C) The fair value of the Company's fixed rate investments was determined by reference to various market data. (D) The fair value is considered to be its carrying amount as this is a recently executed transaction reflective of current market conditions. (E) This $1,200 loan was paid in full on January 18, 2002. The Company considers the fair value of this repaid loan at its face value. (F) The fair value of the Company's floating rate investments is considered to be their carrying amounts. (G) The fair value of the Company's floating rate debt is considered to be their carrying amounts. (H) The fair value of the Company's fixed rate debt was determined by reference to various market data.
F-46 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED) Summarized consolidated quarterly financial information for the years ended December 31, 2001 and 2000 is as follows:
FOR THE THREE MONTHS ENDED --------------------------------------------------------------------- 2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ---------------------------------------------------- -------- ------- ------------ ----------- Revenues ........................................... $ 11,900,234 $ 13,131,882 $ 8,606,792 $ 7,854,091 Costs and expenses* ................................ 11,276,217 13,468,374 9,057,870 12,618,219 Income (loss) from joint ventures .................. 1,946,058 758,816 (763,377) 2,622,909 Minority interest .................................. (91,639) (93,662) (44,570) (52,655) ------------ ------------ ------------ ------------ Income (loss) before taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities ...................... 2,478,436 328,662 (1,259,025) (2,193,874) Income tax expense (benefit) ....................... 465,000 (193,000) 122,000 305,000 Accrued distributions and amortization of costs on Convertible Trust Preferred Securities, net of income tax benefit .............................. 349,954 342,953 346,954 339,954 ------------ ------------ ------------ ------------ Net income (loss) .................................. $ 1,663,482 $ 178,709 $ (1,727,979) $ (2,838,828) ============ ============ ============ ============ Net income (loss) per common share, basic** ........ $ 0.20 $ 0.02 $ (0.27) $ (0.45) ============ ============ ============ ============ Net income (loss) per common share, diluted** ...... $ 0.20 $ 0.02 $ (0.27) $ (0.45) ============ ============ ============ ============ Weighted average number of common shares outstanding, basic .............................. 8,351,623 7,864,302 6,333,094 6,334,927 ============ ============ ============ ============ Weighted average number of common shares outstanding, diluted ............................ 8,356,001 7,873,327 6,333,094 6,334,927 ============ ============ ============ ============ FOR THE THREE MONTHS ENDED --------------------------------------------------------------------- 2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ---------------------------------------------------- -------- ------- ------------ ----------- Revenues ........................................... $ 6,092,239 $ 6,103,532 $ 6,534,460 $ 6,893,558 Expenses ........................................... 6,346,998 5,838,444 6,746,142 7,249,087 Income (loss) from joint ventures .................. 1,260,909 804,764 1,551,955 (370,870) Gain on sale of assets, net of impairment provision -- -- -- 6,134,851 Minority interest .................................. (9,668) 571 (8,338) (48,786) ------------ ------------ ------------ ------------ Income before taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities ............................ 996,482 1,070,423 1,331,935 5,359,666 Income tax expense ................................. 18,000 372,000 283,000 757,000 Accrued distributions and amortization of costs on Convertible Trust Preferred Securities, net of income tax benefit .............................. -- 211,000 352,507 296,954 ------------ ------------ ------------ ------------ Net income ......................................... $ 978,482 $ 487,423 $ 696,428 $ 4,305,712 ============ ============ ============ ============ Net income per common share, basic** ............... $ 0.11 $ 0.06 $ 0.08 $ 0.52 ============ ============ ============ ============ Net income per common share, diluted** ............. $ 0.11 $ 0.06 $ 0.08 $ 0.52 ============ ============ ============ ============ Weighted average number of common shares outstanding, basic .............................. 9,101,393 8,321,888 8,296,507 8,315,172 ============ ============ ============ ============ Weighted average number of common shares outstanding, diluted ............................ 9,107,082 8,326,980 8,313,555 8,325,747 ============ ============ ============ ============ - ---------- * Costs and expenses for the three months ended December 31, 2001 includes a restructuring charge of $3,527,000 in connection with arrangements with the Company's President for his early retirement. ** Aggregate quarterly earnings per share amounts may not equal annual amounts presented elsewhere in these consolidated financial statements due to rounding differences.
F-47 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 WITH REPORT OF INDEPENDENT AUDITORS F-48 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE NO. -------- Report of Independent Auditors.............................................F-50 Consolidated Balance Sheets................................................F-51 Consolidated Statements of Income..........................................F-52 Consolidated Statements of Changes in Members' Equity......................F-53 Consolidated Statements of Cash Flows......................................F-54 Notes to Consolidated Financial Statements.................................F-56 F-49 REPORT OF INDEPENDENT AUDITORS To the Members of Wellsford/Whitehall Group, L.L.C. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Wellsford/Whitehall Group, L.L.C. (formerly Wellsford/Whitehall Properties II, L.L.C.) and Subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in members' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wellsford/Whitehall Group, L.L.C. and Subsidiaries at December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP New York, New York February 15, 2002 F-50 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ 2001 2000 ---- ---- ASSETS Real estate assets, at cost: Land............................................... $ 67,403,646 $ 66,547,270 Buildings and improvements......................... 483,071,868 450,575,368 ------------- ------------- 550,475,514 517,122,638 Less accumulated depreciation................... (44,550,895) (30,498,428) ------------- ------------- 505,924,619 486,624,210 Construction in progress........................... 5,723,067 102,530,148 ------------- ------------- 511,647,686 589,154,358 Real estate held for transfer to New Venture, net..... -- 7,835,884 Cash and cash equivalents............................. 32,723,263 6,160,768 Restricted cash....................................... 9,845,420 8,980,244 Deferred costs, less accumulated amortization......... 8,265,860 2,250,769 Receivables, prepaids and other assets, net........... 9,628,307 7,753,659 ------------- ------------- Total assets.......................................... $ 572,110,536 $ 622,135,682 ============= ============= LIABILITIES AND MEMBERS' EQUITY Liabilities: Mortgages payable.................................. $ 111,948,662 $ 136,490,353 Secured senior credit facility .................... -- 181,728,228 Secured mezzanine credit facility ................. -- 62,521,799 Portfolio loan..................................... 258,060,434 -- Accrued expenses and other liabilities............. 11,814,405 16,915,187 Distributions payable.............................. 4,221,364 2,515,281 Ground lease obligation............................ 1,124,981 1,120,213 Security deposits.................................. 1,651,181 1,477,629 ------------- ------------- Total liabilities..................................... 388,821,027 402,768,690 ------------- ------------- Commitments and contingencies Members' equity: Membership units, $.01 par value per unit.......... 192,662 143,035 Paid in capital.................................... 275,752,333 201,667,531 Other comprehensive loss........................... (525,560) -- Series A convertible preferred membership units.... -- 18,322,550 Excess of distribution over earnings............... (92,129,926) (766,124) ------------- ------------- Total members' equity................................. 183,289,509 219,366,992 ------------- ------------- Total liabilities and members' equity................. $ 572,110,536 $ 622,135,682 ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-51 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Revenues: Rental income ................................. $ 78,458,718 $ 77,087,349 $ 73,355,970 Interest and other income ..................... 5,051,328 5,363,354 1,319,987 ------------ ------------ ------------ Total revenues ......................... 83,510,046 82,450,703 74,675,957 ------------ ------------ ------------ Expenses: Property operations and maintenance ........... 20,067,281 18,993,827 18,141,650 Real estate taxes ............................. 8,744,809 8,282,532 7,891,159 Depreciation and amortization ................. 17,323,039 13,215,194 11,701,917 Property and asset management ................. 1,515,727 1,497,279 1,398,399 Interest ...................................... 26,558,656 25,993,982 25,586,242 General and administrative .................... 7,345,226 9,598,690 8,142,147 ------------ ------------ ------------ Total expenses ......................... 81,554,738 77,581,504 72,861,514 ------------ ------------ ------------ Income available before gains on dispositions and preferred distributions ....................... 1,955,308 4,869,199 1,814,443 Gains on dispositions, net of losses on impairment 10,790,576 238,829 15,642,149 Income available for members before preferred distributions ................................. 12,745,884 5,108,028 17,456,592 Preferred distributions .......................... (757,541) (1,099,353) (1,140,000) ------------ ------------ ------------ Net income available for members ................. $ 11,988,343 $ 4,008,675 $ 16,316,592 ============ ============ ============ Net income per membership unit, basic ............ $ 0.77 $ 0.30 $ 1.42 ============ ============ ============ Net income per membership unit, diluted .......... $ 0.77 $ 0.30 $ 1.39 ============ ============ ============ Weighted average number of membership units outstanding, basic ............................ 15,527,652 13,457,410 11,526,864 ============ ============ ============ Weighted average number of membership units outstanding, diluted .......................... 16,200,451 14,439,499 12,545,264 ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-52 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
SERIES A CONVERTIBLE MEMBERSHIP UNITS PREFERRED ---------------------- PAID-IN MEMBERSHIP UNITS AMOUNT CAPITAL UNITS ----- ------ ------- ----- December 31, 1998 ...... 9,940,325 $ 99,403 $ 130,032,663 $ 19,000,000 Additional equity contributions, net .. 3,270,756 32,708 51,808,785 -- Net income ............. -- -- -- 1,140,000 Distributions .......... -- -- -- (1,140,000) ---------- ------------- ------------- ------------- December 31, 1999 ...... 13,211,081 132,111 181,841,448 19,000,000 Additional equity contributions, net .. 1,109,108 11,091 19,898,466 -- Redemption of equity ... (16,717) (167) (72,383) (677,450) Net income ............. -- -- -- 1,099,353 Distributions .......... -- -- -- (1,099,353) ---------- ------------- ------------- ------------- December 31, 2000 ...... 14,303,472 143,035 201,667,531 18,322,550 Additional equity contributions, net .. 3,980,435 39,804 55,772,075 -- Conversion of equity ... 982,286 9,823 18,312,727 (18,322,550) Net income ............. -- -- -- 757,541 Other comprehensive loss -- -- -- -- Distributions .......... -- -- -- (757,541) ---------- ------------- ------------- ------------- December 31, 2001 ...... 19,266,193 $ 192,662 $ 275,752,333 -- ========== ============= ============= ============= EXCESS OF DISTRIBUTIONS OTHER TOTAL OVER COMPREHENSIVE MEMBERS' EARNINGS LOSS EQUITY -------- ---- ------ December 31, 1998 ...... $ 2,733,768 $ -- $ 151,865,834 Additional equity contributions, net .. -- -- 51,841,493 Net income ............. 16,316,592 -- 17,456,592 Distributions .......... (19,284,324) -- (20,424,324) ------------- ------------- ------------- December 31, 1999 ...... (233,964) -- 200,739,595 Additional equity contributions, net .. -- -- 19,909,557 Redemption of equity ... -- -- (750,000) Net income ............. 4,008,675 -- 5,108,028 Distributions .......... (4,540,835) -- (5,640,188) ------------- ------------- ------------- December 31, 2000 ...... (766,124) -- 219,366,992 Additional equity contributions, net .. -- -- 55,811,879 Conversion of equity ... -- -- -- Net income ............. 11,988,343 -- 12,745,884 Other comprehensive loss -- (525,560) (525,560) Distributions .......... (103,352,145) -- (104,109,686) ------------- ------------- ------------- December 31, 2001 ...... $ (92,129,926) $ (525,560) $ 183,289,509 ============= ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-53 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Income available for members before preferred distributions .............................................. $ 12,745,884 $ 5,108,028 $ 17,456,592 Adjustments to reconcile net income available for members to net cash (used in) provided by operating activities: Gains on dispositions of real estate assets ................ (27,335,636) (238,829) (15,642,149) Depreciation and amortization .............................. 17,323,039 13,215,194 11,701,917 Loss on impairment of assets ............................... 16,545,060 -- -- Amortization of deferred financing costs ................... 3,186,126 1,943,783 2,826,429 Deferred rental revenue .................................... (697,047) (1,321,837) (1,217,697) (Increase) decrease in assets: Receivables, prepaids and other assets .................. (4,010,596) (691,787) 40,372 (Decrease) increase in liabilities: Accrued expenses and other liabilities .................. (4,146,577) 2,873,333 777,086 Security deposits ....................................... 173,552 304,547 421,848 ------------- ------------- ------------- Net cash provided by operating activities .................. 13,783,805 21,192,432 16,364,398 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of real estate assets ............................ (21,032,951) -- (74,232,052) Acquisitions of and improvements to real estate assets held for transfer to New Venture ................................ -- (15,145,322) -- Cash received for transfer of real estate assets to New Venture .................................................... 5,277,002 11,250,000 -- Cash transferred with assets transferred to New Venture ....... (306,791) -- -- Prepaid acquisition costs refunded (paid) ..................... 479,419 (608,832) -- Disposal of real estate assets, net of selling expenses ....... 139,305,312 4,562,255 71,957,877 Improvements to real estate assets ............................ (47,066,583) (56,325,217) (39,730,980) ------------- ------------- ------------- Net cash provided by (used in) investing activities ........ 76,655,408 (56,267,116) (42,005,155) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage loans .................................. 16,919,774 22,371,095 35,645,000 Proceeds from secured senior credit facility .................. -- 6,099,963 5,913,930 Proceeds from secured mezzanine credit facility ............... -- 1,524,991 1,478,482 Proceeds from Portfolio loan .................................. 272,912,000 -- -- Repayment of mortgage loans ................................... (37,423,221) (711,591) (623,205) Repayment of secured senior credit facility ................... (181,728,228) (1,632,730) (35,942,780) Repayment of secured mezzanine credit facility ................ (62,521,799) (403,462) (8,985,695) Repayment of Portfolio loan ................................... (14,851,566) -- -- Increase in restricted cash ................................... (865,176) (3,484,944) (3,321,274) Deferred financing costs ...................................... (9,726,778) (1,431,948) (183,242) Preferred distributions ....................................... (757,541) (1,113,093) (1,140,000) Member distributions .......................................... (101,646,062) (7,610,848) (16,984,104) Equity contributions, net ..................................... 55,811,879 19,909,557 51,841,493 Redemption of equity .......................................... -- (750,000) -- ------------- ------------- ------------- Net cash (used in) provided by financing activities ........... (63,876,718) 32,766,990 27,698,605 ------------- ------------- ------------- Net increase (decrease) increase in cash and cash equivalents . 26,562,495 (2,307,694) 2,057,848 Cash and cash equivalents, beginning of period ................ 6,160,768 8,468,462 6,410,614 ------------- ------------- ------------- Cash and cash equivalents, end of period ...................... $ 32,723,263 $ 6,160,768 $ 8,468,462 ============= ============= ============= F-54 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- SUPPLEMENTAL DISCLOSURE: Cash paid for interest......................................... $ 28,276,227 $ 34,362,662 $ 28,615,307 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Seller financing - 2nd Mortgage - One Mall..................... $ 2,750,000 Assumption of Mortgage IDS Loan - One Mall..................... 5,015,719 Capitalized Lease Obligation - Airport Park.................... 1,108,099 ------------- $ 8,873,818 ============= Seller financing - real estate held for transfer to New Venture.................................................. $ 4,000,000 ============= Conversion of Series A convertible preferred membership units....................................................... $ 18,322,550 =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-55 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Wellsford/Whitehall Group, L.L.C. and subsidiaries (the "Company") was formed in May 1999 by the then members of Wellsford/Whitehall Properties II, L.L.C. ("Properties"). Properties was a joint venture between Wellsford Commercial Properties Trust ("WCPT"), a subsidiary of Wellsford Real Properties, Inc. ("WRP"), WHWEL Real Estate Limited Partnership ("WHWEL"), an affiliate of The Goldman Sachs Group Inc. (the "Whitehall Members"), and the Saracen Members (collectively, the "Properties' Members"). Properties (formerly Wellsford/Whitehall Properties, L.L.C.) was formed on August 28, 1997 as a private real estate investment company. WCPT intends to qualify as a real estate investment trust ("REIT"). On May 28, 1999, the Properties' Members assigned their interests in Properties to the Company and two affiliates of WHWEL contributed two office buildings, located in Warren, NJ with an aggregate value of approximately $7.9 million in exchange for membership units. No other changes occurred in the operations of the owned properties at that time. On December 21, 2000, the Company's Members agreed to a number of modifications to the existing operating agreement, and WRP and the Whitehall Members entered into several other agreements. Among other items, WRP and the Whitehall Members agreed to extend their capital commitments to the Company for one year to December 31, 2001 and to provide an aggregate of $10 million of additional financing or preferred equity to the Company through December 2003, if required. All employees working on Company business were transferred from WRP to WP Commercial, L.L.C. ("WP"), the new management company, which is owned by affiliates of the Whitehall Members and senior management of WP. Effective January 1, 2001, WP replaced WCPT as the Manager of the Company on a day-to-day basis; certain major and operational decisions require the consent of the Members. At the same time, WHWEL transferred part of its interests in the Company to WP. WP also provides management, construction, development and leasing services to the Company as well as to third parties, including tenants of the Company, based upon an agreed upon fee schedule and also provides such services to a new venture organized by certain of the Whitehall Members ("New Venture"). The Company no longer pays a $600,000 annual administrative fee to WRP after December 31, 2000. However, the Whitehall Members have agreed to separately pay WRP fees for assets sold by the Company equal to 25 basis points of the sales proceeds and up to 60 basis points (30 basis points are deferred pending certain hurdles being reached) for each purchase of real estate made by the New Venture until such purchases aggregate $400 million. The Whitehall Members also returned to WRP approximately 2.1 million warrants to purchase common shares of WRP. Under the terms of the agreements, it is expected that the Company will not purchase any new real estate assets, except in limited cases, to replace certain assets being sold or assets that compliment presently owned real estate assets. The Members have agreed to an orderly disposal of the Company's assets over time and WCPT and the Whitehall Members agreed to a buy/sell agreement effective after December 31, 2003 with respect to any remaining assets. In connection with the agreements, the Company transferred to the New Venture three previously acquired assets at costs plus interest. These assets were held solely for the benefit of the New Venture and were acquired for a total of $15.2 million, net of $4 million seller financing on one asset. The assets are shown, net of aggregate deposits of $11.3 million received by the Company in December 2000, on the accompanying Consolidated Balance Sheets as real estate held for transfer to New Venture. The transfer occurred on January 4, 2001 at an aggregate amount of $16.5 million. F-56 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ORGANIZATION AND BUSINESS (CONTINUED) On May 15, 1998, thirteen office buildings located in suburban Boston with an aggregate value of approximately $148.7 million were contributed to Properties for a combination of cash, Series A convertible preferred membership units and membership units (the "Saracen Transaction"). In connection with this transaction, several shareholders of the Saracen Companies (the "Saracen Members") were issued both Series A convertible preferred membership units and membership units and Properties assumed a mortgage loan on six of the properties aggregating approximately $68.3 million. On September 7, 2001, all of the holders of the Series A Convertible preferred membership units exercised their conversion rights and were issued membership units. The Company will terminate on December 31, 2045, unless sooner by the written consent of WHWEL, WXI/WWG Realty, L.L.C., W/W Group Holdings, L.L.C., WP and WCPT or by the triggering of the aforementioned buy/sell agreement. At December 31, 2001, the Company owned 27 office properties, totaling approximately 3,840,000 square feet, six drugstores totaling approximately 64,800 square feet, and approximately 34 acres of land under development. The office properties are located in Northern New Jersey (13), Downtown and Suburban Boston (10) and Suburban Baltimore and Washington, DC (4). The drugstores are located in the Middle Atlantic (3) and Southern (3) regions of the United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and Properties and its wholly owned subsidiaries for their respective periods of ownership. All significant inter-company accounts and transactions among the Company and Properties and their subsidiaries have been eliminated in consolidation. CASH AND CASH EQUIVALENTS. The Company considers all demand and money market accounts and short-term investments in government funds with an original maturity of three months or less when purchased to be cash and cash equivalents. RESTRICTED CASH. Restricted cash primarily consists of debt service reserve balances. REAL ESTATE AND DEPRECIATION. Real estate assets are stated at cost. Costs directly related to the acquisition and improvement of real estate are capitalized, including the purchase price, legal fees, acquisition costs, interest, property taxes and other operational costs during the period of development and until the lease up of the acquired development properties. Ordinary repairs and maintenance items are expensed as incurred. Replacements and betterments are capitalized and depreciated over their estimated useful lives. Tenant improvements and leasing commissions are capitalized and amortized over the terms of the related leases. Depreciation is computed over the expected useful lives of the depreciable property on a straight-line basis, principally 40 years for commercial properties and 5 to 12 years for furnishings and equipment. Statement of Financial Accounting Standard ("SFAS") 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Write downs as a result of impairments have been shown as an adjustment to gains on dispositions in the accompanying consolidated financial statements. F-57 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED COSTS. Deferred costs consist primarily of costs incurred to obtain financing. Such deferred financing costs are amortized over the expected term of the respective agreements; such amortization is included in interest expense in the accompanying Consolidated Statements of Income. FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments consist of cash and cash equivalents and long-term debt. The Company believes that the carrying amount of cash and cash equivalents approximates fair value due to the short maturity of this item. In addition, the Company believes that the carrying values of its portfolio loan and certain mortgages approximate fair values because such debt consists of variable rate debt that reprices frequently. The Company believe that the fair values of the remainder of the mortgage loans is in excess of their carrying values, based upon various market data analysis. PROFIT AND REVENUE RECOGNITION. Sales of real estate assets are recognized at closing, subject to the receipt of down payments and other requirements in accordance with applicable accounting guidelines. Commercial properties are leased under operating leases. Rental revenue is recognized on a straight-line basis over the terms of the respective leases. INCOME TAXES. The Company is a limited liability company as were the predecessor companies. In accordance with the tax law regarding such entities, each of the Company's membership unit holders is responsible for reporting their share of the Company's taxable income or loss on their separate tax returns. Accordingly, the Company has recorded no provision for Federal, state or local income taxes. PER UNIT DATA. Net income per membership unit is computed based upon the weighted average number of membership units outstanding during the period. The assumed conversion of the Series A convertible preferred membership units is dilutive in 1999, and anti-dilutive in 2001 and 2000. ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DERIVATIVE AND HEDGING ACTIVITIES. In June 1998, SFAS No. 133--Accounting for Derivative Instruments and Hedging Activities was issued. In June 1999, SFAS No. 137--Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133 (an amendment of FASB Statement No. 133) was issued. SFAS No. 137 extended the required date of adoption of SFAS No. 133 to the fiscal year beginning June 15, 2000. The Company has adopted SFAS No. 133 effective January 1, 2001. SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair market value. The Company's derivative investments are primarily interest rate protection agreements which limit the base rate of variable rate debt. The ineffective portion of a derivative's change in fair market value is immediately recognized in earnings, if applicable. The effective portion of the fair market value difference of the derivative is reflected separately in shareholders' equity as other comprehensive loss. F-58 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In October 2001, SFAS No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets was issued. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 related to the recognition and measurement of the impairment of long-lived assets to be held and used. In addition, SFAS No. 144 provides more guidance on estimating cash flows when performing a recoverability test and establishes more restrictive criteria to classify an asset as held for sale. The Company will adopt SFAS No. 144 on January 1, 2002. The Company has determined that the adoption of the new statement will not have a material effect on the financial position or results of operations of the Company. RECLASSIFICATIONS. Certain reclassifications have been made to the prior period presentation to conform with the current year. F-59 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. COMMERCIAL PROPERTIES The Company owns the following properties at December 31, 2001 and 2000:
Properties Collateralizing Portfolio Loan at December 31, 2001* --------------------------------------------------------------- (amounts in thousands, except square foot amounts) YEAR CONSTRUCTED/ GROSS INVESTMENT SQUARE FEET (UNAUDITED) ----------------- ---------------- ----------------------- REHABILITATED (000s) PROPERTY LOCATION 2001 2000 (UNAUDITED) 2001 2000 -------- -------- ---- ---- ----------- ---- ---- 1800 Valley Road .......... Wayne, NJ -- 56,000 1980 $ -- $ 5,520 Greenbrook Corporate Center Fairfield, NJ 201,000 201,000 1987 25,712 25,370 Chatham Executive Center .. Chatham, NJ -- 63,000 1972/1997 -- 10,898 300 Atrium Drive .......... Somerset, NJ 147,000 150,000 1983 19,551 19,214 400 Atrium Drive .......... Somerset, NJ 355,000 355,000 1985 36,136 35,395 500 Atrium Drive .......... Somerset, NJ 169,000 169,000 1984 21,108 21,144 700 Atrium Drive .......... Somerset, NJ 181,000 181,000 1985 18,735 18,167 Mountain Heights Center I . Berkeley Hts, NJ 183,000 183,000 1968/1986/1998 26,226 25,700 Mountain Heights Center II Berkeley Hts, NJ 123,000 123,000 1968/1986/2000 21,815 21,775 Garden State Exhibit Center Somerset, NJ 82,000 82,000 1968/1989 6,134 6,159 60/74 Turner Street ....... Waltham, MA 16,000 16,000 1970 2,154 2,154 117 Kendrick Street ....... Needham, MA 210,000 210,000 1963/2000 35,789 30,511 180/188 Mt Airy Road ...... Basking Ridge, NJ 104,000 104,000 1980 16,378 16,101 377/379 Campus Drive ...... Franklin Twp, NJ 199,000 199,000 1984 23,309 23,309 105 Challenger Road ....... Ridgefield Park, NJ 147,000 147,000 1992 21,269 21,231 79 Milk Street ............ Boston, MA 65,000 64,000 1920/1998/2000 14,284 13,224 24 Federal Street ......... Boston, MA 74,000 68,000 1921/1997/2000 21,069 19,806 401 North Washington ...... Rockville, MD 248,000 236,000 1972/2001 35,258 23,479 --------- --------- --------- --------- 2,504,000 2,607,000 344,927 339,157 --------- --------- --------- --------- Properties Collateralizing the Nomura Loan at December 31, 2001* ---------------------------------------------------------------- (amounts in thousands, except square foot amounts) YEAR CONSTRUCTED/ GROSS INVESTMENT SQUARE FEET (UNAUDITED) ----------------- ---------------- ----------------------- REHABILITATED (000s) PROPERTY LOCATION 2001 2000 (UNAUDITED) 2001 2000 -------- -------- ---- ---- ----------- ---- ---- 333 Elm Street............. Dedham, MA 48,000 48,000 1983 5,974 5,958 Dedham Place............... Dedham, MA 160,000 160,000 1987 28,302 27,328 128 Technology Center...... Waltham, MA 218,000 218,000 1986 37,302 36,250 201 University Avenue...... Westwood, MA 82,000 82,000 1982 10,363 10,363 7/57 Wells Avenue.......... Newton, MA 88,000 88,000 1982 12,651 12,407 75/85/95 Wells Avenue...... Newton, MA 242,000 242,000 1976/1986 41,663 41,559 --------- --------- --------- --------- 838,000 838,000 136,255 133,865 --------- --------- --------- --------- F-60 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMERCIAL PROPERTIES (CONTINUED) Properties Collateralizing Other Mortgages or Unencumbered at December 31, 2001 ------------------------------------------------------------------------------- YEAR CONSTRUCTED/ GROSS INVESTMENT SQUARE FEET (UNAUDITED) ----------------- ---------------- ----------------------- REHABILITATED (000s) PROPERTY LOCATION 2001 2000 (UNAUDITED) 2001 2000 -------- -------- ---- ---- ----------- ---- ---- Pointview Corporate Center. Wayne, NJ -- 564,000 1976/1998 $ -- $ 45,551 Morris Technology Center... Parsippany, NJ -- 257,000 1963/1977/2000 -- 32,170 600 Atrium Drive (land)**.. Somerset, NJ N/A N/A N/A 2,695 2,651 150 Wells Avenue........... Newton, MA -- 11,000 1987 -- 1,292 72 River Park.............. Needham, MA -- 22,000 1983 -- 2,638 70 Wells Avenue............ Newton, MA -- 29,000 1979 -- 3,930 160 Wells Avenue........... Newton, MA -- 19,000 1970/1997 -- 3,416 2331 Congress Street....... Portland, ME -- 24,000 1980 -- 2,158 100 Wells Avenue........... Newton, MA -- 21,000 1978 -- 2,556 Shattuck Office Center..... Andover, MA -- 63,000 1985 -- 7,833 150 Mount Bethel Road...... Warren, NJ 129,000 129,000 1981 9,059 8,056 McDonough Crossroads....... Owings Mills, MD 32,000 32,000 1988 3,842 3,840 Airport Park............... Hanover Twp, NJ 96,000 96,000 1979 13,637 12,503 Airport Park-Land**........ Hanover Twp, NJ N/A N/A N/A 3,028 2,354 One Mall North............. Columbia, MD 97,000 97,000 1978/1998 12,823 11,504 Oakland Ridge.............. Columbia, MD 144,000 144,000 1972 8,879 4,179 CVS........................ Essex, MD 10,125 N/A 2000 4,776 -- CVS........................ Pennsauken, NJ 12,150 N/A 2001 3,925 -- CVS........................ Runnemede, NJ 12,150 N/A 2001 4,134 -- CVS........................ Wetumpka, AL 10,125 N/A 2000 2,681 -- CVS........................ Richmond, VA 10,125 N/A 2001 3,194 -- CVS........................ Decatur, GA 10,125 N/A 2001 2,344 -- --------- --------- --------- --------- 562,800 1,508,000 75,017 146,631 --------- --------- --------- --------- Total Commercial Properties 3,904,800 4,953,000 $ 556,199 $ 619,653 ========= ========= ========= ========= - ---------- *The properties encumbered by the Nomura Loan will also be encumbered by the Portfolio Loan once certain operating results are achieved and initial proceeds are drawn from the Portfolio Loan related to these properties. **Unencumbered.
No individual tenant aggregated greater than 8% of rental revenue in 2001. In 2000, one telecommunications tenant aggregated 11% of rental revenue. This tenant's lease was terminated during 2001 and the Company received approximately $3,700,000 in lease termination fees. The Company capitalizes interest related to buildings under renovation to the extent such assets qualify for capitalization. Total interest incurred and capitalized was $27,089,010 and $3,716,480, $33,004,102 and $8,953,903, $28,627,209 and $5,867,396 respectively, for the years ended December 31, 2001, 2000 and 1999, respectively. F-61 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMERCIAL PROPERTIES (CONTINUED) The Company sold the following buildings and properties:
YEAR ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 ---- ---- ---- Number of buildings (including a small land parcel in 1999) 11 1 4 ============ ============ ============ Net sales proceeds (approximate) .......................... $139,305,000 $ 4,562,000 $ 71,958,000 ============ ============ ============ Gains on sales ............................................ $ 27,335,636 $ 238,829 $ 15,642,149 ============ ============ ============
The Company recorded a $16,545,060 impairment provision during the year on three assets; the Pointview Corporate Center, 2331 Congress St. and McDonough Crossroads. The Pointview Corporate Center property and 2331 Congress St. were sold in September 2001 and May 2001, respectively. 4. LEASES Office space in the properties is generally leased to tenants under lease terms which provide for the tenants to pay base rents plus increases in operating expenses in excess of specified amounts. Non-cancelable operating leases with tenants expire on various dates through 2024. The future minimum lease payments to be received under leases existing as of December 31, 2001, are as follows:
(amounts in thousands) PROPERTIES COLLATERALIZING -------------------------- PORTFOLIO NOMURA FOR THE YEARS ENDED DECEMBER 31, TOTAL LOAN LOAN OTHER - -------------------------------- ----- ---- ---- ----- 2002............................ $ 62,262 $ 44,383 $ 11,012 $ 6,867 2003............................ 59,893 43,037 9,726 7,130 2004............................ 47,321 31,040 9,332 6,949 2005............................ 40,002 26,255 6,904 6,843 2006............................ 30,253 20,102 4,453 5,698 Thereafter...................... 83,930 35,621 7,572 40,737 --------- --------- -------- -------- Total........................... $ 323,661 $ 200,438 $ 48,999 $ 74,224 ========= ========= ======== ========
The above future minimum lease payments do not include specified payments for tenant reimbursements of operating expenses which amounted to approximately $7,295,000, $7,895,000 and $6,543,000 for the years ended December 31, 2001, 2000 and 1999, respectively. These amounts have been included in rental income in the accompanying consolidated statements of income. F-62 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. GROUND LEASES The leasehold interests in two buildings totaling 291,000 square feet and 15.22 acres of developable land are subject to ground leases. At December 31, 2001, aggregate future minimum rental payments under the leases which expire in October 2066, April 2077 and January 2084, are as follows: (amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, AMOUNT -------------------------------- ------ 2002........................ $ 216 2003........................ 218 2004........................ 231 2005........................ 233 2006........................ 234 Thereafter.................. 27,859 ------- Total....................... $28,991 ======= 6. LONG TERM DEBT The Company's long-term debt consisted of the following:
(amounts in thousands) DECEMBER 31, ------------ DEBT MATURITY DATE 2001 2000 ---- ------------- ---- ---- Portfolio Loan .................. June 2004 $258,060 $ -- Secured Senior Credit Facility .. December 2001 -- 181,728 Secured Mezzanine Credit Facility December 2001 -- 62,522 Nomura Loan ..................... February 2027 66,189 66,863 Other Mortgage Loans ............ May 2002 - January 2024 45,760 69,627 -------- -------- $370,009 $380,740 ======== ========
In December 1997, the Company obtained a $375 million loan facility (the "Prior Bank Facility") consisting of a secured term loan facility ("Secured Term Loan") of up to $225 million and a secured revolving credit facility ("Secured Revolving Credit Facility") of up to $150 million. The term loan facility bore interest at LIBOR + 1.60% and had a term of four years; the revolving credit facility bore interest at LIBOR + 2.50% and had a term of three years. Interest expense on the Prior Bank Facility was $7,456,062 in 1998. In July 1998, the Company modified its then existing $375 million loan facility with Fleet National Bank and Goldman Sachs Mortgage (the "Prior Bank Facility") to provide for a secured senior credit facility ("Secured Senior Credit Facility") of up to $300 million and a secured mezzanine credit facility ("Secured Mezzanine Credit Facility") of up to $75 million (collectively, the "Bank Facility"). The loans bore interest at LIBOR + 1.65% and LIBOR + 3.20%, respectively, and were due on December 15, 2001 after a one year extension granted under the terms of the existing agreements, in December 2000. The proceeds from the Bank Facility were used to repay amounts outstanding under the Prior Bank Facility. Interest expense on the Secured Senior Credit Facility and the Secured Mezzanine Credit Facility was $5,989,255 and $2,552,047, respectively, in 2001, $14,929,905 and $6,122,440, respectively, in 2000 and $15,293,524 and $6,088,260, respectively, in 1999. F-63 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LONG TERM DEBT (CONTINUED) In June 2001, the Company obtained a loan with General Electric Capital Real Estate for up to $353 million (the "Portfolio Loan"). The loan bears interest at a rate of LIBOR + 2.90% and has an initial term of three years. The loan also provides for two 12-month extension options, subject to meeting certain operating and valuation covenants. The loan had an initial funding of $273 million, before transaction costs, and the remaining balance is available to be drawn to fund certain capital expenditures and upon achieving certain operating results from six properties. The net proceeds were used to repay amounts due under the Bank Facility and two mortgages; the remainder was distributed to the Members. Interest expense on the Portfolio Loan was $8,310,059 in 2001. The 30-day LIBOR rate was 1.88%, 6.57% and 6.30%, respectively, on December 31, 2001, 2000 and 1999. The average 30-day LIBOR rate was 3.72%, 6.43% and 5.16%, respectively, for the years ended December 31, 2001, 2000 and 1999. In connection with the Saracen transaction, the Company assumed a mortgage loan held by Nomura Asset Capital Corporation in the original amount of approximately $68.3 million (the "Nomura Loan"). The loan bears interest at a rate of 8.03% and requires monthly payments of principal and interest until maturity in February 2027. In April 2001, the Company obtained mortgages on five of its owned drugstores (the "Drugstore Mortgages"). The interest rate on the Drugstore Mortgages is 7.28%, and matures in January 2024. During 2000 and 1999, the Company obtained eight mortgages to acquire and improve eight properties including one second mortgage provided by the seller on one property (collectively, with the Drugstore Mortgages, the "Other Mortgage Loans"). The interest rates on the Other Mortgage Loans range from LIBOR + 2.05% to 10.50% and the maturity dates range from May 2002 to January 2024. Two of the Other Mortgage Loans were repaid in June 2001 in connection with obtaining the Portfolio Loan described above. The Company expects to refinance the two mortgage loans maturing in 2002. As of December 31, 2001 and 2000, the Company was in compliance with the terms of covenants under all loan agreements. Based upon various market analysis, the fair market value of the Company's long term debt is approximately $396,976,000 and $380,740,000 at December 31, 2001 and 2000, respectively. The aggregate maturities for the Company's long-term debt obligations for each of the next five years and thereafter are as follows:
(amounts are in thousands) PORTFOLIO OTHER MORTGAGE FOR THE YEARS ENDED DECEMBER 31, TOTAL LOAN NOMURA LOAN LOANS - -------------------------------- ----- ---- ----------- ----- 2002 .......................... $ 10,082 $ -- $ 731 $ 9,351 2003 .......................... 13,884 -- 793 13,091 2004 .......................... 262,091 258,060 844 3,187 2005 .......................... 1,402 -- 931 471 2006 .......................... 1,518 -- 1,010 508 Thereafter..................... 81,032 -- 61,880 19,152 -------- -------- -------- -------- Total ......................... $370,009 $258,060 $ 66,189 $ 45,760 ======== ======== ======== ========
F-64 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LONG TERM DEBT (CONTINUED) In July 2001, the Company entered into an interest rate protection agreement (the "Cap") at a cost of $1,780,000, which limits LIBOR exposure to 5.83% until June 2003 and 6.83% for the following year to June 2004 on $285,000,000 of debt. At December 31, 2001 the fair market value of the Cap was approximately $1,089,000. The ineffective portion of the Cap's change in fair market value was recorded as an adjustment to interest expense of $17,347 in 2001. The effective portion of the Cap's change in fair market value, which was recorded as an adjustment to other comprehensive loss during 2001, is $525,560. An affiliate of the Whitehall Members is the counterparty under the Cap. Prior to December 31, 2000 the Company entered into two interest rate protection agreements (the "Prior Caps"). The first interest rate protection agreement capped LIBOR at 7.50% for up to $300 million through March 15, 2001 and for up to $200 million through May 15, 2001. The other interest rate protection agreement, which was entered into capped LIBOR at 7.69% for up to $64 million through June 15, 2000. The cost of the Prior Caps was amortized over their lives. The interest rate swap agreement fixed LIBOR at 5.90% for up to $220 million until May 15, 2000. The amortization of the interest rate protection agreements and the net settlement amount of the interest rate swap agreement, which was recorded as an adjustment to interest expense in 2000 and 1999 aggregated approximately $416,000 and $1,354,000, respectively. 7. TRANSACTIONS WITH AFFILIATES As discussed in Note 1, WP performs management, development and leasing services to the Company. The Company pays WP an administrative cost and expense management fee equal to 0.93% of an agreed upon initial aggregate asset value of $700 million of the Company's real estate assets. The fee will be reduced six months after any asset is sold pursuant to an agreed upon formula. The Company incurred an aggregate of $6,421,577 in 2001 related to these fees. Pursuant to the agreements discussed in Note 1, the Company also pays WP for construction management, development and leasing based upon a schedule of rates in which each geographic area the Company operates. The Company incurred an aggregate of $1,786,814 in 2001 related to these services. All amounts have been capitalized as part of real estate assets. Pursuant to the agreements discussed in Note 1, WP currently leases space at three buildings owned by the Company and at one building previously owned by the Company, which was sold in November 2001. Rental income under those leases was $542,450 for the year ended December 31, 2001. In connection with the formation of the Company in 1997 and the new capital commitment from Whitehall in 1999, WRP issued warrants to Whitehall to purchase a total of 2,128,098 shares of WRP's common stock at an exercise price of $24.20 per share, payable in cash or in exchange for membership units of the Company. These warrants were not exercised and were surrendered on December 21, 2000, pursuant to the agreements discussed in Note 1. Affiliates of the Whitehall Members provide debt placement, environmental and insurance services for the Company. During the years ended December 31, 2000 and 1999, these affiliates provided only environmental and insurance services. The Company incurred $3,406,884, $590,014 and $203,069, respectively, for these services for the years ended December 31, 2001, 2000 and 1999. In addition, an affiliate of the Whitehall Members is the counter-party of the Cap discussed in Note 6. Under the terms of the joint venture, WCPT, as managing member of the Company, was entitled to an administrative fee of $600,000 per year for the reimbursement of salaries and costs incurred relating to the operation of the Company through December 31, 2000. Such fees were $600,000 in each of the years ended December 31, 2000 and 1999, respectively. F-65 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TRANSACTIONS WITH AFFILIATES (CONTINUED) The Company earned interest income of approximately $675,000 in 2000 at LIBOR + 4.00% based upon the total investment in the three real estate assets transferred to the New Venture on January 4, 2001, as discussed in Note 1. The Company incurred aggregate interest to WRP on short-term advances during the years ended December 31, 2000 and 1999 of approximately $703,000 and $517,000, respectively. The interest rate charged was LIBOR + 5.00%. Affiliates of the Saracen Members performed asset management and property management services for the Company. Fees paid during 1999 amounted to $495,000 which included asset management fees through January 21, 1999, when the asset management agreement was terminated. Upon termination, the Company agreed to pay $1 million in 2004, plus quarterly interest at 10% per annum paid currently. Property management fees amounted to approximately $337,000 and $528,000, respectively for the years ended December 31, 2001 and 2000. At December 31, 2001 the Company has approximately $742,000 payable to its Members or their affiliates, and at December 31, 2000 the Company had approximately $978,000 of receivables from its Members or their affiliates. These amounts are in included accrued expenses and other liabilities and in receivables, prepaids and other assets, respectively on the accompanying consolidated balance sheets. Affiliates of the Saracen Members lease space at 7/57 Wells Avenue. Revenue related to these leases for the years ended December 31, 2001, 2000 and 1999, amounted to $47,258, $44,826 and $43,650, respectively. See Notes 1, 6, 8 and 9 for additional related party interest information. 8. MEMBERS' EQUITY WRP, through WCPT, and WP are entitled to receive incentive compensation, payable out of distributions, made by the Company to WCPT and the Whitehall members (the "Promote") after return of capital and minimum annual returns of at least 15% to 17.5% on such capital balances to WCPT and Whitehall (as defined in the Company's Operating Agreement). To date, neither WRP nor WP have earned or received any distribution of the Promote. At December 31, 2001, all capital commitments have been fully funded. WCPT or WRP and the Whitehall Members have also agreed to contribute an aggregate of $10 million on a revolving, as needed basis ("Revolving Equity") through December 31, 2003. This Revolving Equity accrues dividends at a rate of LIBOR + 5.00% and is senior to the membership units. At the formation of the Company, 2,505,000 membership units were issued to WCPT, representing its 50.1% interest, and 2,495,000 units were issued to Whitehall, representing its 49.9% interest. Subsequently, an additional 3,771,780 and 9,060,287 units were issued to WCPT and Whitehall (603,768 and 3,376,668, respectively, in 2001), respectively, in connection with net additional capital contributions used to fund acquisitions and renovations. F-66 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MEMBERS' EQUITY (CONTINUED) In connection with the Saracen Transaction, 468,557 membership units and 760,000 Series A convertible preferred membership units were issued to the Saracen Members. The membership units were issued at a price of $16.22 per membership unit. The Series A convertible preferred membership units were convertible into membership units at a price of $18.65 per membership unit. These units also provided for cumulative dividend payments of the greater of (a) 6% or (b) the dividend payable to membership unitholders, calculated on an as converted basis, payable quarterly in arrears, and had a liquidation preference of $25.00 per Series A convertible preferred membership unit plus accrued and unpaid distributions. In February 2000, the Company redeemed the 16,717 membership units and 27,098 Series A convertible preferred membership units held by one of the Saracen members for an aggregate amount of $750,000. In September 2001, the holders of the Series A convertible preferred membership units exercised their conversion option; 982,286 membership units were issued in connection with the conversion. The number of membership units issued and outstanding are as follows: DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- WCPT .......... 6,276,780 5,673,012 5,463,413 Whitehall ..... 11,555,287 8,178,620 7,279,111 Saracen Members 1,434,126 451,840 468,557 ---------- ---------- ---------- Total ......... 19,266,193 14,303,472 13,211,081 ========== ========== ========== During 2001, 2000 and 1999, distributions of $103,352,145, $4,540,834 and $19,284,324, respectively, were declared, of which $4,221,364, $2,253,520 and $5,323,534 remained unpaid at December 31, 2001, 2000 and 1999, respectively. 9. COMMITMENTS AND CONTINGENCIES Under the terms of the Company's joint venture agreement, Whitehall may require the Company to sell any and all of its properties to an independent third party purchaser, subject to certain restrictions. Subsequent to December 31, 2003, Whitehall may trigger the sale of all of the Company's membership units or remaining assets to either WCPT or Whitehall, subject to certain conditions. As of December 31, 2001, the Company has an obligation to perform certain repair and maintenance items at the Pointview property pursuant to the terms of the sale of the property, which occurred in September 2001. These items are estimated to be approximately $671,000 in the aggregate, and are shown in accrued expenses and other liabilities in the accompanying consolidated balance sheets. As a commercial real estate owner, the Company is subject to potential environmental costs. At December 31, 2001, management of the Company is not aware of any environmental concerns that would have a material adverse effect on the Company's consolidated financial condition, consolidated results of operations or consolidated cash flows. From time to time, legal actions are brought against the Company in the ordinary course of business. In the opinion of management, such matters will not have a material effect on the Company's consolidated financial condition, consolidated results of operations or consolidated cash flows. F-67 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company has management agreements with unaffiliated property management companies to manage the operations of the properties. Management fees are generally based on 2% to 3% of gross rentals collected and are generally terminable on 30 days notice. See Notes 1, 6, 7 and 8 for additional commitments and contingencies. F-68 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (amounts in thousands, except square footage and units)
COST INITIAL COST CAPITALIZED UNITS/ -------------------------------- SUBSEQUENT DATE YEAR SQUARE DEPRECIABLE BUILDING AND TO DESCRIPTION ACQUIRED BUILT FEET LIFE LAND IMPROVEMENTS TOTAL ACQUISITION ----------- -------- ----- ---- ---- ---- ------------ ----- ----------- DEVELOPMENT Blue Ridge - Garden Apts Dec- Denver, CO ...... 1997 1997 456 27.5 yrs $ 5,225 $ 36,339 $ 41,564 $ 201 Red Canyon - Garden Apts Nov- Denver, CO ...... 1998 1998 304 27.5 yrs 5,060 28,844 33,904 (196) Silver Mesa - Garden Apts Dec- Denver, CO ...... 2000 2000 136 27.5 yrs 3,343 18,959 22,302 1 Green River - Garden Apts Dec- Denver, CO ...... 2001 2001 424 27.5 yrs 8,451 47,889 56,340 -- ------- -------- -------- -------- -------- TOTAL DEVELOPMENT ..... 1,320 22,079 132,031 154,110 6 ======= -------- -------- -------- -------- OFFICE AND INDUSTRIAL Two properties- Feb- Office/Industrial 1998 Var. 175,183 40 yrs 1,035 5,865 6,900 1,322 ======= -------- -------- -------- -------- TOTAL ............. $ 23,114 $137,896 $161,010 $ 1,328 ======== ======== ======== ======== TOTAL COST -------------------------------- PROVISION BUILDING AND FOR ACCUMULATED DESCRIPTION LAND IMPROVEMENTS TOTAL IMPAIRMENT NET DEPRECIATION ENCUMBRANCE ----------- ---- ------------ ----- ---------- --- ------------ ----------- DEVELOPMENT Blue Ridge - Garden Apts Denver, CO ...... $ 5,225 $ 36,540 $ 41,765 $ -- $ 41,765 $ 5,309 $ 32,917(A) Red Canyon - Garden Apts Denver, CO ...... 5,060 28,648 33,708 -- 33,708 3,213 26,035(A) Silver Mesa - Garden Apts Denver, CO ...... 3,343 18,960 22,303 -- 22,303 864 13,352(A)(B) Green River - Garden Apts Denver, CO ...... 8,451 47,889 56,340 -- 56,340 -- 36,747(A) --------- -------- -------- --------- -------- -------- -------- TOTAL DEVELOPMENT ..... 22,079 132,037 154,116 -- 154,116 9,386 109,051 --------- -------- -------- --------- -------- -------- -------- OFFICE AND INDUSTRIAL Two properties- Office/Industrial 1,035 7,187 8,222 (2,175)(C) 6,047 487 --(D) --------- -------- -------- --------- -------- -------- -------- TOTAL ............. $ 23,114 $139,224 $162,338 $ (2,175) $160,163 $ 9,873 $109,051 ========= ======== ======== ======== ======== ======== ======== - ---------- (A) Encumbrance balances exclude the Palomino Park Bonds, which are secured by each phase. The balance of the Palomino Park Bonds was $12,680 at December 31, 2001. (B) Debt is also collateralized by the condominium portion of the project with a carrying amount of approximately $5,401; individual units are currently held for sale. (C) Provision for impairment relates to excess of carrying amounts over estimated individual net sale prices of assets held for sale. (D) These properties are unencumbered at December 31, 2001.
S-1 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION The following is a reconciliation of real estate assets and accumulated depreciation:
(amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---- ---- ---- REAL ESTATE Balance at beginning of period.......... $ 123,201 $ 135,418 $ 134,239 Additions: Acquisitions and transfers from construction in progress.......... 56,340 22,302 7,238 Recovery of impairment reserve....... 2,550 -- -- Capital improvements................. 537 1,993 1,179 ---------- ---------- ---------- 182,628 159,713 142,656 Less: Provision for impairment............. -- (4,725) -- Cost of real estate sold............. 22,465 (31,787) (7,238) ---------- ---------- ---------- Balance at end of period................ $ 160,163(A) $ 123,201 $ 135,418 ========== ========== ========== ACCUMULATED DEPRECIATION Balance at beginning of period.......... $ 8,248 $ 6,584 $ 2,707 Additions: Charged to operating expense......... 3,066 4,198 3,877 ---------- ---------- ---------- 11,314 10,782 6,584 Less: Accumulated depreciation on real estate sold....................... 1,441 2,534 -- ---------- ---------- ---------- Balance at end of period............... $ 9,873(A) $ 8,248 $ 6,584 ========== ========== ========== - ---------- (A) The aggregate depreciated cost for federal income tax purposes was approximately $3,200 less at December 31, 2001.
S-2 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE IV MORTGAGE NOTES ON REAL ESTATE
(amounts in thousands) NOTES TYPE OF RECEIVABLE SECURITY INTEREST RATE MATURITY DATE PAYMENT TERMS ---------- -------- ------------- ------------- ------------- 277 Park Loan . Office(B) 12.00% May 2007(C) Interest Only Patriot Loan .. Office(D) LIBOR + 4.75% July 2002 Principal & Interest(E) Guggenheim Loan (F) 8.25% December 2005 Principal & Interest(G) Other ......... Various Various Various Various TOTAL ......... CARRYING TOTAL PRINCIPAL AMOUNT SUBJECT TO NOTES OF PRIOR CARRYING DELINQUENT RECEIVABLE LIENS FACE AMOUNT AMOUNT(A) PAYMENTS ---------- ----- ----------- --------- -------- 277 Park Loan . $320,994 $ 25,000 $ 25,000 $ -- Patriot Loan .. 72,514 5,000 4,973 -- Guggenheim Loan -- 4,128 3,612 -- Other ......... -- 1,200 1,200 1,200(H) -------- -------- -------- -------- TOTAL ......... $393,508 $ 35,328 $ 34,785(I) $ 1,200 ======== ======== ======== ======== - ---------- (A) The aggregate carrying amount for federal income tax purposes is equal to the total face amount reflected in this schedule. (B) This loan is secured by certain equity interests in an entity which owns a 52-story, approximately 1.75 million square foot office building in New York, NY. (C) This loan precludes prepayments until May 2003. From May 2003 to April 2006, a prepayment penalty based on a yield maintenance formula (as defined in the related documents) is applicable. From May 2006 to maturity, no prepayment penalty is applicable. The prior lien amount includes only mortgage obligations. (D) This loan is secured by a fee interest in an office property totaling 607,668 square feet located in Boston, MA. (E) This loan commenced principal and interest payments in August 2001, prior to which the loan terms provided for payments of interest only. (F) This loan is secured by an equity interest in The Liberty Hampshire Company, L.L.C. (G) This loan has scheduled annual principal and interest payments (as defined in the related documents). (H) On January 18, 2002, a $1,200 note was repaid in full. (I) Reconciliation of carrying amount: Balance at January 1, 1999............... $ 124,707 Additions: New loans............................. 49,295 Amortization of discount.............. 217 Deductions: Collection of principal............... (112,741) Contributions for joint venture interests........................... (24,218) ----------- Balance at December 31, 1999............. 37,260 Additions: New loans............................. 32,961 Amortization of discount.............. 12 Deductions: Collection of principal............... (32,409) ----------- Balance at December 31, 2000............. 37,824 Additions: New loans............................. 500 Amortization of discount.............. 50 Deductions: Collection of principal............... (3,589) ----------- Balance at December 31, 2001............. $ 34,785 ===========
S-3 EX-10.3 3 ex10-3.txt 2ND AMENDT TO OP. AGRMT-RED CANYON 11/16/98 SECOND AMENDMENT TO OPERATING AGREEMENT OF RED CANYON AT PALOMINO PARK LLC THIS SECOND AMENDMENT TO OPERATING AGREEMENT OF RED CANYON AT PALOMINO PARK LLC (this "Second Amendment") is made as of the 16th day of November, 1998, by and between AL FELD, an individual ("Feld"), and WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation ("WPHC"). RECITALS A. Feld and WPHC constitute all of the members (collectively, the "Members") of Red Canyon at Palomino Park LLC, a Colorado limited liability company (the "Company"), which is governed by that certain Operating Agreement of Red Canyon at Palomino Park LLC dated as of April 17, 1996, as amended by that certain First Amendment to Operating Agreement dated May 19, 1997, between Feld and WPHC (collectively, the "Operating Agreement"). B. The Members now desire to further amend the Operating Agreement as set forth herein. C. Capitalized terms not otherwise defined herein shall have the definitions set forth in the Operating Agreement. NOW, THEREFORE, for and in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Feld and WPHC hereby agree follows: 1. The second sentence of Section 1(bk) of the Operating Agreement, with respect to the definition of Net Operating Income, is hereby amended to read in its entirety as follows: Notwithstanding the foregoing, in connection with the calculation of the Completion Fee and the Incentive Fee, Net Operating Income shall be determined on an accrual basis for the relevant period with the following additional adjustments: if property taxes do not fully reflect the completion of the Project, then the property taxes shall be increased to the amount of property taxes that would have been assessed had the Project been completed and included in the calculation of the property taxes. With respect to calculating the Completion Fee only, such fully-assessed tax estimate shall be applied on a per-building basis beginning only upon receipt of a certificate of occupancy for each building. 2. 7.6 of the Operating Agreement is hereby renumbered as Section 7.7 and the following is hereby inserted as a new Section 7.6: 7.6 Completion Fee. The Company shall pay Feld at Final Closing a fee (the "Completion Fee") equal to 100% of Net Operating Income for the period ending with Substantial Completion, less an amount equal to all interest accrued or paid on the Construction Loan from and after the earlier of (i) the date on which Budgeted Construction Loan Interest is exhausted, or (ii) the Date of Substantial Completion; provided, however, that in no event shall the Completion Fee exceed $500,000. 3. Headings and Captions. The headings and captions of this Second Amendment are inserted for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent or intent of this Second Amendment, the First Amendment, the Operating Agreement, or any provisions thereof. 4. Full Force and Effect. The Operating Agreement, as specifically amended herein, is hereby ratified by the Members and shall remain in full force and effect. 5. Counterparts. This Second Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall constitute one agreement binding on the parties hereto, notwithstanding that all the parties may not have signed the same counterpart. Signature pages from one counterpart may be removed and attached to another counterpart to create one fully-executed document. (Remainder of this page intentionally left blank) IN WITNESS WHEREOF, the parties hereto, being all of the Members of the Company, have executed this Second Amendment as of the date first written above. /s/ Al Feld ----------------------------------------- Al Feld WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: /s/ David M. Strong ----------------------------------------- David M. Strong, Vice President EX-10.60 4 ex10-60.txt EMPLOYMENT AGREEMENT-JAMES BURNS 07/01/01 WELLSFORD REAL PROPERTIES, INC. 535 Madison Avenue, 26th Floor New York, New York 10022 As of July 1, 2001 Mr. James Burns 390 Dogwood Lane Manhasset, NY 11030 Dear Mr. Burns: We are pleased to offer you employment with Wellsford Real Properties, Inc. (the "Company"). This letter agreement (this "Agreement") sets forth our understanding regarding your employment. 1. Duties. The Company hereby employs you as Senior Vice-President and Chief Financial Officer to perform such services for the Company and its affiliated entities commensurate with your position as Senior Vice President and Chief Financial Officer as may be assigned to you from time to time. You shall devote your full business time, attention and energies to the performance of your duties hereunder as requested by the Company from time to time. 2. Term. The term of this Agreement shall commence as of the date hereof and, unless sooner terminated in accordance with the provisions of this Agreement, shall continue up to and including, December 31, 2003. The term of this Agreement may be extended by the written agreement of you and the Company. 3. Salary. For all services rendered by you pursuant to this Agreement, you shall receive a salary at a rate per annum equal to at least $210,000 to be paid at such regular intervals, not less frequently than monthly, as the Company may establish from time to time with respect to its employees generally. Salary for all employees are reviewed each December and yours will be reviewed as part of that process. 4. Bonuses. You will also be eligible for an annual management bonus at the discretion of the Compensation Committee. The current guideline for an annual management bonus for your position is a minimum of 50% of your annual salary, which bonus shall be prorated, of course, for any partial calendar year during which the term of your employment commences or terminates. While the final decision rests with the Compensation Committee, management will recommend at least a guideline bonus to the Compensation Committee, and, of course, the Compensation Committee may consider more generous grants depending on individual and Company performance. 5. Health Insurance & Benefits. The Company shall provide you with the same standard health and other insurance coverages as is afforded to all employees of the Company pursuant to the contributory coverages maintained by the Company from time to time. In lieu thereof, at your election, you may continue your Ernst & Young health insurance coverage, and the Company will reimburse you for what its contribution would have been towards the coverage you decline. You shall also be entitled to participate in the Company's 401(k) Plan consistent with, and subject to, the terms of such plan. The Company may also provide you with other benefits in accordance with the policies of the Company in effect from time to time. You will be entitled to vacation at the rate of five weeks per calendar year. 6. Expenses. You shall be reimbursed for all reasonable business related expenses incurred by you at the request of or on behalf of the Company in connection with the performance of your duties and responsibilities hereunder, consistent with, and subject to, the Company's policies for expense reimbursement. 7. Termination. (a) Your employment hereunder may be terminated by the Company (i) for Cause (as defined below) or (ii) for any reason other than Cause, (b) "Cause" shall mean (i) you have committed fraud, willful misconduct or gross negligence in the performance of your obligations hereunder, (ii) you shall be convicted of a felony or (iii) you shall violate any of the terms, covenants or conditions of this Agreement. 8. Results of Termination. (a) If your employment under this Agreement is terminated by the Company by reason of Cause or as a result of your disability (as determined in the reasonable discretion of the Company) or as a result of your death or by you for any reason (other than as provided for in subparagraph 8 (c) below) you shall not be entitled to receive salary for periods following termination; provided, however, if your employment under this Agreement is terminated by the Company other than by reason of Cause or is terminated as a result of your disability or as a result of your death you shall be entitled to receive a bonus equal to 50% of your annual salary for the calendar year in which the termination occurs, which bonus shall be prorated based on the number of days in the calendar year in which the termination occurs which have elapsed prior to such termination. (b) If your employment under this Agreement is terminated by the Company other than by reason of Cause or your death or disability, you shall be entitled to receive a lump sum payment equal to twice the amount of your then annual salary in lieu of any salary, bonus or other compensation which you would otherwise be entitled to under this Agreement. Such amount shall be paid within 60 days of the effective date of termination. (c) If you terminate your employment hereunder following a "change in control of the Company" (as described below) and provided you have not been offered "comparable employment" (as defined below) within 60 days after the event resulting in the change in control of the Company you shall be entitled to receive in lieu of any salary, bonus or other compensation to which you would otherwise be entitled to under this Agreement, (i) a lump sum payment equal to twice the amount of your annual salary for the calendar year in which the event resulting in the change in control of the Company occurs and (ii) a bonus equal to 50% of your annual salary for the calendar year in which the event resulting in the change in control of the Company occurs, which bonus shall be prorated based on the number of days in the calendar year in which the event resulting in the change in control of the Company occurs which have elapsed prior to such occurrence. Such amount shall be paid within 60 days of the effective date of termination. (d) For purposes of this Agreement, a "change in control of the Company" shall be deemed to occur if: (i) the Company merges or consolidates with, or sells all or substantially all of its assets to, another company (each, a "Transaction"), provided, however, that a Transaction shall not be deemed to result in a "change in control of the Company" if (A) immediately prior thereto (1) you are the other party to the transaction that would otherwise result in a "change in control of the Company" or (2) you are an executive officer, trustee, director or more than 5% equity holder of the other party to the transaction or of any entity, directly or indirectly, controlling such other party or (B)(1) the shareholders of the Company, immediately before such Transaction own, directly or indirectly, immediately following such Transaction in excess of sixty-nine percent (69%) of the combined voting power of the outstanding voting securities of the corporation or other entity resulting from such Transaction (the "Surviving Corporation") in substantially the same proportion as their ownership of the voting securities of the Company immediately before such Transaction and (2) the individuals who were members of the Company's Board of Directors immediately prior to the execution of the agreement providing for such Transaction constitute at least a majority of the members of the board of directors or the board of trustees, as the case may be, of the Surviving Corporation, or of a corporation or other entity beneficially directly or indirectly owning a majority of the outstanding voting securities of the Surviving Corporation, (ii) the Company acquires assets of another company or a subsidiary of the Company merges or consolidates with another company (each, an "Other Transaction") and (i) the shareholders of the Company, immediately before such Other Transaction own, directly or indirectly, immediately following such Other Transaction 69% or less of the combined voting power of the outstanding voting securities of the corporation or other entity resulting from such Other Transaction (the "Other Surviving Corporation") in substantially the same proportion as their ownership of the voting securities of the Company immediately before such Other Transaction or (ii) the individuals who were members of the Company's Board of Directors immediately prior to the execution of the agreement providing for such Other Transaction constitute less than a majority of the members of the board of directors or the board of trustees, as the case may be, of the Other Surviving Corporation, or of a corporation or other entity beneficially directly or indirectly owning a majority of the outstanding voting securities of the Other Surviving Corporation, provided, however, that an Other Transaction shall not be deemed to result in a "change in control of the Company" if immediately prior thereto the circumstances in (i)(A)(1) or (i)(A)(2) above exist, or (iii)any person or entity or group of affiliated persons or entities owns at any time 30% or more of the outstanding voting securities of the Company, provided that such person, entity or group shall not be deemed to own 30% or more of the outstanding voting securities of the Company if the last event or transaction which results in such ownership is (a) the issuance of such securities in connection with the sale by the Company of less than all or substantially all of its assets or (b) the acquisition by the Company of any such voting securities. (e) For purposes of this Agreement, you shall be deemed to have received an offer of "comparable employment" if you receive an offer to continue your employment for at least the balance of the term covered by this Agreement, with the same title set forth in Paragraph 1 hereof, pursuant to which you would perform the same type of duties you had been performing under this Agreement and at a salary not less than that provided for in Paragraph 3 hereof. 9. Governing Law; Severability. This Agreement shall be governed and construed in accordance with the laws of the State of New York. If any provision of this Agreement is determined to be invalid, it shall not affect the validity or enforceability of any of the other remaining provisions hereof. 10. Entire Agreement. This Agreement sets forth the entire agreement of the parties and is intended to supersede all prior employment negotiations, understandings and agree ments. No provision of this Agreement may be waived or changed, except by a writing signed by the party to be charged with such waiver or change. Notwithstanding the foregoing, this Agreement is subject to the policies of the Company in effect from time to time with respect to the terms of the employment of the Company's employees. 11. Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one and the same agreement. Please acknowledge your agreement to the foregoing by signing this Agreement in the space indicated and returning it to the Company. Very truly yours, WELLSFORD REAL PROPERTIES, INC. By: /s/ Edward Lowenthal ------------------------ Name: Edward Lowenthal Title: President ACCEPTED AND AGREED TO: /s/ James Burns - --------------- James Burns EX-10.61 5 ex10-61.txt EMPLOYMENT AGREEMENT-MARK CANTALUPPI 07/01/01 WELLSFORD REAL PROPERTIES, INC. 535 Madison Avenue, 26th Floor New York, New York 10022 As of July 1, 2001 Mr. Mark Cantaluppi 3 Chambers Place Randolph, NJ 07869 Dear Mr. Cantaluppi: We are pleased to offer you employment with Wellsford Real Properties, Inc. (the "Company"). This letter agreement (this "Agreement") sets forth our understanding regarding your employment. 1. Duties. The Company hereby employs you as Vice President and Chief Accounting Officer to perform such services for the Company and its affiliated entities commensurate with your position as Vice President and Chief Accounting Officer as may be assigned to you from time to time. You shall devote your full business time, attention and energies to the performance of your duties hereunder as requested by the Company from time to time. 2. Term. The term of this Agreement shall commence as of the date hereof and, unless sooner terminated in accordance with the provisions of this Agreement, shall continue up to and including, June 30, 2003. The term of this Agreement may be extended by the written agreement of you and the Company. 3. Salary. For all services rendered by you pursuant to this Agreement, you shall receive a salary at a rate per annum at least equal to $150,000 to be paid at such regular intervals, not less frequently than monthly, as the Company may establish from time to time with respect to its employees generally. 4. Bonuses. You shall also be entitled to minimum bonuses of 50% of your base salary for 2001 and 2002 and a prorated bonus for 2003. Any bonus payable to you in excess of the amounts set forth above shall be at the Company's sole discretion. Any bonus payable to you shall be paid to you within 30 days of the end of the period for which the bonus is payable. 5. Health Insurance & Benefits. The Company shall provide you with the same standard health and other insurance coverages as is afforded to all employees of the Company pursuant to the contributory coverages maintained by the Company from time to time. You shall also be entitled to participate in the Company's 401(k) Plan consistent with, and subject to, the terms of such plan. The Company may also provide you with other benefits in accordance with the policies of the Company in effect from time to time. 6. Expenses. You shall be reimbursed for all reasonable business related expenses incurred by you at the request of or on behalf of the Company in connection with the performance of your duties and responsibilities hereunder, consistent with, and subject to, the Company's policies for expense reimbursement. 7. Termination. (a) Your employment hereunder may be terminated by the Company (i) for Cause (as defined below) or (ii) for any reason other than Cause, (b) "Cause" shall mean (i) you have committed fraud, willful misconduct or gross negligence in the performance of your obligations hereunder, (ii) you shall be convicted of a felony or (iii) you shall violate any of the terms, covenants or conditions of this Agreement. 8. Results of Termination. (a) If your employment under this Agreement is terminated by the Company by reason of Cause or as a result of your disability (as determined in the reasonable discretion of the Company) or as a result of your death or by you for any reason (other than as provided for in subparagraph 8 (c) below) you shall not be entitled to receive salary for periods following termination. In the case of termination by reason of Cause you shall not be entitled to receive any portion of any unpaid bonus. In the case of termination as a result of your disability or death you shall receive a pro rata portion of any minimum bonus payable to you pursuant to Paragraph 4 hereof only with respect to the calendar year in which the termination occurs. (b) If your employment under this Agreement is terminated by the Company other than by reason of Cause or your death or disability, you shall be entitled to receive a lump sum payment equal to the sum of twice the amount of your then annual salary and a pro rata portion of any minimum bonus payable to you pursuant to Paragraph 4 hereof only with respect to the calendar year in which the termination occurs in lieu of any salary, bonus or other compensation which you would otherwise be entitled to under this Agreement. Such amount shall be paid within 60 days of the effective date of termination. (c) If you terminate your employment hereunder following a "change in control of the Company" (as described below) and provided you have not been offered "comparable employment" (as defined below) within 60 days after the event resulting in the change in control of the Company you shall be entitled to receive a lump sum payment equal to the sum of twice the amount of your annual salary for the calendar year in which the event resulting in the change in control of the Company occurs and a pro rata portion of any minimum bonus payable to you pursuant to Paragraph 4 hereof only with respect to the calendar year in which the termination occurs in lieu of any salary, bonus or other compensation to which you would otherwise be entitled to under this Agreement. Such amount shall be paid within 60 days of the effective date of termination. (d) For purposes of this Agreement, a "change in control of the Company" shall be deemed to occur if: (i) the Company merges or consolidates with, or sells all or substantially all of its assets to, another company (each, a "Transaction"), provided, however, that a Transaction shall not be deemed to result in a "change in control of the Company" if (A) immediately prior thereto (1) you are the other party to the transaction that would otherwise result in a "change in control of the Company" or (2) you are an executive officer, trustee, director or more than 5% equity holder of the other party to the transaction or of any entity, directly or indirectly, controlling such other party or (B)(1) the shareholders of the Company immediately before such Transaction own, directly or indirectly, immediately following such Transaction in excess of sixty-nine percent (69%) of the combined voting power of the outstanding voting securities of the corporation or other entity resulting from such Transaction (the "Surviving Corporation") in substantially the same proportion as their ownership of the voting securities of the Company immediately before such Transaction and (2) the individuals who were members of the Company's Board of Directors immediately prior to the execution of the agreement providing for such Transaction constitute at least a majority of the members of the board of directors or the board of trustees, as the case may be, of the Surviving Corporation, or of a corporation or other entity beneficially directly or indirectly owning a majority of the outstanding voting securities of the Surviving Corporation, (ii) the Company acquires assets of another company or a subsidiary of the Company merges or consolidates with another company (each, an "Other Transaction") and (i) the shareholders of the Company, immediately before such Other Transaction own, directly or indirectly, immediately following such Other Transaction 69% or less of the combined voting power of the outstanding voting securities of the corporation or other entity resulting from such Other Transaction (the "Other Surviving Corporation") in substantially the same proportion as their ownership of the voting securities of the Company immediately before such Other Transaction or (ii) the individuals who were members of the Company's Board of Directors immediately prior to the execution of the agreement providing for such Other Transaction constitute less than a majority of the members of the board of directors or the board of trustees, as the case may be, of the Other Surviving Corporation, or of a corporation or other entity beneficially directly or indirectly owning a majority of the outstanding voting securities of the Other Surviving Corporation, provided, however, that an Other Transaction shall not be deemed to result in a "change in control of the Company" if immediately prior thereto the circumstances in (i)(A)(1) or (i)(A)(2) above exist, or (iii)any person or entity or group of affiliated persons or entities owns at any time 30% or more of the outstanding voting securities of the Company, provided that such person, entity or group shall not be deemed to own 30% or more of the outstanding voting securities of the Company if the last event or transaction which results in such ownership is (a) the issuance of such securities in connection with the sale by the Company of less than all or substantially all of its assets or (b) the acquisition by the Company of any such voting securities. (e) For purposes of this Agreement, you shall be deemed to have received an offer of "comparable employment" if you receive an offer to continue your employment for at least the balance of the term covered by this Agreement, with the same title set forth in Paragraph 1 hereof, pursuant to which you would perform the same type of duties you had been performing under this Agreement and at a salary and minimum bonus not less than that provided for in Paragraphs 3 and 4 hereof. 9. Governing Law; Severability. This Agreement shall be governed and construed in accordance with the laws of the State of New York. If any provision of this Agreement is determined to be invalid, it shall not affect the validity or enforceability of any of the other remaining provisions hereof. 10. Entire Agreement. This Agreement sets forth the entire agreement of the parties and is intended to supersede all prior employment negotiations, understandings and agree ments. No provision of this Agreement may be waived or changed, except by a writing signed by the party to be charged with such waiver or change. Notwithstanding the foregoing, this Agreement is subject to the policies of the Company in effect from time to time with respect to the terms of the employment of the Company's employees. 11. Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one and the same agreement. Please acknowledge your agreement to the foregoing by signing this Agreement in the space indicated and returning it to the Company. Very truly yours, WELLSFORD REAL PROPERTIES, INC. By: /s/ Edward Lowenthal ------------------------ Name: Edward Lowenthal Title: President ACCEPTED AND AGREED TO: /s/ Mark Cantaluppi - ------------------- Mark Cantaluppi EX-10.77 6 ex10-77.txt OPERATING AGREEMENT-SILVER MESA 12/10/98 OPERATING AGREEMENT OF SILVER MESA AT PALOMINO PARK LLC, A COLORADO LIMITED LIABILITY COMPANY as of December 10, 1998 TABLE OF CONTENTS Page ---- ARTICLE 1- DEFINITIONS.........................................................1 ARTICLE 2-FORMATION OF COMPANY................................................13 2.1 Formation.........................................................13 2.2 Name..............................................................13 2.3 Principal Place of Business.......................................13 2.4 Registered Office and Registered Agent............................14 2.5 Articles of Organization..........................................14 2.6 Term..............................................................14 ARTICLE 3-BUSINESS OF COMPANY.................................................14 3.1 Permitted Businesses..............................................14 3.2 Other Activity or Business........................................14 ARTICLE 4-CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS AND LOANS TO THE COMPANY......................................................14 4.1 Capital Contributions.............................................15 4.2 Withdrawal or Reduction of Members' Contributions to Capital......15 4.3 Development Deficit Payments......................................15 4.4 Operating Deficit Payments........................................16 4.5 Additional Capital Contributions..................................16 4.6 Miscellaneous.....................................................16 ARTICLE 5-INITIAL CLOSING; INFRASTRUCTURE LAND CLOSING; CONSTRUCTION LOAN CLOSING.....................................................16 5.1 Initial Closing...................................................16 5.2 Construction Procedures and Closing...............................17 5.3 Infrastructure Land Closing and Bond Financing of Infrastructure..20 5.4 Failure of Initial Closing or Construction Loan Closing to Occur..20 ARTICLE 6-DEVELOPMENT OF PROJECT; OPERATIONS PRIOR TO THE FINAL CLOSING DATE............................................................20 6.1 Duties of Feld....................................................20 6.2 Construction Completion...........................................22 6.3 Development Deficit Guaranty......................................22 6.4 Operating Deficit Guaranty........................................23 6.5 Liabilities of the Company........................................23 6.6 Construction Contracts............................................23 6.7 Administration of the Construction Loan...........................23 6.8 Change Orders.....................................................24 6.9 Retainage.........................................................24 6.10 Agreements with Affiliates........................................24 6.11 Warranty by Feld..................................................24 6.12 Insurance.........................................................25 6.13 Personal Obligation...............................................26 6.14 Force Majeure.....................................................26 6.15 Limitations of Feld's Authority...................................26 6.16 Pre-Existing Environmental Condition Liability....................27 ARTICLE 7-COMPENSATION TO FELD................................................27 7.1 Development Management Fee........................................27 7.2 Construction Management Fee.......................................27 7.3 Construction Loan Guarantee Fee...................................27 7.4 Cost Savings Fee..................................................28 7.5 Incentive Fee.....................................................28 7.6 Completion Fee....................................................28 7.7 Conditions to Payment of Fees; Right of Offset....................28 ARTICLE 8-FINAL CLOSING.......................................................29 8.1 Conditions to Final Closing.......................................29 8.2 Initiation of Final Closing.......................................29 8.3 Actions at the Final Closing......................................29 8.4 Certain Rights of Feld Upon Satisfaction of Final Closing Funding Conditions .................................30 ARTICLE 9-ALLOCATIONS.........................................................30 9.1 Profits and Losses................................................30 9.2 General Provisions................................................30 9.3 Special Provisions................................................31 9.4 Code Section 704(c) Allocations...................................32 9.5 Allocations Relating to Taxable Issuance of Interest..............32 ARTICLE 10-DISTRIBUTIONS......................................................33 10.1 Cash Flow.........................................................33 10.2 Division Among Members............................................33 10.3 Special Distribution to WPHC......................................33 ARTICLE 11-BOOKS, RECORDS, AND ACCOUNTING.....................................33 11.1 Books and Records.................................................33 11.2 Reports...........................................................33 11.3 Tax Returns.......................................................34 11.4 Special Basis Adjustment..........................................34 11.5 Tax Matters Partner...............................................34 11.6 Bank Accounts.....................................................34 ARTICLE 12-MANAGEMENT.........................................................35 12.1 Management........................................................35 12.2 Number, Tenure and Qualifications.................................35 12.3 Appointment of Feld as Manager....................................35 12.4 Certain Powers of Managers........................................35 12.5 Member Approval of Certain Acts...................................36 12.6 Liability for Certain Acts........................................36 12.7 Indemnity of the Members and the Managers.........................37 12.8 Manner of Acting..................................................37 12.9 Informal Act by Managers..........................................37 12.10 Participation by Electronic Means.................................37 12.11 Resignation.......................................................37 12.12 Removal...........................................................38 12.13 Vacancies.........................................................39 12.14 Prohibition Against Publicly Traded Partnership...................39 ARTICLE 13-REPRESENTATIONS, WARRANTIES AND COVENANTS..........................40 13.1 Representations and Warranties of Each Member.....................40 13.2 Representations, Warranties and Covenants of Feld.................41 13.3 General Representation............................................43 13.4 Survival; Indemnity...............................................43 ARTICLE 14-RIGHTS AND OBLIGATIONS OF MEMBERS..................................44 14.1 Limitation of Liability...........................................44 14.2 Company Debt Liability............................................44 14.3 List of Members...................................................44 14.4 Company Books.....................................................45 14.5 Priority and Return of Capital....................................45 14.6 Outside Activity..................................................45 ARTICLE 15-MEETINGS OF MEMBERS................................................45 15.1 Annual Meeting....................................................46 15.2 Special Meetings..................................................46 15.3 Place of Meeting..................................................46 15.4 Notice of Meetings................................................46 15.5 Meeting of all Members............................................46 15.6 Record Date.......................................................46 15.7 Quorum............................................................46 15.8 Manner of Acting..................................................47 15.9 Proxies...........................................................47 15.10 Action by Members Without a Meeting...............................47 15.11 Voting by Ballot..................................................47 15.12 Waiver of Notice..................................................47 ARTICLE 16-TRANSFERABILITY; PUT-CALL PROVISIONS...............................47 16.1 Restrictions on Transferability...................................47 16.2 Put-Call Rights...................................................48 16.3 Calculation of Option Price.......................................48 16.4 Right of Offset...................................................49 16.5 Restrictions on Resignation.......................................49 16.6 Permitted WPHC Transfer...........................................49 ARTICLE 17-ADMISSION OF ADDITIONAL MEMBERS....................................49 ARTICLE 18-DISSOLUTION AND TERMINATION........................................50 18.1 Dissolution.......................................................50 18.2 Effect of Filing of Dissolving Statement..........................50 18.3 Distribution of Assets Upon Dissolution...........................50 18.4 Articles of Dissolution...........................................51 18.5 Filing of Articles of Dissolution.................................51 18.6 Winding Up........................................................51 18.7 No Restoration of Deficit Capital Accounts........................51 18.8 Deemed Liquidation................................................51 18.9 Permitted Withdrawal by Feld......................................52 ARTICLE 19-MISCELLANEOUS PROVISIONS...........................................52 19.1 Statement of Intent of Parties....................................52 19.2 Notices...........................................................52 19.3 Application of Colorado Law.......................................53 19.4 Waiver of Action for Partition....................................53 19.5 Amendments........................................................54 19.6 Construction......................................................54 19.7 Headings..........................................................54 19.8 Waivers...........................................................54 19.9 Time of the Essence...............................................54 19.10 Remedies for Default..............................................54 19.11 Rights and Remedies Cumulative....................................54 19.12 Severability......................................................54 19.13 Heirs, Successors and Assigns.....................................54 19.14 Counterparts......................................................54 19.15 Further Assurances................................................55 19.16 Entire Agreement..................................................55 19.17 Attorneys Fees....................................................55 THE SECURITIES REPRESENTED BY THIS INSTRUMENT OR DOCUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE MANAGERS OF THE COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE SUBMISSION TO THE MANAGERS OF THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE MANAGERS TO THE EFFECT THAT ANY SUCH TRANSFER OR SALE WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED THEREUNDER. OPERATING AGREEMENT OF SILVER MESA AT PALOMINO PARK LLC, A COLORADO LIMITED LIABILITY COMPANY THIS OPERATING AGREEMENT is made as of the 10th day of December, 1998, by and among AL FELD, an individual ("Feld"), and WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation ("WPHC"), as the members of SILVER MESA AT PALOMINO PARK LLC, a Colorado limited liability company (the "Company"). NOW THEREFORE, pursuant to the Act, the following shall constitute the Operating Agreement of SILVER MESA AT PALOMINO PARK LLC, a Colorado limited liability company. 1 DEFINITIONS The following terms used in this Operating Agreement shall have the following meanings (unless otherwise expressly provided herein): (a) "Accountants" means Ernst & Young or such other accountant engaged by the Company with the unanimous consent of the Members. (b) "Act" means the version of the Colorado Limited Liability Company Act adopted by the State of Colorado, Colo. Rev. Stat.ss.ss.7-80-101 to 7-80-913, as amended from time to time. (c) "Adjusted Capital Account Deficit" with respect to any Member means the deficit balance, if any, in such Member's Capital Account as of the end of any Fiscal Year after giving effect to the following adjustments: (i) credit to such Capital Account the sum of (A) any amount which such Member is obligated to restore to such Capital Account pursuant to any provision of this Agreement, plus (B) an amount equal to such Member's share of Partnership Minimum Gain as determined under Regulation Section 1.704-2(g)(1) and such Member's share of Partner Nonrecourse Debt Minimum Gain as determined under Regulation Section 1.704-2(i)(5), plus (C) any amounts which such Member is deemed to be obligated to restore pursuant to Regulation Section 1.704-1(b)(2)(ii)(c); and (ii) debit to such Capital Account the items described in Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). (d) "Affiliate" means any Person controlling the outstanding equity interests or profits interests of any other Person, any Person whose outstanding equity interests are controlled by any other Person, or any Person controlling, controlled by, or under common control with any other Person. (e) "Agreement" shall mean this Operating Agreement as originally executed and as it may be amended from time to time. (f) "Approved Affiliate Agreements" shall have the meaning set forth in Section 5.2.6 hereof. (g) "Architect's Agreement" means the agreement to be entered into between the Company and Feld Design, Inc. ("Architect"), an Affiliate of Feld, at or prior to the Construction Loan Closing. (h) "Asset Value" with respect to any Company asset means: (i) The fair market value, when contributed, of any asset contributed to the Company by any Member; (ii) The fair market value on the date of distribution of any asset distributed by the Company to any Member as consideration for an Interest in the Company; (iii) The fair market value of all Property at the time of the happening of any of the following events: (A) the admission of a Member to, or the increase of an Interest of an existing Member in, the Company in exchange for a Capital Contribution; or (B) the liquidation of the Company under Regulation Section 1.704-1(b)(2)(ii)(g); or (iv) The Basis of the asset in all other circumstances. (i) "Bankruptcy Event" with respect to the Company or any Member means any one of: (A) Filing a voluntary petition in bankruptcy or for reorganization or for adoption of an arrangement under the Bankruptcy Code; (B) Making a general assignment for the benefit of creditors; (C) The appointment by a court of a receiver for all or a portion of the property of the Company or for all or a portion of a Member's property having an aggregate value in excess of $500,000; (D) The entry of an order for relief in the case of an involuntary petition in bankruptcy; or (E) The assumption of custody or sequestration by a court of competent jurisdiction of all or substantially all of the Company's or such Member's property, as appropriate. (j) "Basis" with respect to an asset means the adjusted basis from time to time of such asset for federal income tax purposes. (k) "Budgeted Construction Loan Interest" means that amount which appears in the line item of the Final Project Budget (attached hereto as Exhibit O) denoted as "CONSTR. LOAN INTEREST. (l) "Call Option" means the call option of WPHC with respect to the Interest of Feld as described in Section 16.2.1 hereof. (m) "Capital Account" means an account maintained for each Member in accordance with Regulation Sections 1.704-1(b) and 1.704-2 and to which the following provisions apply to the extent not inconsistent with such Regulations: (i) There shall be credited to each Member's Capital Account (A) such Member's Capital Contributions; (B) such Member's distributive share of Profits; (C) any items of income or gain specially allocated to such Member under Section 9.3 of this Agreement; and (D) the amount of any Company liabilities (determined as provided in Code Section 752(c) and the Regulations thereunder) assumed by such Member or to which Property distributed to such Member is subject; (ii) There shall be debited to each Member's Capital Account (A) the amount of money and the Asset Value of any Property distributed to such Member pursuant to this Agreement; (B) such Member's distributive share of Losses; (C) any items of expense or loss which are specially allocated to such Member under Section 9.3 of this Agreement, and (D) the amount of liabilities (determined as provided in Code Section 752(c) and the Regulations thereunder) of such Member assumed by the Company or to which Property contributed to the Company by such Member is subject; and (iii) The Capital Account of any transferee Member shall include the appropriate portion of the Capital Account of the Member from whom the transferee Member's Interest was obtained. (n) "Capital Contribution" means the amount of money and the Asset Value of any property other than money contributed to the Company by a Member with respect to such Member's Interest in the Company. (o) "Capital Contribution Balance" means with respect to any Member the aggregate Capital Contributions made by such Member, plus an amount corresponding to interest thereon at an annual rate of twelve percent (12%) from the date(s) such Capital Contributions are made until the Option Closing Date. The parties acknowledge that the definition of Capital Contribution Balance is only used in connection with the determination of Fair Market Value of Feld's Interest. (p) "Cash Flow" means the Operating Cash Flow and Sales or Refinancing Cash Flow for any given period. (q) "Code" means the Internal Revenue Code of 1986, as amended, or corresponding provisions of subsequent superseding federal revenue laws. (r) "Company" means SILVER MESA AT PALOMINO PARK LLC, a Colorado limited liability company. (s) "Construction Consultant" means the Construction Consultant selected by WPHC to monitor construction on behalf of WPHC, or such other consultant as may be selected by WPHC. (t) "Construction Lender" means the maker of the Construction Loan, or its successor and assigns in such capacity. (u) "Construction Loan" means the Construction Loan in a principal amount not to exceed $29,000,000.00 to be made to the Company by the Construction Lender at the Construction Loan Closing. (v) "Construction Loan Closing" means the closing of the transactions described in Section 5.2 hereof. (w) "Construction Loan Closing Date" means the date on which the Construction Loan Closing occurs. (x) "Construction Loan Outside Date" has the definition given it in Section 5.2.4 hereof. (y) "Construction Procedures" means the requirements regarding construction procedures set forth on Exhibit B attached hereto. (z) "Conversion Date" means the date on which Substantial Completion has occurred. (aa) "Control" means the direct or indirect ownership of at least 50% of the equity interests or profits interests of any other Person. (bb) "Cost Savings" means the positive amount, if any, equal to: Total Budgeted Development Costs, minus (i) the undisbursed amount, if any, of Budgeted Construction Loan Interest through Substantial Completion and minus (ii) the actual Development Costs incurred through the Final Closing Date." (cc) "Deposit Agreement" means the Deposit and Contract Administration Agreement between WPHC and The Feld Company regarding the Land Contract, which Deposit and Contract Administration Agreement is attached hereto as Exhibit C. (dd) "Depreciation" for any Fiscal Year or other period means the cost recovery deduction with respect to an asset for such year or other period as determined for federal income tax purposes, provided that if the Asset Value of such asset differs from its Basis at the beginning of such year or other period, depreciation shall be determined as provided in Regulation Section 1.704-1(b)(2)(iv)(g)(3). (ee) "Development Costs" means the direct or indirect costs paid or accrued by the Company related to the acquisition of the Project Land and the development of the Project, including without limitation: (i) all costs of construction and development of the Project; (ii) all costs of causing the Project and its operations to comply with laws prior to the date of Substantial Completion; (iii) all real estate taxes, assessments and personal property taxes relating to the period prior to the Conversion Date; (iv) all costs of insurance incurred by or charged to the Company relating to the period prior to the Conversion Date; (v) all fees paid to Feld or its Affiliates (excluding the property management fee paid to The Feld Company); (vi) all financing costs relating to the period prior to the Conversion Date, including origination fees, reimbursement of expenses of the Construction Lender and interest; (vii) all costs of administration of the Company, including legal and accounting fees prior to or on the Final Closing Date; and (viii) costs of title insurance endorsements deleting the mechanic's lien exception from the owner's title policy and bringing the date of the owner's title policy down to the date of Final Closing. (ff) "Development Deficits" means the positive amount, if any, by which Development Costs exceed the sum of: (a) the Capital Contributions of the Members required to be made at the Initial Closing, (b) the Final Closing Capital Contribution, and (c) the aggregate NOI Construction Loan Interest Payments, less any undisbursed Budgeted Construction Loan Interest, for the period prior to the date of Substantial Completion. (gg) "Development Deficit Payments" shall mean the Development Deficit Payments to be paid by Feld pursuant to Section 6.3 of this Agreement. (hh) "Entity" means any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association, or any governmental or quasi-governmental agency or body. (ii) "Environmental Laws" means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.A. Section 9601, et. seq.; the Hazardous Materials - Transportation Act, 49 U.S.C.A. Section 1801, et. seq.; the Resource Conversation and Recovery Act, 42 U.S.C.A. Section 6901, et. seq.; the Toxic Substances Control Act, 15 U.S.C.A. Section 2601, et. seq.; the Federal Water Pollution Control Act, 33 U.S.C.A. Section 1251, et. seq.; any Colorado environmental laws; or any successor to such laws (in existence on the date any relevant representation is made or updated), or any other federal, state or local environmental, health or safety statute, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards concerning or in connection with hazardous or toxic wastes, substances, material, smoke, gas or particulate matter as now or at any time hereafter in effect, or any common law theory based on nuisance or strict liability. (jj) "Environmental Reports" means the Environmental Site Assessment prepared by ATC Associates dated March 16, 1994, concerning the Land, and the Phase I Environmental Site Assessment Update dated November ___, 1998, prepared by ATC Associates. (kk) "Fair Market Value of Feld's Interest" means the following: (i) one percent (1.0%) of the following: (A) the fair market value of the Company's assets as determined by the Accountants based on the books and records of the Company and on a current appraisal of the Project, minus (B) the amount of the Company's debts and liabilities, including without limitation, any debt encumbering the Project, trade payables, accrued expenses and adjustments for any reasonably foreseeable contingent liabilities as determined by the Accountants and any other fees payable to Feld, minus (C) the Infrastructure Cost allocable to the Project made on the same basis that such allocation of Infrastructure Cost is made in connection with the calculation of the Incentive Fee; minus (ii) the amount determined as of the Option Closing Date by which (A) one percent (1.0%) of the aggregate Capital Contribution Balances of Feld and WPHC exceeds (B) the Capital Contribution Balance of Feld. (ll) "Final Closing" means the closing of the transactions described in Article 8 hereof. (mm) "Final Closing Date" means the date on which the Final Closing occurs. (nn) "Final Closing Capital Contribution" means the Capital Contribution to be made by WPHC pursuant to Section 4.1.2(c) hereof, when, as and if required by this Agreement. (oo) "Final Closing Funding Conditions" means the conditions to the obligations of WPHC to make the Final Closing Capital Contribution, or otherwise to satisfy its obligation under Section 8.3.1 hereof, which conditions are set forth on Exhibit D attached hereto. (pp) "Final Completion" means the lien-free completion of construction of the improvements in accordance with the Plans and Specifications (subject only to minor and inconsequential field changes and other changes consented to by WPHC), including without limitation, completion or correction of all punchlist items and seasonal items such as landscaping to the reasonable satisfaction of WPHC, payment and release of all liens of subcontractors, materialmen, and other providers of labor, equipment, material and/or services to the Property and the Project as evidenced by the receipt of all unconditional lien releases from all such subcontractors, materialmen and all other providers of labor, equipment, material and/or services to the Property and the Project, or in the event a lien is being contested, the posting by Feld of collateral in an amount and form reasonably satisfactory to WPHC, which may include providing a surety bond to which the lien is transferred and providing title insurance coverage against such liens. (qq) "Fiscal Year" means the taxable year of the Company for federal income tax purposes as determined under Code Section 706 and the Regulations thereunder. (rr) "Force Majeure" means acts of God, strikes, shortages of labor or materials, weather conditions or other matters not reasonably within Feld's control ("Force Majeure"), except that under no circumstances shall lack of available funds be considered an event of Force Majeure. (ss) "Gross Operating Revenues" shall mean, with respect to any given period of time, all gross operating income and rental revenues actually received by or paid to or for the account of the Company with respect to the ownership, operation, leasing and occupancy of the Project, excluding tenant security deposits paid under Leases but including, but not limited to, any and all of the following: (i) rentals paid by tenants under leases of space in the Project ("Leases"); (ii) late charges and interest paid by tenants under Leases; (iii) rents and receipts from vending machines and similar items; (iv) fees from parking garages or carports, if applicable; and (v) cable television and telephone revenues. (tt) "Hazardous Materials" means without limitation, (i) asbestos or any material composed of or containing asbestos or urea formaldehyde in any form and in any type; (ii) polychlorinated biphenyl compounds; (iii) oil hydrocarbons, petroleum, petroleum products or products containing or derived from petroleum; (iv) any hazardous or toxic waste, substance, material, smoke, gas or particulate matter, as presently defined by or for purposes of Environmental Laws. (uu) "Incentive Fee" has the meaning set forth in Exhibit P hereof. (vv) "Infrastructure" means the interior street improvements, utilities, landscaping, a perimeter wall and gate, a guardhouse, a recreational center and amenities, and a park and recreational amenities to be constructed on the Infrastructure Land, as more particularly described on Exhibit E attached hereto. (ww) "Infrastructure Costs" means the actual cost of acquiring, constructing and developing all of the Infrastructure, including without limitation the cost of the Infrastructure Land, design and engineering costs, construction management fees, general contractor fees, property taxes on the Infrastructure Land prior to completion of the Infrastructure, interest expense on the Infrastructure Land and the Infrastructure at an assumed nine percent (9.0%) rate of interest for the period prior to the completion of each applicable phase of the Infrastructure. Infrastructure shall not include the cost of issuance of bonds to finance the Infrastructure. If all of the Infrastructure has not been finally completed at the time of determination of Infrastructure Costs due to phasing of the construction of Infrastructure or for any other reason, then Infrastructure Costs shall include an amount equal to the expected amount of Infrastructure Costs upon final completion of the Infrastructure as reasonably determined by WPHC. (xx) "Infrastructure Land" means the parcel of land on which the Infrastructure improvements shall be constructed, which parcel is described on Exhibit F attached hereto. (yy) "Infrastructure Improvements Agreement" has the meaning set forth in Section 5.3.3 hereof. (zz) "Initial Closing" means the closing of the transactions described in Section 5.1 hereof. (aaa) "Initial Closing Date" means the date on which the Initial Closing occurs. (bbb) "Interest" means the ownership interest of a Member in the Company at any particular time, including the right of such Member to any and all benefits to which such member may be entitled as provided in this Agreement or the Act, together with the obligations of such Member to comply with all the terms and provisions of this Agreement and the Act. Such Interest of each Member shall, except as specifically provided herein, be the percentage of the aggregate of such benefits or obligations specified in this Agreement as such Member's Percentage Interest. (ccc) "Land" means the parcel of land located in Douglas County, Colorado, which parcel is described on Exhibit G attached hereto. (ddd) "Land Contract" means that certain Second Amended and Restated Vacant Land Purchase and Sale Agreement dated March 23, 1995, between Mission Viejo Company, as Seller, and The Feld Company, as Purchaser, as assigned to and assumed by WPHC by that certain Assignment and Assumption Agreement - Purchase Agreement dated May 2, 1995. (eee) "Majority In Interest" shall mean Members holding a majority of the Percentage Interests. (fff) "Managers" shall mean one or more managers. Specifically, "Managers" shall mean Feld or any other Persons that succeed such Manager in that capacity. Managers need not be residents of the State of Colorado or Members of the Company. References to the Manager in the singular or as him, her, it, itself, or other like references shall also, where the context so requires, be deemed to include the plural or the masculine or feminine reference, as the case may be. (ggg) "Master Development" means a five-phase, gated apartment community to be constructed on the Master Development Land, including a central 23-acre park containing a clubhouse, swimming pool and health club. The approximate anticipated number of units in each phase of the Master Development is as follows: Phase I -- 456; Phase II -- 304; Phase III -- 264; Phase IV -- 424; and Phase V -- 352, plus 80 units unallocated, for a total of 1,880 units if fully developed. (hhh) "Master Development Land" means the Land described on Exhibit H attached hereto, which land is all of the land to be sold and conveyed pursuant to the Land Contract. (iii) "Material Default" means a default by Feld in any of its obligations hereunder which in the reasonable judgment of WPHC has caused or is likely to cause damages to WPHC of $250,000 or more. (jjj) "Members" shall mean Feld and WPHC and each of the parties who may hereafter become additional or substituted Members. (kkk) "Minimum Option Price" means $50,000. (lll) "Multi-Family Project" shall mean an apartment project, condominium project, town- home project or other multi-family residential project. (mmm) "Net Operating Income" means, with respect to any given period of time, the aggregate Gross Operating Revenue for such period of time minus the aggregate Operating Expenses for such period of time. Notwithstanding the foregoing, in connection with the calculation of the Completion Fee, Net Operating Income shall be determined on an accrual basis for the relevant period with the following additional adjustments: if property taxes do not fully reflect the completion of the Project, then the property taxes shall be increased to the amount of property taxes that would have been assessed had the Project been completed and included in the calculation of the property taxes. With respect to calculating the Completion Fee only, such fully-assessed tax estimate shall be applied on a per-building basis beginning only upon receipt of a certificate of occupancy for each building. (nnn) "NOI Construction Loan Interest Payments" has the definition given it in Section 6.3 hereof. (ooo) "Operating Cash Flow" means with respect to any given period the Net Operating Income of the Company actually received and attributable to such period reduced by all debt service charges and expenses related to such period and by expenditures required to be capitalized for federal income tax purposes incurred during such period (other than Development Costs). (ppp) "Operating Deficits" means, for any specified period, the greater of 0 or the following: (A) the interest payments, accruals and periodic charges and expenses on the Construction Loan for such period to the extent each of the foregoing exceeds the amount available for such item under the Construction Loan; plus (B) the aggregate Operating Expenses for such period of time; minus (C) Gross Operating Revenue for such period of time. (qqq) [INTENTIONALLY DELETED]. (rrr) "Operating Expenses" shall mean with respect to any given period of time all expenses of the Company in connection with the ownership, operation, leasing and occupancy of buildings in the Project, which either are rent-ready or all or any portion of which are occupied by tenants, attributable to such period of time as determined on an accrual basis, excluding interest payments and accruals on the Construction Loan but including, but not limited to, any and all of the following: (i) general real estate taxes; (ii) special assessments or similar charges; (iii) personal property taxes, if any; (iv) sales and use taxes applicable to such operating expenses; (v) cost of utilities for the Project; (vi) maintenance and repair costs of the Project; (vii) operating and management expenses and fees; (viii) premiums of insurance carried on or with respect to the Project; (ix) costs, including leasing commissions, advertisement and promotional costs, to obtain leases and the cost of work performed to ready space in the Project for occupancy under leases; (x) accounting and auditing fees and costs, attorneys' fees and other administrative and general expenses and disbursements of the Company in connection with the ownership, operation, leasing and management of the Project; (xi) expensed improvements in accordance with the accounting practices of WPHC; (xii) an allocable share of the costs and expenses of operating and maintaining the Infrastructure, excluding such costs and expenses that are paid by the owner of any other phase of the Master Development or are paid from operating reserves of the Infrastructure owner established in connection with the financing of the Infrastructure (the method of allocation of such costs and expenses shall be agreed upon by the Members at or prior to the Construction Loan Closing); and (xiii) any other costs, charges or expenses incurred by the Company which are not Development Costs. (sss) "Option Closing Date" means the date on which the Call Option or the Put Option shall close. (ttt) "Option Price" means the greater of the Fair Market Value of Feld's Interest and the Minimum Option Price. (uuu) "Outside Date" means the date that is twenty-eight (28) months following the Construction Loan Closing Date. Such Outside Date may be extended by Force Majeure, but in no event by more than 120 days. (vvv) "Percentage Interest" shall mean the following: (i) with respect to Feld, one percent (1.0%); and (ii) with respect to WPHC, ninety-nine percent (99.0%). (www) "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of such Person where the context so admits. (xxx) "Plans and Specifications" means the for-construction plans and specifications for the construction of the Project, which plans and specifications are to be prepared and approved by the Members as described in Section 5.2.2 hereof. (yyy) "Pre-Existing Environmental Condition" means the presence, if any, of Hazardous Materials on or about the Project Land on the Initial Closing Date which at any subsequent time constitutes a violation of Environmental Laws or which subjects or is reasonably expected to subject the Company or its Members or Managers to liability to any Person. (zzz) "Pre-Existing Environmental Condition Liability" means any liability, loss, damage or cost incurred by the Company prior to the Final Closing Date arising from a Pre-Existing Environmental Condition, including without limitation, any increase in Development Costs or Operating Expenses arising directly from a Pre-Existing Environmental Condition. (aaaa) "Profits" and "Losses" for any Fiscal Year or other period means an amount equal to the Company's taxable income or loss for such year or period determined in accordance with Code Section 703(a) and the Regulations thereunder with the following adjustments: (i) All items of income, gain, loss and deduction of the Company required to be stated separately shall be included in taxable income or loss; (ii) Income of the Company exempt from federal income tax shall be treated as taxable income; (iii) Expenditures of the Company described in Code Section 705(a)(2)(B) or treated as such expenditures under Regulation Section 1.704-1(b)(2)(iv)(i) shall be subtracted from taxable income; (iv) The difference between Basis and Asset Value shall be treated as gain or loss upon the happening of any event described in Article 1(h)(i), (ii) or (iii); (v) Gain or loss resulting from the disposition of Property from which gain or loss is recognized for federal income tax purposes shall be determined with reference to the Asset Value of such Property; (vi) Depreciation shall be determined based upon Asset Value instead of as determined for federal income tax purposes; and (vii) Items which are specially allocated under Article 9 of this Agreement shall not be taken into account. (bbbb) "Project" means the 264-unit apartment complex and related facilities and amenities to be constructed on the Project Land in accordance with the Plans and Specifications. Project does not include the Infrastructure. (cccc) "Project Budget" means the budget for construction and development of the Project by the Company. An "Initial Project Budget is attached hereto as Exhibit I. As described in Section 5.2.3 hereof, in connection with the Construction Loan Closing, the Members shall agree upon the "Final Project Budget." (dddd) "Project Land" means the Land, excluding the Infrastructure Land. (eeee) "Property" means all real and personal property, tangible and intangible, owned by the Company. (ffff) "Property Management Agreement" means the Property Management Agreement to be entered into between the Company and The Feld Company, an Affiliate of Feld, in the form attached hereto as Exhibit J. The Property Management Agreement provides that it shall terminate on the first to occur of the following: (i) at the option of either party, upon the Removal of Feld; and (ii) after the Final Closing Date, upon 30 days' written notice of termination from one party to the other. (gggg) "Put Option" means the put option of Feld with respect to the Interest of Feld as described in Section 16.2.2 hereof. (hhhh) "Regulations" means the federal income tax regulations, including temporary (but not proposed) regulations, promulgated under the Code. (iiii) "Removal" means the removal of Feld pursuant to Section 12.12 hereof. (jjjj) "Removal Event" has the meaning set forth in Section 12.12 hereof. (kkkk) "Restricted Party" has the meaning set forth in Section 14.6.4 hereof. (llll) "Sales or Refinancing Cash Flow" means, for any given period, the cash proceeds received from the Company from the sale, other disposition, or refinancing of any or all of the Property (including payments of principal and interest on obligations received by the Company in connection with such sale or other disposition) in excess of amounts necessary to discharge Company obligations with respect to such Property. (mmmm) "Substantial Completion" means satisfaction of all of the following: (i) completion of construction of the Project in compliance with the Plans and Specifications (subject only to minor and inconsequential field changes and other changes consented to by WPHC, punch list items and seasonal items such as landscaping which do not interfere with the occupancy and use of the Project, and liens of subcontractors, materialmen, and other providers of labor, equipment, material and/or services to the Property and the Project not yet due and payable or for which either a surety bond or title insurance reasonably acceptable to WPHC is provided by Feld), as evidenced by temporary or permanent certificate(s) of occupancy, or the equivalent, issued by the applicable governmental authority for all buildings which are part of the Project, which permit the occupancy and use of all the apartment units; and (ii) each unit in the Project having been made rent-ready, including, without limitation, the installation of all appliances (including, without limitation, refrigerators and ranges), light fixtures, floor coverings and window coverings required by the Plans and Specifications or otherwise required for the use, occupancy, and operation of the units. (nnnn) "Substitute Member" shall mean any Person who or which is admitted to the Company as a substitute Member pursuant to Colo. Rev. Stat.ss.7-80-702(2) (1991), as it may be amended. (oooo) "Total Budgeted Development Costs" means the Total Development Costs as shown on the Final Project Budget. (pppp) "WRP" shall mean Wellsford Real Properties, Inc., a Delaware corporation. (qqqq) "WPHC" means Wellsford Park Highlands Corp., a Colorado corporation. 2 FORMATION OF COMPANY 2.1 FORMATION. On May 13, 1998, the parties hereto caused the Company to be organized as a Colorado limited liability company under and pursuant to the Act. 2.2 NAME. The name of the Company is Silver Mesa at Palomino Park LLC, a Colorado limited liability company. 2.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Company within the State of Colorado shall be 1623 Blake Street, Suite 270, Denver, Colorado 80202. The Company may locate its places of business and registered office at any other place or places as the Managers may from time to time deem advisable. 2.4 REGISTERED OFFICE AND REGISTERED AGENT. The Company's registered office shall be at the office of its registered agent at Corporation Service Company, 1560 Broadway, Denver, Colorado 80202 and the name of its initial registered agent at such address shall be Corporation Service Company. The registered agent shall provide promptly to the Managers copies of all written notices, summonses and other documents received by the registered agent on behalf of the corporation (other than general advertising and promotional materials) and, in any event, such copies shall be provided not more than ten (10) business days after receipt thereof by such registered agent. The Managers shall have no liability for the effects of any failure by the registered agent to timely deliver any such items to the Managers except to the extent the Managers had actual notice of such items prior to delivery by the registered agent. In any contracts, subcontracts, loan agreements or other documents entered into by the Company, the Managers shall provide that the addresses for notice to be given under any such agreements shall include both the registered agent and the Managers. 2.5 ARTICLES OF ORGANIZATION. The Articles of Organization filed for the Company with the Secretary of State of the State of Colorado (the "Articles of Organization") are hereby adopted and incorporated by reference into this Agreement. In the event of any inconsistency between the Articles of Organization and this Agreement, the terms of the Articles of Organization shall govern. 2.6 TERM. The term of the Company shall be thirty (30) years from the date of filing of Articles of Organization with the Secretary of State of the State of Colorado, unless the Company is earlier dissolved in accordance with either the provisions of this Agreement or the Act. 3 BUSINESS OF COMPANY 3.1 PERMITTED BUSINESSES. The business of the Company shall be: 3.1.1 To acquire the Land and to construct, develop, own, operate, manage, lease, finance, improve and sell or otherwise dispose of the Project; and 3.1.2 To engage in all activities necessary, customary, convenient, or incidental to any of the foregoing. 3.2 OTHER ACTIVITY OR BUSINESS. The Company shall not engage in any other activity or business unless approved by all Members. 4 CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS AND LOANS TO THE COMPANY 4.1 CAPITAL CONTRIBUTIONS. Subject to the provisions of this Agreement, the Members shall be obligated to make the following Capital Contributions to the Company: 4.1.1 CAPITAL CONTRIBUTIONS BY FELD. At the Initial Closing, Feld shall make a Capital Contribution of $1,000. 4.1.2 CAPITAL CONTRIBUTIONS BY WPHC. WPHC shall make the following Capital Contributions: (a) At the Initial Closing, WPHC shall make a Capital Contribution by conveying the Land to the Company, which Capital Contribution the parties agree shall be valued at $2,127,999 for the Land purchase price plus pre-development costs and carrying costs of $1,305,759, for a total of $3,433,758. (b) WPHC shall have the right, but not the obligation, to make Capital Contributions from time to time in its sole and absolute discretion to fund Operating Deficits or other expenses incurred by the Company. Notwithstanding the foregoing, so long as: (i) Feld is not in material default under this Agreement, and (ii) Feld has personally guaranteed the Construction Loan pursuant to Section 5.2.4 and is not in material default under such guaranty, then WPHC shall be obligated to make Capital Contributions to fund: (y) prior to Substantial Completion, the amount (if any) by which Operating Expenses exceed Gross Operating Revenue, and (z) Operating Deficits which were incurred during the period between Substantial Completion and payment in full of the Construction Loan. (c) At the Final Closing and contingent on satisfaction of all of the Final Closing Funding Conditions, WPHC shall make the Final Closing Capital Contribution in an amount equal to the following: (i) the Total Budgeted Development Costs, minus (ii) any Capital Contributions made prior to the Final Closing Date by WPHC, plus (iii) any distributions made to WPHC pursuant to Section 10.3 hereof, minus (iv) an amount equal to fifty percent (50%) of Cost Savings, if any; or WPHC shall otherwise satisfy its obligations under Section 8.3.1 hereof. WRP shall guaranty the obligation of WPHC to make the Final Closing Capital Contribution by executing the Guaranty attached hereto. 4.2 WITHDRAWAL OR REDUCTION OF MEMBERS' CONTRIBUTIONS TO CAPITAL. 4.2.1 A Member shall not receive out of the Company's Property any part of such Member's Capital Contributions in violation of the Act. 4.2.2 A Member, irrespective of the nature of such Member's Capital Contribution, has the right to demand and receive only cash in return for such Member's Capital Contribution and then only in accordance with the terms of this Agreement. 4.3 DEVELOPMENT DEFICIT PAYMENTS. Feld shall have the obligation to make Development Deficit Payments when and as required under Article 6 of this Agreement. 4.4 OPERATING DEFICIT PAYMENTS. [INTENTIONALLY DELETED]. 4.5 ADDITIONAL CAPITAL CONTRIBUTIONS. Except as expressly described in this Article 4, no Member has an obligation to make any Capital Contributions or loans or advances to the Company. 4.6 MISCELLANEOUS. 4.6.1 NO INTEREST ON CAPITAL CONTRIBUTION. No Member shall be entitled to or shall receive interest on such Member's Capital Contribution. 4.6.2 NO WITHDRAWAL OF CAPITAL CONTRIBUTION. No Member may withdraw any capital from the capital of the Company except as expressly provided herein or under the Act. 4.6.3 NO PRIORITY OF RETURN OF CAPITAL CONTRIBUTION. No Member shall have any priority over any other Member with respect to the return of any Capital Contribution, except as expressly provided herein. 4.6.4 NO THIRD PARTY BENEFICIARIES. The provisions of this Article 3 are not intended to be for the benefit of and shall not confer any rights on any creditor or other Person (other than a Member in such Member's capacity as a Member) to whom any debts, liabilities or obligations are owed by the Company or any of the Members. 5 INITIAL CLOSING; INFRASTRUCTURE LAND CLOSING; CONSTRUCTION LOAN CLOSING 5.1 INITIAL CLOSING. The Members of the Company shall cooperate to cause an Initial Closing at which the following shall occur: 5.1.1 LAND CLOSING. The Company shall acquire the Land from WPHC. The Company shall obtain an Owner's Policy of Title Insurance from a title insurer acceptable to the Members (the "Title Company"). 5.1.2 REIMBURSEMENT OF FELD EXPENSES. Notwithstanding anything to the contrary herein, only those Reimbursable Expenses which constitute actual, third party costs of Feld shall be paid at the Initial Closing. Any Reimbursable Expenses for in-house architectural services or other services provided by Feld or The Feld Company ("In House Reimbursable Expenses") shall be paid only if and when a Construction Loan Closing occurs. In connection with any request for the payment of In House Reimbursable Expenses, Feld shall submit to WPHC for approval the following: (i) detailed invoices setting forth the services performed and work delivered by Feld and its Affiliates; and (ii) receipts, releases and documents of transfer and conveyance in connection with the work performed and services provided as may be reasonably requested by WPHC. The payment of any In House Reimbursable Expenses shall be subject to the approval of WPHC, which approval shall not be unreasonably withheld. If Feld is removed or withdraws as a Member and a Construction Loan Closing has not occurred by the date of such removal or withdrawal, then the Company shall have no obligation to pay Feld, The Feld Company or their Affiliates for any In House Reimbursable Expenses. Except as set forth in this Section 5.1.2, neither Feld nor The Feld Company shall have any right of reimbursement from the Company with respect to any other costs and expenses incurred in connection with the Project prior to the Initial Closing Date. 5.1.3 APPROVAL OF LAND DOCUMENTS. The Company shall not proceed with the Initial Closing unless and until the form of documents related to the closing of the acquisition of the Land by the Company have been approved by all the Members. 5.1.4 PLEDGE OF INTEREST. 5.1.4.1 As collateral for the performance by Feld of its obligations under this Agreement, at the Initial Closing Feld shall execute a Pledge and Security Agreement in the form of Exhibit L attached hereto, wherein Feld grants WPHC a first lien security interest in Feld's Interest in the Company and in Feld's right to receive all fees, payments and distributions from the Company. Any uncured default under this Agreement shall constitute an Event of Default (as such term is defined in said Pledge and Security Agreement) under said Pledge and Security Agreement, and any Event of Default under said Pledge and Security Agreement shall be a default under this Agreement. 5.1.4.2 As collateral for the performance by WPHC of their obligations to make Capital Contributions as required under this Agreement, at the Initial Closing WPHC shall execute a Pledge and Security Agreement in the form of Exhibit M attached hereto, wherein it grants Feld a first lien security interest in its Interest in the Company and in its right to receive all fees, payments and distributions from the Company. Any uncured default under this Agreement shall constitute an Event of Default (as such term is defined in said Pledge and Security Agreement) under said Pledge and Security Agreement, and any Event of Default under said Pledge and Security Agreement shall be a default under this Agreement. 5.2 CONSTRUCTION PROCEDURES AND CLOSING. 5.2.1 PREDEVELOPMENT ACTIVITIES. 5.2.1.1 Feld shall pursue, with reasonable diligence and subject to the reasonable direction of WPHC, all approvals required to commence construction of the Project. Subject to the input and approval of WPHC, Feld shall develop appropriate site plans and other plans as may be required to obtain such approvals. Feld shall not submit any proposed plans or other materials to any governmental agency without the prior approval of WPHC. In addition, Feld shall not incur any third party expense without the prior approval of WPHC. WPHC agrees to reasonably cooperate with Feld in obtaining the Approvals, which cooperation shall include, without limitation, prompt review of any matters submitted to WPHC and prompt response to Feld in connection with any matters submitted to WPHC. Copies of all reports, studies and other information and material generated for or on behalf of Feld in connection with its review and evaluation of the Property shall promptly be delivered to WPHC, including, without limitation, the full text of all drawings, reports and memoranda supplied by engineers and other consultants and any memoranda of discussions with governmental officials and neighborhood groups. 5.2.1.2 Feld shall prepare and submit to WPHC for a approval a pre- development budget for the activities of the Company prior to the Construction Loan Closing Date. If and when WPHC approves in writing a pre-development budget, Feld shall be authorized to incur costs in accordance with such pre-development budget and WPHC shall be obligated to fund such approved pre-development budget. 5.2.2 PLANS AND SPECIFICATIONS. Prior to the Construction Loan Closing and after consultation with WPHC, Feld shall cause to be prepared detailed construction Plans and Specifications for the Project, and shall submit such Plans and Specifications to WPHC for approval. If and when WPHC approves the Plans and Specifications, the Members shall initial a description of the Plans and Specifications and attach the description to this Agreement as Exhibit N. 5.2.3 PROJECT BUDGET. Prior to the Construction Loan Closing and after consultation with WPHC, Feld shall cause to be prepared a revised Project Budget based on the approved Plans and Specifications, and shall submit such Project Budget to WPHC for approval. If and when WPHC approves the revised Project Budget, the Members shall initial such Project Budget and attach it to this Agreement as Exhibit O. Upon approval, such revised Project Budget shall for all purposes be the "Final Project Budget." 5.2.4 OBTAINING A CONSTRUCTION LOAN. Feld shall use its best efforts to cause the Company to obtain a Construction Loan for construction of the Project on terms and from a Construction Lender acceptable to the Members, including, but not limited to, the following: (a) the Construction Loan amount must be acceptable to WPHC and sufficient to reimburse WPHC at the Construction Loan Closing for the acquisition cost of the Project Land and any advances it made to the Company for predevelopment activities; (b) the interest rate shall be a variable rate equal to LIBOR plus a spread reasonably acceptable to the Members; (c) the Construction Loan Closing must take place on or before December 31, 1998, provided, however, such date shall be extended to a date not later than January 31, 1999, if Feld is diligently pursuing his obligations and if the delay is not attributable to a default by Feld (such date as it may be extended is referred to herein as the "Construction Loan Outside Date"); (d) Feld shall personally guarantee the Construction Loan and shall guarantee Operating Deficits, all to the extent required by the Construction Lender; (e) the Construction Loan shall have a maturity date of at least twenty-eight (28) months from the date of the Construction Loan Closing; and (f) the other terms shall be reasonably acceptable to WPHC. 5.2.5 CONSTRUCTION LOAN DOCUMENTS. The Company shall not proceed with the Construction Loan Closing unless and until the form of documents related to the Construction Loan have been approved by all the Members. There shall be no modification to the Construction Loan documents without the prior written approval of all Members. 5.2.6 APPROVED AFFILIATE AGREEMENTS. On or prior to the Construction Loan Closing Date and only with the approval of all of the Members, the Company shall enter into (a) a construction management agreement with Tricor Construction Company, an Affiliate of Feld ("Contractor"), (b) a construction contract with Contractor, and (c) the Architect's Agreement with Architect. Except for a reasonable fee to be paid pursuant to the Architect's Agreement with the approval of WPHC, no fees or other compensation, profit or cost savings shall be paid to Contractor under such agreements except the fees provided for in Article 7 below. The Company hereby agrees that Contractor may enter into a landscape design contract and an interior design contract with Architect, and all subcontracts entered into by Contractor and/or Architect shall be included in the Final Project Budget, but such subcontracts shall provide for the subcontractor to look only to Contractor or Architect, as applicable, for payment under the subcontracts. Fees or other profit, compensation or sharing of cost savings under such subcontracts shall not exceed the amount a prudent owner would pay in a bona fide arm's length transaction after obtaining competitive bids. The agreements described in this Section 5.2.6, together with the Property Management Agreement, are hereinafter called the "Approved Affiliate Agreements." Neither Feld nor Contractor nor Architect shall enter into any other agreements with parties affiliated with Feld without specific disclosure to all Members in writing of such affiliation and without prior written consent of all the Members in each instance. In the event of any conflict between this Agreement and such Approved Affiliate Agreements, this Agreement shall control. In the event of an uncured default by Feld under this Agreement, the Approved Affiliate Agreements may be terminated at the option of WPHC. Any default by Feld under any Approved Affiliate Agreement which is not timely cured shall be a default hereunder. There shall be no modification to the Approved Affiliate Agreements without the prior written approval of all Members. Each Approved Affiliate Agreement shall provide that the Company shall have the right to terminate such agreement upon the Removal of Feld without such termination constituting a default. 5.2.7 FELD GUARANTEE. Feld shall personally guarantee to the Construction Lender the payment and performance of all obligations of the Company under the Construction Loan, subject to such limitations on liability of Feld and guaranty termination provisions as are acceptable to the Construction Lender. Subject to the requirements of the Construction Lender, Feld's obligation to the Company and to WPHC to guarantee interest payments on the Construction Loan applies to payments which are due and payable through Substantial Completion; Feld shall not be responsible for guaranteeing payments which come due after Substantial Completion. Nothing in this Section 5.2.7 shall relieve Feld of any other obligations which accrue prior to Final Completion. 5.2.8 [INTENTIONALLY DELETED] 5.2.9 PROPERTY MANAGEMENT AGREEMENT. At the Construction Loan Closing, the Company shall enter into the Property Management Agreement with The Feld Company, an Affiliate of Feld. 5.3 INFRASTRUCTURE LAND CLOSING AND BOND FINANCING OF INFRASTRUCTURE. It is the intent of the Members that the Infrastructure Land be acquired and developed by Palomino Park Public Improvements Corporation, a Colorado non-profit corporation ("PPPIC"), which has financed acquisition and development and certain land and Infrastructure improvements through the issuance of tax-exempt bonds (the "Bonds"). 5.3.1 [INTENTIONALLY DELETED]. 5.3.2 CONTROL OVER MATTERS RELATED TO INFRASTRUCTURE AND BONDS. Notwithstanding anything to the contrary herein, WPHC shall have sole and exclusive control over all decisions of the Company relating to the Bonds, to the subdivision and sale of the Infrastructure Land and to the financing, construction, use and development of the Infrastructure. In order to procure for the Project the benefits of the use and enjoyment of the Infrastructure to be constructed by PPPIC, the Company shall enter into such agreements with PPPIC as WPHC may require, in form and content acceptable to WPHC in its sole discretion, providing, among other things, for the encumbering of the Land by liens securing payment of the Bonds, operation and maintenance of the Infrastructure and satisfaction of certain indemnification obligations undertaken by PPPIC with respect to the Infrastructure. 5.3.3 CONSTRUCTION OF INFRASTRUCTURE. An Affiliate of Feld, has entered into one or more agreements and may enter into additional agreements (collectively, the "Infrastructure Improvements Agreement") with PPPIC (or its contractor) to construct the Infrastructure for a guaranteed maximum price, including a fee to Feld not to exceed three percent (3%) of the hard costs of construction of the Infrastructure. A default by Feld in the performance of its obligations under that contract not cured within any applicable cure period shall constitute a default under this Agreement. WPHC may in its discretion cause the phasing of the construction of the Infrastructure Improvements. 5.4 FAILURE OF CONSTRUCTION LOAN CLOSING TO OCCUR. Feld covenants to cause the Construction Loan Closing to occur by the Construction Loan Outside Date. If for any reason the Construction Loan Closing has not occurred by the Construction Loan Outside Date, then WPHC shall have the right to remove Feld as a Member and Manager of the Company in accordance with the provisions of Section 12.12. 6 DEVELOPMENT OF PROJECT; OPERATIONS PRIOR TO THE FINAL CLOSING DATE 6.1 DUTIES OF FELD. Feld shall have the authority, duty and the obligation to: 6.1.1 act on behalf of the Company in relation with any governmental agency or authority, the Construction Lender, and all contractors and subcontractors with respect to all matters relating to the construction and development of the Project; 6.1.2 use its best efforts to cause the Company to obtain a commitment for the Construction Loan on terms and conditions acceptable to all the Members and satisfy the conditions for the Construction Loan Closing; 6.1.3 coordinate with Architect the preparation of the Plans and Specifications, ensure that the Plans and Specifications are in compliance with all applicable codes, laws, ordinances, rules and regulations, and recommend alternative solutions whenever design details affect construction feasibility or schedules; 6.1.4 negotiate all necessary contracts and subcontracts for the construction of the Project and monitor disbursement and payment of amounts owed the Architect, Contractor and subcontractors; 6.1.5 choose the products and materials necessary to equip the Project in a manner which satisfies all requirements of the Construction Lender and the Plans and Specifications; 6.1.6 secure all building code approvals and obtain certificates of occupancy for all of the apartment units of the Project; 6.1.7 cause the Project to be commenced not more than thirty (30) days after the Construction Loan Closing, or by such earlier date as may be required under the Construction Loan documents, and completed in a prompt and expeditious manner, consistent with good workmanship, and in compliance, without any material deviation, with the following: (a) the Plans and Specifications as they may be amended in accordance with the terms of this Agreement; (b) any and all zoning regulations, county ordinances, including health, fire and safety regulations, and any other requirements of federal, state and local laws, rules, regulations and ordinances applicable to construction of the Project; 6.1.8 cause to be performed in a diligent and efficient manner the following: (a) construction of the Project pursuant to and in accordance, without any material deviation, with the Plans and Specifications, free and clear (except as otherwise permitted herein) of all mechanics and materialmen's liens; and (b) general administration and supervision of construction of the Project, including but not limited to activities of subcontractors and their employees and agents, and others employed as to the Project in a manner which complies in all material respects with the Construction Loan, the Plans and Specifications and the Construction Procedures; 6.1.9 keep, or cause to be kept, accounts and cost records as to the construction of the Project and make available to WPHC, during normal business hours copies of all material contracts and subcontracts; 6.1.10 provide regular monitoring, and periodically (at least monthly, or more often if requested by any Member) update the Project construction time schedule and summarize potential variances between scheduled and probable completion dates, the schedule for work not started or incomplete; 6.1.11 revise and refine the approved estimate of Development Costs, incorporate changes as they occur, and develop cash flow reports and forecasts as needed; 6.1.12 develop and implement a system for review and processing of change orders as to construction of the Project; 6.1.13 develop and implement a procedure for the review and processing of applications by subcontractors for progress and final payments; and 6.1.14 record the progress of the Project and submit written progress reports to WPHC, including the percentage of completion and the number and amounts of change orders. 6.2 CONSTRUCTION COMPLETION. Feld hereby unconditionally covenants and warrants as follows: (i) the Project shall be constructed in a good and workmanlike manner and all work shall be performed in accordance with the terms of Section 6.11 hereof; (ii) Feld shall fully and timely perform all of its other obligations under this Agreement; and (iii) subject to Force Majeure, it shall cause (a) Substantial Completion of the Project to occur within twenty-one (21) months after the Construction Loan Closing Date; (b) Final Completion to occur within twenty-four (24) months after the Construction Loan Closing Date; and (c) all Final Closing Funding Conditions shall be satisfied prior to the Outside Date. 6.3 DEVELOPMENT DEFICIT GUARANTY. Feld hereby guarantees Feld shall advance to or for the account of the Company amounts equal to all Development Deficits at such time as such Development Deficits occur ("Development Deficit Payments"). Feld shall make Development Deficit Payments required of him by the earlier of (A) the date required to avoid a default under Company obligations, including without limitation the Construction Loan, and (B) the date required to keep all sources of funding for the Project "in balance" as adequate sources of funds to timely cause Final Completion of the Project and satisfaction of other obligations of the Company. In any event, all Development Deficits shall be paid by Feld in full prior to the Final Closing Date. All Development Deficit Payments made to the Company shall be non-reimbursable payments, and Feld shall not be entitled to any repayment from the Company (unless advances of the Construction Loan are later available to reimburse Feld for the same), and the Capital Account of Feld shall not be affected by any Deficit Payments made by Feld. Without limiting the generality of the foregoing, Feld shall not be entitled to reimburse himself for any Development Deficits. Notwithstanding anything to the contrary in this Agreement, the Members agree that, prior to Substantial Completion, all debt service expenses shall be paid only from the funds reserved for Budgeted Construction Loan Interest and from Development Deficit Payments, not from any other funds of the Company (including, without limitation, Net Operating Income); provided, however, that Net Operating Income shall be used to pay debt service expenses if so requested by the Construction Lender (such payments are herein referred to as "NOI Construction Loan Interest Payments"). If any such payments are requested by the Construction Lender, such payments will be included in the calculation of the Completion Fee to the extent any Budgeted Construction Loan Interest remains undisbursed. Without the prior written consent of WPHC, the funds reserved as Budgeted Construction Loan Interest will be used for the sole purpose of debt service expenses on the Construction Loan and for no other purpose (including, without limitation, the payment of Development Deficits). Any funds remaining after the payment of debt service on the Construction Loan will be treated as net Cash Flow. 6.4 OPERATING DEFICIT GUARANTY. [INTENTIONALLY DELETED]. 6.5 LIABILITIES OF THE COMPANY. Feld covenants that by the earlier of the Final Closing Date or the Outside Date, provided WPHC has satisfied its obligation to make the Final Closing Capital Contribution, or has otherwise satisfied its obligation under Section 8.3.1 hereof, Feld shall cause the Company to have no unsatisfied debts or liabilities other than obligations under service contracts and other agreements relating to the Project permitted by this Agreement related to the period after the Final Closing, or related to the period prior to the Final Closing if adequate cash reserves are held by the Company to pay such liabilities. 6.6 CONSTRUCTION CONTRACTS. Feld shall obtain and the Company shall enter into such contracts, agreements or obligations, as are necessary to construct and develop the Project. Feld shall not, without the consent of WPHC, which consent shall not be unreasonably withheld, do or permit to be done any of the following: 6.6.1 Enter into or cause the Company to enter into any other primary contract relating to the construction of the Project; and 6.6.2 Amend or modify any Approved Affiliate Agreements. 6.7 ADMINISTRATION OF THE CONSTRUCTION LOAN. Feld shall administer the Construction Loan on behalf of the Company and in accordance with the Construction Procedures. The Company shall engage the Construction Consultant to monitor the progress of construction of the Project and to review draw requests on behalf of WPHC. Feld shall cooperate with the Construction Consultant and shall provide access to the Construction Consultant for inspection of the construction work of the Project as it progresses. Feld shall approve and submit Construction Loan draw requests to the Construction Lender on behalf of the Company, which requests shall be accompanied by those items of information required by the Construction Lender and the Title Company. Copies of all draw requests and of the monthly construction ledger shall be delivered to WPHC simultaneously with delivery to the Construction Lender. If the Construction Consultant determines that a draw request is not justified on a percentage of completion basis and the draw would result in construction funding being out of balance by an amount in excess of $250,000, WPHC shall have the right to disapprove such draw request in its sole discretion unless Feld modifies such draw request to correspond to percentage of completion and/or makes a Development Deficit Payment such that the Construction Loan shall not be out of balance by more than $250,000. After any such disapproval of a draw request by WPHC, all subsequent draw requests shall require the prior approval of WPHC unless and until such right to prior approval is waived in writing by WPHC. 6.8 CHANGE ORDERS. No change orders with respect to the Plans and Specifications may be made without the prior written consent of WPHC, except that Feld shall have the right to approve minor change orders which comply with the Construction Procedures, do not have a material adverse effect on the Project, do not increase Total Development Costs, do not reduce the amount available from the Construction Loan for payment of interest on the Construction Loan, and do not exceed $10,000 as to any one change order or $250,000 in the aggregate. Unless expressly approved in writing by all Members, no change order shall be permitted or approved that would cause total Development Costs to exceed Total Budgeted Development Costs. 6.9 RETAINAGE. Feld shall cause all agreements with contractors and subcontractors to provide for retainages at levels acceptable to Construction Lender and the release of retainages as set forth in the Construction Loan documents as executed at the Construction Loan Closing. 6.10 AGREEMENTS WITH AFFILIATES. Feld shall cause the Company to enforce each Approved Affiliate Agreement to which the Company is a party as would a prudent manager of a limited liability company, and Feld shall cause each other Approved Affiliate Agreement to be enforced in a prudent manner and for the benefit of the Company. Feld hereby agrees, for himself and on behalf of each Person affiliated with Feld that is a party to an Approved Affiliate Agreement: (i) in the event of any conflict between this Agreement and any Approved Affiliate Agreement, this Agreement shall control; (ii) in the event of any uncured material default by Feld under this Agreement, the Company shall have the right to terminate any or all of the Approved Affiliate Agreements; (iii) an uncured default by Feld or any person affiliated with Feld under an Approved Affiliate Agreement shall constitute a default by Feld under this Agreement; and (iv) Feld shall defend, indemnify and hold the Company harmless with respect to the effects of any default by any Person affiliated with Feld under such Approved Affiliate Agreements, including, without limitation, any mechanics liens with respect to claims under any Approved Affiliate Agreements. 6.11 WARRANTY BY FELD. If, within one (1) year after the date of Final Completion of the Project, any of the structural or non-structural work performed to construct the Project is found to be materially defective or not in accordance in all material respects with the Plans and Specifications and with all applicable building codes, laws, rules and regulations, Feld shall correct or shall cause the construction contractor to correct such defect promptly after receipt of written notice from WPHC to do so, unless WPHC has previously given Feld specific written acceptance of such defective condition. With respect to portions of the work first performed after Final Completion, this period of one (1) year shall be extended by the period of time between Final Completion and the actual performance of the work. The obligation under this Section shall survive acceptance of the work performed to construct the Project. WPHC shall give such notice promptly after discovery of the condition. In the event a material defect is discovered more than one (1) year after the date of Final Completion, as such period may be extended under this Section 6.11, and such defect was known to Feld or a Person affiliated with Feld and was not disclosed to WPHC or was intentionally concealed by Feld or such affiliated Person, then Feld shall promptly take such action as may be necessary at Feld's sole expense to correct such defective work. WPHC shall report to Feld within thirty (30) days after discovery any such defective condition discovered more than one (1) year after Final Completion, as such period may be extended under this Section 6.11. Nothing contained herein shall require Feld to correct defective work that is discovered more than three (3) years following Final Completion, as such period may be extended under this Section 6.11. 6.12 INSURANCE. Feld shall at all times keep in force the following policies of insurance naming the Company as the insured: 6.12.1 During the construction period (which ends on the date a certificate of occupancy for each building comprising the Project is issued), "Builder's Risk" insurance as required by the holder(s) of the Construction Loan; 6.12.2 After issuance of a certificate of occupancy for each building comprising the Project, all risk property and, if applicable, boiler and machinery insurance against loss or damage to the Property or the Project (including contents) including but not limited to fire and extended coverage perils (but excluding flood and earthquake unless either or both are required by the Construction Lender) as WPHC may from time to time require, but in no event less than one hundred percent (100%) of the full replacement cost of the Property or the Project without deduction for physical depreciation, or the unpaid balance of any loans secured by the Property or the Project, whichever is greater; 6.12.3 After issuance of a certificate of occupancy for each building comprising the Project, insurance against the loss of "rental value" of the improvements on a "rented or vacant basis" arising out of the perils insured against pursuant to Section 6.12.2 above, in any reasonable amount required by WPHC but in no event less than 100% of one year's gross "rental value" of the improvements with co-insurance waived. "Rental value" as used herein is defined as the sum of (A) the total anticipated gross rental income from tenant occupancy of the Project, (B) the amount of all charges which are the legal obligation of tenants, and (C) the fair rental value of any portion of the Project occupied by the Company, if any; and 6.12.4 At all times, (i) commercial general liability insurance in an amount of not less than Five Million Dollars ($5,000,000) against claims for personal injury, death or property damage occurring on, in or about the Property or the Project or arising from or connected with use, conduct or operation of the Company's business in the amount from time to time required by WPHC; (ii) automobile liability insurance with a combined single limit of One Million Dollars ($1,000,000); and (iii) workers compensation coverage with statutory limits and employers liability insurance with limits of One Million Dollars ($1,000,000). Any workers compensation insurance shall be accompanied by a waiver of subrogation from the insurer endorsed on the policy. All insurance policies and renewals thereof shall be in a form and issued by insurers acceptable to WPHC and shall provide for deductibles not to exceed $2,500.00. WPHC and Feld (but only as long as Feld is a Manager and a Member of the Company) shall each be additional named insureds on all such policies and renewals. Feld hereby irrevocably appoints WPHC as Feld's attorney in fact for purposes of endorsing payments, submitting claims and otherwise dealing with all such insurance and the proceeds thereof in the name, place and stead of Feld, such power of attorney to take effect immediately upon withdrawal, Removal or resignation of Feld as Manager of the Company and member of the LLC, and Feld agrees that such power shall be coupled with an interest and shall survive the disability or death of Feld. Each policy shall provide that it will not be modified or canceled without thirty (30) days prior written notice to WPHC. Feld shall promptly furnish to WPHC all renewal notices and all receipts of paid premiums. At least thirty (30) days prior to the expiration date of a policy, Feld shall deliver to WPHC a renewal policy in form satisfactory to WPHC, together with a receipt showing payment of annual premiums. Any excess insurance proceeds or refunds of insurance premiums shall be the property of the Company. 6.13 PERSONAL OBLIGATION. The obligations of Feld under this Agreement are personal recourse obligations of Feld, as limited by Section 14.1.3 of this Agreement, for which Feld shall be fully responsible to the Company and WPHC. 6.14 FORCE MAJEURE. Feld shall not be liable for delay in performance of his obligations under this Agreement to the extent such failure or delay results solely from an event of Force Majeure, and in no event shall any delay for an event of Force Majeure exceed one hundred twenty (120) days. 6.15 LIMITATIONS OF FELD'S AUTHORITY. Anything to the contrary herein notwithstanding, Feld shall not have the power or authority to do any of the following without the prior written consent of all the other Members: 6.15.1 to commit any act contrary to the purpose of the Company; 6.15.2 to refinance the Project or incur any indebtedness other than the Construction Loan; 6.15.3 to enter into any agreements with affiliates of Feld except as specified above; 6.15.4 to modify the Construction Loan documents or any agreement with any affiliate of Feld which previously was consented to by the other Members; or 6.15.5 to sell or dispose of any portion of the Project. 6.16 PRE-EXISTING ENVIRONMENTAL CONDITION LIABILITY. Feld agrees to promptly disclose to WPHC in writing if it becomes aware of any Pre-Existing Environmental Condition Liability. If the Company incurs any Pre-Existing Environmental Condition Liability, it shall use any available contingency in the Project Budget or any Cost Savings to satisfy such Pre-Existing Environmental Condition Liability. If such sources of funds are not adequate to satisfy the Pre-Existing Environmental Condition Liability, then WPHC shall make a Capital Contribution to the Company equal to one-half of the amount of the Pre-Existing Environmental Condition Liability which is then due and Feld shall make a Development Deficit Payment equal to one-half of the amount of such Pre-Existing Environmental Condition Liability. This provision is solely for the benefit of the members and no other Person shall have the right to rely on or enforce this provision. A Pre- Existing Environmental Condition Liability shall not be satisfied from Net Operating Income. 7 COMPENSATION TO FELD In consideration of the performance by Feld of his obligations under Article 6 of this Agreement, the Company shall pay Feld or his designee the fees described in this Article 7 at the time, in the manner and subject to the conditions set forth herein. 7.1 DEVELOPMENT MANAGEMENT FEE. Feld shall receive a development management fee equal to $2,000 per unit. Such development management fee shall be payable from monthly draws on the Construction Loan, on a percentage of completion basis as certified by the Construction Consultant. 7.2 CONSTRUCTION MANAGEMENT FEE. Contractor shall receive a construction management fee under the construction management agreement to be executed at or before the Construction Loan Closing equal to $2,000 per unit, payable from monthly draws on the Construction Loan based on percentage of completion as certified by the Construction Consultant as certified by the Construction Consultant, minus $49,000. All amounts paid to Contractor under the construction management agreement described in Section 5.2.6 above shall be applied against and reduce the amount due under this Section 7.2. 7.3 CONSTRUCTION LOAN GUARANTEE FEE. Feld shall receive a construction loan guarantee fee equal to 1.0% of the final committed loan amount of the Construction Loan, payable at the Construction Loan Closing from a draw on the Construction Loan. 7.4 COST SAVINGS FEE. The Company shall pay Feld at Final Closing a cost savings fee equal to fifty percent (50%) of cost savings, if any. Feld shall submit to WPHC a proposed calculation of the amount of the fee to be paid under this Section 7.4. WPHC shall be entitled, at its sole discretion, to submit such calculation to the Company's Accountants for verification or auditing prior to approving such calculation. For a period of twelve (12) months after the Final Closing Date, each Member shall have the right to cause the recalculation of the Cost Savings Fee and the post-closing adjustment of the amount of the Cost Savings Fee, if such Member pays the costs of the Company's Accountants in making such recalculation and if the amount of the adjustment is in excess of $5,000. No post-closing adjustment shall be made for amounts of $5,000 or less or based on a recalculation made more than twelve (12) months after the Final Closing Date. 7.5 INCENTIVE FEE. [INTENTIONALLY DELETED]. 7.6 COMPLETION FEE. The Company shall pay Feld at Final Closing a fee (the "Completion Fee") equal to 100% of Net Operating Income for the period beginning with the Construction Loan Closing and ending with Substantial Completion, less (i) an amount equal to all interest accrued or paid on the Construction Loan from the date on which Budgeted Construction Loan Interest is exhausted to the date of Substantial Completion; and less (ii) an amount equal to interest at the rate of seven and one half percent (7 1/2%) per annum on the total Capital Contributions made by WPHC, such interest to be calculated for the period described in (i) above; provided, however, that in no event shall the Completion Fee exceed $500,000. 7.7 CONDITIONS TO PAYMENT OF FEES; RIGHT OF OFFSET. Each payment of fees described in this Article 7 shall be conditioned upon there being no uncured event of default by Feld under this Agreement or any Approved Affiliate Agreement. In the event of nonpayment of fees due to an uncured default, if such default is subsequently cured prior to withdrawal, resignation or removal of Feld as a Member and Manager, then the unpaid fees shall be payable, subject to all the terms and provisions of this Agreement. All fees will be included in the Final Project Budget to be approved by WPHC. With respect to fees payable prior to Final Closing, if the Construction Loan does not provide a source of funding for such fees, then payment of such fees shall be deferred until the later of the date(s) the Construction Loan permits such funding or until the Final Closing. All fees payable to Feld shall be subject to a right of offset in favor of the Company and WPHC with respect to any claims or damages they may have against Feld and for any Development Deficits. In the event of the withdrawal, resignation or Removal of Feld as a Member and Manager prior to the Final Closing Date, except in the case of Removal of Feld due to Feld failing to provide a Construction Loan acceptable to all the Members, in which case no fees shall have been earned by or be due to Feld, Feld shall be entitled to fees fully earned and accrued through the date of his Removal when and as such fees are otherwise payable pursuant to this Agreement, subject to the foregoing right of offset and provided that WPHC has been fully compensated for its out of pocket expenses with respect to the Project. In no event shall the Removal of Feld accelerate the due date for any fees earned by Feld during the period prior to his Removal. 8 FINAL CLOSING 8.1 CONDITIONS TO FINAL CLOSING. The obligation of WPHC to participate in the Final Closing shall be conditioned on all of the Final Closing Funding Conditions being satisfied either prior to the Final Closing or concurrently with the Final Closing. WPHC shall have the right, but not the obligation, to waive one or more of the Final Closing Funding Conditions. Any Member shall have the right to require an escrow closing to effect the Final Closing, and the other Members shall cooperate with regard to such escrow closing. 8.2 INITIATION OF FINAL CLOSING. Upon ten (10) days prior written notice from WPHC to Feld, the Final Closing shall be held on the date designated by WPHC. If WPHC has not designated a date for the Final Closing by the Outside Date, upon ten (10) days prior written notice from Feld to WPHC, the Final Closing shall be held on the date designated by Feld, provided such date for the Final Closing designated by Feld shall be not less than twenty-eight (28) months after the Construction Loan Closing Date. 8.3 ACTIONS AT THE FINAL CLOSING. Once the date for the Final Closing has been designated as provided herein and provided that the Final Closing Funding Conditions have been satisfied by Feld, the Members shall cooperate to cause a Final Closing at which the following shall occur: 8.3.1 WPHC shall either (i) fund its Final Closing Capital Contribution, (ii) obtain a release from the Construction Lender of Feld's obligation to guarantee the Construction Loan, or (iii) provide to Feld a written indemnity from WPHC, secured by the guaranty of WRP and by WPHC's interest in the Company, indemnifying and holding Feld harmless from any further liability under his guarantee of the Construction Loan, provided that such indemnity shall be subject to a right of offset in favor of WRP and WPHC with respect to any liability of Feld to WPHC or the Company arising under this Agreement. Such indemnity shall expire upon payment in full of the Construction Loan. The form of such indemnity agreement shall be reasonably acceptable to Feld. 8.3.2 The Company shall pay the Construction Loan in full or shall provide one of the items in 8.3.1(ii) or (iii) above. 8.3.3 Any accrued and unpaid fees due to Feld under this Agreement shall be paid. 8.3.4 If either WPHC or Feld has exercised its (his) option under the Put-Call provisions of Article 16 hereof, the closing of the transfer of the Interest of Feld to WPHC shall occur. 8.3.5 At the election of WPHC, the responsibility for maintaining insurance coverage on the Project or any portion thereof may be transferred to WPHC. 8.4 CERTAIN RIGHTS OF FELD UPON SATISFACTION OF FINAL CLOSING FUNDING CONDITIONS. At any time after Final Completion and satisfaction of all of the other Final Closing Funding Conditions but prior to the Outside Date, Feld may provide WPHC notice that all of the Final Closing Funding Conditions have been satisfied and that it is prepared to proceed with the Final Closing, which notice shall be accompanied by all documents necessary to verify that the Final Closing Funding Conditions have been satisfied. Within fifteen (15) days of its receipt of its notice, WPHC shall notify Feld of the election of WPHC to do one of the following by the date that is within forty-five (45) days of WPHC's receipt of notice from Feld: (the "Release Date"): (i) WPHC shall participate in the Final Closing and make its Final Closing Capital Contribution; (ii) WPHC shall cause Feld to be released from its guaranty of the Construction Loan; or (iii) WPHC shall deliver to Feld an indemnity agreement executed by WRP, wherein WRP agrees to indemnify Feld against any loss or liability it may suffer as a guarantor of the Construction Loan, provided that such indemnity shall be subject to a right of offset in favor of WRP and WPHC with respect to any liability of Feld to WPHC or the Company arising under this Agreement (the form of such indemnity agreement shall be reasonably acceptable to Feld). If all of the Final Closing Funding Conditions have been and remain satisfied on the Release Date, WPHC shall take the action specified in its notice to Feld. 9 ALLOCATIONS 9.1 PROFITS AND LOSSES. Subject to the special allocation provisions in this Article 9, the Members' distributive shares of the Profits or Losses of the Company for any Fiscal Year shall be as follows: 9.1.1 PROFITS. Profits shall be allocated to each Member pro rata in proportion with such Member's respective Percentage Interest. 9.1.2 LOSSES. Losses shall be allocated to each Member pro rata in proportion to such Member's respective Percentage Interest. 9.2 GENERAL PROVISIONS. 9.2.1 Except as otherwise provided in this Agreement, the Members' distributive shares of all items of Company income, gain, loss, and deduction are the same as their distributive shares of Profits and Losses. 9.2.2 The Managers shall allocate Profits, Losses, and other items properly allocable to any period using any method permitted by Code Section 706 and the Regulations thereunder. 9.2.3 To the extent permitted by Regulations Section 1.704-2(h) and Section 1.704- 2(i)(6), the Managers shall endeavor to avoid treating distributions of Operating Cash Flow and of Sales and Refinancing Cash Flow as being from the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Debt (as defined in Regulation Sections 1.704-2(b)(3) and 1.704-2(b)(4), respectively). 9.2.4 If there is a change in any Member's Interest in the Company during a Fiscal Year, each Member's distributive share of Profits or Losses or any item thereof for such Fiscal Year, shall be determined by any method prescribed by Code Section 706(d) or the Regulations thereunder that takes into account the varying Interests of the Members in the Company during such Fiscal Year. 9.2.5 The Members agree to report their shares of income and loss for federal income tax purposes in accordance with the provisions of this Agreement. 9.3 SPECIAL PROVISIONS. 9.3.1 MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this Article 9, if there is a net decrease in Partnership Minimum Gain (as defined in Regulation Section 1.704-2(d)) during any Fiscal Year, then each Member shall be allocated such amount of income and gain for such year (and subsequent years, if necessary) determined under and in the manner required by Regulation Section 1.704-2(f) as is necessary to meet the requirements for a minimum gain chargeback as provided in that Regulation. 9.3.2 PARTNER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this Article 9, except Section 9.3.1, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain (as defined in accordance with Regulation Section 1.704-2(i)(3)) attributable to a Partner Nonrecourse Debt (as defined in Regulation Section 1.704-2(b)(4)) during any Fiscal Year, any Member who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt determined in accordance with Regulation Section 1.704-2(i)(5), shall be allocated such amount of income and gain for such year (and subsequent years, if necessary) determined under and in the manner required by Regulation Section 1.704-2(i)(4) as is necessary to meet the requirements for a chargeback of Partner Nonrecourse Debt Minimum Gain as is provided in that Regulation. 9.3.3 QUALIFIED INCOME OFFSET. If a Member unexpectedly receives any adjustment, allocation or distribution described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be specifically allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 9.3.3 shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in Section 9.1 and this Section 9.3 of this Agreement tentatively have been made as if this Section 9.3.3 were not in this Agreement. 9.3.4 LIMITATION ON LOSSES. Notwithstanding anything else contained in this Agreement, Losses allocated to any Member pursuant to Section 9.1 of this Agreement shall not exceed the maximum amount of Losses that may be allocated without causing such Member to have an Adjusted Capital Account Deficit at the end of the Fiscal Year for which the allocation is made. 9.3.5 CODE SECTION 754 ADJUSTMENT. To the extent that an adjustment to the Basis of any asset pursuant to Code Section 734(b) or Code Section 743(b) is required to be taken into account in determining Capital Accounts as provided in Regulation Section 1.704-1(b)(2)(iv)(m), the adjustment shall be treated (if an increase) as an item of gain or (if a decrease) as an item of loss, and such gain or loss shall be allocated to the Members consistent with the allocation of the adjustment pursuant to such Regulation. 9.3.6 NONRECOURSE DEDUCTIONS. Nonrecourse Deductions (as determined under Regulation Section 1.704-2(c)) for any Fiscal Year shall be allocated among the Members in proportion to their Percentage Interests. 9.3.7 PARTNER NONRECOURSE DEDUCTIONS. Any Partner Nonrecourse Deductions (as defined under Regulation Section 1.704-2(i)(2)) shall be allocated pursuant to Regulation Section 1.704-2(i) to the Member who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which it is attributable. 9.3.8 PURPOSE AND APPLICATION. The purpose and the intent of the special allocations provided for in this Section 9.3 are to comply with the provisions of Regulation Sections 1.704-1(b) and 1.704-2, and such special allocations are to be made so as to accomplish that result. However, to the extent possible, the Managers, in allocating items of income, gain, loss, or deduction among the Members, shall take into account the special allocations in such a manner that the net amount of allocations to each Member shall be the same as such Member's distributive share of Profits and Losses would have been had the events requiring the special allocations not taken place. The Managers shall apply the provisions of this Section 9.3 in whatever order the Managers reasonably believe will minimize any economic distortion that otherwise might result from the application of the special allocations. 9.4 CODE SECTION 704(C) ALLOCATIONS. Solely for federal, state, and local income tax purposes and not with respect to determining any Member's Capital Account, distributive shares of Profits, Losses, other items, or distributions, a Member's distributive share of income, gain, loss, or deduction with respect to any Property (other than money) contributed to the Company, or with respect to any Property the Asset Value of which was adjusted as provided in Article 1(g)(iii) of this Agreement upon the acquisition of an additional Interest in the Company by a new Member or existing Member in exchange for a Capital Contribution, shall be determined in accordance with Code Section 704(c) and the Regulations thereunder or with the principles of such provisions. 9.5 ALLOCATIONS RELATING TO TAXABLE ISSUANCE OF INTEREST. Any income, gain, loss or deduction realized by the Company as a direct or indirect result of the issuance of an Interest by the Company (the "Issuance Items") shall be allocated among the Members so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Member, shall be equal to the net amount that would have been allocated to each such Member if the Issuance Items had not been realized. 10 DISTRIBUTIONS 10.1 CASH FLOW. Except when the Company is in the process of dissolution and winding up as provided in Article 18 of this Agreement and except as otherwise provided in Section 10.3 hereof, the Managers shall determine and distribute the Cash Flow on a quarterly basis, less reserves determined by the Managers for future expenditures, to the Members as follows: (i) first, to WPHC, until it has received aggregate distributions equal to the amount of Capital Contributions made by it pursuant to Section 4.1.2(b), (ii) then, to the Members in accordance with their respective Percentage Interests. Notwithstanding the foregoing, no distributions shall be made at or prior to the completion of the Final Closing without the consent of WPHC. 10.2 DIVISION AMONG MEMBERS. If there is a change in a Member's Interest in the Company during a Fiscal Year, any distributions thereafter shall be made so as to take into account the varying Interests of the Members during the period to which the distribution relates in any manner chosen by the Managers that is provided in Code Section 706(d) and the Regulations thereunder. 10.3 SPECIAL DISTRIBUTION TO WPHC. Immediately after the Construction Loan Closing, the Company shall make a distribution to WPHC as a return of its capital in the amount allowed for such purpose under the terms of the Construction Loan. 11 BOOKS, RECORDS, AND ACCOUNTING 11.1 BOOKS AND RECORDS. The Company shall maintain at its principal place of business books of account that accurately record all items of income and expenditure relating to the business of the Company and that accurately and completely disclose the results of the operations of the Company. Such books of account shall be maintained according to generally accepted accounting principles consistently applied and, unless otherwise agreed by the Members, on the basis of the Fiscal Year. Each Member shall have the right to inspect, copy, and audit the Company's books and records at any time during normal business hours without notice to any other Member. 11.2 REPORTS. Within thirty (30) days after the close of each Fiscal Year, the Managers shall furnish to each Member a copy of the income and loss statement and of the balance sheet of the Company for such Fiscal Year, and a statement disclosing all allocations of income, gain, loss, or deduction among the Members and distributions made by the Company to the Members during such year. The statements of income and loss and balance sheets to be delivered hereunder may be unaudited in the sole discretion of WPHC. 11.3 TAX RETURNS. The Managers shall cause independent certified public accountants of the Company to prepare and timely file all income tax and other tax returns of the Company. The Managers shall furnish to each Member a copy of all such returns together with all schedules thereto and such other information which each Member may request in connection with such Member's own tax affairs. 11.4 SPECIAL BASIS ADJUSTMENT. At the request of either the transferor or transferee in connection with a transfer of an Interest in the Company approved by the Members pursuant to Article 16 of this Agreement, the Managers shall cause the Company to make the election provided for in Code Section 754 and maintain a record of the adjustments to Basis of Property resulting from that election. Any such transferee shall pay all costs incurred by the Company in connection with such election and the maintenance of such records. 11.5 TAX MATTERS PARTNER. 11.5.1 WPHC is hereby designated the Tax Matters Partner (as defined in the Code) on behalf of the Company. 11.5.2 Without the unanimous consent of the Members, the Tax Matters Partner shall have no right to extend the statute of limitations for assessing or computing any tax liability against the Company or the amount of any Company tax item. 11.5.3 If the Tax Matters Partner elects to file a petition for readjustment of any Company tax item (in accordance with Code Section 6226(a)) such petition shall be filed in the United States Tax Court unless the Members unanimously agree otherwise. 11.5.4 The Tax Matters Partner shall, within ten (10) business days of receipt thereof, forward to each Member a photocopy of any correspondence relating to the Company received from the Internal Revenue Service. The Tax Matters Partner shall, within ten (10) business days thereof, advise each Member in writing of the substance of any conversation held with any representative of the Internal Revenue Service and of any petition for readjustment. 11.5.5 Any reasonable costs incurred by the Tax Matters Partner for retaining accountants and/or lawyers on behalf of the Company in connection with any Internal Revenue Service audit of the Company shall be expenses of the Company. Any accountants and/or lawyers retained by the Company in connection with any Internal Revenue Service audit of the Company shall be selected by the Tax Matters Partner and the fees therefor shall be expenses of the Company. 11.6 BANK ACCOUNTS. The Managers shall establish and maintain one or more separate accounts in the name of the Company in one or more federally insured banking institutions acceptable to all the Members into which shall be deposited all funds of the Company and from which all Company expenditures and other disbursements shall be made. At least one such account shall be maintained at First Interstate Bank. Unless otherwise decided by the Managers, funds may be withdrawn from such accounts on the signatures of all of the Managers, collectively and not individually, or such other Person or Persons that the Managers shall determine, provided, however, that two signatures shall be required on all checks. 12 MANAGEMENT 12.1 MANAGEMENT. The business and affairs of the Company shall be managed by the designated Managers. Subject to the terms and limitations of this Agreement, the Managers shall direct, manage and control the business of the Company to the best of such Managers' ability with reasonable diligence and prudence and, subject to the terms and limitations of this Agreement, shall have the authority, power and discretion to make any and all decisions and to do any and all things which the Managers shall deem to be reasonably required in light of the Company's business and objectives. 12.2 NUMBER, TENURE AND QUALIFICATIONS. The number of Managers of the Company and the length of the term of each Manager shall be fixed from time to time by the Members who hold a Majority In Interest. Each Manager shall hold office until removed pursuant to Section 12.12 hereof or until such Manager's successor shall have been selected. Managers need not be residents of the State of Colorado or Members of the Company. 12.3 APPOINTMENT OF FELD AS MANAGER. Feld is appointed as the Manager to serve from the date hereof until the earliest to occur of (i) the Final Closing Date, (ii) his withdrawal or Removal as a Member and Manager, or (iii) the Outside Date. Notwithstanding the provisions of Section 12.2, Feld shall serve as Manager for the duration of his initial term unless and until removed in accordance with the terms of this Agreement. 12.4 CERTAIN POWERS OF MANAGERS. Without limiting the generality of Section 12.1, the Managers shall have the power and authority, upon the unanimous agreement of all Managers, on behalf of the Company: 12.4.1 To cause the Company to develop the Project in accordance with the Plans and Specifications without any material deviation therefrom; 12.4.2 To purchase liability and other insurance to protect the Company's Property and business; 12.4.3 To hold and own any and all Company Property on behalf of and in the name of the Company; 12.4.4 To invest any Company funds temporarily in time deposits with federally insured financial institutions or short-term United States governmental obligations; 12.4.5 Subject to the provisions of this Agreement, to employ accountants, legal counsel, managing agents or other experts to perform services for the Company and to compensate them from Company funds; and 12.4.6 To do and perform all other acts as may be necessary or appropriate to the conduct of the Company's ordinary course of business. Unless authorized to do so by this Agreement or by the Managers of the Company, no Member, agent, or employee of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. However, the Managers may act by a duly authorized attorney-in-fact. 12.5 MEMBER APPROVAL OF CERTAIN ACTS. The Managers shall have the power and authority, but only upon the unanimous written consent of all Members, on behalf of the Company: 12.5.1 to amend or modify any of the documents executed in connection with the Construction Loan at the Construction Loan Closing or to waive any rights under such documents; 12.5.2 to borrow money or incur any indebtedness (other than the Construction Loan) or to grant any liens on any assets of the Company; 12.5.3 to enter into any agreements with affiliates of the Managers other than the Approved Affiliate Agreements; 12.5.4 to amend or modify the Approved Affiliate Agreements or to waive any rights thereunder; 12.5.5 except for the Management Agreement, to execute any agreement which will impose any obligations on the Company which will survive the Final Closing Date; and 12.5.6 to sell or dispose of any portion of the Project or any other material assets of the Company. 12.6 LIABILITY FOR CERTAIN ACTS. A Manager of the Company shall perform such Manager's duties, including duties as a member of any committee upon which such Manager may serve, in good faith, in a manner such Manager reasonably believes to be in the best interests of the Company, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. A Person who so performs such Person's duties shall not have any liability by reason of being or having been a Manager of the Company except as otherwise provided in this Agreement. Nothing in this Section 12.6 shall limit Feld's liability to the other Members to perform its obligations with respect to the development of the Project, to make Development Deficit Payments and to perform its other obligations to the other Members arising under this Agreement. 12.7 INDEMNITY OF THE MEMBERS AND THE MANAGERS. 12.7.1 The Company shall indemnify every Member and Manager in respect to the payments made and personal liabilities reasonably incurred by that Member or Manager in the ordinary and proper conduct of the Company's business or property. No indemnification shall be provided if and to the extent that such liability was incurred based on the breach of this Agreement by the Manager, his negligence (to the extent not reimbursed by insurance), fraud or misconduct. 12.7.2 Provided that Feld has fully and timely performed his obligations under this Agreement, the Company shall indemnify Feld against any liability he may incur as a result of his guaranty of the Construction Loan; the Company shall, nevertheless, have a right of offset with respect to all damages incurred by the Company or any Member resulting from any breach by Feld of his obligations hereunder, in addition to all other rights and remedies that the Company and the other Members may have with respect to such breach by Feld. 12.7.3 The indemnification set forth in this Article 12 shall in no event cause the Members to incur any liability, or result in any liability of the Members to any third party, beyond those liabilities specifically enumerated in the Articles of Organization, the Act or this Agreement. 12.8 MANNER OF ACTING. In all actions to be taken by the Managers pursuant to this Agreement, the unanimous act of the Managers shall be required. 12.9 INFORMAL ACT BY MANAGERS. Any action required or permitted to be taken at a meeting of the Managers or of any committee designated by said Managers may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by each Manager or committee member, and delivered to the Person having custody of the Company records for inclusion in the minutes or for filing with the records. Action taken under this Section 12.9 is effective when all Managers or committee members have signed the consent, unless the consent specifies a different effective date. Such consent has the same force and effect as an unanimous vote of the Managers or committee members and may be stated as such in any document. 12.10 PARTICIPATION BY ELECTRONIC MEANS. Any Manager or any committee designated by the Managers may participate in a meeting of the Managers or committee by means of telephone conference or similar communications equipment by which all Persons participating in the meeting can hear each other at the same time. Such participation shall constitute presence in person at the meeting. 12.11 RESIGNATION. Feld covenants and agrees to serve as the sole Manager until the earlier of the Final Closing Date or the Outside Date. Otherwise, any Manager of the Company may resign at any time by giving written notice to the Members of the Company. The resignation of any Manager shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice. 12.12 REMOVAL. 12.12.1 CAUSES FOR REMOVAL. WPHC shall have the right to remove Feld as the Manager and as a Member ("Removal") and substitute WPHC as Manager or appoint a new Manager upon any of the following (a "Removal Event"): 12.12.1.1 [INTENTIONALLY DELETED.] 12.12.1.2 If the Construction Loan Closing has not occurred by the Construction Loan Closing Outside Date; 12.12.1.3 Delays in construction not caused by Force Majeure which result in the Project falling behind schedule by six (6) months or more based on the Construction Schedule approved by the parties prior to the Construction Loan Closing, or delays in construction, whether or not caused by Force Majeure which cause WPHC to reasonably conclude that the Project will not or cannot be completed by the Outside Date; 12.12.1.4 The Project having incurred Development Deficits in excess of $250,000 which have not been funded by Development Deficit Payments from Feld within thirty (30) days of notice from WPHC requiring such funding; 12.12.1.5 [INTENTIONALLY DELETED.] 12.12.1.6 The death or disability of Feld; 12.12.1.7 If the Final Closing has not occurred by the Outside Date; 12.12.1.8 If Feld shall be in Material Default Feld under this Agreement, and such Material Default is not cured within thirty (30) days after written notice thereof from WPHC or, if such Material Default cannot be cured within such 30-day period, Feld does not commence within such thirty (30) days and diligently proceed to cure such breach and actually completes such cure in any event within ninety (90) days after such notice; or 12.12.1.9 If any breach or default under the Construction Loan, which is not caused solely by the act or omission of WPHC, is not cured within any applicable cure period provided for under the Construction Loan. 12.12.2 DOCUMENTATION IN CONNECTION WITH REMOVAL. Upon Removal of Feld, Feld shall cease to have any interest in the Company and Feld shall cease to be a Member of the Company. Such removal shall be effective without the necessity of the execution of any documents by Feld. Nevertheless, Feld shall promptly execute such assignment and transfer documents as WPHC may reasonably request to evidence the Removal of Feld. 12.12.3 EFFECT OF REMOVAL ON CERTAIN OBLIGATIONS OF FELD. 12.12.3.1 If Feld is removed prior to the Construction Loan Closing Date, he shall have no continuing obligations for the performance of his obligations under Article 6 after the date of his Removal and no obligation to perform any continuing covenants set forth in Article 13. Feld shall be liable, however, for any breach of any representation or warranty which occurred prior to his Removal. 12.12.3.2 If Feld is removed after the Construction Loan Closing Date, Feld shall not be released from his ongoing performance obligations under Sections 6.3 or 6.10 or Article 13 of this Agreement and Feld shall be liable to WPHC for damages resulting from any breach by Feld of his obligations arising under Sections 6.1, 6.2, 6.3, 6.6, 6.7, 6.10 or 6.11 or Article 13 of this Agreement, including without limitation, damages relating to the period after Feld's Removal, unless such damages arise solely from acts or omissions of a party other than Feld. WPHC shall have the obligation to make reasonable efforts to mitigate its damages following a Removal of Feld after the Construction Loan Closing Date. 12.12.4 DEATH OR DISABILITY OF FELD. Prior to the Construction Loan Closing, Feld, WPHC and The Feld Company shall execute the "Substitution Agreement" in the form attached hereto as Exhibit U. The Substitution Agreement shall include the following principle terms: (i) upon the death or disability of Feld, at the written request of WPHC, The Feld Company shall acquire from Feld (or his estate) the entire interest of Feld in the Company, The Feld Company shall be admitted as the Managing Member, and The Feld Company shall assume in writing all of the obligations of the Managing Member hereunder; (ii) Feld (or his estate) shall remain obligated for the performance of all of the obligations of the Managing Member, whether relating to the period before or after Feld's Removal; and (iii) if WPHC fails to exercise its option under this Section 12.13 to cause The Feld Company to be substituted as the Managing Member within ninety (90) days of the date of Removal, then such option shall lapse and Feld (or his estate) shall be released from any obligation hereunder related to the period after his withdrawal in connection with his death or disability. 12.13 VACANCIES. Any vacancy occurring for any reason in the number of Managers of the Company may be filled by WPHC or a Manager appointed by WPHC. 12.14 PROHIBITION AGAINST PUBLICLY TRADED PARTNERSHIP. The Manager shall take all action necessary to prevent the Company from qualifying as a publicly traded partnership within the meaning of Code Section 7704, including, without limitation, limiting the number of Members to less than 500 in compliance with the safe harbor under IRS Notice 88-75. 13 REPRESENTATIONS, WARRANTIES AND COVENANTS 13.1 REPRESENTATIONS AND WARRANTIES OF EACH MEMBER. Each Member hereby represents and warrants as of the date hereof as follows: 13.1.1 Such Member, if other than an individual, is a duly organized entity under the laws of its state of organization and has the requisite power and authority to enter into and carry out the terms of this Agreement, and all required action has been taken to authorize such Member to execute and consummate this Agreement. 13.1.2 Such Member has been duly authorized to enter into this Agreement, and such Member is not a foreign person as defined under Code Section 1445(f)(3). 13.1.3 To the best of such Member's knowledge, neither the execution of nor the compliance with this Agreement has resulted or will result in a default under, or will create, any encumbrance on the Property, and there is no action pending or threatened which questions the validity or enforceability of this Agreement as to such Member. 13.1.4 The Interests to be acquired hereunder are being acquired by the Member for investment only and for such Member's own account; no Person other than the Member has or shall have any beneficial interest in the Interests; and the Member has no present intention of distributing, reselling or assigning the Interests. 13.1.5 Such Member understands that the Interests have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), or under the laws of any jurisdiction; that the Company does not intend and is under no obligation to so register the Interests; that the Interests may not be sold, assigned, pledged or otherwise transferred except upon delivery to the Company of an opinion of counsel satisfactory to the Managers that registration under the 1933 Act is not required for such transfer, or the submission to the Managers of such other evidence as may be satisfactory to the Managers, to the effect that any such transfer will not be in violation of the 1933 Act, applicable state securities laws or any rule or regulation promulgated thereunder; and that legends to the foregoing effect will be placed on all documents evidencing the Interests. The Member understands that the foregoing does not limit other restrictions regarding the transfer of its Interests set forth in this Agreement or in the Act. 13.1.6 Such Member, either itself or through its shareholders, partner or advisors, is sophisticated and experienced in investment matters, and, as a result, is in a position to evaluate the merits and risks of an investment in the Company. 13.1.7 Such Member is an "Accredited Investor" as defined in Regulation D promulgated under the 1933 Act. 13.1.8 Except as may be disclosed in the Environmental Report, each Member represents that it does not have current actual knowledge of any Pre-existing Environmental Condition. 13.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF FELD. In addition to the warranties provided for in Article 6 of this Agreement, as of the date hereof and as of the date of Final Closing, Feld hereby represents, warrants and covenants to the Company and the Members as follows: 13.2.1 To the best of Feld's knowledge, the Master Development Land is zoned to permit its use as a matter of right for multi-family residential use, subject to compliance with statutory requirements regarding obtaining approval of a site development plan. Under the Land Contract and the closing documents executed in connection therewith, Mission Viejo Company has irrevocably allocated the right to build 1880 multi-family residential units on the Master Development Land. 13.2.2 Feld shall use his best efforts to cause the approval by Douglas County and any other governmental authority whose approval may be required of a site development plan for the Land (the "Land Use Approval"), which approval will permit as a matter of right the construction of a multi-family project having not less than 264 units on the Project Land. 13.2.3 Feld shall use its best efforts to cause by the earlier of the Construction Loan Closing Date and the Construction Loan Outside Date, the County of Douglas to approve the Plans and Specifications for issuance of building permits for construction of the Project (the "Building Permits") and to issue all of the Building Permits necessary for construction of the Project. 13.2.4 Feld shall use its best efforts to cause the Company to obtain prior to the earlier of the starting construction of the Project or the Construction Loan Outside Date, such permits licenses, waivers, consents, approvals and authorizations, and Feld will make such material registrations, qualifications, designations, declarations and filings required (collectively, the "Approvals") as determined or as may be determined necessary by Feld to the best of his knowledge so that the Project may be constructed and, subject only to the issuance of customary temporary or permanent certificates of occupancy by the County of Douglas and any other necessary operating permits, operated as a multi-family housing development with related facilities as depicted on the Plans and Specifications. As of the date hereof, Feld has no reason to believe such certificates of occupancy will not be issued in the ordinary course of business following completion of construction of the Project substantially in accordance with the Plans and Specifications. Feld shall use its best efforts to cause all of the Approvals at the commencement of construction of the Project to be in full force and effect. Feld shall, promptly upon receipt of any Approvals, deliver to WPHC true, correct and complete copies of all such Approvals. 13.2.5 The Land is, and at the Final Closing shall be, free from delinquent water charges, sewer rents, taxes and assessments. 13.2.6 To the best knowledge of Feld, all utility services, including but not limited to storm and sanitary sewer, water, gas, electric power and telephone service will be prior to the earlier of Substantial Completion of the Project or the Outside Date, available to the Project Land in form and capacity sufficient for the useful enjoyment and operation of the Project and there will be no unpaid assessments, impact fees, development fees, tap-on fees or recapture costs payable in connection therewith except for charges shown on the tax certificates and the usual and customary charges involved in the ordinary course of business and specifically identified in the Final Project Budget. 13.2.7 To the best of Feld's knowledge, when constructed substantially in accordance with the Plans and Specifications, the Project shall not violate in any material respects all applicable covenants, conditions and restrictions, zoning ordinances and regulations, building codes, environmental and all other federal, state and local laws, ordinances, statutes, rules and regulations applicable to the Project. To the best of Feld's knowledge, as of the date hereof, the Project is not subject to any laws, rules, regulations, orders or requirements, which require the Company to designate any of the Project as affordable housing, low income housing or moderate income housing. 13.2.8 The construction and development of the Project shall be undertaken and shall be completed in a timely and workmanlike manner in substantial compliance with (a) all applicable requirements of the Construction Loan, (b) to the best of Feld's knowledge, all applicable requirements of all appropriate governmental entities, the violation of which would have, or would be likely to have, an adverse effect on the Project or the Company, and (c) the Plans and Specifications for the Project that have been or shall be hereafter approved by the Construction Lender, WPHC, and if required, any applicable governmental entities, as such Plans and Specifications may be changed from time to time with the approval of the Construction Lender, WPHC, and any applicable governmental entities, if such approval shall be required. 13.2.9 To the best of Feld's knowledge and based on Feld's review of the Environmental Reports, copies of which have been provided to the, Land is not designated by any governmental or quasi-governmental authority to be subject to environmental, wetlands or other regulation that would materially adversely affect the use of the Land for the Project as contemplated by this Agreement, and at the Final Closing the Land and the Project shall be in compliance with all Environmental Laws and free of Hazardous Materials except for those necessary for and lawfully used in operation and maintenance of the Project, and then only in reasonable amounts which shall be labeled, stored and used in compliance with Environmental Laws. 13.2.10 To the best of Feld's knowledge, the Land is or will be prior to Final Closing benefitted by such easements of unlimited duration as are necessary for the operation of the Project. As of the Final Closing, no additional easements will be required, subsequent to the Final Closing, for the provision of utilities, access, egress and drainage to or for the benefit of the Land or the Project in connection with the use and operation of the Land as the Project contemplated by this Agreement. 13.2.11 Feld shall use his best efforts to cause the Company to obtain, prior to the earlier of the date of Final Closing or the Outside Date, all permanent certificates of occupancy and other consents and approvals required from the County of Douglas and other governmental authorities and associations and boards with jurisdiction over the Project and such consents, approvals and certificates shall be in full force and effect without the presence or existence of any unsatisfied conditions or requirements with respect thereto, and true, correct and complete copies of such consents, approvals and certificates of occupancy shall be delivered to WPHC upon issuance thereof. 13.2.12 For the purpose of this Section 13.2, the terms "to the best of Feld's knowledge," "to the best of his knowledge" and "to the best knowledge of Feld" shall mean and include such information as is actually known to Feld or should have been known to him upon diligent inquiry or of which Feld has received constructive notice. If, prior to the Final Closing, any of the foregoing representations, warranties or covenants become incorrect or misleading in any material respect, Feld shall immediately notify WPHC in writing and such representation, warranty or covenant shall be deemed remade by Feld as of the date of such notification based upon such new information. 13.2.13 Feld, all Affiliates of Feld and all other parties related to or affiliated with Feld or with such Affiliates shall receive no fees, compensation or other profit or share of cost savings with respect to the Project except the amounts set forth in Article 7 hereof or in any Approved Affiliate Agreement. In the event of any breach of this Section 13.2.13, any amount improperly received by such parties shall be immediately paid over to the Company, together with interest thereon from the date received at twelve percent (12%) per annum, compounded monthly. 13.2.14 Feld shall cause the Project to be at least 75% leased on terms reasonably acceptable to WPHC within thirty-six (36) months after the Construction Loan Closing. Failure to do so shall be a default under this Agreement and shall give WPHC the right to cause the Removal of Feld. 13.3 GENERAL REPRESENTATION. No representation, warranty or statement of Feld in this Agreement or in any document, certificate or schedule furnished or to be furnished by Feld or its agents or contractors to WPHC pursuant hereto contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements or facts contained therein not misleading. 13.4 SURVIVAL; INDEMNITY. All of the representations, warranties and covenants of Feld contained in this Article 13 shall survive the resignation or withdrawal of Feld as Manager and/or Member of the Company and shall survive the Final Closing Date for a period of one (1) year after the Final Closing Date except that, in the case of any material matter intentionally concealed or intentionally not disclosed by Feld, such period shall be extended to three (3) years after the Final Closing Date. Feld shall defend, indemnify and hold harmless WPHC against a breach of any of the foregoing representations, warranties and covenants and any damage, loss or claim caused thereby, including reasonable attorneys' fees and costs and expenses of litigation and collection. 14 RIGHTS AND OBLIGATIONS OF MEMBERS 14.1 LIMITATION OF LIABILITY. 14.1.1 Each Member's liability to Persons other than the other Members shall be limited as set forth in the Act and other applicable law. 14.1.2 No officer, director or shareholder of WPHC shall be bound by or have any personal liability hereunder or under any document, agreement, understanding or arrangement relating to this transaction. The parties to this Agreement shall look solely to the assets of WPHC for satisfaction of any liability of WPHC in respect of this Agreement and all documents, agreements, understandings and arrangements relating to this transaction and will not seek recourse or commence any action against any of the directors, officers or shareholders of WPHC or any of their personal assets for the performance or payment of any obligation hereunder or thereunder. The foregoing shall also apply to any and all future documents, agreements, understandings, arrangements and transactions between the parties hereto with respect to the Project or this Agreement. 14.1.3 The Members acknowledge that Feld has made certain transfers to the LES Trust and the LF Trust prior to November 4, 1991, and agree that no Member will assert any right to recover against either of such trusts by reason of any transfer made prior to November 4, 1991, regardless of the consideration or lack of consideration for such transfer. Feld shall make no further transfers to either of such trusts as long as all or any part of Feld's obligations under this Agreement remain outstanding. In addition to the foregoing, the Members hereby agree that the personal residence of Feld to be located at 170 South Eudora Street, Denver, Colorado and Feld's vacation home at 19 Creekside Drive in Palm Springs, California (the "Palm Springs Residence"), are not available to support the obligations of Feld under this Agreement and agree not to assert any right to recover against such personal residence or the Palm Springs Residence, and the Members hereby disclaim, quitclaim, release and relinquish any right to proceed against such personal residence or the Palm Springs Residence for amounts owed by Feld under this Agreement. It is understood and acknowledged that Feld intends to replace his secondary residence in Palm Springs with a residence located at 101 Wanish in Palm Desert, California, and upon Feld's acquisition of the residence located at 101 Wanish in Palm Desert, the same will be automatically substituted as the Palm Springs Residence hereunder. 14.2 COMPANY DEBT LIABILITY. A Member will not personally be liable for any debts or losses of the Company, except as provided herein or in the Act. 14.3 LIST OF MEMBERS. Upon written request of any Member, the Managers shall provide a list showing the names, addresses and Percentage Interests of all Members in the Company. 14.4 COMPANY BOOKS. The Managers shall maintain and preserve, during the term of the Company, and for five (5) years thereafter, all accounts, books, and other relevant Company documents. Upon reasonable request, each Member shall have the right, during ordinary business hours, to inspect and copy such Company documents at the Member's expense. 14.5 PRIORITY AND RETURN OF CAPITAL. Except as specifically provided herein, no Member shall have priority over any other Member, either as to the return of Capital Contributions or as to Profits, Losses or distributions; provided that this Section shall not apply to loans (as distinguished from Capital Contributions) which a Member may make to the Company. 14.6 OUTSIDE ACTIVITY. 14.6.1 Except for the limitations on the activities of Feld and certain Affiliates set forth herein, each Member, including but not limited to the Manager, may engage in any capacity (as owner, employee, consultant, or otherwise) in any activity, whether or not such activity competes with or is benefitted by the business of the Company, without being liable to the Company or the other Members for any income or profit derived from such activity. 14.6.2 [INTENTIONALLY DELETED.] 14.6.3 From the date hereof until the date that Feld ceases to be a Member of the Company, neither Feld nor any other Restricted Party shall (i) purchase, construct or commence construction of any Multi-Family Project any part of which Multi-Family Project is located within three (3) miles of any portion of the Land, or (ii) purchase, construct or commence construction of any Multi-Family Project outside said three-mile area without giving prior written notice to WPHC. 14.6.4 "Restricted Parties" shall mean Feld, The Feld Company and any entity in which they individually or collectively, directly or indirectly, have an ownership interest of in excess of 20 percent of any class of security. Feld covenants that it shall cause each Restricted Party to comply with the restrictions in this Section 14.6, and a failure of a Restricted Party to comply with the terms of this Agreement shall constitute a breach of this Agreement by Feld. Feld shall comply with the restrictions set forth in this Section 14.6 in good faith and shall not employ any artifice or device to evade the intent of this provision. The restrictions in Subsections 14.6.2 and 14.6.3 are cumulative, and shall apply to a Restricted Party as an owner for its own account or as a developer, construction manager, general contractor or partner of any other Person. This Section 14.6 shall not prohibit any Restricted Party from conducting pre-development activities in connection with a Multi- Family Project, provided that construction activity (including any activity for which a building permit is required) has not commenced on such Multi-Family Project. 15 MEETINGS OF MEMBERS 15.1 ANNUAL MEETING. The annual meeting of the Members shall be held on the first business day of May or at such other time as shall be determined by resolution of the Members, commencing with the year 1999, for the purpose of the transaction of such business as may come before the meeting. 15.2 SPECIAL MEETINGS. Special meetings of the Members, for any purpose or purposes, unless otherwise prescribed by statute, may be called by any Manager or by any Member or Members holding at least 1% of the Percentage Interests. 15.3 PLACE OF MEETINGS. The Members may designate any place, either within or outside the State of Colorado, as the place of meeting for any meeting of the Members. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal business office of the Company in the State of Colorado. 15.4 NOTICE OF MEETINGS. Except as otherwise provided for herein, written notice stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the Managers or Person calling the meeting, to each Member entitled to vote at such meeting. 15.5 MEETING OF ALL MEMBERS. If all of the Members shall meet at any time and place, either within or outside of the State of Colorado, and consent to the holding of a meeting at such time and place, such meeting shall be valid without call or notice, and at such meeting lawful action may be taken. 15.6 RECORD DATE. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Members entitled to receive payment of any distribution, or in order to make a determination of Members for any other purpose, the date on which notice of the meeting is sent or the date on which the resolution declaring such distribution is adopted, as the case may be, shall be the record date for such determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this Section, such determination shall apply to any adjournment thereof. 15.7 QUORUM. Members holding at least a Majority In Interest, represented in person or by proxy, shall constitute a quorum at any meeting of Members. In the absence of a quorum at any such meeting, a majority of the Percentage Interests so represented may adjourn the meeting from time to time for a period not to exceed sixty (60) days without further notice. However, if the adjournment is for more than sixty (60) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of Members owning that number of Percentage Interests whose absence would cause less than a quorum. 15.8 MANNER OF ACTING. If a quorum is present, the affirmative vote of Members holding at least a Majority In Interest and entitled to vote on the subject matter shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Act, by the Articles of Organization, or by this Agreement. 15.9 PROXIES. At all meetings of Members, a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Managers of the Company before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. 15.10 ACTION BY MEMBERS WITHOUT A MEETING. Action required or permitted to be taken at a meeting of Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by each Member entitled to vote and delivered to the Managers of the Company for inclusion in the minutes or for filing with the Company records. Action taken under this Section 15.10 is effective when all Members entitled to vote have signed the consent, unless the consent specifies a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent. 15.11 VOTING BY BALLOT. Voting on any question or in any election may be by voice vote unless the Managers or any Member shall demand that voting be by ballot. 15.12 WAIVER OF NOTICE. When any notice is required to be given to any Member, a waiver thereof in writing signed by the Person entitled to such notice, whether before, at, or after the time stated therein, shall be equivalent to the giving of such notice. 16 TRANSFERABILITY; PUT-CALL PROVISIONS 16.1 RESTRICTIONS ON TRANSFERABILITY. Except as provided in Section 16.2 and Section 16.6, no transfer, pledge or assignment of all or any part of a Member's Interest in the Company (including the transfer of any rights to receive or share in profits, losses, income or the return of contributions) shall be effective unless and until written notice (including the name and address of the proposed purchaser, transferee, or assignee and the date of such transfer) has been provided to the Company and the non-transferring Members approve of the proposed sale, pledge or assignment of a selling, pledging or assigning Member's Interest by unanimous written consent, which may be withheld in their sole discretion. 16.2 PUT-CALL RIGHTS. 16.2.1 WPHC shall have the option (the "Call Option") to acquire the Interest of Feld in the Company, including his right to receive any distributions related to any periods prior to and including the Option Closing Date: (i) on and after the Final Closing for the Option Price, or (ii) on or after the Construction Loan Outside Date, for $100.00 if the Construction Loan Closing has not occurred by the Construction Loan Outside Date for any reason whatsoever, or (iii) at any time for $100.00 if Feld fails to timely cure any default by Feld under this Agreement. The exercise by WPHC of the Call Option described in item (i) of this Section is conditioned on WPHC performing its obligation under Section 8.3.1 hereof when and as required under this Agreement. To exercise its Call Option, WPHC shall provide written notice of exercise to Feld. 16.2.2 Feld shall have the right to cause WPHC to acquire the Interest of Feld in the Company, including his right to receive any distributions related to any periods prior to and including the Option Closing Date, at Final Closing for the Option Price (the "Put Option") by providing written notice to WPHC of Feld's intention to exercise the Put Option, provided that all the Final Closing Funding Conditions have been satisfied. 16.2.3 If the Call Option or Put Option is exercised, Feld shall forthwith upon request of WPHC execute an Assignment of Interest in the form of Exhibit Q or Exhibit R, as applicable, attached hereto, wherein Feld shall assign its Interest in the Company free and clear of all liens, security interests and competing claims. Feld shall execute such other instruments of transfer and of due authorization, execution and delivery and of the absence of any such liens, security interests or competing claims as WPHC may reasonably request. Feld shall have no duty, obligation or right to continue as Manager of the Company after such transfer of its Interest. 16.3 CALCULATION OF OPTION PRICE. 16.3.1 The Members shall use their respective, good faith efforts to determine the Option Price prior to the Option Closing Date. For a period of at least ten (10) business days prior to ordering an appraisal in connection with the determination of the Option Price, WPHC and Feld shall attempt in good faith to negotiate the fair market value of the Project to be used in such determination. Each of WPHC and Feld shall be entitled to submit the calculation of the Option Price to the Company's Accountants for verification or auditing. If WPHC and Feld are unable to determine the Option Price by the Option Closing Date, then WPHC shall pay Feld the Minimum Option Price as estimated by WPHC in its good faith judgment. The parties shall make a determination of the Option Price promptly after the Option Closing, and (i) if the Option Price as so determined exceeds the estimated Minimum Option Price paid at the Option Closing, then WPHC shall pay Feld such excess within five (5) business days after the determination of the Option Price, or (ii) if the Option Price as so determined is less than the estimated Minimum Option Price paid at the Option Closing, then Feld shall pay the difference to WPHC within five (5) business days after the determination of the Option Price. In addition, for a period of twelve (12) months after the Final Closing Date, WPHC and Feld shall each have the right to cause the recalculation of the Option Price, if such Member pays the costs of the Company's Accountants in making such recalculation. If the amount of the adjustment is in excess of $5,000, then WPHC and Feld shall adjust the Option Price within five (5) business days after the recalculation of the Option Price. No post-closing adjustment in the Option Price shall be made for amounts of $5,000 or less or based on a recalculation made more than twelve (12) months after the Option Closing Date. Notwithstanding anything to the contrary herein, the appraised value of the Project as determined shall be final and shall not be subject to challenge or recalculation by any Member. 16.4 RIGHT OF OFFSET. Payment of the Option Price shall be subject to a right of offset in favor of the Company and WPHC with respect to any claims or damages they may have against Feld. 16.5 RESTRICTIONS ON RESIGNATION. Notwithstanding anything to the contrary contained herein or under the Act, no Member shall have the right to resign from the Company. In the event a Member does resign in violation of the foregoing provision, (i) the Company shall not be obligated to pay any amounts to the Member, nor to distribute any of the Property to the Member or any interest therein, (ii) the Member shall be deemed to have forfeited any rights to legal or beneficial ownership of its Interest, and (iii) the Company may recover from the resigning Member damages for breach of this Agreement. 16.6 PERMITTED WPHC TRANSFER. WPHC shall have the right to transfer a portion of WPHC's Interest in the Company (a "WPHC Permitted Transfer") to a Person (a "WPHC Permitted Transferee"), provided that WPHC at all times during the term of this Agreement shall retain an Interest in the Company of at least twenty-one percent (21%) of the total Interests in capital, income, gain, loss, deduction and credit. WPHC acknowledges that any transfer pursuant to this Section 16.6 shall be solely from the Interest of WPHC and shall not result in the dilution of the Interest of Feld. In the event of a Permitted WPHC Transfer, (I) WPHC shall have the exclusive authority to communicate all decisions, votes and elections ("Decisions") made by it and by the WPHC Permitted Transferee with respect to the Interest of WPHC and such transferee in the Company, (II) Feld shall be entitled to rely exclusively on communications made by WPHC with respect to all such Decisions, and any communications by a WPHC Permitted Transferee with respect to a Decision other than through WPHC shall be invalid, and (III) prior to and as a condition to the admission of a WPHC Permitted Transferee as a Member, the WPHC Permitted Transferee shall execute an admission agreement wherein it agrees to be bound by all the terms of this Agreement, including without limitation, this Section 16.6. 17 ADMISSION OF ADDITIONAL MEMBERS From the date of the formation of the Company, with the unanimous written consent of the Members, any Person acceptable to the Members may, subject to the terms and conditions of this Agreement: (i) become an additional Member in this Company by the sale of new Interests for such consideration as the Members by unanimous vote shall determine, or (ii) become a Substitute Member as a transferee of a Member's Interest or any portion thereof. 18 DISSOLUTION AND TERMINATION 18.1 DISSOLUTION. 18.1.1 The Company shall be dissolved upon the occurrence of any of the following events ("Dissolution Event"): (a) When the period fixed for the duration of the Company shall expire; (b) by the unanimous written agreement of all Members; or (c) upon the death, retirement, resignation, expulsion, Removal, bankruptcy, dissolution of a Member or occurrence of any other event which terminates the continued membership of a Member in the Company (a "Withdrawal Event"), unless the business of the Company is continued by the consent of a majority of the Interests of the remaining Members in the capital and profits of the Company, as determined in accordance with Revenue Procedure 94- 46 within ninety (90) days after the termination. 18.1.2 As soon as possible following the occurrence of any of the events specified in this Section effecting the dissolution of the Company, the appropriate representative of the Company shall execute a statement of intent to dissolve in such form as shall be prescribed by the Colorado Secretary of State and file duplicate originals of the same with the Colorado Secretary of State's office. 18.2 EFFECT OF FILING OF DISSOLVING STATEMENT. Upon the filing with the Colorado Secretary of State of a statement of intent to dissolve, the Company shall cease to carry on its business, except insofar as may be necessary for the winding up of its business, but its separate existence shall continue until articles of dissolution have been filed with the Secretary of State or until a decree dissolving the Company has been entered by a court of competent jurisdiction. 18.3 DISTRIBUTION OF ASSETS UPON DISSOLUTION. In settling accounts after dissolution, the liabilities of the Company shall be entitled to payment in the following order: 18.3.1 to creditors, in the order of priority as provided by law (except to Members on account of their Capital Contributions); 18.3.2 to Members and former Members in satisfaction of liabilities for distributions under Section 7-80-601 or 7-80-603 of the Act; and 18.3.3 to Members pro rata in accordance with the positive balances in their Capital Accounts after taking into account all adjustments to the Capital Accounts for all periods. 18.4 ARTICLES OF DISSOLUTION. When all debts, liabilities and obligations have been paid and discharged or adequate provisions have been made therefor and all of the remaining Property and assets have been distributed to the Members, articles of dissolution shall be executed in duplicate and verified by the Person signing the articles, which articles shall set forth the information required by the Act. 18.5 FILING OF ARTICLES OF DISSOLUTION. 18.5.1 Duplicate originals of such articles of dissolution shall be delivered to the Colorado Secretary of State. 18.5.2 Upon the filing of the articles of dissolution, the existence of the Company shall cease, except for the purpose of suits, other proceedings and appropriate action as provided in the Act. The Managers shall thereafter be trustees for the Members and creditors of the Company and as such shall have authority to distribute any Property of the Company discovered after dissolution, convey real estate and take such other action as may be necessary on behalf of and in the name of the Company. 18.6 WINDING UP. If the Property of the Company remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the Capital Contribution of each Member, such Member shall have no recourse against any other Member. The winding up of the affairs of the Company and the distribution of its assets shall be conducted exclusively by the Managers, who are hereby authorized to take all actions necessary to accomplish such distribution, including without limitation, selling the assets of the Company. In the discretion of the Managers, a pro rata portion of the amounts that otherwise would be distributed to the Members under this Article 18 may be withheld to provide a reasonable reserve for unknown or contingent liabilities of the Company. 18.7 NO RESTORATION OF DEFICIT CAPITAL ACCOUNTS. If the Company is deemed to be liquidated for federal income tax purposes within the meaning of Regulation Section 1.704- 1(b)(2)(ii)(g), distributions under Section 14.3(c) shall be made in compliance with Regulation Section 1.704-1 (b)(2)(ii)(b)(2) to those Members who have positive Capital Accounts. If the Capital Account of any Member has a deficit balance after such distributions (after giving effect to all contributions, distributions, and allocations for all taxable years), such Member shall have no obligation to make any contribution to the capital of the Company with respect to such deficit and such deficit shall not be considered a debt owed to the Company or any other Person for any purpose whatsoever. 18.8 DEEMED LIQUIDATION. If no Dissolution Event has occurred, but the Company is deemed liquidated for federal income tax purposes within the meaning of Regulation Section 1.704-1 (b)(2)(ii)(g), the Company shall not be wound up and dissolved but its assets and liabilities shall be deemed to have been distributed to the Members and contributed to a new limited liability company which shall operate and be governed by the terms of this Agreement. 18.9 PERMITTED WITHDRAWAL BY FELD. If the Construction Loan Closing has not occurred by the Construction Loan Outside Date, upon not less than ten (10) days prior written notice to WPHC, Feld may withdraw as the Manager and as a Member without such withdrawal (a "Permitted Withdrawal") constituting a breach of this Agreement. In the event of a Permitted Withdrawal, Feld shall not have any obligation under the Development Deficit Guaranty, and Feld shall be released from any obligation hereunder related to the period after his Withdrawal. Upon a Permitted Withdrawal, Feld shall have no right to any fees or payments from the Company or any interest in any property of the Company. Feld shall execute such documents or instruments evidencing his withdrawal as WPHC may reasonably request. Except for a Permitted Withdrawal or a withdrawal upon the death or disability of Feld, any withdrawal by Feld from the Company shall constitute a default by Feld under this Agreement and WPHC shall be entitled to damages and any other legally available relief based upon such default. 19 MISCELLANEOUS PROVISIONS 19.1 STATEMENT OF INTENT OF PARTIES. It is the present intent of WPHC and Feld to jointly develop the Project as the third phase leading to the eventual development of the Master Development. Due to the changes that may take place in the capital and real estate markets and other events, unknown at this time, which may alter either WPHC's or Feld's interest in or outlook on future phases, no specific provision is made in this Agreement in regard to future phases. It is the present intent of the parties to use the basic economic and transaction structure of this Operating Agreement on future phases. However, either party may require changes or elect not to participate in the joint development of future phases. It is imperative to WPHC that it control the future of this development in regard to all issues, including timing, cost, design, etc. While this control is absolute, it is WRP's and Feld's present intent that Feld continue as development partner. Notwithstanding the foregoing statement of intent, the provisions of this Agreement and related documents governing the duties and relationships among the parties shall control over the foregoing statement of intent and neither party shall have any obligation, express or implied, to jointly develop another phase of the Master Development with the other party. 19.2 NOTICES. Any notice or communication required or permitted to be given by any provision of this Agreement, including but not limited to any consents, shall be in writing and shall be deemed to have been given and received by the Person to whom directed (a) when delivered personally to such Person or to an officer or partner of the Member to which directed, (b) twenty-four (24) hours after transmitted by facsimile, evidence of transmission attached, to the facsimile number of such Person who has notified the Company and all of the Members of its facsimile number, or (c) three (3) business days after being posted in the United States mails if sent by registered or certified mail, return receipt requested, postage and charges prepaid, or one (1) business day after deposited with overnight courier, return receipt requested, delivery charges prepaid, in either case addressed to the Person to which directed at the address of such Person as it appears in this Agreement or such other address of which such Person has notified the Company and all of the Members. WPHC: c/o Wellsford Real Properties, Inc. 1623 Blake Street, Suite 270 Denver, Colorado 80202 Attention: David M. Strong Facsimile No. (303) 534-4398 with copies to: Lynda A. McNeive, Esq. Brownstein Hyatt Farber & Strickland, P.C. 410 17th Street, 22nd Floor Denver, Colorado 80202 Facsimile No. (303) 623-1956 Feld: Mr. Al Feld The Feld Company 4600 South Ulster Street, Suite 350 Denver, Colorado 80237 Facsimile No. (303) 721-9418 with a copy to: Alan B. Lottner, Esq. Haligman & Lottner, P.C. 633 17th Street, Suite 2700, North Tower Denver, Colorado 80202 Facsimile No. (303) 292-1300 19.3 APPLICATION OF COLORADO LAW. This Agreement, and the application or interpretation hereof, shall be governed exclusively by its terms and by the laws of the State of Colorado, and specifically by the Act. 19.4 WAIVER OF ACTION FOR PARTITION. Each Member irrevocably waives during the term of the Company any right that such Member may have to maintain any action for partition with respect to the Property of the Company. 19.5 AMENDMENTS. This Agreement may be amended only upon the written Agreement of all of the Members. 19.6 CONSTRUCTION. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders, and vice versa. 19.7 HEADINGS. The headings in this Agreement are inserted for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent or intent of this Agreement or any provision hereof. 19.8 WAIVERS. The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation. 19.9 TIME OF THE ESSENCE. Time is of the essence in regard to the obligations of the parties set forth in this Agreement. 19.10 REMEDIES FOR DEFAULT. If any party hereto fails to perform any of its obligations under this Agreement, at the time and in the manner set forth herein, and such failure continues uncured after any applicable notice and cure period, then any other party may assert a claim against the defaulting party for damages and, to the extent damages are not an adequate remedy, for specific performance of this Agreement. 19.11 RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive the right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. 19.12 SEVERABILITY. If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid, illegal or unenforceable to any extent, the remainder of this Agreement and the application thereof shall not be affected and shall be enforceable to the fullest extent permitted by law. 19.13 HEIRS, SUCCESSORS AND ASSIGNS. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Agreement, their respective heirs, legal representatives, successors and assigns. 19.14 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 19.15 FURTHER ASSURANCES. The Members and the Company agree that they and each of them will take whatever action or actions as are reasonably necessary or desirable from time to time to effectuate the provisions or intent of this Agreement, and to that end, the Members and the Company agree that they will execute, acknowledge, seal, and deliver any further instruments or documents which may be necessary to give force and effect to this Agreement or any of the provisions hereof, or to carry out the intent of this Agreement or any of the provisions hereof. 19.16 ENTIRE AGREEMENT. This Agreement and each of the exhibits attached hereto set forth all (and are intended by all parties hereto to be an integration of all) of the promises, agreements, conditions, understandings, warranties, and representations among the parties hereto with respect to the formation and operations of the Company; and there are no promises, agreements, conditions, understandings, warranties, or representations, oral or written, express or implied, among them other than as set forth herein. The exhibits attached hereto are incorporated herein by reference. 19.17 ATTORNEYS FEES. Should any party hereto institute any legal action or proceeding to enforce any provision of the Operating Agreement or for damages by reason of any alleged breach of any provision of the Operating Agreement or for any other judicial remedy, the prevailing party shall be entitled to receive from the non-prevailing party all reasonable attorneys' fees and all court costs in connection with said action or proceeding, in addition to any other award. CERTIFICATE The undersigned hereby agree, acknowledge and certify that the foregoing Agreement constitutes the Operating Agreement of Silver Mesa at Palomino Park LLC adopted by the Members of the Company effective as of December 10, 1998. /s/ Al Feld ----------------------------------------- Al Feld WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: /s/ David M. Strong ----------------------------------------- David M. Strong, Vice President STATE OF COLORADO ) ) ss. COUNTY OF Denver ) The foregoing operating agreement was acknowledged before me this 17th day of December, 1998 by Al Feld. WITNESS my hand and official seal. My commission expires: 9/14/99 /s/ ------------------------------------------ Notary Public STATE OF COLORADO ) ) ss. CITY AND COUNTY OF DENVER ) The foregoing operating agreement was acknowledged before me this 16th day of December, 1998 by David M. Strong as Vice President of Wellsford Park Highlands Corp., a Colorado corporation. WITNESS my hand and official seal. My commission expires: 11/25/2001 /s/ ------------------------------------------ Notary Public GUARANTY By its execution hereof, WELLSFORD REAL PROPERTIES, INC., a Colorado corporation ("WRP"), hereby guarantees to Al Feld ("Feld") that Wellsford Park Highlands Corp., a Colorado corporation, shall timely and fully satisfy its obligation to fund the Final Closing Capital Contribution or otherwise to satisfy its obligation under Section 8.3.1 of the foregoing Operating Agreement when, as and if required by the foregoing Operating Agreement, as such Agreement may be amended from time to time (the "Obligation"). This guaranty is a guaranty of payment and performance of the Obligations, not merely of collection. Any amendment or modification of the Obligations made by WPHC and Feld shall not release the duties and obligations of WRP hereunder, and this Guaranty shall extend to the Obligations as so amended or modified. This Guaranty shall be continuing and irrevocable until the Obligations have been satisfied in full. WRP hereby waives notice of acceptance of this Guaranty. WRP waives and agrees not to assert or take advantage of: (a) any right to require Feld to proceed against any other person or to proceed against or exhaust any security held by Feld at any time or to pursue any other remedy in Feld's power before proceeding against WRP; (b) any right to require Feld to proceed against WPHC or any other person or to proceed against or exhaust any security held by Feld at any time or to pursue any other remedy in Feld's power before proceeding against WRP; and (c) any requirement that notice be provided to WRP. This Guaranty and all documents, agreements, understandings and arrangements relating to this Guaranty have been executed by the undersigned on behalf of WRP in his/her capacity as an officer of WRP, and not individually, and neither the officers or shareholders of WRP shall be bound by or have any personal liability hereunder or thereunder. The beneficiary of this Guaranty shall look solely to the assets of WRP for satisfaction of any liability of WRP in respect of this Agreement and all documents, agreements, understandings and arrangements relating to this transaction and will not seek recourse or commence any action against any of the officers or shareholders of WRP or any of their personal assets for the performance or payment of any obligation hereunder or thereunder. The foregoing shall also apply to all and any future documents, agreements, understandings, arrangements and transactions between the parties hereto with respect to the this Guaranty or any matter related thereto. Should any one or more provisions of this Guaranty be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. This Guaranty shall be governed by and construed in accordance with the laws of the State of Colorado. EXECUTED as of December 16, 1998. WELLSFORD REAL PROPERTIES, INC., a Delaware corporation By: /s/ David M. Strong ----------------------- David M. Strong, Vice President STATE OF COLORADO ) ) ss. CITY AND COUNTY OF DENVER ) The foregoing guaranty was acknowledged before me this 16th day of December, 1998 by David M. Strong, as Vice President of Wellsford Real Properties, Inc., a Delaware corporation. WITNESS my hand and official seal. My commission expires: 11/25/01 /s/ ------------------------------------------ Notary Public EXHIBITS EXHIBIT A [INTENTIONALLY OMITTED] EXHIBIT B Construction Procedures EXHIBIT C Deposit and Contract Administration Agreement EXHIBIT D Final Closing Funding Conditions EXHIBIT E Description of Infrastructure EXHIBIT F Description of Infrastructure Land EXHIBIT G Description of the Land EXHIBIT H Description of the Master Development Land EXHIBIT I [INTENTIONALLY OMITTED] EXHIBIT J Property Management Agreement EXHIBIT K Release and Waiver EXHIBIT L Pledge and Security Agreement -- Feld to WPHC EXHIBIT M Pledge and Security Agreement -- WPHC to Feld EXHIBIT N Description of Plans and Specifications EXHIBIT O Final Project Budget EXHIBIT P Calculation of the Feld Incentive Fee EXHIBIT Q Assignment of Interest -- Call Option EXHIBIT R Assignment of Interest -- Put Option EXHIBIT S-1 Architect's Certificate EXHIBIT S-2 Engineer's Certificate EXHIBIT T [INTENTIONALLY OMITTED] EXHIBIT U Substitution Agreement EXHIBIT A [INTENTIONALLY OMITTED] EXHIBIT B CONSTRUCTION PROCEDURES 1. Requests for advances by the Construction Lender for payment of costs of labor, materials, and services supplied for the construction of the improvements and other items shown in the Project Budget shall be submitted by Feld, not more frequently then as specified in the Construction Loan, after actual commencement of construction of the improvements. WPHC, and the Construction Consultant shall be provided with copies of the application for advance simultaneously with delivery to the Construction Lender, except as otherwise provided in Section 6.6 of the Operating Agreement. 2. WPHC and the Construction Consultant shall have the right and Feld shall permit them to enter upon the Property and any location where materials which are intended to be utilized in the construction of the improvements are stored for purpose of inspection of the Property and such materials at all reasonable times. 3. Feld shall timely comply with and promptly furnish to WPHC and Construction Consultant a true and complete copy of any notice or claim by any governmental authority pertaining to the Property and of any notice or claim from the Construction Lender or any subcontractor or supplier with respect to the Project. 4. Feld shall disburse all advances for payment of costs and expenses for purposes specified in the Project Budget, and for no other purpose. 5. WPHC and Construction Consultant shall be advised, in advance of, and shall have the right to attend all meetings pertaining to the construction of the improvements. Feld agrees to use his best efforts to attempt to notify WPHC and Construction Consultant reasonably in advance of such meetings in order to allow attendance at such meeting by representatives of WPHC and the Construction Consultant. 6. Feld shall not reallocate to other line items any portion of the line items in the Project Budget that relate to Construction Loan interest or loan fees. 7. Feld shall deliver copies of the monthly construction ledger to WPHC on or before the 10th day of the following month. 8. Change orders shall be dealt with as provided in Section 6.7 of the Operating Agreement. EXHIBIT C DEPOSIT AND CONTRACT ADMINISTRATION AGREEMENT EXHIBIT D FINAL CLOSING FUNDING CONDITIONS (a) No Default; Certificate From Feld. There shall be no uncured default by Feld under this Agreement and no uncured default under the Construction Loan, and WPHC shall have received a certificate from Feld that the representations, warranties and covenants of Feld in Articles 6 and 13 are materially true and accurate as of the date of the proposed Final Closing and that Feld and the Company are not in default of any of their obligations hereunder or under any contracts or agreements relating to the Project as of the date of the proposed Final Closing. (b) Construction Loan. Feld shall provide evidence satisfactory to WPHC that the principal amount of the Construction Loan and all accrued interest thereon have either been paid in full or will be paid in full from the proceeds of the Final Closing Capital Contribution immediately upon the funding of the Final Closing Capital Contribution. Such evidence may consist of a payoff letter in form sufficient to allow the title insurer to insure over the lien of the Construction Loan. (c) Physical Inspection. The Construction Consultant shall have prepared a physical inspection report reasonably satisfactory to WPHC. (d) Final Completion; Development Deficits. Final Completion of the Project shall have occurred, and all Development Deficit Payments shall have been made by Feld. (e) Lien Waivers. Feld shall obtain and provide copies to WPHC of unconditional lien releases from all subcontractors, materialmen and providers of labor, equipment, material and/or services to the Property and the Project, as to all work performed and materials purchased in connection with the construction of the Project, in form reasonably satisfactory to WPHC or, with respect to any liens not so released, Feld shall have provided surety bonds to which any contested liens are transferred (and released from the Property) and title insurance over any such liens. (f) Title Policy. The title insurance company shall have issued the following endorsements to the Company's title policy: (1) an endorsement indicating that the Company owns fee simple title to the Project Land and that the Project Land will be free and clear of the Construction Loan upon payment of the Final Closing Capital Contribution; (2) a "date down" endorsement to the title policy extending the effective date of the title policy to the date of Final Closing and showing no exceptions to title other than the exceptions reflected on the title policy as of Initial Closing, except as shall be acceptable to WPHC in its reasonable judgment; (3) an endorsement affording mechanics lien coverage; (4) an endorsement increasing the amount of insurance by an amount equal to the Final Closing Capital Contribution; and (5) such other endorsements as WPHC may reasonably require, including without limitation, the following: (i) 103.1 and 103.2 (Encroachments) to the extent required and available; (ii) 103.7 (Property Abuts Open Street); (iii) 107.2 (Increase Policy Amount) for the amount of the Final Closing Capital Contribution plus the Initial Closing Capital Contribution; (iv) 110.1 (Deleting Standard Exceptions) if not already provided; (v) 110.2 (Special Exceptions) if any new exceptions appear that are not acceptable to WPHC in its sole discretion; (vi) 115.2 (PUD); (vii) 116.1 (Survey); (viii) 123.2 (Zoning). (g) Survey. WPHC shall have received and approved an updated and recertified as-built survey reasonably satisfactory to WPHC dated no more than thirty (30) days prior to the date of Final Closing, showing no encroachments or other adverse matters affecting title to the Project, except as shall be reasonably acceptable to or have been previously approved in writing by WPHC. (h) As-Built Plans and Specifications. Feld shall have submitted to WPHC a written document executed by Feld, the architect and the general contractor certifying no material change to the approved "for-construction" Plans and Specifications except any changes stated therein that have previously been approved by WPHC. (i) Permits, Licenses and Certificates of Occupancy. WPHC shall have received a copy of the final and unconditional certificate or certificates of occupancy issued by the appropriate governmental authorities for the Project in its entirety and a copy of any permits and licenses which are required for the operation and use of the Project. (j) Architect's and Engineer's Certificates. Feld shall have delivered to WPHC an architect's certificate in the form attached hereto as Exhibit S-1 and an Engineer's Certificate in the form attached hereto as Exhibit S-2. (k) Payment of Taxes. WPHC shall have received satisfactory evidence (which may be included in the title policy described in subsection (f) of these Final Closing Funding Conditions) that all real property taxes and assessments for the Project due and payable through the date of funding have been timely and fully paid. (l) Release and Waiver. Feld and each affiliate of Feld that is a party to an Approved Affiliate Agreement shall have executed for the benefit of the Members a Release and Waiver, substantially in the form attached hereto as Exhibit K with respect to all liabilities incurred by Feld during its period of membership in the Company, including, without limitation, all liabilities incurred by Feld under the Architect's Agreement, the construction contract for the construction of the Project, and any contracts, agreements, or other instruments entered into by Feld in connection with the construction of the Project or the business of the Company. EXHIBIT E DESCRIPTION OF INFRASTRUCTURE EXHIBIT F DESCRIPTION OF INFRASTRUCTURE LAND EXHIBIT G DESCRIPTION OF THE LAND PARCEL 1 LOT 3-A, HIGHLANDS RANCH FILING NO. 126-A, AS DESCRIBED IN THE LOT LINE ADJUSTMENT CERTIFICATE, RECORDED APRIL 29, 1996 IN BOOK 1337 AT PAGE 324, RECEPTION NO. 9622585 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO. PARCEL 2 THAT CERTAIN PERPETUAL EASEMENT INTEREST AND ESTATE APPURTENANT TO PARCEL 1 AND ALL RIGHTS AND PRIVILEGES IN CONNECTION THEREWITH, RESERVED BY PARK AT HIGHLANDS LLC, A COLORADO LIMITED LIABILITY COMPANY, ITS SUCCESSORS, ASSIGNS AND DESIGNEES, UNDER AND PURSUANT TO THE TERMS OF THAT CERTAIN SPECIAL WARRANTY DEED, EXECUTED BY PARK AT HIGHLANDS LLC, GRANTOR, TO PALOMINO PARK PUBLIC IMPROVEMENTS CORPORATION, A COLORADO NON-PROFIT CORPORATION, GRANTEE, RECORDED JANUARY 3, 1996, UNDER RECEPTION NO. 9600509 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO, COVERING THE REAL PROPERTY MORE PARTICULARLY DESCRIBED AS FOLLOWS: TRACT A, HIGHLANDS RANCH FILING NO. 126-A, 1ST AMENDMENT, AS FILED ON DECEMBER 19, 1995 UNDER RECEPTION NO. 9560621 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO. EXHIBIT H DESCRIPTION OF THE MASTER DEVELOPMENT LAND LOTS 4 AND 5, HIGHLANDS RANCH FILING 126-A, DOUGLAS COUNTY, COLORADO EXHIBIT I [INTENTIONALLY OMITTED] EXHIBIT J PROPERTY MANAGEMENT AGREEMENT EXHIBIT K RELEASE AND WAIVER EXHIBIT L PLEDGE AND SECURITY AGREEMENT BY FELD EXHIBIT M PLEDGE AND SECURITY AGREEMENT BY WPHC EXHIBIT N PLANS AND SPECIFICATIONS (to be approved by all Members prior to the closing of the Construction Loan and a description thereof to be attached hereto at or before Construction Loan Closing) EXHIBIT O FINAL PROJECT BUDGET EXHIBIT P CALCULATION AND PAYMENT OF THE INCENTIVE FEE NOTE:This Exhibit is retained solely for the purpose of calculating the allocation of Infrastructure costs. No Incentive Fee shall be due or payable under this Agreement. 1. Definitions. The following definitions shall apply for the purpose of calculation of the Incentive Fee: a. "Cost Recovery" shall mean that (I) the sum of Disposition Recovery, Land Recovery, and Ownership Recovery, exceeds (II) Infrastructure Costs for any an all phases of the Infrastructure, plus interest on Infrastructure Costs at an annual rate of nine percent, compounded monthly. Cost Recovery shall be determined on a calendar year basis; such determination shall be made by March 31 of each year for the preceding calendar year. b. "Disposition Recovery" shall mean (I) the sale proceeds net of all costs of closing and brokerage costs received by the Company from a sale of the Project by the Company, plus (II) the sale proceeds net of all costs of closing and brokerage costs received from the sale of Future Projects by the initial owner(s) of such Future Projects, minus (III) Total Development Costs for the Project (if sold by the Company) and Total Development Costs for all Future Projects (which have been sold). c. "Future Project" shall mean any apartment project constructed by WPHC, WRP or an Affiliate of them (provided that WPHC or WRP directly or indirectly owns 50% or more of such Affiliate), which project is constructed on the Master Development Land. "Future Project" shall not include, however, the Project which is the subject of the Operating Agreement. d. "Incentive Cap" shall mean the lesser of $1,957,447.00 or the product of $4,255.32 and the number of apartment units actually constructed in Phase I. If subsequent phases are developed, each will have an Incentive Cap based on the number of units in such phases and a per unit limit of $4,255,32. In no event shall the Incentive Cap for all phases exceed an aggregate of $8,000,000. e. "Land Recovery" shall mean (I) the amount(s) received by WPHC in connection with the sale(s) of all or a portion of its interest in the Land Contract or in the Master Development Land acquired by it pursuant to the Land Contract, minus (II) the purchase price paid by the WPHC or its Affiliates for such Master Development Land, plus all closing costs and incidental holding and carrying costs at an assumed annual interest rate of nine percent (9%), and the earnest money deposit in connection with the Land Contract unless and until such earnest money deposit is applied against the purchase price of Master Development Land. Land Recovery shall not include any amounts received from the sale of the Project or a Future Project. f. "Ownership Recovery" shall mean (I) the Project Value for the Project and any Future Projects, minus (II) Total Development Costs for the Project and all such Future Projects. If the Project or a Future Project is sold anytime during the calendar year preceding the date of determination of Cost Recovery, such Project or Future Project shall not be included in the calculation of Ownership Recovery for such calendar year. g. "Project NOI" shall mean the Net Operating Income for the Project or a Future Project for the calendar year preceding the date of determination of Cost Recovery. h. "Project Value" shall mean with respect to the Project or any Future Project the Project NOI for such Project or Future Project divided by ten percent (10.0%). i. "Stabilized NOI" shall mean the Net Operating Income for Phase II for the 12 month period following the Stabilization Date. j. "Stabilization Date" shall mean the first day of the month following the date on which any one of the following shall have occurred: (i) 93% occupancy in the operations of the Project at any point in time; (ii) 6 months after issuance of a certificate of occupancy for all of the apartments comprising the Project; or (iii) forty-two (42) months after the Initial Closing. k. "Total Development Costs" with respect to the Project shall mean Total Development Costs as set forth in the Operating Agreement, and with respect to any Future Phase shall have an equivalent meaning. Total Development Costs does not include an allocation of Infrastructure Costs. l. "Target Fee" shall mean an amount equal to 3% of Total Development Costs (including any Cost Saving Fee paid to Feld). m. "Yield" shall mean (i) Stabilized NOI, divided by (ii) the sum of (A) Total Development Costs (including any Cost Saving Fee paid to Feld), (B) the Incentive Fee, (C) the Infrastructure Costs allocable to the Project (i.e. for Phase I, 24.26% of total Infrastructure Cost), and (D) interest at 9%, compounded monthly, on the pro rata share of the Infrastructure Cost. 2. Calculation of Incentive Fee. The LLC's accountants shall calculate the Incentive Fee promptly after they have sufficient information to accurately calculate Stabilized NOI. The Incentive Fee shall equal the following, provided that in no event shall the Incentive Fee exceed the Incentive Cap: a. If the Yield is 9% or less, the Incentive Fee shall equal zero; b. If the Yield is greater than 9% and less than or equal to 10%, then the Incentive Fee shall equal (A) the Target Fee, multiplied by (B) the Yield minus 9%, multiplied by (C) 100. c. If the Yield is greater than 10% and less than or equal to 11.5%, then the Incentive Fee shall equal the following: (i) the Target Fee, plus (ii) (A) the Incentive Cap minus the Target Fee, multiplied by (B) the Yield minus 10%, divided by (C) 1.5, multiplied by (D) 100. d. If the Yield is greater than 11.5%, then the Incentive Fee shall equal the Incentive Cap. 3. Payment of Incentive Fee. The Incentive Fee shall be deemed earned at the time it is calculated but shall not be due or payable unless and until Cost Recovery has occurred. The Incentive Fee shall accrue simple interest at 9% per annum from the date it is deemed earned until paid. 4. Accelerated Payment of Incentive Fee. Notwithstanding anything to the contrary in this Exhibit P, if WPHC, in its sole discretion, causes the Final Closing to occur more than thirty (30) days prior to the Outside Date, then the Incentive Fee shall equal the Target Fee and the Company shall pay 50 percent of such Incentive Fee at the Final Closing and 50 percent of such Incentive Fee within two years of the date of Final Closing. 5. Allocation of Infrastructure Costs. The allocation of Infrastructure Costs for purposes of the calculation of the Incentive Fee is solely for such purpose and is distinct from and will not be modified by the actual allocation of Infrastructure Costs per unit. EXHIBIT Q EXERCISE OF CALL OPTION; ASSIGNMENT OF INTEREST POWER OF ATTORNEY THIS ASSIGNMENT OF INTEREST (this "Assignment") is made and entered into as of the ____ day of ______________ 19__, by and between Al Feld, an individual ("Assignor"), and Wellsford Park Highlands Corp., a Colorado corporation ("Assignee"). RECITALS b. Pursuant to that certain Operating Agreement (the "Operating Agreement") of Silver Mesa at Palomino Park LLC, a Colorado limited liability company (the "Company") dated as of _______________, 1998, by and among Assignor and Assignee, Assignee is the owner of an option (the "Call Option") to acquire the ownership interest of Assignor in the Company as of the date hereof (including the right of Assignor to receive any distributions related to any periods prior to and including the date hereof), which ownership interest includes the right of Assignor to any and all benefits to which Assignor may be entitled as a Member and as a Manager (each as defined in the Operating Agreement), as provided in the Operating Agreement or the version of the Colorado Limited Liability Company Act adopted by the State of Colorado, Co. Rev. Stat. ss.ss.7-80-101 to 7-80- 913, as amended from time to time (the "Act"), together with the unaccrued obligations of Assignor, in its capacity as a Member and Manager, to comply with all the terms and provisions of the Operating Agreement and the Act (collectively, the "Ownership Interest"). c. In accordance with Section 16.2.1 of the Operating Agreement, Assignee, by its execution and delivery of this Assignment to Assignor, hereby desires (i) to exercise the Call Option as contemplated therein and (ii) to cause Assignor to resign as Member and Manager of the Company. d. Assignor has agreed, concurrently with the exercise of the Call Option by Assignee: (i) to assign and sell the Ownership Interest to Assignee pursuant to the terms and conditions set forth in the Operating Agreement and (ii) to appoint Assignee as its true and lawful attorney-in-fact, as set forth herein. e. Terms not otherwise defined herein shall have the meanings set forth in the Operating Agreement. AGREEMENT In consideration of the receipt of Ten and no/100 Dollars ($10.00) and other good and valuable consideration in hand paid by Assignee to Assignor, the receipt and sufficiency of which are hereby acknowledged and confessed by Assignor, Assignor and Assignee hereby agree as follows: 1. Assignment and Assumption. Concurrently with and conditioned upon the satisfaction of all of the conditions and covenants of Section 16.2.1 of the Operating Agreement, Assignor hereby assigns, grants and conveys to Assignee all of Assignor's right, title and interest in and to the Ownership Interest. Assignee hereby assumes the Ownership Interest and agrees to be bound by and comply with and perform all of the obligations of Assignor in its capacity as a Member and as a Manager arising under the Operating Agreement which accrue after the date hereof. Assignor shall remain obligated to perform all of the obligations of Assignor under the Operating Agreement (i) which are not expressly assumed hereunder or (ii) which have accrued on or prior to the date hereof. Further, all benefits of the Operating Agreement relating to Assignor, including, without limitation, the right to receive any distributions related to any periods prior to and including the date hereof, shall inure to the benefit of Assignee. 2. Representation and Warranty of Assignor. Assignor represents and warrants that: (i) Assignor is the sole owner of the entire Ownership Interest; (ii) Assignor is not in default under or in breach of any of the terms, covenants or provisions of the Operating Agreement, and Assignor knows of no event which, but for the passage of time or the giving of notice, or both, would constitute an event of default under or a breach of the Operating Agreement by Assignor; (iii) Assignor is duly authorized to execute and deliver this Assignment; and (iv) the Ownership Interest is free and clear of any and all liens, security interests, encumbrances, and competing claims. 3. Appointment of Assignee as Attorney-in-Fact. Effective as of the date hereof, Assignor hereby irrevocably constitutes and appoints Assignee to be its true and lawful attorney-in- fact to act for Assignor, in the name, place and stead of Assignor, for the following purposes: to endorse any check or other instrument payable to Assignor in connection with the Project, to submit claims and otherwise deal with all insurance and insurance proceeds with respect to the Project, to execute and file with the appropriate governmental authority or office any and all certificates, reports or other evidence of the withdrawal of Assignor from the Company, and to perform such other acts as may be necessary to carry out the purpose and intent of the within assignment or to continue the business of the Company. Assignor hereby ratifies, acknowledges and confirms all acts taken by Assignee, as attorney-in-fact, pursuant to this appointment. Assignor hereby revokes, annuls and cancels any and all powers of attorney, if any, previously executed by Assignor with respect to such stated purposes, and the same shall be of no further force or effect. Assignor hereby acknowledges that such power shall be coupled with an interest and shall survive the disability or death of the Assignor. 4. Indemnity. Assignor hereby agrees to indemnify and defend Assignee and hold it harmless against any claim, loss or liability arising from any of the following: (i) any breach of any representation or warranty hereunder; or (ii) any assertion that Assignee is liable for any debts or obligations of Assignor, whether based on any act or omission of Assignor which occurs prior or subsequent to the date of this Assignment. 5. Governing Law. This Assignment shall be governed by and construed under the laws of the State of Colorado. 6. Successors and Assigns. This Assignment shall inure to the benefit and be binding upon the successors and assigns of Assignor and Assignee. 7. Counterparts. This Assignment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Assignment is executed to be effective as of the date first set forth above. ASSIGNOR: ------------------------- AL FELD, an individual ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: ------------------------------ Name: Title: CONSENT: Pursuant to Section 18.1.1 of the Operating Agreement and Section 7-80-801(1)(c) of the Act, Assignee hereby consents to the continuation of the business of the Company, notwithstanding the withdrawal and resignation of Assignor as a Member of the Company. ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: ------------------------------ Name: Title: [NOTE: Continuing Members to execute Unanimous Written Consent per Schedule A attached hereto.] STATE OF } --------------------- }ss COUNTY OF } -------------------- The foregoing instrument was acknowledged before me on __________ __, 19__, by AL FELD, an individual. My Commission expires: ----------- ------------------------------------------ Notary Public STATE OF } --------------------- }ss COUNTY OF } -------------------- The foregoing instrument was acknowledged before me on ________, ______, by ______________, as of Wellsford Park Highlands Corp., a Colorado corporation. My Commission expires: ------------------------------------------ Notary Public SCHEDULE A TO EXHIBIT Q UNANIMOUS WRITTEN CONSENT IN LIEU OF MEETING BY THE MEMBERS OF SILVER MESA AT PALOMINO PARK LLC, a Colorado Limited Liability Company __________________ ___, 19___ Section 7-80-711 of the Colorado Limited Liability Company Act, as amended (the "Act") provides that any action required or permitted to be taken at a meeting of the members of a limited liability company may be taken without a meeting if a written consent, setting forth the action so taken, shall be signed by all the members entitled to vote with respect to the subject matter thereof and delivered to the limited liability company in the manner described in the Act. Section 15.10 of that certain Operating Agreement ("Operating Agreement") of Silver Mesa at Palomino Park LLC (the "Company"), a Colorado limited liability company, dated as of ___________, 1998, by and between Al Feld and Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"), provides that action required or permitted to be taken at a meeting of Members of the Company, may be taken without a meeting under similar circumstances. The undersigned, which constitute all of the Remaining Members (defined below) of the Company, by signing this document, waive any and all notice that may be required for a meeting of the members of the Company and take the following action: WHEREAS, pursuant to Section 16.2.1 of the Operating Agreement, WPHC, by executing the attached Exercise of Call Option, Assignment of Interest and Power of Attorney attached hereto as Exhibit L-1, has given notice to the Company of its desire (i) to exercise the Call Option as contemplated in the Operating Agreement and (ii) to cause Al Feld to resign as Member and Manager of the Company; and WHEREAS, the Members other than Al Feld (the "Remaining Members") desire (i) to accept the withdrawal and resignation of Al Feld as Member and Manager of the Company, (ii) to consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (iii) to appoint and elect WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; and (iv) to consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; RESOLVED, that the Remaining Members hereby accept the withdrawal and resignation of Al Feld as Member and Manager of the Company; and FURTHER RESOLVED, that the Remaining Members hereby (i) consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (ii) appoint, elect and qualify WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; (iii) consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; and (iv) authorize the Members to execute, deliver and take all action necessary to effectuate the actions contemplated under the attached Exhibit L-1. This Consent, when signed by all of the Remaining Members of the Company and delivered to the Company in the manner prescribed in the Act, shall have the same force and effect as a unanimous vote, and may be stated as such in any document. IN WITNESS WHEREOF, the undersigned have executed this Consent as of the date above written. WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation, Member By: ____________________________ Title: EXHIBIT R EXERCISE OF PUT OPTION; ASSIGNMENT OF INTEREST POWER OF ATTORNEY This ASSIGNMENT OF INTEREST (this "Assignment") is made and entered into as of the ____ day of ___________________ , 19 by and between Al Feld, an individual ("Assignor"), and Wellsford Park Highlands Corp., a Colorado corporation ("Assignee"). RECITALS A. Pursuant to that certain Operating Agreement (the "Operating Agreement") of Silver Mesa at Palomino Park LLC, a Colorado limited liability company (the "Company") dated as of __________, 1998, by and between Assignor and Assignee, Assignor is the owner of an option (the "Put Option") to cause Assignee to acquire the ownership interest of Assignor in the Company as of the date hereof (including the right of Assignor to receive any distributions related to any periods prior to and including the date hereof), which ownership interest includes the right of Assignor to any and all benefits to which Assignor may be entitled as a Member and as a Manager (each as defined in the Operating Agreement), as provided in the Operating Agreement or the version of the Colorado Limited Liability Company Act adopted by the State of Colorado, Co. Rev. Stat. ss.ss.7-80- 101 to 7-80-913, as amended from time to time (the "Act"), together with the unaccrued obligations of Assignor, in its capacity as a Member and Manager, to comply with all the terms and provisions of the Operating Agreement and the Act (collectively, the "Ownership Interest"). B. In accordance with Section 16.2.2 of the Operating Agreement, Assignor, by its execution and delivery of this Assignment to Assignee, hereby desires (i) to exercise the Put Option as contemplated therein and (ii) to resign as Member and Manager of the Company. C. At Final Closing (as defined in the Operating Agreement), concurrently with the above exercise of the Put Option by Assignor, (i) Assignee has agreed to acquire and buy the Ownership Interest from Assignor pursuant to the terms and conditions set forth in the Operating Agreement, provided that all of the Final Closing Funding Conditions have been satisfied and (ii) Assignor has agreed to appoint Assignee as its true and lawful attorney-in-fact, as set forth herein. D. Terms not otherwise defined herein shall have the meanings set forth in the Operating Agreement. AGREEMENT In consideration of the receipt of Ten and no/100 Dollars ($10.00) and other good and valuable consideration in hand paid by Assignor to Assignee, the receipt and sufficiency of which are hereby acknowledged and confessed by Assignee, Assignor and Assignee hereby agree as follows: 1. Assignment and Assumption. At Final Closing (as defined in the Operating Agreement), concurrently with and conditioned upon the satisfaction of all of the conditions and covenants of Section 16.2.2 of the Operating Agreement, (i) Assignor hereby assigns, grants and conveys to Assignee all of Assignor's right, title and interest in and to the Ownership Interest and (ii) Assignee hereby assumes the Ownership Interest and agrees to be bound by and comply with and perform all of the obligations of Assignor in its capacity as a Member and as Manager, arising under the Operating Agreement which accrue after the date hereof. Assignor shall remain obligated to perform all of the obligations of Assignor under the Operating Agreement (i) which are not expressly assumed hereunder or (ii) which have accrued on or prior to the date hereof. Further, all benefits of the Operating Agreement relating to Assignor, including, without limitation, the right to receive any distributions related to any periods prior to and including the date hereof, shall inure to the benefit of Assignee. 2. Representation and Warranty of Assignor. Assignor represents and warrants that: (i) Assignor is the sole owner of the entire Ownership Interest; (ii) Assignor is not in default under or in breach of any of the terms, covenants or provisions of the Operating Agreement, and Assignor knows of no event which, but for the passage of time or the giving of notice, or both, would constitute an event of default under or a breach of the Operating Agreement by Assignor; (iii) Assignor is duly authorized to execute and deliver this Assignment; and (iv) the Ownership Interest is free and clear of any and all liens, security interests, encumbrances, and completing claims. 3. Appointment of Assignee as Attorney-in-Fact. Effective as of the date hereof, Assignor hereby constitutes and appoints Assignee to be its true and lawful attorney-in-fact to act for Assignor, in the name, place and stead of Assignor, for the following purposes: to endorse any check or other instrument payable to Assignor in connection with the Project, to submit claims and otherwise deal with all insurance and insurance proceeds with respect to the Project, to execute and file with the appropriate governmental authority or office any and all certificates, reports or other evidence of the withdrawal of Assignor from the Company, and to perform such other acts as may be necessary to carry out the purpose and intent of the within assignment or to continue the business of the Company. Assignor hereby ratifies, acknowledges and confirms all acts taken by Assignee, as attorney-in-fact, pursuant to this appointment. Assignor hereby revokes, annuls and cancels any and all powers of attorney, if any, previously executed by Assignor with respect to such stated purposes, and the same shall be of no further force or effect. Assignor hereby acknowledges that such power shall be coupled with an interest and shall survive the disability or death of the Assignor. 4. Indemnity. Assignor hereby agrees to indemnify and defend Assignee and hold it harmless against any claim, loss or liability arising from any of the following: (i) any breach of any representation or warranty hereunder; or (ii) any assertion that Assignee is liable for any debts or obligations of Assignor, whether based on any act or omission of Assignor which occurs prior or subsequent to the date of this Assignment. 5. Governing Law. This Assignment shall be governed by and construed under the laws of the State of Colorado. 6. Successors and Assigns. This Assignment shall inure to the benefit and be binding upon the successors and assigns of Assignor and Assignee. 7. Counterparts. This Assignment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Assignment is executed to be effective as of the date first set forth above. ASSIGNOR: ----------------------- AL FELD, an individual ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: ----------------------- Name: Title: CONSENT: Pursuant to Section 18.1.1 of the Operating Agreement and Section 7-80-801(1)(c) of the Act, Assignee hereby consents to the continuation of the business of the Company, notwithstanding the withdrawal and resignation of Assignor as a Member of the Company. ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: ----------------------- Name: Title: [NOTE: Continuing Members to execute Unanimous Written Consent per Schedule A attached hereto.] STATE OF } }ss COUNTY OF } The foregoing instrument was acknowledged before me on _____________, _____, by AL FELD, an individual. My Commission expires: ____________ ------------------------------------------ Notary Public STATE OF } }ss COUNTY OF } The foregoing instrument was acknowledged before me on ___________, 199__, by ____________, as __________________________________ of WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation. My Commission expires: ----------- ------------------------------------------ Notary Public SCHEDULE A TO EXHIBIT R UNANIMOUS WRITTEN CONSENT IN LIEU OF MEETING BY THE MEMBERS OF SILVER MESA AT PALOMINO PARK LLC, a Colorado Limited Liability Company __________________ ___, 19__ Section 7-80-711 of the Colorado Limited Liability Company Act, as amended (the "Act") provides that any action required or permitted to be taken at a meeting of the members of a limited liability company may be taken without a meeting if a written consent, setting forth the action so taken, shall be signed by all the members entitled to vote with respect to the subject matter thereof and delivered to the limited liability company in the manner described in the Act. Section 15.10 of that certain Operating Agreement ("Operating Agreement") of Silver Mesa at Palomino Park LLC (the "Company"), a Colorado limited liability company, dated as of __________, 1998 by and between Al Feld and Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"), provides that action required or permitted to be taken at a meeting of Members of the Company, may be taken without a meeting under similar circumstances. The undersigned, which constitute all of the Remaining Members (defined below) of the Company, by signing this document, waive any and all notice that may be required for a meeting of the members of the Company and take the following action: WHEREAS, pursuant to Section 16.2.2 of the Operating Agreement, Al Feld, by executing the attached Exercise of Put Option, Assignment of Interest and Power of Attorney attached hereto as Exhibit L-2, has given notice to the Company of its desire (i) to exercise the Put Option as contemplated in the Operating Agreement and (ii) to resign as Member and Manager of the Company; and WHEREAS, the Members other than Al Feld (the "Remaining Members") desire (i) to accept the withdrawal and resignation of Al Feld as Member and Manager of the Company, (ii) to consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (iii) to appoint and elect WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; and (iv) to consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; RESOLVED, that the Remaining Members hereby accept the withdrawal and resignation of Al Feld as Member and Manager of the Company; and FURTHER RESOLVED, that the Remaining Members hereby (i) consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (ii) appoint, elect and qualify WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; (iii) consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; and (iv) authorize the Members to execute, deliver and take all action necessary to effectuate the actions contemplated under the attached Exhibit L-2. This Consent, when signed by all of the Remaining Members of the Company and delivered to the Company in the manner prescribed in the Act, shall have the same force and effect as a unanimous vote, and may be stated as such in any document. IN WITNESS WHEREOF, the undersigned have executed this Consent as of the date above written. WELLSFORD PARK HIGHLANDS CORP., a Colorado Corporation, Member ------------------------------- By: Title: EXHIBIT S-1 FORM OF ARCHITECT'S CERTIFICATE (Letterhead of Architect) CERTIFICATE OF ARCHITECT ______________, 1998 Silver Mesa at Palomino Park LLC Wellsford Real Properties, Inc. Wellsford Park Highlands Corp. l623 Blake Street, Suite 270 Denver, Colorado 80202 Reference: ______________________ ____________, Colorado Ladies and Gentlemen: Please refer to the final architectural plans, specifications and Architectural Supplemental Instructions (the "Plans") described in the attached Exhibit A. The undersigned understands that Wellsford Real Properties, Inc. or its designee ("Wellsford") is acquiring an interest in a residential project owned by Silver Mesa at Palomino Park LLC, a Colorado limited liability company ("Owner"), located on a parcel of real property in the County of Douglas, State of Colorado, and described on Exhibit B attached hereto (the "Site"), on which Owner has constructed a complex of 264 apartment units known as Silver Mesa at Palomino Park (the "Project"). This Certificate is a condition precedent to Wellsford acquiring the Project, and the undersigned acknowledges that Wellsford will be relying upon this Certificate in consummating such transaction. With such understanding, the undersigned has reviewed the Plans, the construction of the Project in relationship to the Plans, and its conformity and compliance with applicable laws and regulations (i.e., applicable federal, state, county and municipal laws and regulations and ordinances, including without limitation, governing building and fire codes, zoning, subdivision and land use laws and regulations, environmental and safety statutes and regulations, and the rules and regulations of other governmental agencies having jurisdiction over the Site or the Project ("Applicable Laws"). Based upon these reviews and upon due professional investigation, the undersigned declares on its behalf and certifies to and for the benefit of only Owner and Wellsford that: 1. The undersigned is the architect who prepared the Plans and coordinated and supervised the construction of the Project. 2. The Project contains 264 apartment units in __ buildings with a total of approx. 478,824 square feet of gross leasable living area ("GLA"), and _______ parking spaces (including ____ detached garage spaces), with related amenities and facilities. The GLA is calculated from the Plans and the square footage includes the outside face of frame and the interior stairs, but excludes the interior storage space and any non-usable space. 3. We have examined all applicable materials relative to those types of restrictions and requirements sometimes referred to as use, dimensional, bulk and parking restrictions, jurisdictional wetlands requirements, setback and buffering requirements, density restraints, landscaping and vegetation preservation ordinances, laws, rules and regulations and environmental restraints, which relate to the Site (hereinafter referred to as "Development Constraints") and have determined, to the best of our knowledge, that the Project and Site are in compliance with the Development Constraints and are permitted as a matter of right. 4. The Site is zoned Highlands Ranch Planned Development - Planning areas 73 (Town Center) and 67 (High Density Residential) under the applicable regulations of the County of Douglas, Colorado. 5. The improvements contemplated by the Plans have been completed in substantial compliance therewith with no material changes, except for Architectural Supplemental Instructions ____________________________; and except for Change Orders _____________________ which have been approved by Wellsford; and except for the items in the attached Exhibit C and estimated cost-to-complete as shown. 6. We are of the opinion that the Project has been designed in accordance with the applicable provisions of Colorado law, the Americans with Disabilities Act of 1990, 42 U.S.C. Section 12101, et seq., as amended, and any other applicable law, rule or regulation of any kind or description relating to the elimination of architectural barriers for the handicapped. 7. All amounts due and payable to us under or in connection with the Standard form of Agreement between Owner and Architect for Housing Services dated _________, 19__, and all amendments thereto, with regard to the Project have been paid in full. 8. The Project, the Plans and all improvements comply with known Applicable Laws, including without limitation, the applicable Plat, and all necessary and required notices, permits or license agreements in connection with the Plans. To the best of our knowledge, all permits, licenses and approvals required for the construction of the improvements contemplated by the Plans and for the use and occupancy of the Project, including, without limitation, all final certificates of occupancy, have been obtained from the applicable governmental or quasi- governmental agency having jurisdiction or any private party from whom any license is required. 9. The improvements are ready for occupancy. 10. The undersigned is a licensed architect and has the power and authority to render this Certificate and to execute and deliver it on behalf of _______________. For the purposes of this Certificate, the terms "known" and "to the best of our knowledge" shall mean and include information actually known to the undersigned or should have been known to it upon diligent inquiry or of which the undersigned has received constructive notice. Very truly yours, By: ---------------------------------------------- Supervising Architect Dated:________________________ EXHIBIT A TO CERTIFICATE OF ARCHITECT DRAWING LIST ARCHITECTURAL: STRUCTURAL: FOUNDATION: MECHANICAL: PLUMBING: ELECTRICAL: LANDSCAPING: EXHIBIT B TO CERTIFICATE OF ARCHITECT LEGAL DESCRIPTION LOT 3-A, HIGHLANDS RANCH FILING NO. 126-A, AS DESCRIBED IN THE LOT LINE ADJUSTMENT CERTIFICATE, RECORDED APRIL 29, 1996 IN BOOK 1337 AT PAGE 324, RECEPTION NO. 9622585 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO. EXHIBIT C TO CERTIFICATE OF ARCHITECT Incomplete Items Cost of Completion EXHIBIT S-2 FORM OF ENGINEER'S CERTIFICATE (Letterhead of Project Engineer) ENGINEER'S CERTIFICATE __________________, 1997 Silver Mesa at Palomino Park LLC Wellsford Real Properties, Inc. Wellsford Park Highlands Corp. l623 Blake Street, Suite 270 Denver, Colorado 80202 Reference: ______________ _________________, Colorado Ladies and Gentlemen: The undersigned understands that __________________________ or its designee ("Wellsford") is acquiring an interest in or is causing the repayment of the construction loan for a residential complex owned by Silver Mesa at Palomino Park LLC, a Colorado limited liability company ("Owner"), located on that certain parcel of real property having an address of ______________________ in the City of ___________, County of __________, State of Colorado and described on Exhibit A attached hereto (the "Site"), on which Owner has constructed a complex of ______ apartment units known as ______________ (the "Project"). This Certificate is a condition precedent to Wellsford's acquiring the Project or repaying such loan, and the undersigned acknowledges that Wellsford will be relying upon this Certificate in consummating such transaction. With such understanding, the undersigned has reviewed those portions of the plans and specifications for the Project that are listed on Exhibit B attached hereto (the "Engineering Plans"), the construction of the Project in relationship to the Engineering Plans, and its conformity and compliance with certain applicable laws and regulations. Based upon these reviews and upon due professional investigation, the undersigned declares and certifies to and for the benefit of Owner and Wellsford that: 1. Satisfactory methods of access to and egress from the Site and the Project and adjoining or nearby public ways are available and are sufficient to meet the reasonable needs of the Project and all applicable requirements of public authorities. Sanitary water supply and storm sewer and sanitary sewer facilities and other required utilities (gas, electricity, telephone, etc.) are likewise available and are sufficient to meet the reasonable needs of the Project and all applicable requirements of public authorities. 2. We are of the opinion that the Property is not located in a 100-Year Flood Plain or in an identified "flood prone area," as defined by the U.S. Department of Housing and Urban Development, pursuant to the Flood Disaster Protection Act of 1973, as amended, and is not subject to any federal, state or local "wetlands" rules, regulations, ordinances or requirements. 3. We have reviewed and are familiar with all tests and analyses performed and professional recommendations made by soil engineers and other consultants regarding the condition of the soil of the Site. In our professional opinion, the condition of the soil of the Site is adequate to support the Project as completed. 4. We have reviewed the locations of all easements, rights-of-way, subsurface rights or jurisdictional wetlands, and all rules and regulations pertaining to the same in force relating to the Site, and the Plans are prepared so that the Project does not encroach over, across or upon any such easements, rights-of-way, subsurface rights or jurisdictional wetlands and the like, and all necessary permits and approvals required for the Project have been obtained. 5. We have reviewed all deeds, easements, covenants, restrictions and other matters set forth in Schedule B of Title Commitment No. __________ issued by Land Title Guaranty Company, and the Project satisfies and/or does not violate any provisions concerning construction of improvements on the Site set forth in such deeds, easements, covenants, restrictions and other matters. This Certificate may be relied upon only by Owner and Wellsford. Very Truly yours, [ENGINEER] By: ----------------------------------------- Title: ----------------------------- Dated: ------------------------------ EXHIBIT A TO CERTIFICATE OF ENGINEERING LEGAL DESCRIPTION LOT 3-A, HIGHLANDS RANCH FILING NO. 126-A, AS DESCRIBED IN THE LOT LINE ADJUSTMENT CERTIFICATE, RECORDED APRIL 29, 1996 IN BOOK 1337 AT PAGE 324, RECEPTION NO. 9622585 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO. EXHIBIT B TO CERTIFICATE OF ENGINEERING ______________, Colorado DRAWING LIST CIVIL ENGINEERING DRAWINGS: STRUCTURAL: FOUNDATION: MECHANICAL: PLUMBING: ELECTRICAL: LANDSCAPING: EXHIBIT T [INTENTIONALLY DELETED] EXHIBIT U SUBSTITUTION AGREEMENT TO BE AGREED UPON BY PARTIES PRIOR TO CONSTRUCTION LOAN CLOSING EX-10.78 7 ex10-78.txt 1ST AMENDT TO OP. AGRMT-SILVER MESA 12/19/00 FIRST AMENDMENT TO OPERATING AGREEMENT OF SILVER MESA AT PALOMINO PARK LLC THIS FIRST AMENDMENT TO OPERATING AGREEMENT OF SILVER MESA AT PALOMINO PARK LLC (this "Second Amendment") is made as of the 19th day of December, 2000, by and between AL FELD, an individual ("Feld"), and WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation ("WPHC"). RECITALS A. Feld and WPHC constitute all of the members (collectively, the "Members") of Silver Mesa at Palomino Park LLC, a Colorado limited liability company (the "Company"), which is governed by that certain Operating Agreement of Silver Mesa at Palomino Park LLC dated as of December 10, 1998 (the "Operating Agreement"). B. The Members now desire to amend the Operating Agreement as set forth herein. C. Capitalized terms not otherwise defined herein shall have the definitions set forth in the Operating Agreement. NOW, THEREFORE, for and in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Feld and WPHC hereby agree to amend the Operating Agreement as follows: 1. Single-Member LLC. Feld and WPHC hereby agree that, notwithstanding any provisions to the contrary in the Operating Agreement, the Company shall continue in existence and its business shall be continued after the transfer to WPHC of all of Feld's interest in the Company pursuant to the Call Option. The Articles of Organization shall be amended to permit continuation of the Company as a single-member limited liability company and, upon such amendment to the Articles of Organization, the Operating Agreement shall be and hereby is amended to conform thereto. 2. Full Force and Effect. The Operating Agreement, as specifically amended herein, is hereby ratified by the Members and shall remain in full force and effect. 3. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall constitute one agreement binding on the parties hereto, notwithstanding that all the parties may not have signed the same counterpart. Signature pages from one counterpart may be removed and attached to another counterpart to create one fully-executed document. IN WITNESS WHEREOF, the parties hereto, being all of the Members of the Company, have executed this Amendment as of the date first written above. /s/ Al Feld ----------------------------------------- Al Feld WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: /s/ David M. Strong ----------------------------------------- David M. Strong, Vice President EX-10.97 8 ex10-97.txt SALE/PURCHASE-250 TURNPIKE ST.11/05/01 SALE-PURCHASE AGREEMENT SALE-PURCHASE AGREEMENT (this "AGREEMENT"), made as of November 5th, 2001 between WELLSFORD CAPITAL PROPERTIES, L.L.C., a Delaware limited liability company having an address c/o Wellsford Real Properties, Inc., 535 Madison Avenue, 26th Floor New York, New York 10022 ("SELLER") and THE JUDGE ROTENBERG EDUCATIONAL CENTER, INC., a Massachusetts non-profit corporation having an office at 240 Turnpike Street, Canton, Massachusetts 02021 ("PURCHASER"). W I T N E S S E T H: - - - - - - - - - - Seller and Purchaser, in consideration of the mutual covenants herein contained, hereby agree as follows: ARTICLE 1. CERTAIN DEFINITIONS ------------------------------ For purposes of this Agreement, the following terms shall have the following meanings: 1.1. "Affiliate" shall mean any entity which controls, is controlled by, or is under common control with, Purchaser. For purposes of this definition, "control" means the ownership, directly or indirectly, of more than fifty percent (50%) of the beneficial interests in an entity, together with the possession, directly or indirectly, of the power to direct the management and policies of an entity, whether through ownership of beneficial interests, by contract or otherwise. 1.2. "Broker" shall mean, collectively, Trammell Crow Company and Grubb & Ellis Company. 1.3. "Business Day" shall mean any day other than a Saturday, Sunday or any day upon which banks in the Commonwealth of Massachusetts or the State of New York are required or authorized by law to be closed. 1.4. "Effective Date" shall mean the date upon which Purchaser receives a fully executed counterpart of this Agreement. Promptly following the occurrence of the Effective Date, Purchaser shall execute and deliver to Seller such instrument as Seller may submit to it to evidence the occurrence of the Effective Date. 1.5. "Escrowee" shall mean Old Republic National Title Insurance Company. 1.6. "Existing Service Contracts" shall mean the service contracts, maintenance agreements, brokerage agreements and other agreements affecting the Property and set forth in Exhibit C annexed hereto. 1.7. "Invasive Tests" shall mean any physical inspection or testing of the Premises, other than visual examination, and shall include, without limitation, sampling of soils and other media. 1.8. "JRC License Agreement" shall mean that certain Parking License Agreement dated October 19, 2001 between Seller and Purchaser. 1.9. "New Service Contracts" shall mean any service contracts, maintenance agreements, brokerage agreements or other agreements entered into by Seller in accordance with the terms of this Agreement. 1.10. "Requirements" shall mean (i) any federal, state or municipal law, ordinance, order or requirement (including those pertaining to hazardous substances) and (ii) any provision of any municipal approval or instrument of record pertaining to the Premises. 1.11. "Service Contracts" shall mean the Existing Service Contracts and the New Service Contracts in effect on the Closing Date. 1.12. "Title Insurer" shall mean Old Republic National Title Insurance Company. ARTICLE 2. SALE-PURCHASE OF PROPERTY ------------------------------------ 2.1. Agreement to Sell and Purchase. Seller shall sell to Purchaser, and Purchaser shall purchase from Seller, at the Purchase Price and upon the terms and conditions set forth in this Agreement, the following (collectively, the "PROPERTY"): (a) the parcels of land more particularly described in Exhibit A annexed hereto and as shown on the survey annexed hereto as Exhibit A-1 (the "LAND"); (b) the buildings and other structures situated on the Land, inclusive of all of Seller's right, title and interest in and to the improvements, fixtures, systems, plant equipment, apparatus and machinery which form a part of the buildings or such other structures (collectively, the "BUILDING") (the Land and the Building are herein collectively called the "PREMISES"); (c) all right, title and interest of Seller, if any, in and to (i) the land lying in the bed of any street or highway in front of or adjoining the Land to the center line thereof and (ii) any appurtenances in and to the Premises; (d) all right, title and interest of Seller in and to any furniture, furnishings, moveable equipment and other personal property located at, or used in connection with, the Premises (herein collectively called the "PERSONAL PROPERTY"); (e) to the extent assignable, Seller's right, title and interest in and to the Service Contracts; (f) to the extent assignable, Seller's right, title and interest in and to any licenses and permits in the operation of the Premises (collectively, the "LICENSES") and (g) to the extent assignable, any warranties given by any contractor or manufacturer in favor of Seller in connection with the construction, repair or renovation of the Premises (collectively, the "WARRANTIES"). The Premises are located at, and are known as, 250 Turnpike Street, Canton, Massachusetts, 02021, and includes Lots 4 and 8, as more particularly described in Exhibit A annexed hereto. 2.2. Title to Premises. Seller shall convey, and Purchaser shall accept, title to and possession of the Premises on the Closing Date, free of all Title Exceptions other than the Permitted Exceptions (each as hereinafter defined). 2.3. Condition of Property. Purchaser is a sophisticated investor and its valuation of and decision to purchase the Property is based upon its own independent expert evaluations of such facts and materials deemed relevant by Purchaser and its agents. Other than the express representations and warranties of Seller specifically set forth herein, Purchaser has not relied upon any oral or written information from Seller or its employees, affiliates, agents, consultants, advisors or representatives, including, without limitation, any appraisals, projections or evaluations of credit quality prepared by Seller or any of its employees, affiliates, agents, consultants, advisors or representatives. Purchaser further acknowledges that no employee, agent, consultant, advisor or representative of Seller has been authorized to make, and that Purchaser has not relied upon, any statements or representations other than those specifically contained in this Agreement. Without limiting the generality of the foregoing, Purchaser acknowledges and agrees that, except as expressly set forth herein, Purchaser is purchasing the Property "as is" and "where is" on the Closing Date, and, except as expressly set forth herein, Seller is making no representation or warranty, express or implied, and Purchaser has not relied on any representation or warranty, express or implied, regarding the Property, including, without limitation, any representation or warranty with respect to (a) the physical condition of any Improvement or Personal Property comprising all or a part of the Property, or its fitness, merchantability or suitability for any use or purpose, (b) any rents, income or expenses of the Property, (c) the compliance or non-compliance with any laws, codes, ordinances, rules or regulations of any governmental authority (including, without limitation, laws pertaining to hazardous materials) or (d) the current or future use of the Property, including, but not limited to, any Property's use for commercial, retail, industrial or other purposes. Seller is not liable or bound in any manner by any verbal or written statements, repre sentations, offering memoranda or information pertaining to the Property furnished by any real estate broker, advisor, consultant, agent, employee, representative or other person. ARTICLE 3. PURCHASE PRICE ------------------------- 3.1. Purchase Price. The purchase price (the "PURCHASE PRICE") to be paid by Purchaser to Seller for the Property is THREE MILLION TWO HUNDRED FIFTY THOUSAND and 00/00 DOLLARS ($3,250,000.00), net of adjustments made in accordance with Article 8 below. The Purchase Price shall be paid by Purchaser as follows: (a) ONE HUNDRED THOUSAND and 00/100 DOLLARS ($100,000.00), (the "INITIAL DEPOSIT"), payable on the Effective Date by (i) wire transfer of immediately available funds to the account of Escrowee or (ii) Purchaser's check, subject to collection, drawn to the order of Escrowee; (b) Unless this Agreement is validly terminated in accordance with the provisions of Article 4 below, ONE HUNDRED THOUSAND and 00/100 ($100,000.00) (the "SECOND DEPOSIT") (the Initial Deposit and the Second Deposit, collectively, the "DEPOSIT"), payable on or before 5:00 P.M. on the Business Day which is two (2) Business Days after the Due Diligence Expiration Date (hereinafter defined) either by (i) wire transfer of immediately available funds to the account of Escrowee or (ii) check, subject to collection, drawn to the order of Escrowee; and (c) THREE MILLION FIFTY THOUSAND and 00/100 DOLLARS ($3,050,000.00) (the "CASH BALANCE"), payable on the Closing Date by wire transfer of immediately available funds to an account or accounts designated by Seller. 3.2. Escrow of Deposit. The Deposit shall be held, paid over and/or applied by Escrowee in accordance with the following provisions: (a) Escrowee shall hold the Deposit until the Closing or sooner termination of this Agreement. Any interest earned on the Deposit shall be paid to the same party entitled to be paid the Deposit hereunder (as and when such party is entitled to the Deposit), except that, at Closing, interest shall be credited against the Cash Balance. The party receiving such interest (or the benefit of such interest by virtue of the same having been credited against the Cash Balance) shall pay any income taxes thereon. For purposes thereof, the tax identification numbers of the parties are as follows: 13-4027757 (Seller); and 04-2489805 (Purchaser). (b) If this Agreement is validly terminated in accordance with the provisions of Article 4 below, Escrowee shall pay the Initial Deposit to Purchaser. (c) At the Closing, the Deposit shall be paid by Escrowee to Seller. (d) If for any reason the Closing does not occur, then, except as otherwise expressly provided to the contrary in this Section 3.2, Escrowee shall continue to hold the Deposit until otherwise directed by joint written instructions from the parties to this Agreement or a final judgment of a court of competent jurisdiction. Escrowee, however, shall have the right at any time to deposit the Deposit with the clerk of any federal or state court sitting in the Commonwealth of Massachusetts. Escrowee shall give written notice of such deposit to Seller and Purchaser. Upon such deposit, Escrowee shall be relieved and discharged of all further obligations and responsibilities hereunder first arising or accruing from and after the date of such deposit. (e) The parties acknowledge that Escrowee is acting solely as a stakeholder at their request and for their convenience, that Escrowee shall not be deemed to be the agent of either of the parties and that Escrowee shall not be liable to either of the parties for any act or omission on its part unless taken or suffered in bad faith, in willful disregard of this Agreement or involving gross negligence. Seller and Purchaser shall jointly and severally indemnify and hold Escrowee harmless from and against all costs, claims and expenses, including reasonable attorneys' fees, incurred in connection with the performance of Escrowee's duties hereunder, except with respect to actions or omissions taken or suffered by Escrowee in bad faith, in willful disregard of this Agreement or involving gross negligence on the part of Escrowee. (f) Escrowee shall cause the Deposit to be maintained at Fleet National Bank in an interest-bearing money market account or accounts. Escrowee shall not be liable for any losses suffered in connection with any such investment and shall have no obligation to obtain the best (or otherwise seek to maximize) the rate of interest earned on any such investment. Any fees or charges in connection with such investment shall be paid out of the amounts held in escrow before any other payments shall be required to be made from such amounts. Seller and Purchaser acknowledge that the Federal Deposit Insurance Corporation ("FDIC") insures individual depositors up to a maximum amount of $100,000. Seller and Purchaser hereby release Escrowee from any loss or damage they may incur by reason of the Deposit exceeding the maximum coverage afforded to individual depositors by the FDIC. (g) Upon any delivery of the amount remaining in escrow as provided in Sections 3.2(b), (c) or (d) above, Escrowee shall be relieved of all liability, responsibility or obligation with respect to or arising out of the escrow or under this Agreement. Escrowee shall not be bound by any modification to this Section 3.2 unless Escrowee shall have agreed to such modification in writing. (h) Escrowee shall be entitled to rely or act upon any notice, instrument or document believed by Escrowee in good faith to be genuine and to be executed and delivered by the proper person, and shall have no obligation to verify any statements contained in any notice, instrument or document or the accuracy or due authorization of the execution of any notice, instrument or document. (i) Escrowee shall be entitled to retain attorneys of its choice in connection with this escrow. (j) Escrowee has acknowledged its agreement to the foregoing provisions of this Section 3.2 by signing in the place indicated on the signature page of this Agreement. ARTICLE 4. PURCHASER'S INSPECTIONS ---------------------------------- 4.1. Due Diligence Period; Termination Right. During the period commencing on the Effective Date and ending on the date (the "DUE DILIGENCE EXPIRATION DATE") which is forty-five (45) days thereafter (unless such date is not a Business Day, in which event the Due Diligence Expiration Date shall be the next occurring Business Day), Purchaser shall have the right to conduct such due diligence investigations of the Property as it deems necessary, including inspections, studies, examinations and investigations of the Property, and/or any facts, circumstances and matters relating to the Property. If Purchaser, in its sole and absolute discretion, determines for any reason whatsoever that it is unsatisfied with the results of, or the matters disclosed by, its due diligence investigations of the Property, Purchaser shall have the unequivocal right to terminate this Agreement by written notice given to Seller prior to 5:00 p.m. New York time on the Due Diligence Expiration Date (TIME BEING OF THE ESSENCE). Upon any termination of this Agreement pursuant to this Section 4.1, (i) the Initial Deposit shall be refunded to Purchaser and (ii) neither party hereto shall have any further obligation to the other, with the exception of those obligations which expressly survive the termination of this Agreement. If Purchaser shall fail to terminate this Agreement in the time and manner set forth in this Section 4.1, Purchaser shall be deemed to have irrevocably waived its right to terminate this Agreement pursuant to this Section 4.1. 4.2. Inspections. Purchaser and its authorized agents, consultants or representatives shall have the right, upon reasonable prior notice to Seller (which notice may be telephonic, to William Darrow at the telephone number set forth in Section 16.1 hereof), to enter upon the Premises from time to time to conduct such physical and other inspections as Purchaser deems appropriate, provided that Purchaser shall not perform Invasive Tests without first obtaining Seller's consent, which consent shall not be unreasonably withheld or delayed. Prior to any entrance upon the Premises for the performance of Invasive Tests, Purchaser shall deliver to Seller (or cause the applicable contractor to deliver to Seller) a certificate of insurance evidencing that Purchaser has procured and maintains in force and effect commercial general liability insurance covering Purchaser and Seller against claims for bodily injury or death or property damage occurring in, upon or about the Premises in an amount of not less than $2,000,000 (combined single limit), issued by an insurance company with a rating of "A" or better as established by Best's Rating Guide, which insurance shall include blanket contractual liability coverage and shall otherwise be in form reasonably acceptable to Seller. 4.3. Restoration and Indemnity. Following the performance of any Invasive Tests, Purchaser shall restore the Premises to their condition prior to the performance thereof. Purchaser shall indemnify and hold harmless Seller and its officers, directors, members, employees, successors and assigns, from and against any and all damages, losses, costs, expenses, liabilities and claims that arise out of or in any way relate to the conduct of Purchaser's due diligence investigations. The provisions of this Section 4.3 shall survive the termination of this Agreement for a period of one year. 4.4. Confidentiality. Prior to the Closing, Purchaser shall not disclose to any other party the contents of any Confidential Materials (hereinafter defined) without first obtaining Seller's prior written consent. For purposes of this Agreement, the term "Confidential Materials" shall mean (i) materials delivered to Purchaser by Seller with respect to the Property or any summaries thereof prepared by or at the behest of Purchaser (collectively, "DELIVERED MATERIALS") and/or (ii) any reports summarizing any investigations of the Property prepared by Purchaser or its representatives or agents. Notwithstanding the foregoing, Purchaser may, without first obtaining such prior written consent, disclose Confidential Materials to its officers, employees, lenders, counsel, lenders' counsel, appraisers, accountants, insurance advisors, environmental consultants and similar third-party consultants, provided that such parties are apprised of the confidential nature of the Confidential Materials, and provided further that Purchaser may make such disclosures as may be required by law. Upon any termination of this Agreement, Purchaser shall deliver all copies of all Delivered Materials to Seller. The provisions of this Section 4.4 shall survive any termination of this Agreement. ARTICLE 5. TRANSACTION COSTS ---------------------------- 5.1. Seller's Costs. At the Closing, Seller shall pay (i) all transfer taxes payable as a result of the conveyance of title to the Property to Purchaser pursuant to this Agreement, (ii) costs incurred in connection with the discharge of any Title Exceptions which are not Permitted Exceptions, (iii) costs incurred in connection with the filing or recording of any certificates or resolutions required to record the Deed and (iv) inspection and transfer fees, if any, payable in connection with Warranties assigned to Purchaser. In addition, Seller shall be responsible for the costs of its legal counsel, advisors and the other professionals employed by it in connection with the sale of the Property. 5.2. Purchaser's Costs. At the Closing, Purchaser shall pay the cost of recording the Deed. In addition, Purchaser shall be responsible for (i) title insurance premiums and fees payable in connection with any owner's or mortgagee's policy of title insurance obtained by Purchaser, (ii) costs incurred in connection with any update of the survey of the Premises, (iii) the cost of Purchaser's inspections of the Property, (iv) costs and expenses of any financing obtained by Purchaser and (v) the costs of Purchaser's legal counsel, advisors and other professionals employed by it in connection with its acquisition of the Property. ARTICLE 6. CLOSING DATE; CONDITIONS TO CLOSING ---------------------------------------------- 6.1. Closing Date. The closing of the transactions contemplated by this Agreement (the "CLOSING") shall take place on December 27, 2001. The date upon which the Closing occurs, as the same may be adjourned in accordance with the terms hereof, is herein referred to as the "CLOSING DATE". The Closing shall occur on the Closing Date at 10:00 a.m. at the offices of Purchaser's counsel, Eckert Seamans Cherin & Mellott, LLC, One International Place, Boston, Massachusetts, through an escrow established with Title Insurer upon such terms and conditions as Seller, Purchaser and Title Insurer shall mutually agree. TIME SHALL BE OF THE ESSENCE WITH RESPECT TO THE OBLIGATIONS OF PURCHASER AND SELLER TO BE PERFORMED ON THE CLOSING DATE. 6.2. Conditions to Closing. Purchaser's obligation to purchase the Property is subject to the satisfaction of the following conditions precedent, any or all of which may be waived by Purchaser: (a) this Agreement shall be in full force and effect; (b) Seller shall have fully satisfied, or shall therewith fully satisfy, all of its Closing obligations hereunder; and (c) there shall not otherwise then exist any event which would allow Purchaser to terminate this Agreement pursuant to the express terms hereof. 6.3. Seller's Conditions. Seller's obligation to sell the Property is subject to the satisfaction of the following conditions precedent, any or all of which may be waived by Seller: (a) this Agreement shall be in full force and effect, (b) Purchaser shall have fully satisfied, or shall therewith fully satisfy, all of its Closing obligations hereunder, and (c) there shall not otherwise then exist any event which would allow Seller to terminate this Agreement pursuant to the express terms hereof. ARTICLE 7. CLOSING DOCUMENTS AND DELIVERIES ------------------------------------------- 7.1. Conveyancing Documents and Deliveries. At the Closing: (a) Purchaser shall deliver to Seller the Cash Balance and any other amounts payable by Purchaser to Seller at the Closing pursuant to this Agreement; (b) Seller shall execute, acknowledge and deliver a quitclaim deed sufficient to convey the Premises to Purchaser in accordance with the terms hereof, subject only to the Permitted Exceptions (the "DEED"); (c) Seller shall deliver to Purchaser original counterparts (or, if the same are unavailable, copies thereof) of the assignable Service Contracts; (d) Seller shall deliver to Purchaser original counterparts (or, if the same are unavailable, copies thereof) of any permits, approvals or certificates of occupancy pertaining to the Premises, to the extent the same are in Seller's possession or control; (e) Seller shall execute and deliver a general bill of sale in the form of Exhibit E annexed hereto, conveying to Purchaser all of Seller's right, title and interest in and to the Personal Property; (f) Subject to the provisions of Section 7.1(g) hereof, Seller and Purchaser shall mutually execute and deliver to each other an instrument in the form of Exhibit G annexed hereto ( the "SERVICE CONTRACT ASSIGNMENT") providing for the assignment by Seller to Purchaser of all of Seller's right, title and interest in and to the assignable Service Contracts, Licenses and Warranties (other than the JRC License Agreement) and Purchaser's assumption of Seller's obligations under the assignable Service Contracts, Licenses and Warranties (other than the JRC License Agreement) which first arise or accrue after the Closing Date; (g) Seller shall furnish Purchaser with evidence of the termination of the Property Management Agreement (as defined in Exhibit C annexed hereto). Seller and Purchaser mutually acknowledge and agree that, effective as of the Closing, the JRC License Agreement shall terminate, whereupon neither Seller nor Purchaser shall have any further obligation thereunder, with the exception of those obligations which expressly survive the termination of the JRC License Agreement; (h) Seller and Purchaser shall execute and deliver a letter to each of the other parties to the assignable Service Contracts notifying each such party of the sale of the Premises and indicating the new address for notices under the Service Contracts; (i) Seller shall execute and deliver a FIRPTA affidavit required pursuant to the Treasury Department Regulations promulgated under Section 1445 of the Internal Revenue Code of 1986, as amended, in respect of the Property. Seller understands that such certification will be retained by Purchaser and will be made available to the Internal Revenue Service on request; (j) Seller and Purchaser shall execute and deliver to each other a closing statement setting forth with specificity the adjustments made in accordance with Article 8 hereof; (k) Purchaser shall deliver to Seller evidence reasonably satisfactory to Seller of the due authorization, execution and delivery of the documents and instruments to be executed by Purchaser at Closing in accordance with the terms of this Agreement; (l) Seller shall deliver to Purchaser evidence reasonably satisfactory to Purchaser of the due authorization, execution and delivery of the documents and instruments to be executed by Seller at Closing in accordance with the terms of this Agreement; and (m) Seller shall deliver to Purchaser originals of plans or specifications for the Building in its possession or control, if any. ARTICLE 8. CLOSING ADJUSTMENTS ------------------------------ The following are to be adjusted and prorated between Seller and Purchaser as of 11:59 p.m. on the day preceding the Closing Date, based upon a 365 day year, with Seller deemed to be the owner of the Property on the day preceding the Closing Date and Purchaser deemed to be the owner of the Property on the Closing Date. 8.1. Real Estate Taxes. Real estate taxes shall be adjusted and prorated on the basis of the fiscal year for which assessed. If the Closing shall occur before the tax rate or assessed valuation is fixed for the Premises, the apportionment of real estate taxes for such Premises shall be upon the basis of the tax rate for the preceding year applied to the most recently applicable assessed valuation of such Premises, subject to further and final adjustment when the tax rate and/or assessed valuation for such Premises is fixed for the year in which the Closing occurs. In addition, there shall be a further and final adjustment of real estate taxes for the fiscal year in which the Closing occurs if after Closing all or any portion of the Premises is reclassified or reassessed for real estate tax purposes pursuant to Chapter 59, Section 76 of the General Laws of Massachusetts. In the event that the Premises or any part thereof shall be or shall have been affected by an assessment or assessments, Seller shall, at the Closing, be responsible for any installments due prior to the Closing and Purchaser shall be responsible for any installments due on or after the Closing. 8.2. Utility Charges. Seller shall use reasonable efforts to obtain readings of meters measuring utility consumption at the Property for all periods through (and including) the date preceding the Closing Date. Seller shall pay, and be responsible, for all bills rendered on the basis of such readings. If such readings are not obtained for any metered utility, then, at the Closing, apportionment shall be made on the basis of the most recent period for which such readings are available. Upon the taking of subsequent actual readings, there shall be a recalculation of the applicable utility charges, and Seller or Purchaser, as the case may be, shall promptly remit to the other party hereto any amounts to which such party shall be entitled by reason of such recalculation. Unmetered water charges or sewer rents shall be adjusted and prorated as of the Closing Date. 8.3. Other Adjustments. The following items shall also be adjusted as of 11:59 P.M. on the date preceding the Closing Date: (i) charges and payments under Service Contracts assigned to Purchaser; (ii) charges and payments under the JRC License Agreement; and (iii) fees and payments, if any, under Licenses assigned to Purchaser. Any errors or omissions in computing adjustments at the Closing shall be promptly corrected, provided that the party seeking to correct such error or omission shall have notified the other party of such error or omission on or prior to the date that is one (1) year following the Closing Date. The provisions of this Article 8 shall survive Closing. ARTICLE 9. REPRESENTATIONS AND WARRANTIES ----------------------------------------- 9.1. Basic Representations of Purchaser. Purchaser, as of the date hereof, represents and warrants to Seller as follows: (a) Purchaser is a non-profit corporation, duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. (b) Purchaser has full power and authority to enter into and perform this Agreement, the documents to be executed and delivered pursuant hereto, and each and all of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof. (c) The individual executing this Agreement on behalf of Purchaser and the individual executing each of the documents to be executed and delivered in connection herewith on behalf of Purchaser have full power and authority to do so. This Agreement and each of the documents and instruments to be executed by Purchaser in connection herewith are, or will be when executed and delivered, the legal valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with the terms hereof and thereof. Purchaser's performance of its obligations under this Agreement shall not contravene, or cause a default under, any agreement, judgment, order, writ or decree under which Purchaser or any of its assets is bound. (d) Purchaser has not filed any petition seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law relating to bankruptcy or insolvency, nor has any such petition been filed against Purchaser. Purchaser is not insolvent and the consummation of the transactions contemplated by this Agreement shall not render Purchaser insolvent. No general assignment of Purchaser's property has been made for the benefit of creditors, and no receiver, master, liquidator or trustee has been appointed for Purchaser or any of its property. (e) There are no actions or proceedings pending or, to Purchaser's actual knowledge, threatened, against Purchaser which, in Purchaser's reasonable judgment, could have a material adverse affect on Purchaser's ability to perform its obligations hereunder. 9.2. Basic Representations of Seller. Seller, as of the date hereof, represents and warrants to Purchaser as follows: (a) Seller is a limited liability company, duly organized and validly existing and in good standing under the laws of the State of Delaware and authorized to do business in the Commonwealth of Massachusetts. (b) Seller has full power and authority to enter into and perform this Agreement and to enter into the documents to be executed and delivered pursuant hereto, and each and all of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof. (c) The individual executing this Agreement on behalf of Seller and the individuals executing each of the documents to be executed and delivered in connection herewith on behalf of Seller have full power and authority to do so. This Agreement and each of the documents to be executed and delivered by Seller in connection herewith are, or will be when executed and delivered, the legal valid and binding obligations of Seller, enforceable against Seller in accordance with the terms hereof and thereof. Seller's performance of its obligations under this Agreement shall not contravene, or cause a default under, any agreement, judgment, order, writ or decree under which Seller or any of its assets is bound. (d) Seller has not filed any petition seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law relating to bankruptcy or insolvency, nor has any such petition been filed against Seller. Seller is not insolvent and the consummation of the transactions contemplated by this Agreement shall not render Seller insolvent. No general assignment of Seller's property has been made for the benefit of creditors, and no receiver, master, liquidator or trustee has been appointed for Seller or any of its property. (e) There are no actions or proceedings pending or, to Seller's actual knowledge, threatened, against Seller which, in Seller's reasonable judgment, could have a material adverse affect on Seller's ability to perform its obligations hereunder. 9.3. Representations of Seller Regarding the Property. Seller, as of the date hereof, represents and warrants to Purchaser as follows: (a) There are no leases, licenses or occupancy agreements affecting the Premises, other than the JRC License Agreement. (b) There are no service contracts, maintenance agreements or other agreements affecting the Premises, other than the Existing Service Contracts. (c) There are no actions or proceedings pending or, to Seller's actual knowledge, threatened, with respect to the Property. (d) There are no pending or, to Seller's knowledge, threatened, eminent domain or condemnation proceedings with respect to the Property. (e) The Personal Property is free of any lien or encumbrance. (f) Seller has not received written notice that the Premises are in violation of Requirements, nor, to Seller's knowledge, has any governmental authority having jurisdiction over the Premises threatened to issue any such violation. (g) The insurance coverages with respect to the Premises described in Exhibit J annexed hereto are in full force and effect. The representations of Seller contained in Sections 9.3(a) through (e) hereof shall survive Closing for twelve (12) months (the "Representation Survival Period"). 9.4. Closing Certificates of Purchaser and Seller. (a) Purchaser, on the Closing Date, shall execute and deliver to Seller an instrument by which Purchaser shall remake the representations made pursuant to Section 9.1 above as of the Closing, provided that Purchaser, in such instrument, shall (i) update such representations to reflect events occurring between the date hereof and the Closing and (ii) correct such representations to reflect any discovered inaccuracy therein, such instrument being herein called "PURCHASER'S REPRESENTATION CERTIFICATE". (b) Seller, on the Closing Date, shall execute and deliver to Purchaser an instrument by which Seller shall remake the representations made pursuant to Sections 9.2 and 9.3 above as of the Closing, provided that Seller, in such instrument, shall (i) update such representations to reflect events occurring between the date hereof and the Closing and (ii) correct such representations to reflect any discovered inaccuracy therein, such instrument being herein called "SELLER'S REPRESENTATION CERTIFICATE". Notwithstanding the foregoing, (i) Seller's Representation Certificate shall remake the representations contained in Sections 9.3(b) hereof as to the Service Contracts and (ii) Seller shall not remake the representation contained in Sections 9.3(f)-(g) hereof. 9.5. Remedies for Inaccuracies and Other Changes. (a) The remedies of Seller and Purchaser for an inaccuracy in any representation or for any update or correction set forth in any Seller's or Purchaser's Representation Certificate shall be solely as set forth in the following provisions of this Section 9.5. Each of Seller and Purchaser hereby waives any inaccuracy in, or any update made to, any representation made to it pursuant to this Article 9, unless the same is Materially Adverse. For purposes of this Section 9.5, the term "MATERIALLY ADVERSE" shall have the following meanings in the following contexts: (1) An inaccuracy in any representation by Seller shall be deemed to be "MATERIALLY ADVERSE" to Purchaser if, and only if (i) there is an inaccuracy in such representation as of the date made and (ii) Purchaser may reasonably demonstrate that such inaccuracy may reasonably be expected to result in a diminution in the value of the Property or the imposition of liability upon Purchaser which exceeds $25,000; (2) Facts giving rise to an update or correction set forth in a Seller's Representation Certificate shall be deemed to be "MATERIALLY ADVERSE" to Purchaser if, and only if (i) such update or correction is not contemplated or permitted by the terms of this Agreement and (ii) Purchaser may reasonably demonstrate that such update or correction results in a diminution in the value of the Property or the imposition of liability upon Purchaser which exceeds $25,000; and (3) An inaccuracy in any representation by Purchaser or facts giving rise to an update or correction set forth in a Purchaser's Representation Certificate shall be deemed to be "MATERIALLY ADVERSE" to Seller if, and only if, Seller reasonably demonstrates that the same renders Purchaser incapable of proceeding to Closing in accordance with the terms of this Agreement. (b) If, prior to Closing, (i) Seller shall learn of an inaccuracy in any representation of Purchaser set forth in Section 9.1 hereof (as made as of the date hereof) which is Materially Adverse to Seller, which inaccuracy is not cured within ten days after notice from Seller, (ii) Seller shall know of an inaccuracy in any representation of Purchaser made pursuant to Purchaser's Representation Certificate (as made as of the Closing) which is Materially Adverse to Seller or (iii) Purchaser's Representation Certificate shall set forth any update or correction which is Materially Adverse to Seller, then Seller, as its sole remedy therefor in each case, shall have the right to terminate this Agreement upon notice to Purchaser at any time prior to the Closing, whereupon the Deposit shall be paid to Seller as liquidated damages on account thereof and thereafter neither party hereto shall have any further rights or obligations hereunder other than those which expressly survive the termination of this Agreement. Seller and Purchaser agree that the aforesaid liquidated damages are a fair and reasonable amount to be retained by Seller as agreed and liquidated damages in light of Seller's removal of the Premises from the market and the costs incurred by Seller and shall not constitute a penalty or a forfeiture. If, however, Seller proceeds to Closing in accordance with the terms hereof, Seller shall be deemed to have waived the same and shall have no claim on account thereof. Notwithstanding the foregoing, if Seller terminates this Agreement pursuant to this Section 9.5(b) at any time on or before the Due Diligence Expiration Date, the Initial Deposit shall be refunded to Purchaser. (c) If, prior to Closing, (i) Purchaser shall learn of an inaccuracy in any representation of Seller set forth in Sections 9.2 or 9.3 hereof (as made as of the date hereof) which is Materially Adverse to Purchaser, which inaccuracy is not cured within ten days after notice from Purchaser, (ii) Purchaser shall know of an inaccuracy in any representation of Seller made pursuant to Seller's Representation Certificate (as made as of the Closing Date) which is Materially Adverse to Purchaser or (iii) Seller's Representation Certificate shall set forth any update or correction which is Materially Adverse to Purchaser, then Purchaser, as its sole remedy therefor in each case, shall have the right to terminate this Agreement upon notice to Seller at any time prior to Closing, whereupon the Deposit shall be refunded to Purchaser and thereafter neither party shall have any further rights or obligations hereunder other than those which expressly survive the termination of this Agreement. If, however, Purchaser, with actual knowledge of any such inaccuracy, update or correction, elects to proceed to Closing, then Purchaser shall be deemed to have waived the same and shall have no claim on account thereof. Notwithstanding the foregoing, if Purchaser shall elect to terminate this Agreement pursuant to this Section 9.5(c) because Seller has (i) knowingly and intentionally (and with knowledge of the falsity thereof) made a misrepresentation or false warranty or (ii) knowingly and intentionally caused a breach of representation or warranty, which in either case is Materially Adverse to Purchaser, Purchaser shall have a claim for damages on account thereof in the amount of actual, out-of-pocket title examination and survey costs, third-party professional costs (including reasonable attorneys' fees and disbursements) and forfeited loan application or commitment fees incurred in connection with this Agreement, not to exceed $100,000 in the aggregate. (d) If, after Closing, Purchaser shall first learn of an inaccuracy in any representation made by Seller pursuant to Seller's Representation Certificate (as made as of the Closing Date), then Purchaser shall have a claim for damages on account thereof, provided that (i) any claim not brought within the Representation Survival Period shall be deemed waived, (ii) Purchaser hereby waives the right to collect or seek to collect consequential or punitive damages and (iii) the inaccuracy is Materially Adverse to Purchaser. ARTICLE 10. TITLE ----------------- 10.1. Acceptable Title. Seller shall convey, or cause to be conveyed, and Purchaser shall accept, title to the Premises, as of the Closing Date, subject to the Permitted Exceptions, and otherwise free of all tenancies and rights to possession and in broom clean condition. The term "PERMITTED EXCEPTIONS" shall mean, collectively, (i) the matters set forth in Exhibit K annexed hereto, (ii) Title Exceptions that Title Insurer shall be willing to omit as exceptions to coverage in any owner's or mortgagee's policy of title insurance obtained by or on behalf of Purchaser and (iii) any exceptions and matters that are approved, waived or deemed to have been approved or waived by Purchaser. 10.2. Inability to Convey Acceptable Title. Purchaser agrees to obtain from Title Insurer, at Purchaser's expense, a title report with respect to the Premises (the "TITLE REPORT"). Purchaser shall furnish Seller with a copy of the Title Report promptly after its receipt thereof, but in no event later than twenty-five days after the Effective Date. On or before the date which is thirty (30) days after the Effective Date (TIME BEING OF THE ESSENCE), Purchaser may furnish Seller with written notice (a "TITLE OBJECTION NOTICE") of those Title Exceptions (hereinafter defined) noted in the Title Report which are not Permitted Exceptions and as to which Purchaser objects. In addition, within five days of Purchaser's receipt of any continuation of the Title Report, Purchaser may furnish Seller with written notice of Title Exceptions noted therein which are not Permitted Exceptions and as to which Purchaser objects, provided such Title Exceptions were not noted in the Title Report (or any prior continuation thereof). Any such notice shall also constitute a Title Objection Notice. Purchaser shall be deemed to have waived objection to Title Exceptions set forth in the Title Report (or any continuation thereof) to which timely objection is not made in a Title Objection Notice. For purposes of this Agreement, the term "TITLE EXCEPTIONS" shall mean any lien, encumbrance, security interest, charge, reservation, lease, tenancy, easement, right-of-way, encroachment, restrictive covenant, condition or limitation or other matter adversely affecting title to the Property. 10.3. Seller's Rights. Seller shall have the right, in its sole discretion, upon notice to Purchaser (the "TITLE RESPONSE NOTICE") given within ten (10) days after Seller's receipt of any Title Objection Notice (TIME BEING OF THE ESSENCE), to elect to either (i) take such action as Seller deems advisable to discharge those Title Exceptions which are not Permitted Exceptions and are set forth in the Title Objection Notice (the "TITLE DEFECTS") or (ii) subject to the provisions of Section 10.4 hereof, terminate this Agreement, whereupon the Deposit shall be refunded to Purchaser and thereafter neither party hereto shall have any further obligation to the other party hereto, with the exception of those obligations which expressly survive the termination of this Agreement. If Seller fails timely to deliver the Title Response Notice, then Seller shall be deemed to have elected to terminate this Agreement pursuant to clause (ii) above. If Seller, in its Title Response Notice, elects to take action to remove, remedy or comply with the Title Defects, Seller shall be entitled to one or more adjournment(s) of the Closing for up to thirty days in the aggregate to discharge the Title Defects, provided that such adjournment shall not result in the forfeiture of any commitment obtained by Purchaser to finance its acquisition of the Property, unless Purchaser may extend the time in which to close the loan contemplated by the commitment at no cost to Purchaser (it being agreed that the foregoing shall not be deemed to constitute a financing contingency). If Seller elects to adjourn the Closing as aforesaid, Seller shall thereafter use commercially reasonable efforts to remove, remedy or comply with the Title Defects. If Seller is unable to remove, remedy or comply with such Title Defects at the expiration of such adjournment(s), then this Agreement shall be deemed to be terminated as of the last adjourned date of Closing. Upon such termination, the Deposit shall be refunded to Purchaser and neither party hereto shall have any further obligation to the other party, with the exception of those obligations which expressly survive the termination of this Agreement. Except as set forth in Section 10.5 hereof, nothing in this Agreement shall be deemed to require Seller to take or bring any action or proceeding or any other steps to remove any defect in or objection to title or to expend any moneys therefor, nor shall Purchaser have any right of action against Seller, at law or in equity, therefor. 10.4. Purchaser's Right to Accept Title. Purchaser may, upon written notice to Seller at any time on or before the Closing Date (as the same may have been adjourned by Seller in accordance with the provisions of Section 10.3 hereof), elect to accept such title as Seller can convey, notwithstanding the existence of any Title Defects. In such event, (i) this Agreement shall remain in force and effect, (ii) the parties shall proceed to Closing and (iii) Purchaser shall not be entitled to any abatement of the Purchase Price, any credit or allowance of any kind or any claim or right of action against Seller for damages or otherwise by reason of the Title Defects. 10.5. Seller's Obligation. Notwithstanding anything contained in this Article 10 the contrary, Seller shall at or prior to Closing discharge (i) any mortgage affecting the Property, (ii) any Title Defects which are knowingly and intentionally created by Seller subsequent to the date hereof and (iii) any Title Defects which may be discharged solely by the payment of a sum of money, not to exceed $200,000 in the aggregate. 10.6. Wentworth Deed. Seller has furnished Purchaser with a copy of a mortgagee policy of title insurance for the Premises, issued by Fidelity National Title, dated October 22, 1998. Such policy raises an exception from coverage for a reservation of right of way contained in a deed dated July 11, 1927 by E. Francis Wentworth, et al, to Samuel R. Wentworth, recorded in Deed Book 1956, Page 301, Norfolk County Records (the "WENTWORTH DEED"). Purchaser reserves the right to raise objection to the Wentworth Deed in accordance with the provisions of Section 10.2 hereof, whereupon Seller and Purchaser shall have the rights and remedies accorded to them by this Article 10 with respect to Title Exceptions to which Purchaser has raised objection in a Title Objection Notice. If Purchaser fails to raise object to the Wentworth Deed in the time and in the manner specified in Section 10.2 hereof, Purchaser shall be deemed to have waived objection thereto, in which event Purchaser shall close title to the Premises subject thereto without abatement of the Purchase Price, credit or allowance of any kind or claim or right of action against Seller for damages or otherwise by reason of the Wentworth Deed. Nothing in this Agreement shall be deemed to require Seller to take or bring any action or proceeding or any other steps to obtain the discharge of the Wentworth Deed. 10.7. Title Insurance. Purchaser and Seller shall cooperate with Title Insurer and each other in connection with obtaining title insurance insuring title to the Premises subject to the Permitted Exceptions. In furtherance and not in limitation of the foregoing, Seller shall deliver to Title Insurer such certificates or resolutions as may be required to obtain the recordation of the Deed or any instrument required to discharge any Title Exception which is not a Permitted Exception. In addition, Seller shall execute and deliver to Title Insurer an Indemnity Agreement in the form annexed hereto as Exhibit L. 10.8. Violations. Seller shall have no responsibility to cure, or cause to be cured, any violations of Requirements noted against the Premises, whether the same have been noted or issued as of the date hereof or are first noted or issued after the date hereof, and Purchaser agrees to close title to the Premises subject thereto. ARTICLE 11. CASUALTY AND CONDEMNATION ------------------------------------- 11.1. Casualty. (a) For purposes of this Article 11, the following terms shall have the meanings indicated: "MAJOR CASUALTY" means a fire in or other casualty to the Premises which causes damage or injury to the Premises and results in Restoration Costs in excess of an amount equal to ten percent (10%) of the Purchase Price. "RESTORATION COSTS" means the cost to repair or restore (as reasonably determined by an architect or engineer selected by Seller and approved by Purchaser, which approval shall not be unreasonably withheld, conditioned or delayed) the damage to the Premises caused by a fire or other casualty. (b) If, between the date hereof and the Closing, there shall occur a fire or other casualty affecting the Premises which is not a Major Casualty, then Purchaser shall have no right to terminate this Agreement and shall purchase the Premises in its damaged condition without reduction of or offset against the Purchase Price or any other claim against Seller. Seller shall assign to Purchaser the right to receive any insurance proceeds payable to Seller as a result of such fire or other casualty; provided, however, that Seller shall be entitled to retain (to the extent theretofore paid to Seller), and shall not be obligated to assign the right to receive (to the extent not theretofore paid to Seller) an amount of such insurance proceeds equal to Seller's reasonable expenses, if any, incurred in collecting such proceeds and repairing the damage caused by fire or other casualty and provided further that Purchaser shall be entitled to a credit against the Cash Balance in an amount equal to any portion of the insurance claim not payable by reason of the existence of a deductible in Seller's policy of casualty insurance. (c) If, between the date hereof and the Closing, there shall occur a fire or other casualty affecting the Premises which is a Major Casualty, then Purchaser shall have the option, to be exercised upon notice to Seller within fifteen (15) days after receiving notice of such casualty, to terminate this Agreement. If Purchaser shall so elect to terminate this Agreement, the Deposit shall be refunded to Purchaser, whereupon neither party hereto shall have any further obligation to the other hereunder, except for those obligations which expressly survive the termination of this Agreement. If Purchaser shall not elect to terminate this Agreement as provided in this subclause (c), then this Agreement shall remain in full force and effect and the provisions of Section 11.1(b) above shall apply to such damage and any insurance proceeds payable in connection therewith. (d) In no event shall Seller have any obligation to repair any damage or destruction to the Premises, but Seller shall have the right to do so and utilize insurance proceeds for such purpose. (e) Seller and Purchaser expressly intend that the provisions of this Section 11.1 shall govern in the event of a fire or other casualty. 11.2. Condemnation. (a) If, between the date hereof and the Closing, any condemnation or eminent domain proceedings are initiated which would result in a material taking, then either Seller or Purchaser may elect to terminate this Agreement by giving written notice of its election to the other party within fifteen (15) days after receiving notice of such prospective taking. If Seller or Purchaser shall so elect to terminate this Agreement, the Deposit shall be refunded to Purchaser, whereupon neither party hereto shall have any further obligation to the other hereunder, except for those obligations which expressly survive the termination of this Agreement. If neither party so elects to terminate this Agreement, then the parties hereto shall proceed to the Closing without reduction of or offset against the Purchase Price and Purchaser shall have no other claim against Seller. In such event, all of Seller's right, title and interest in and to any condemnation proceeds paid or payable in connection therewith shall be assigned to Purchaser. (b) If, between the date hereof and the Closing, any condemnation or eminent domain proceedings are initiated which would not result in a material taking, then neither Seller nor Purchaser may terminate this Agreement and the parties shall proceed to the Closing without reduction of or offset against the Purchase Price and Purchaser shall have no other claim against Seller. In such event, all of Seller's right, title and interest in and to any condemnation proceeds paid or payable in connection therewith shall be assigned to Purchaser. (c) For purposes of this Section 11.2, a taking shall be deemed to be a material taking if it would result in the taking of in excess of (i) percent (10%) of the rentable square footage of the Building or (ii) five percent (5%) of the parking spaces located on the Land. In no event shall Seller have any obligation to repair or restore the Premises or any portion thereof by reason of any condemnation, whether material or otherwise. ARTICLE 12. DEFAULT AND REMEDIES -------------------------------- 12.1. Default By Purchaser. If Purchaser (i) defaults in its Closing obligations (i.e., defaults in the payment of the Purchase Price or otherwise in the performance of any of its obligations hereunder which are to be performed on, or as of, the Closing Date) or (ii) otherwise materially defaults hereunder and such other material default is not cured within ten (10) days after notice thereof from Seller to Purchaser, then, and in any of such events, Seller, as its sole remedy therefor, may terminate this Agreement by written notice to Purchaser, whereupon the Deposit shall be paid to Seller as liquidated damages on account of such default, and, thereafter, neither party shall have any further rights or obligations hereunder other than those which expressly survive the termination of this Agreement. Seller and Purchaser agree that the aforesaid liquidated damages are a fair and reasonable amount to be retained by Seller as agreed and liquidated damages in light of Seller's removal of the Premises from the market and the costs incurred by Seller and shall not constitute a penalty or a forfeiture. Except as expressly provided to the contrary in this Section 12.1, Seller waives any other right or remedy which Seller may have, at law or in equity, by reason of a default by Purchaser hereunder. 12.2. Default By Seller. If Seller (i) defaults in its Closing obligations (i.e., defaults in the performance of any of its obligations hereunder which are to be performed on, or as of, the Closing Date) or (ii) otherwise materially defaults hereunder and such material default is not cured within ten (10) days after notice thereof from Purchaser to Seller, then, and in either such event, Purchaser may, as its sole remedy therefor, either (x) pursue an action for specific performance of this Agreement by Seller hereunder, without abatement, credit against or reduction of the Purchase Price or (y) terminate this Agreement by written notice to Seller, whereupon the Deposit shall be refunded to Purchaser; it being understood and agreed that in no event shall Purchaser be entitled to money damages. If Purchaser shall elect to so terminate this Agreement, then, except as set forth in Section 12.3 below, neither party shall have any further rights or obligations hereunder other than those which expressly survive the termination of this Agreement. Except as expressly provided in this Section 12.2, Purchaser waives any other right or remedy, at law or in equity, which Purchaser may have or be entitled to as a result of any default by Seller. 12.3. Reimbursement of Purchaser. Notwithstanding the provisions of Section 12.2 hereof, if Purchaser terminates this Agreement pursuant to Section 12.2 hereof because Seller knowingly and intentionally defaulted, beyond any applicable notice and cure period, in the performance of any material covenant of Seller hereunder, Purchaser shall have a claim for damages on account thereof in the amount of actual, out-of-pocket title examination and survey costs, third-party professional costs (including reasonable attorneys' fees and disbursements) and forfeited loan application or commitment fees incurred in connection with this Agreement, not to exceed $100,000 in the aggregate. ARTICLE 13. BROKER ------------------ 13.1. Broker. Seller and Purchaser each represent and warrant to the other that each has had no conversations or dealings with any broker or finder in connection with the transactions contemplated hereby, other than Broker. Purchaser and Seller (each, an "INDEMNIFYING PARTY") shall indemnify, defend and hold the other harmless from and against any and all loss, cost or expense (including, without limitation, reasonable attorneys' fees) arising by reason of a claim for a commission or other compensation made by a broker or finder (other than Broker) claiming to have dealt with the Indemnifying Party. Seller shall pay any commission due to Broker pursuant to separate written agreements. The provisions of this Article 13 shall survive Closing or any termination of this Agreement. ARTICLE 14. ASSIGNMENT ---------------------- 14.1. No Assignment by Purchaser. Neither this Agreement nor any of the rights of Purchaser hereunder (nor the benefits of such rights) may be assigned, transferred or encumbered without Seller's prior written consent (which consent may be withheld in Seller's sole and absolute discretion) and any purported assignment, transfer or encumbrance without Seller's prior written consent shall be void. Purchaser expressly covenants and agrees that (a) if Purchaser is a corporation, a sale or transfer of more than fifty (50%) percent (at any one time or in the aggregate from time to time) of the shares of any class of the issued and outstanding stock of Purchaser, its successors or assigns, or the issuance of additional shares of any class of its stock to the extent of more than fifty (50%) percent (at any one time or, in the aggregate from time to time) of the number of shares of said class of stock issued and outstanding on the date hereof, (b) if Purchaser is a partnership, joint venture or limited liability company, a sale or transfer of more than fifty (50%) percent (at any one time or in the aggregate from time to time) of the partnership, joint venture or membership interests of Purchaser, its successors or assigns, or the issuance of additional partnership, joint venture or membership interests of any class to the extent of more than fifty (50%) percent (at any one time or in the aggregate from time to time) of the amount of partnership, joint venture or membership interests issued on the date hereof shall, in any such case, constitute an assignment of this Agreement. Unless, in each instance, the prior written consent of Seller has been obtained, any such assignment shall constitute a material default under this Agreement and shall entitle Seller to exercise all rights and remedies under this Agreement, at law or equity, in the case of such a default. 14.2. Permitted Assignment to Affiliate. Notwithstanding the provisions of Section 14.1 above to the contrary, the named Purchaser in this Agreement shall have the one-time right to assign its rights and obligations under this Agreement to either (i) an Affiliate of such named Purchaser (including a Massachusetts nominee trust constituting an Affiliate of Purchaser) or (ii) Matthew Israel, Purchaser's executive director, in each case effective on or prior to the Closing, provided that, on or prior to the effective date of such assignment, (i) in the case of an assignment to an Affiliate, Purchaser delivers to Seller evidence of the ownership of Purchaser and the proposed assignee so as to permit Seller to verify that such proposed assignee is an Affiliate of Purchaser and (ii) Purchaser delivers to Seller a written assumption, in form reasonably satisfactory to Seller and duly executed and acknowledged by the assignee, in which the assignee agrees to assume all of Purchaser's covenants, agreements and obligations under this Agreement. As of the date of the assignment of this Agreement to an Affiliate or to Mr. Israel in accordance with the foregoing provisions of this Section 14.2, the representations of Purchaser named herein set forth in Section 9.1 hereof shall be remade as to the Affiliate or Mr. Israel, as the case may be, except that the representations and warranties set forth in Section 9.1(a) hereof shall be modified accordingly. Purchaser named herein shall remain fully liable for all of Purchaser's covenants, agreements and obligations under this Agreement notwithstanding any such permitted assignment pursuant to this Section 14.2. Upon any assignment of this Agreement in accordance with the provisions of this Article 14, Purchaser shall promptly pay to Seller any consideration paid or payable to Purchaser by reason of the assignment. ARTICLE 15. COVENANTS --------------------- 15.1. Operation of Premises. Between the date hereof and the Closing Date, Seller shall continue to maintain the Premises in the ordinary course and substantially in accordance with the practices and procedures customarily followed by Seller in the maintenance of the Premises prior to the date hereof; provided, however, that Seller shall have no obligation to make any repairs or expenditures that are capital in nature. 15.2. Capital Repairs. (a) Between the date hereof and the Closing Date, Seller shall not make any material capital repairs or replacements to the Premises without the prior written consent of Purchaser, which consent shall not be unreasonably withheld or delayed, provided, however, that Seller may undertake such repairs or replacements without Purchaser's consent if (i) the performance of such repairs or replacements is required to avoid an unsafe or hazardous condition, (ii) the performance of such repairs or replacements is required pursuant to any Requirements or (iii) Seller's failure to perform such repairs or replacements would, in Seller's reasonable judgment, subject Seller to criminal or civil liability or result in a forfeiture of the Property or the imposition of a lien or encumbrance thereon. Whenever required pursuant to this Section 15.2, Purchaser's consent shall be deemed granted if not denied by notice (stating the grounds for denial with reasonable specificity) given to Seller within five (5) Business Days of Purchaser's receipt from Seller of request for such consent. Whenever Purchaser's consent to a capital repair or replacement is not required pursuant to this Section 15.2, Seller shall furnish Purchaser with reasonable prior notice of the repair or replacement, except in the case of an emergency, in which case Seller shall furnish Purchaser with such notice as is practicable under the circumstances. (b) Seller and Purchaser acknowledge that Seller anticipates engaging a contractor or contractors to perform repair work upon an approximately 1,080 square foot portion of the facade (the "FACADE WORK"). Purchaser hereby consents to the performance of the Facade Work and to Seller's entrance into such contract as Seller deems appropriate for the performance of the Facade Work (collectively, the "FACADE WORK CONTRACT"). If the Facade Work is not completed on or before the Closing Date, then, at Closing, (i) Seller shall assign to Purchaser all of Seller's right, title and interest in and to the Facade Work Contract and Purchaser shall assume all of Seller's obligations thereunder in accordance with the provisions of the Service Contract Assignment and (ii) Purchaser shall be entitled to a credit against the Cash Balance in an amount equal to the remaining balance under the Facade Work Contracts. If the Facade Work is completed before Closing, Seller shall at Closing assign to Purchaser any warranties by the contractor under the Facade Work Contract. 15.3. Insurance. Between the date hereof and the Closing Date, Seller shall either (i) maintain in full force and effect the fire and other casualty insurance coverages described in Exhibit J annexed hereto or (ii) replace such insurance policies with other policies providing coverage equivalent thereto. 15.4. Leases. Between the date hereof and the Closing Date, Seller shall not enter into any lease, license or occupancy agreement with respect to the Premises. 15.5. Service Contracts. Between the date hereof and the Closing Date, Seller shall not enter into any New Service Contracts or modify, renew or extend the term of any of the Existing Service Contracts or New Service Contracts without Purchaser's prior written consent in each instance, which consent shall not be unreasonably withheld, conditioned or delayed. If required, Purchaser's consent shall be deemed granted if not denied by notice (stating the grounds for denial with reasonable specificity) given to Seller within five (5) Business Days of Purchaser's receipt from Seller of request for such consent. Notwithstanding anything contained in this Section 15.4 to the contrary, Seller shall have the right, without Purchaser's consent, to terminate any one or more of the Existing Service Contracts and the New Service Contracts at any time on or prior to the Closing Date. 15.6. Notices. Seller shall promptly furnish Purchaser with copies of any written notices Seller receives from governmental authorities which pertain to the Premises. ARTICLE 16. MISCELLANEOUS ------------------------- 16.1. Notices. (a) All notices, demands, requests and other communications required hereunder shall be in writing and shall be deemed to have been given: (i) upon delivery, if personally delivered; (ii) three (3) days after deposit in the United States Mail when delivered, postage prepaid, by certified or registered mail; or (iii) one (1) Business Day after deposit with a nationally recognized overnight delivery service marked for delivery on the next Business Day. Notice may also be given by telecopy, provided that telecopy notice shall not be effective unless the sender (x) furnishes the recipient with the telephonic notice of the telecopy delivery (which may occur by voice mail) and (y) retains the telecopy machine confirmation of the telecopy delivery. Telecopy notice shall be deemed to have been given on the later to occur of (A) the date of receipt of telephonic notice of the telecopy delivery and (B) the confirmed date of telecopy transmission. Each notice shall be addressed to the party for whom it is intended at its address hereinafter set forth: If to Seller: Wellsford Capital Properties, LLC c/o Wellsford Real Properties, Inc. 535 Madison Avenue 26th Floor New York, NY 10022 Attention: William H. Darrow Telecopy No. (212) 421-7244 Telephone No. (212) 819-4903 with a mandatory copy to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, New York 10104 Attention: Dennis M. Sughrue, Esq. Telecopy No. (212) 541-4630 Telephone No. (212) 541-2009 If to Purchaser: The Judge Rotenberg Educational Center, Inc. 240 Turnpike Street Canton, Massachusetts 02021 Attention: Matthew Israel Telecopy No. (781) 828-2804 Telephone No. (781) 828-2202 with a mandatory copy to: Eckert Seamans Cherin & Melott LLC One International Place, 18th Floor Boston, Massachusetts 02110 Attention: Arthur Gold, Esq. Telecopy No.: (617) 342-6899 Telephone No.: (617) 342-6834 and a mandatory copy to: Jeffer, Mangels, Butler & Marmaro LLP 2121 Avenue of the Stars, 10th Floor Los Angeles, California 90067-5010 Attention: Timothy Lappen, Esq. Telecopy No. (310) 201-3539 Telephone No. (310) 201-3536 If to Escrowee: Old Republic National Title Insurance Company Three Center Plaza Suite 440 Boston, Massachusetts 02018 Attention: Sophie Stein Telecopy No. (617) 742-5000 Telephone No. (617) 742-4000 (b) Any party may designate a change of address by written notice to the others given in accordance with the provisions of this Section 16.1. (c) The attorney for any party may send notices on that party's behalf. 16.2. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. 16.3. Successors. All of the provisions of this Agreement and of any of the documents and instruments executed in connection herewith shall apply to and be binding upon, and inure to the benefit of Seller and Purchaser, their successors and their permitted assigns. 16.4. No Third Party Beneficiary. This Agreement and each of the provisions hereof are solely for the benefit of Purchaser and Seller and their permitted assigns. No provisions of this Agreement or of any of the documents and instruments executed in connection herewith shall be construed as creating in any person or entity other than Purchaser and Seller and their permitted assigns any rights of any nature whatsoever. 16.5. No Personal Liability. Purchaser shall look only to Seller's estate and interest in the Property for the collection of a judgement (or other judicial process) requiring the payment of money by Seller in the event that Purchaser is expressly entitled to a damage claim against Seller pursuant to the terms of this Agreement, and no other property or assets of Seller or its partners, members, officers, managers, shareholders or principals, disclosed or undisclosed, shall be subject to levy, execution, attachment or other enforcement procedure for the satisfaction of any such damage claim against Seller under or with respect to this Agreement. The foregoing provisions of this Section are not intended to, and shall not, limit any express right that Purchaser might otherwise have to obtain equitable relief (including the remedy of specific performance where applicable and appropriate) against Seller. The terms and provisions of this subsection shall survive the Closing or the earlier termination of this Agreement. 16.6. Entire Agreement. This Agreement, together with the documents and instruments executed and delivered in connection herewith, set forth the entire agreement between Purchaser and Seller relating to the transactions contemplated hereby and all other prior or contemporaneous agreements, understandings, representations or statements, oral or written, relating directly to the Property are superseded hereby. 16.7. Severability. If any provision in this Agreement is found by a court of competent jurisdiction to be in violation of any applicable law, and if such court should declare such provision of this Agreement to be unlawful, void, illegal or unenforceable in any respect, the remainder of this Agreement shall be construed as if such unlawful, void, illegal or unenforceable provision were not contained therein, and the rights, obligations and interests of the parties hereto under the remainder of this Agreement shall continue in full force and effect undisturbed and unmodified in any way. 16.8. Modification. This Agreement and the terms hereof may not be changed, waived, modified, supplemented, canceled, discharged or terminated orally, but only by an instrument or instruments in writing executed and delivered by Seller and Purchaser. 16.9. Waiver of Trial by Jury. EACH PARTY HEREBY WAIVES, IRREVOCABLY AND UNCONDITIONALLY, TRIAL BY JURY IN ANY ACTION BROUGHT ON, UNDER OR BY VIRTUE OF OR RELATING IN ANY WAY TO THIS AGREEMENT OR ANY OF THE DOCUMENTS OR CERTIFICATES EXECUTED IN CONNECTION HEREWITH, THE PROPERTY, OR ANY CLAIMS, DEFENSES, RIGHTS OF SET-OFF OR OTHER ACTIONS PERTAINING HERETO OR TO ANY OF THE FOREGOING. 16.10. Venue. Purchaser and Seller each hereby irrevocably waives any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of this Agreement or the transactions contemplated hereby brought in any federal or state court sitting in the Commonwealth of Massachusetts and hereby further irrevocably waives and claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Seller and Purchaser further hereby expressly submits to the jurisdiction of all federal and state courts sitting in the Commonwealth of Massachusetts. 16.11. No Recording. Neither this Agreement nor any memorandum hereof shall be recorded. Each party hereby agrees to indemnify and hold harmless the others for all liabilities, losses, damages, liens, suits, claims, costs and expenses (including reasonable attorneys' fees) incurred by the others by reason of a breach of the foregoing covenant. 16.12. Captions. The captions and table of contents in this Agreement are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Agreement or any of the provisions hereof. 16.13. Counterparts; Effectiveness of Agreement. This Agreement may be executed in any number of counterparts, each of which shall constitute an original but all of which together will constitute one instrument. This Agreement shall not be effective unless and until the same has been executed and delivered by all parties hereto whether in one or more counterparts. 16.14. Merger. The delivery of the Deed to Purchaser and the closing of title to the Property shall be deemed to constitute full performance and discharge by Seller of every agreement and obligation on the part of Seller to be performed hereunder, and no agreement, promise, representation or warranty, express or implied, on the part of Seller shall survive Closing unless expressly set forth to the contrary herein. 16.15. Fair Interests. The parties acknowledge that each party and its counsel have reviewed this Agreement and the rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. 16.16. Legal Fees. If either party brings any action or suit against the other by reason of any default under this Agreement, the prevailing party, as finally determined in such action or suit, shall be entitled to recover from the other party all costs and expenses of such action or suit (including appellate proceedings), including, without limitation, reasonable attorneys' fees and disbursements, it being agreed that the determination of which party is the prevailing party shall be included in the matters which are the subject of such action or suit. 16.17. Time is of the Essence. Time shall be of the essence with respect to the obligations of Seller and Purchaser hereunder. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Seller: ------ WELLSFORD CAPITAL PROPERTIES, L.L.C. By: Wellsford Capital, its sole member By: /s/ William H. Darrow ------------------------ William H. Darrow Vice President Purchaser: --------- THE JUDGE ROTENBERG EDUCATIONAL CENTER, INC. By: /s/ Matthew L. Israel ------------------------- Name: Matthew L. Israel Title: President and Treasurer Agreed as to Section 3.2 only: Escrowee: - -------- OLD REPUBLIC NATIONAL TITLE INSURANCE COMPANY By: /s/ Sophie Stein -------------------- Name: Sophie Stein Partner Title Counsel Exhibit A (the Land) Exhibit A-1 (Survey) Exhibit B Intentionally Omitted EXHIBIT C (Existing Service Contracts) 1. Termite Control Contract, dated as of October 18, 2000, by and between Waltham Chemical and Wellsford Capital Properties. 2. Interior Plant Maintenance Contract, dated as of April 6, 2000, by and between Rentokil- Tropical Plant Services and Wellsford Capital Properties. 3. Fire Alarm Monitoring and Testing Contract, dated as of May 2, 2001, by and between American Alarm and Communications and Wellsford Capital Properties. 4. Property Management Agreement, dated as of April 1, 1998, by and between Wellsford Capital and Trammell Crow Operations (the "Property Management Agreement") 5. Exterior Landscaping Contract, dated as of April 12, 2001, by and between Vanaria & Sons Landscaping and Wellsford Capital Properties. 6. Agreement dated as of September 12, 2001 between Seller and Sea & Shore Construction Company, Inc. 7. Parking License Agreement dated October 19, 2001 between Seller and Purchaser. Exhibit D Intentionally Omitted Exhibit E (Form of Bill of Sale) BILL OF SALE ------------ KNOW ALL MEN BY THESE PRESENTS, That WELLSFORD CAPITAL PROPERTIES, L.L.C., having an office at 535 Madison Avenue, 26th Floor, New York, New York 10022 ("GRANTOR"), for and in consideration of the sum of Ten Dollars ($10.00), lawful money of the United States, to it in hand paid, at or before delivery of these presents by THE JUDGE ROTENBERG EDUCATIONAL CENTER, INC., a Massachusetts non-profit corporation having an office at 240 Turnpike Street, Canton, Massachusetts 02021 ("GRANTEE"), the receipt of which is hereby acknowledged, by these presents does hereby convey unto Grantee, its successors and assigns, all right, title and interest of Grantor in and to all personal property affixed to, located upon or used in connection with the real property described in Schedule 1 annexed hereto and made a part hereof. The foregoing conveyance is made without recourse, representation or warranty of any kind, except as may be set forth in that certain Sale-Purchase Agreement dated as of November ___, 2001 between Grantor and Grantee, and subject to the limitations set forth therein. TO HAVE AND TO HOLD the same unto Grantee, its successors and assigns forever. This Bill of Sale shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, Grantor has caused this instrument to be duly executed as of this ___ day of ______, 2001 WELLSFORD CAPITAL PROPERTIES, L.L.C. By: Wellsford Capital, a Maryland real estate investment trust, its Manager By: _______________________________ William H. Darrow Vice President Schedule 1 Exhibit F Intentionally Omitted Exhibit G (Form of Assignment and Assumption of Service Contracts, Licenses and Warranties ASSIGNMENT AND ASSUMPTION OF ---------------------------- SERVICE CONTRACTS, LICENSES AND WARRANTIES ------------------------------------------ THIS ASSIGNMENT AND ASSUMPTION OF SERVICE CONTRACTS, LICENSES AND WARRANTIES (this "ASSIGNMENT"), made as of the ___ day of _______, ____, by and between WELLSFORD CAPITAL PROPERTIES, L.L.C., having an office at 535 Madison Avenue, 26th Floor, New York, New York 10022 ("ASSIGNOR"), and THE JUDGE ROTENBERG EDUCATIONAL CENTER, INC. a Massachusetts non-profit corporation having an office at 240 Turnpike Street, Canton, Massachusetts 02021 ("ASSIGNEE"), for and in consideration of the sum of Ten Dollars ($10.00) lawful money of the United States to it in hand paid, at or before delivery of these presents by Assignee with reference to the following: R E C I T A L S --------------- Pursuant to a Sale-Purchase Agreement dated as of November ___, 2001 between Assignor and Assignee (the "PURCHASE AGREEMENT"), Assignor is conveying to Assignee the Property (as defined in the Purchase Agreement). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Purchase Agreement. NOW THEREFORE, in consideration of the sum of Ten Dollars ($10.00), the foregoing promises, covenants and undertakings contained in this Assignment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ASSIGNMENT AND ASSUMPTION ------------------------- 1. (a) Assignor hereby assigns to Assignee, without recourse representation or warranty of any kind, all of its right, title and interest in and to the Service Contracts identified on Schedule 1 annexed hereto (collectively, the "ASSIGNED SERVICE CONTRACTS") and the assignable Licenses and Warranties. (b) Assignee hereby accepts the foregoing assignment and agrees to assume, keep, perform and fulfill all of the terms, conditions and obligations which are required to be kept, performed and fulfilled by Assignor in connection with or arising out of the Assigned Service Contracts and the assignable Licenses and Warranties from and after the date hereof. 2. This Assignment shall be binding upon, enforceable by and shall inure to the benefit of the parties hereto and their respective successors and assigns. 3. This Assignment may be signed in multiple counterparts which, when taken together and signed by all parties and delivered to any other party hereto, shall constitute a binding Assignment between the parties. 4. This Assignment shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, Assignor and Assignee have duly executed this instrument as of the date first set forth above. ASSIGNOR: WELLSFORD CAPITAL PROPERTIES, L.L.C. By: Wellsford Capital, a Maryland real estate investment trust, its Manager By: ------------------------- William H. Darrow Vice President ASSIGNEE: THE JUDGE ROTENBERG EDUCATIONAL CENTER, INC. By: ------------------------- Name: Title: Exhibit H Intentionally Omitted Exhibit I Intentionally Omitted Exhibit J (Insurance Coverages) Exhibit K (Permitted Exceptions) 1. Zoning and building regulations, ordinances, and requirements adopted by any governmental or municipal authority having jurisdiction thereof, and amendments and additions thereto now in force and effect, which relate to the Premises. 2. Subject to adjustment as herein provided, assessments due and payable after Closing and real estate taxes. 3. Sewer Easement taken by the Board of Selectman of the Town of Canton dated August 21, 1973 and recorded in Book 4975, Page 27 and filed as Document 337255. 4. Rights of Way as set forth in Documents Nos. 101763, 232129 and 233197. 5. Twenty Foot-Wide Way along southwesterly portion of Lot 8 as shown on Land Court Plan No. 1888F. 6. Decision by Town of Canton, Board of Appeals Zoning Board, dated October 13, 1996, filed with Land Court as Document No. 752070. 7. Conditions disclosed by a survey of the Premises, prepared by Selwyn & Kirwin Associates, last redated October 16, 1998. EXHIBIT L Indemnity Agreement EX-10.98 9 ex10-98.txt INDEMNITY AGREEMT-GREEN RIVER CONST LOAN 12/31/01 INDEMNITY AGREEMENT This Indemnity Agreement (this "Agreement") is made as of the 31st day of December, 2001 by and between Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"), whose address is 1600 Wynkoop Street, Suite 202, Denver, Colorado 80202, and Wellsford Real Properties, Inc. a Delaware corporation ("WRP") whose address is 535 Madison Avenue, 26th Floor, New York, New York 10022, (WRP and WPHC being herein collectively called "Indemnitors"), and Al Feld ("Feld"). 1. Loan Agreement and Note. This Agreement is executed in connection with that certain Construction Loan Agreement (the "Loan Agreement") dated February 8, 2000 between Bank of America, N.A. ("Lender") and Green River at Palomino Park LLC, a Colorado limited liability company ("Borrower"), pursuant to which Lender has made a loan to Borrower (the "Loan") evidenced by the Loan Agreement and by Borrower's promissory note in the stated principal amount of $39,400,000 (the "Note") also dated February 8, 2000. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Loan Agreement. 2. Purpose and Consideration. In consideration of making the Loan pursuant to the Loan Agreement, Lender required that Feld execute and deliver to Lender that certain Guaranty Agreement dated as of February 8, 2000 (the "Guarantee") in favor of Lender. WRP owns an interest in WPHC, which is a member of Borrower, and accordingly, Indemnitors are providing this Indemnity Agreement to Feld to satisfy certain requirements set forth in the Operating Agreement of Borrower dated January 5, 2000 (the "Operating Agreement") in connection with the Final Closing (as such term is defined in the Operating Agreement). 3. Indemnity. Indemnitors hereby agree to indemnify, defend and hold harmless Feld from and against any loss, cost, fee, damage, claim, liability, demand, suit, judgment or expense of any kind whatsoever, including without limitation reasonable attorneys' fees and costs (collectively "Claims"), that may be incurred by or asserted against Feld arising out of or related in any way to the Guarantee, but specifically excluding therefrom the following: (i) any Claims arising out of a default, or an event that with the giving of notice or passage of time would become a default, under the Loan occurring prior to the date hereof and caused by any act or omission of Feld or any Affiliate (such term, as used herein, shall have the meaning given it in the Operating Agreement) of Feld; (ii) any Claims arising from any negligence, fraud or misrepresentation by Feld or any Affiliate of Feld or from any breach of any representation or warranty of Feld set forth in the Guarantee, or any breach of any representation, warranty or covenant concerning Feld or any Affiliate of Feld set forth in the Loan Documents, and (iii) any failure of Feld to timely furnish and correctly certify to Lender the statements, certificates and other information regarding Feld or any Affiliate of Feld, as and when required under the Guarantee or the Loan Documents. In the event Feld has or at any time had a claim against Indemnitors under this paragraph 3 and amounts paid to Feld by Indemnitors on account thereof are subsequently recovered from Feld in any bankruptcy proceeding, such amounts may be recovered by Feld from Indemnitors to the extent of the amount recovered from Feld in any bankruptcy proceeding. Indemnitors shall be liable to Feld for all attorneys' fees and other costs, penalties and charges arising out of any claims covered by this paragraph 3. 4. Offset. Notwithstanding any other provision hereof, any amounts that may otherwise be due to Feld under this Agreement shall be offset and reduced by any liability of Feld to Indemnitors or Borrower arising under or in connection with this Agreement, the Operating Agreement or any agreement delivered in connection with the Operating Agreement. 5. Term. This Indemnity shall remain in full force and effect until the Loan is paid in full. 6. Defenses. In the event of a claim against Feld under the Guarantee that may give rise to obligations of Indemnitors under this Agreement, Feld shall give notice to Indemnitors within ten (10) business days of Feld receiving notice of such claim, and Feld shall cooperate fully with Indemnitors in raising and pursuing any and all defenses, offsets or waivers that may be available to Feld under or in connection with the Guarantee. Any counsel selected to assert defenses on behalf of Feld shall be subject to reasonable approval by Feld and Indemnitors. 7. Cooperation. Feld shall cooperate with Indemnitors, at not more than nominal cost to Feld, in providing any documents or information requested by Lender or Indemnitors in connection with the Loan and in maintaining the Loan in good standing. 8. Security. The obligations of WPHC under this Agreement are secured by that certain Pledge and Security Agreement made as of January 5, 2000, by WPHC for benefit of Feld (the "Pledge"), and WPHC hereby agrees that its obligations hereunder shall be included in the term "Obligations" as used in the Pledge. Feld and WPHC hereby agree with respect to the Pledge: (a) that subparagraph (ii) of paragraph 23 of the Pledge is hereby deleted and replaced with the following: "(ii) expiration of that certain Indemnity Agreement dated as of December 31, 2001, from Pledgor and Wellsford Real Properties, Inc. to Pledgee," (b) that any failure of WPHC to perform its obligations under this Agreement, subject to WPHC's offset rights set forth in this Agreement, shall be a default by WPHC under the Pledge, and (c) that, upon payment in full of the Loan, Feld shall cause the termination of the UCC Financing Statement, file no. 20002062785, filed July 10, 2000 with the Secretary of State of the State of Colorado, given by WPHC to Feld in connection with the Pledge. 9. Notices. All notices and communications hereunder shall be in writing and shall be served by (a) U.S. mail, certified, return receipt requested, or (b) a nationally recognized overnight delivery service that routinely issues receipts, or (c) personal delivery, addressed to the party to whom such notice is intended as set forth below or to such other places as the parties may designate in writing, delivered in the manner aforesaid. Any such notice shall be deemed given and effective upon the earlier of (i) five (5) days after such notice has been deposited in the United States mail as aforesaid, (ii) actual receipt or refusal, or (iii) when personally delivered to the specified parties. Notices to Indemnitors shall be addressed to each of the Indemnitors at the addresses set forth in the first paragraph of this Indemnity Agreement. Notices to Feld shall be addressed: c/o The Feld Company 4600 South Ulster Street Suite 350 Denver, CO 80237 10. Indemnitors' Representations and Warranties. Indemnitors represent and warrant to Feld that: (a) Each of the Indemnitors is a corporation in good standing in its state of organization and has the full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder; the execution, delivery and performance of this Agreement by each of the Indemnitors has been duly and validly authorized; and all requisite corporate action has been taken by each of the Indemnitors to make this Agreement valid and binding upon each of the Indemnitors, enforceable in accordance with its terms; (b) there is no action, suit, proceeding or investigation pending or threatened against either of the Indemnitors which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of Indemnitors or in any material impairment of the right or ability of Indemnitors to carry on their business substantially as now conducted, or which would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of Indemnitors contemplated herein, or which would be likely to impair materially the ability of Indemnitors to perform under the terms of this Agreement; (c) Indemnitors do not believe nor do they have any reason or cause to believe, that Indemnitors cannot perform each and every covenant of Indemnitors contained in this Agreement; (d) no approval, authorization, order, license or consent of, or registration or filing with, any governmental authority or other person, and no approval, authorization or consent of any other party is required in connection with Indemnitors entering into this Agreement; and (e) this Agreement constitutes a valid, legal and binding obligation of Indemnitors, enforceable against them in accordance with the terms hereof, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 11. Applicable Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Colorado without reference to conflicts of law. 12. Entire Agreement. This Agreement embodies the entire agreement and understanding among the parties relating to the subject matter hereof and supersedes all prior agreements and understandings related to such subject matter. It is agreed that there are no terms, understandings, representations or warranties, express or implied, relating to such subject matter other than those set forth herein. 13. No Waiver. No delay by any party hereto in exercising any right, power or privilege under this Agreement shall operate as a waiver of any such privilege, power or right except to the extent such delay damages or causes any prejudice to any other party hereto. 14. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement 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 Agreement. 15. No Oral Change. This Agreement, 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 Indemnitors or Feld, but only by an agreement in writing signed by all parties hereto. 16. Headings. The headings and captions of various paragraphs of this Agreement 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. 17. Successor and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the heirs, executors, administrators and legal representative of Feld and the successors and assigns of Indemnitors, all of whom shall be bound by the provisions of this Agreement, provided that no rights or obligation under this Agreement may be assigned except with the written consent of each party hereto. (Remainder of page intentionally left blank.) IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the day and year first above written. INDEMNITORS: Wellsford Real Properties, Inc., a Delaware corporation By: /s/ David M. Strong ---------------------- David M. Strong Vice President Wellsford Park Highlands Corp., a Colorado corporation By: /s/ David M. Strong ---------------------- David M. Strong Vice President FELD: /s/ Al Feld ------------------------------------ Al Feld STATE OF COLORADO ) ) ss. CITY and COUNTY OF Denver ) The foregoing was acknowledged before me this 22nd day of February, 2002 by David M. Strong, as Vice President of Wellsford Real Properties, Inc., a Delaware corporation. WITNESS my hand and official seal. My commission expires: July 3, 2002. /s/ -------------- Notary Public STATE OF COLORADO ) ) ss. CITY and COUNTY OF Denver ) The foregoing was acknowledged before me this 22nd day of February, 2002 by by David M. Strong, as Vice President of Wellsford Park Highlands Corp., a Colorado corporation. WITNESS my hand and official seal. WITNESS my hand and official seal. My commission expires: July 3, 2002. /s/ -------------- Notary Public F-48 STATE OF ___________ ) ) ss. COUNTY OF ____________________ ) The foregoing was acknowledged before me this _____ day of _________________, 2002 by Al Feld. WITNESS my hand and official seal. My commission expires: . ------------------------------ -------------- Notary Public EX-10.99 10 ex10-99.txt OP AGRMT-GREEN RIVER 01/05/2000 OPERATING AGREEMENT OF GREEN RIVER AT PALOMINO PARK LLC, A COLORADO LIMITED LIABILITY COMPANY as of January 5, 2000
TABLE OF CONTENTS Page ---- 1 DEFINITIONS..............................................................................................1 2 FORMATION OF COMPANY....................................................................................13 2.1 Formation....................................................................13 2.2 Name.........................................................................13 2.3 Principal Place of Business..................................................13 2.4 Registered Office and Registered Agent.......................................14 2.5 Articles of Organization.....................................................14 2.6 Term.........................................................................14 3 BUSINESS OF COMPANY.....................................................................................14 3.1 Permitted Businesses.........................................................14 3.2 Other Activity or Business...................................................14 4 CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS AND LOANS TO THE COMPANY.......................................................................15 4.1 Capital Contributions........................................................15 4.2 Withdrawal or Reduction of Members' Contributions to Capital ..............................................................................................15 4.3 Development Deficit Payments.................................................16 4.4 Operating Deficit Payments...................................................16 4.5 Additional Capital Contributions.............................................16 4.6 Miscellaneous................................................................16 5 INITIAL CLOSING; INFRASTRUCTURE LAND CLOSING; CONSTRUCTION LOAN CLOSING......................................................................16 5.1 Initial Closing..............................................................16 5.2 Construction Procedures and Closing..........................................18 5.3 Infrastructure Land Closing and Bond Financing of Infrastructure ..............................................................................................20 5.4 Failure of Construction Loan Closing to Occur................................20 6 DEVELOPMENT OF PROJECT; OPERATIONS PRIOR TO THE FINAL CLOSING DATE.............................................................................21 6.1 Duties of Feld...............................................................21 6.2 Construction Completion......................................................22 6.3 Development Deficit Guaranty.................................................22 6.4 Operating Deficit Guaranty...................................................23 6.5 Liabilities of the Company...................................................23 6.6 Construction Contracts.......................................................23 6.7 Administration of the Construction Loan......................................24 6.8 Change Orders................................................................24 6.9 Retainage....................................................................24 6.10 Agreements with Affiliates...................................................24 6.11 Warranty by Feld.............................................................25 6.12 Insurance....................................................................25 6.13 Personal Obligation..........................................................26 6.14 Force Majeure................................................................26 6.15 Limitations of Feld's Authority..............................................26 6.16 Pre-Existing Environmental Condition Liability...............................27 7 COMPENSATION TO FELD....................................................................................27 7.1 Development Management Fee...................................................27 7.2 Construction Management Fee..................................................27 7.3 Construction Loan Guarantee Fee..............................................28 7.4 Cost Savings Fee.............................................................28 7.5 Incentive Fee................................................................28 7.6 Completion Fee...............................................................28 7.7 Conditions to Payment of Fees; Right of Offset...............................28 8 FINAL CLOSING...........................................................................................29 8.1 Conditions to Final Closing..................................................29 8.2 Initiation of Final Closing..................................................29 8.3 Actions at the Final Closing.................................................29 8.4 Certain Rights of Feld Upon Satisfaction of Final Closing Funding Conditions.....................................................................................30 9 ALLOCATIONS.............................................................................................30 9.1 Profits and Losses...........................................................30 9.2 General Provisions...........................................................30 9.3 Special Provisions...........................................................31 9.4 Code Section 704(c) Allocations..............................................32 9.5 Allocations Relating to Taxable Issuance of Interest.........................33 10 DISTRIBUTIONS...........................................................................................33 10.1 Cash Flow....................................................................33 10.2 Division Among Members.......................................................33 10.3 Special Distribution to WPHC.................................................33 11 BOOKS, RECORDS, AND ACCOUNTING..........................................................................33 11.1 Books and Records............................................................33 11.2 Reports......................................................................33 11.3 Tax Returns..................................................................34 11.4 Special Basis Adjustment.....................................................34 11.5 Tax Matters Partner..........................................................34 11.6 Bank Accounts................................................................35 12 MANAGEMENT..............................................................................................35 12.1 Management...................................................................35 12.2 Number, Tenure and Qualifications............................................35 12.3 Appointment of Feld as Manager...............................................35 12.4 Certain Powers of Managers...................................................35 12.5 Member Approval of Certain Acts..............................................36 12.6 Liability for Certain Acts...................................................36 12.7 Indemnity of the Members and the Managers....................................37 12.8 Manner of Acting.............................................................37 12.9 Informal Act by Managers.....................................................37 12.10 Participation by Electronic Means............................................37 12.11 Resignation..................................................................38 12.12 Removal......................................................................38 12.13 Vacancies....................................................................39 12.14 Prohibition Against Publicly Traded Partnership..............................39 13 REPRESENTATIONS, WARRANTIES AND COVENANTS...............................................................40 13.1 Representations and Warranties of Each Member................................40 13.2 Representations, Warranties and Covenants of Feld............................41 13.3 General Representation.......................................................43 13.4 Survival; Indemnity..........................................................43 14 RIGHTS AND OBLIGATIONS OF MEMBERS.......................................................................44 14.1 Limitation of Liability......................................................44 14.2 Company Debt Liability.......................................................44 14.3 List of Members..............................................................45 14.4 Company Books................................................................45 14.5 Priority and Return of Capital...............................................45 14.6 Outside Activity.............................................................45 15 MEETINGS OF MEMBERS.....................................................................................46 15.1 Annual Meeting...............................................................46 15.2 Special Meetings.............................................................46 15.3 Place of Meeting.............................................................46 15.4 Notice of Meetings...........................................................46 15.5 Meeting of all Members.......................................................46 15.6 Record Date..................................................................46 15.7 Quorum.......................................................................46 15.8 Manner of Acting.............................................................47 15.9 Proxies......................................................................47 15.10 Action by Members Without a Meeting..........................................47 15.11 Voting by Ballot.............................................................47 15.12 Waiver of Notice.............................................................47 16 TRANSFERABILITY; PUT-CALL PROVISIONS....................................................................47 16.1 Restrictions on Transferability..............................................47 16.2 Put-Call Rights..............................................................48 16.3 Calculation of Option Price..................................................48 16.4 Right of Offset..............................................................49 16.5 Restrictions on Resignation..................................................49 16.6 Permitted WPHC Transfer......................................................49 17 ADMISSION OF ADDITIONAL MEMBERS.........................................................................50 18 DISSOLUTION AND TERMINATION.............................................................................50 18.1 Dissolution..................................................................50 18.2 Effect of Filing of Dissolving Statement.....................................50 18.3 Distribution of Assets Upon Dissolution......................................50 18.4 Articles of Dissolution......................................................51 18.5 Filing of Articles of Dissolution............................................51 18.6 Winding Up...................................................................51 18.7 No Restoration of Deficit Capital Accounts...................................51 18.8 Deemed Liquidation...........................................................52 18.9 Permitted Withdrawal by Feld.................................................52 19 MISCELLANEOUS PROVISIONS................................................................................52 19.1 Statement of Intent of Parties...............................................52 19.2 Notices......................................................................52 19.3 Application of Colorado Law..................................................53 19.4 Waiver of Action for Partition...............................................54 19.5 Amendments...................................................................54 19.6 Construction.................................................................54 19.7 Headings.....................................................................54 19.8 Waivers......................................................................54 19.9 Time of the Essence..........................................................54 19.10 Remedies for Default.........................................................54 19.11 Rights and Remedies Cumulative...............................................54 19.12 Severability.................................................................54 19.13 Heirs, Successors and Assigns................................................54 19.14 Counterparts.................................................................55 19.15 Further Assurances...........................................................55 19.16 Entire Agreement.............................................................55 19.17 Attorneys Fees...............................................................55
THE SECURITIES REPRESENTED BY THIS INSTRUMENT OR DOCUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE MANAGERS OF THE COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE SUBMISSION TO THE MANAGERS OF THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE MANAGERS TO THE EFFECT THAT ANY SUCH TRANSFER OR SALE WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED THEREUNDER. OPERATING AGREEMENT OF GREEN RIVER AT PALOMINO PARK LLC, A COLORADO LIMITED LIABILITY COMPANY THIS OPERATING AGREEMENT is made as of the 5th day of January, 2000, by and among AL FELD, an individual ("Feld"), and WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation ("WPHC"), as the members of GREEN RIVER AT PALOMINO PARK LLC, a Colorado limited liability company (the "Company"). NOW THEREFORE, pursuant to the Act, the following shall constitute the Operating Agreement of GREEN RIVER AT PALOMINO PARK LLC, a Colorado limited liability company. 1 DEFINITIONS The following terms used in this Operating Agreement shall have the following meanings (unless otherwise expressly provided herein): (a) "Accountants" means Ernst & Young or such other accountant engaged by the Company with the unanimous consent of the Members. (b) "Act" means the version of the Colorado Limited Liability Company Act adopted by the State of Colorado, Colo. Rev. Stat.ss.ss.7-80-101 to 7-80-913, as amended from time to time. (c) "Adjusted Capital Account Deficit" with respect to any Member means the deficit balance, if any, in such Member's Capital Account as of the end of any Fiscal Year after giving effect to the following adjustments: (i) credit to such Capital Account the sum of (A) any amount which such Member is obligated to restore to such Capital Account pursuant to any provision of this Agreement, plus (B) an amount equal to such Member's share of Partnership Minimum Gain as determined under Regulation Section 1.704-2(g)(1) and such Member's share of Partner Nonrecourse Debt Minimum Gain as determined under Regulation Section 1.704-2(i)(5), plus (C) any amounts which such Member is deemed to be obligated to restore pursuant to Regulation Section 1.704-1(b)(2)(ii)(c); and (ii) debit to such Capital Account the items described in Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). (d) "Affiliate" means any Person controlling the outstanding equity interests or profits interests of any other Person, any Person whose outstanding equity interests are controlled by any other Person, or any Person controlling, controlled by, or under common control with any other Person. (e) "Agreement" shall mean this Operating Agreement as originally executed and as it may be amended from time to time. (f) "Approved Affiliate Agreements" shall have the meaning set forth in Section 5.2.6 hereof. (g) "Architect's Agreement" means the agreement to be entered into between the Company and Feld Design, Inc. ("Architect"), an Affiliate of Feld, at or prior to the Construction Loan Closing. (h) "Asset Value" with respect to any Company asset means: (i) The fair market value, when contributed, of any asset contributed to the Company by any Member; (ii) The fair market value on the date of distribution of any asset distributed by the Company to any Member as consideration for an Interest in the Company; (iii) The fair market value of all Property at the time of the happening of any of the following events: (A) the admission of a Member to, or the increase of an Interest of an existing Member in, the Company in exchange for a Capital Contribution; or (B) the liquidation of the Company under Regulation Section 1.704-1(b)(2)(ii)(g); or (iv) The Basis of the asset in all other circumstances. (i) "Bankruptcy Event" with respect to the Company or any Member means any one of: (A) Filing a voluntary petition in bankruptcy or for reorganization or for adoption of an arrangement under the Bankruptcy Code; (B) Making a general assignment for the benefit of creditors; (C) The appointment by a court of a receiver for all or a portion of the property of the Company or for all or a portion of a Member's property having an aggregate value in excess of $500,000; (D) The entry of an order for relief in the case of an involuntary petition in bankruptcy; or (E) The assumption of custody or sequestration by a court of competent jurisdiction of all or substantially all of the Company's or such Member's property, as appropriate. (j) "Basis" with respect to an asset means the adjusted basis from time to time of such asset for federal income tax purposes. (k) "Budgeted Construction Loan Interest" means that amount which appears in the line item of the Final Project Budget (attached hereto as Exhibit O) denoted as "CONSTR. LOAN INTEREST. (l) "Call Option" means the call option of WPHC with respect to the Interest of Feld as described in Section 16.2.1 hereof. (m) "Capital Account" means an account maintained for each Member in accordance with Regulation Sections 1.704-1(b) and 1.704-2 and to which the following provisions apply to the extent not inconsistent with such Regulations: (i) There shall be credited to each Member's Capital Account (A) such Member's Capital Contributions; (B) such Member's distributive share of Profits; (C) any items of income or gain specially allocated to such Member under Section 9.3 of this Agreement; and (D) the amount of any Company liabilities (determined as provided in Code Section 752(c) and the Regulations thereunder) assumed by such Member or to which Property distributed to such Member is subject; (ii) There shall be debited to each Member's Capital Account (A) the amount of money and the Asset Value of any Property distributed to such Member pursuant to this Agreement; (B) such Member's distributive share of Losses; (C) any items of expense or loss which are specially allocated to such Member under Section 9.3 of this Agreement, and (D) the amount of liabilities (determined as provided in Code Section 752(c) and the Regulations thereunder) of such Member assumed by the Company or to which Property contributed to the Company by such Member is subject; and (iii) The Capital Account of any transferee Member shall include the appropriate portion of the Capital Account of the Member from whom the transferee Member's Interest was obtained. (n) "Capital Contribution" means the amount of money and the Asset Value of any property other than money contributed to the Company by a Member with respect to such Member's Interest in the Company. (o) "Capital Contribution Balance" means with respect to any Member the aggregate Capital Contributions made by such Member, plus an amount corresponding to interest thereon at an annual rate of twelve percent (12%) from the date(s) such Capital Contributions are made until the Option Closing Date. The parties acknowledge that the definition of Capital Contribution Balance is only used in connection with the determination of Fair Market Value of Feld's Interest. (p) "Cash Flow" means the Operating Cash Flow and Sales or Refinancing Cash Flow for any given period. (q) "Code" means the Internal Revenue Code of 1986, as amended, or corresponding provisions of subsequent superseding federal revenue laws. (r) "Company" means GREEN RIVER AT PALOMINO PARK LLC, a Colorado limited liability company. (s) "Construction Consultant" means the Construction Consultant selected by WPHC to monitor construction on behalf of WPHC, or such other consultant as may be selected by WPHC. (t) "Construction Lender" means the maker of the Construction Loan, or its successor and assigns in such capacity. (u) "Construction Loan" means the Construction Loan in a principal amount not to exceed $39,400,000 to be made to the Company by the Construction Lender at the Construction Loan Closing. (v) "Construction Loan Closing" means the closing of the transactions described in Section 5.2 hereof. (w) "Construction Loan Closing Date" means the date on which the Construction Loan Closing occurs. (x) "Construction Loan Outside Date" has the definition given it in Section 5.2.4 hereof. (y) "Construction Procedures" means the requirements regarding construction procedures set forth on Exhibit B attached hereto. (z) "Conversion Date" means the date on which Substantial Completion has occurred. (aa) "Control" means the direct or indirect ownership of at least 50% of the equity interests or profits interests of any other Person. (bb) "Cost Savings" means the positive amount, if any, equal to: Total Budgeted Development Costs, minus (i) the undisbursed amount, if any, of Budgeted Construction Loan Interest through Substantial Completion and minus (ii) the actual Development Costs incurred through the Final Closing Date." (cc) "Deposit Agreement" means the Deposit and Contract Administration Agreement between WPHC and The Feld Company regarding the Land Contract, which Deposit and Contract Administration Agreement is attached hereto as Exhibit C. (dd) "Depreciation" for any Fiscal Year or other period means the cost recovery deduction with respect to an asset for such year or other period as determined for federal income tax purposes, provided that if the Asset Value of such asset differs from its Basis at the beginning of such year or other period, depreciation shall be determined as provided in Regulation Section 1.704-1(b)(2)(iv)(g)(3). (ee) "Development Costs" means the direct or indirect costs paid or accrued by the Company related to the acquisition of the Project Land and the development of the Project, including without limitation: (i) all costs of construction and development of the Project; (ii) all costs of causing the Project and its operations to comply with laws prior to the date of Substantial Completion; (iii) all real estate taxes, assessments and personal property taxes relating to the period prior to the Conversion Date; (iv) all costs of insurance incurred by or charged to the Company relating to the period prior to the Conversion Date; (v) all fees paid to Feld or its Affiliates (excluding the property management fee paid to The Feld Company); (vi) all financing costs relating to the period prior to the Conversion Date, including origination fees, reimbursement of expenses of the Construction Lender and interest; (vii) all costs of administration of the Company, including legal and accounting fees prior to or on the Final Closing Date; and (viii) costs of title insurance endorsements deleting the mechanic's lien exception from the owner's title policy and bringing the date of the owner's title policy down to the date of Final Closing. (ff) "Development Deficits" means the positive amount, if any, by which Development Costs exceed the sum of: (a) the Capital Contributions of the Members required to be made at the Initial Closing, (b) the Final Closing Capital Contribution, and (c) the aggregate NOI Construction Loan Interest Payments, less any undisbursed Budgeted Construction Loan Interest, for the period prior to the date of Substantial Completion. (gg) "Development Deficit Payments" shall mean the Development Deficit Payments to be paid by Feld pursuant to Section 6.3 of this Agreement. (hh) "Entity" means any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association, or any governmental or quasi-governmental agency or body. (ii) "Environmental Laws" means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.A. Section 9601, et. seq.; the Hazardous Materials Transportation Act, 49 U.S.C.A. Section 1801, et. seq.; the Resource Conversation and Recovery Act, 42 U.S.C.A. Section 6901, et. seq.; the Toxic Substances Control Act, 15 U.S.C.A. Section 2601, et. seq.; the Federal Water Pollution Control Act, 33 U.S.C.A. Section 1251, et. seq.; any Colorado environmental laws; or any successor to such laws (in existence on the date any relevant representation is made or updated), or any other federal, state or local environmental, health or safety statute, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards concerning or in connection with hazardous or toxic wastes, substances, material, smoke, gas or particulate matter as now or at any time hereafter in effect, or any common law theory based on nuisance or strict liability. (jj) "Environmental Reports" means the Environmental Site Assessment prepared by ATC Associates dated March 16, 1994, concerning the Land, and the Phase I Environmental Site Assessment Update dated November 15, 1999, prepared by ATC Associates. (kk) "Fair Market Value of Feld's Interest" means the following: (i) one percent (1.0%) of the following: (A) the fair market value of the Company's assets as determined by the Accountants based on the books and records of the Company and on a current appraisal of the Project, minus (B) the amount of the Company's debts and liabilities, including without limitation, any debt encumbering the Project, trade payables, accrued expenses and adjustments for any reasonably foreseeable contingent liabilities as determined by the Accountants and any other fees payable to Feld, minus (C) the Infrastructure Cost allocable to the Project made on the same basis that such allocation of Infrastructure Cost is made in connection with the calculation of the Incentive Fee; minus (ii) the amount determined as of the Option Closing Date by which (A) one percent (1.0%) of the aggregate Capital Contribution Balances of Feld and WPHC exceeds (B) the Capital Contribution Balance of Feld. (ll) "Final Closing" means the closing of the transactions described in Article 8 hereof. (mm) "Final Closing Date" means the date on which the Final Closing occurs. (nn) "Final Closing Capital Contribution" means the Capital Contribution to be made by WPHC pursuant to Section 4.1.2(c) hereof, when, as and if required by this Agreement. (oo) "Final Closing Funding Conditions" means the conditions to the obligations of WPHC to make the Final Closing Capital Contribution, or otherwise to satisfy its obligation under Section 8.3.1 hereof, which conditions are set forth on Exhibit D attached hereto. (pp) "Final Completion" means the lien-free completion of construction of the improvements in accordance with the Plans and Specifications (subject only to minor and inconsequential field changes and other changes consented to by WPHC), including without limitation, completion or correction of all punchlist items and seasonal items such as landscaping to the reasonable satisfaction of WPHC, payment and release of all liens of subcontractors, materialmen, and other providers of labor, equipment, material and/or services to the Property and the Project as evidenced by the receipt of all unconditional lien releases from all such subcontractors, materialmen and all other providers of labor, equipment, material and/or services to the Property and the Project, or in the event a lien is being contested, the posting by Feld of collateral in an amount and form reasonably satisfactory to WPHC, which may include providing a surety bond to which the lien is transferred and providing title insurance coverage against such liens. (qq) "Fiscal Year" means the taxable year of the Company for federal income tax purposes as determined under Code Section 706 and the Regulations thereunder. (rr) "Force Majeure" means acts of God, strikes, shortages of labor or materials, weather conditions or other matters not reasonably within Feld's control ("Force Majeure"), except that under no circumstances shall lack of available funds be considered an event of Force Majeure. (ss) "Gross Operating Revenues" shall mean, with respect to any given period of time, all gross operating income and rental revenues actually received by or paid to or for the account of the Company with respect to the ownership, operation, leasing and occupancy of the Project, excluding tenant security deposits paid under Leases but including, but not limited to, any and all of the following: (i) rentals paid by tenants under leases of space in the Project ("Leases"); (ii) late charges and interest paid by tenants under Leases; (iii) rents and receipts from vending machines and similar items; (iv) fees from parking garages or carports, if applicable; and (v) cable television and telephone revenues. (tt) "Hazardous Materials" means without limitation, (i) asbestos or any material composed of or containing asbestos or urea formaldehyde in any form and in any type; (ii) polychlorinated biphenyl compounds; (iii) oil hydrocarbons, petroleum, petroleum products or products containing or derived from petroleum; (iv) any hazardous or toxic waste, substance, material, smoke, gas or particulate matter, as presently defined by or for purposes of Environmental Laws. (uu) "Incentive Fee" has the meaning set forth in Exhibit P hereof. (vv) "Infrastructure" means the interior street improvements, utilities, landscaping, a perimeter wall and gate, a guardhouse, a recreational center and amenities, and a park and recreational amenities to be constructed on the Infrastructure Land, as more particularly described on Exhibit E attached hereto. (ww) "Infrastructure Costs" means the actual cost of acquiring, constructing and developing all of the Infrastructure, including without limitation the cost of the Infrastructure Land, design and engineering costs, construction management fees, general contractor fees, property taxes on the Infrastructure Land prior to completion of the Infrastructure, interest expense on the Infrastructure Land and the Infrastructure at an assumed nine percent (9.0%) rate of interest for the period prior to the completion of each applicable phase of the Infrastructure. Infrastructure shall not include the cost of issuance of bonds to finance the Infrastructure. If all of the Infrastructure has not been finally completed at the time of determination of Infrastructure Costs due to phasing of the construction of Infrastructure or for any other reason, then Infrastructure Costs shall include an amount equal to the expected amount of Infrastructure Costs upon final completion of the Infrastructure as reasonably determined by WPHC. (xx) "Infrastructure Land" means the parcel of land on which the Infrastructure improvements shall be constructed, which parcel is described on Exhibit F attached hereto. (yy) "Infrastructure Improvements Agreement" has the meaning set forth in Section 5.3.3 hereof. (zz) "Initial Closing" means the closing of the transactions described in Section 5.1 hereof. (aaa) "Initial Closing Date" means the date on which the Initial Closing occurs. (bbb) "Interest" means the ownership interest of a Member in the Company at any particular time, including the right of such Member to any and all benefits to which such member may be entitled as provided in this Agreement or the Act, together with the obligations of such Member to comply with all the terms and provisions of this Agreement and the Act. Such Interest of each Member shall, except as specifically provided herein, be the percentage of the aggregate of such benefits or obligations specified in this Agreement as such Member's Percentage Interest. (ccc) "Land" means the parcel of land located in Douglas County, Colorado, which parcel is described on Exhibit G attached hereto. (ddd) "Land Contract" means that certain Second Amended and Restated Vacant Land Purchase and Sale Agreement dated March 23, 1995, between Mission Viejo Company, as Seller, and The Feld Company, as Purchaser, as assigned to and assumed by WPHC by that certain Assignment and Assumption Agreement - Purchase Agreement dated May 2, 1995. (eee) "Majority In Interest" shall mean Members holding a majority of the Percentage Interests. (fff) "Managers" shall mean one or more managers. Specifically, "Managers" shall mean Feld or any other Persons that succeed such Manager in that capacity. Managers need not be residents of the State of Colorado or Members of the Company. References to the Manager in the singular or as him, her, it, itself, or other like references shall also, where the context so requires, be deemed to include the plural or the masculine or feminine reference, as the case may be. (ggg) "Master Development" means a five-phase, gated apartment community to be constructed on the Master Development Land, including a central 23-acre park containing a clubhouse, swimming pool and health club. The approximate anticipated number of units in each phase of the Master Development is as follows: Phase I -- 456; Phase II -- 304; Phase III -- 264; Phase IV -- 424; and Phase V -- 352, plus 80 units unallocated, for a total of 1,880 units if fully developed. (hhh) "Master Development Land" means the Land described on Exhibit H attached hereto, which land is all of the land to be sold and conveyed pursuant to the Land Contract. (iii) "Material Default" means a default by Feld in any of its obligations hereunder which in the reasonable judgment of WPHC has caused or is likely to cause damages to WPHC of $250,000 or more. (jjj) "Members" shall mean Feld and WPHC and each of the parties who may hereafter become additional or substituted Members. (kkk) "Minimum Option Price" means $50,000. (lll) "Multi-Family Project" shall mean an apartment project, condominium project, town- home project or other multi-family residential project. (mmm) "Net Operating Income" means, with respect to any given period of time, the aggregate Gross Operating Revenue for such period of time minus the aggregate Operating Expenses for such period of time. Notwithstanding the foregoing, in connection with the calculation of the Completion Fee, Net Operating Income shall be determined on an accrual basis for the relevant period with the following additional adjustments: if property taxes do not fully reflect the completion of the Project, then the property taxes shall be increased to the amount of property taxes that would have been assessed had the Project been completed and included in the calculation of the property taxes. With respect to calculating the Completion Fee only, such fully-assessed tax estimate shall be applied on a per-building basis beginning only upon receipt of a certificate of occupancy for each building. (nnn) "NOI Construction Loan Interest Payments" has the definition given it in Section 6.3 hereof. (ooo) "Operating Cash Flow" means with respect to any given period the Net Operating Income of the Company actually received and attributable to such period reduced by all debt service charges and expenses related to such period and by expenditures required to be capitalized for federal income tax purposes incurred during such period (other than Development Costs). (ppp) "Operating Deficits" means, for any specified period, the greater of 0 or the following: (A) the interest payments, accruals and periodic charges and expenses on the Construction Loan for such period to the extent each of the foregoing exceeds the amount available for such item under the Construction Loan; plus (B) the aggregate Operating Expenses for such period of time; minus (C) Gross Operating Revenue for such period of time. (qqq) [INTENTIONALLY DELETED]. (rrr) "Operating Expenses" shall mean with respect to any given period of time all expenses of the Company in connection with the ownership, operation, leasing and occupancy of buildings in the Project, which either are rent-ready or all or any portion of which are occupied by tenants, attributable to such period of time as determined on an accrual basis, excluding interest payments and accruals on the Construction Loan but including, but not limited to, any and all of the following: (i) general real estate taxes; (ii) special assessments or similar charges; (iii) personal property taxes, if any; (iv) sales and use taxes applicable to such operating expenses; (v) cost of utilities for the Project; (vi) maintenance and repair costs of the Project; (vii) operating and management expenses and fees; (viii) premiums of insurance carried on or with respect to the Project; (ix) costs, including leasing commissions, advertisement and promotional costs, to obtain leases and the cost of work performed to ready space in the Project for occupancy under leases; (x) accounting and auditing fees and costs, attorneys' fees and other administrative and general expenses and disbursements of the Company in connection with the ownership, operation, leasing and management of the Project; (xi) expensed improvements in accordance with the accounting practices of WPHC; (xii) an allocable share of the costs and expenses of operating and maintaining the Infrastructure, excluding such costs and expenses that are paid by the owner of any other phase of the Master Development or are paid from operating reserves of the Infrastructure owner established in connection with the financing of the Infrastructure (the method of allocation of such costs and expenses shall be agreed upon by the Members at or prior to the Construction Loan Closing); and (xiii) any other costs, charges or expenses incurred by the Company which are not Development Costs. (sss) "Option Closing Date" means the date on which the Call Option or the Put Option shall close. (ttt) "Option Price" means the greater of the Fair Market Value of Feld's Interest and the Minimum Option Price. (uuu) "Outside Date" means the date that is twenty-eight (28) months following the Construction Loan Closing Date. Such Outside Date may be extended by Force Majeure, but in no event by more than 120 days. (vvv) "Percentage Interest" shall mean the following: (i) with respect to Feld, one percent (1.0%); and (ii) with respect to WPHC, ninety-nine percent (99.0%). (www) "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of such Person where the context so admits. (xxx) "Plans and Specifications" means the for-construction plans and specifications for the construction of the Project, which plans and specifications are to be prepared and approved by the Members as described in Section 5.2.2 hereof. (yyy) "Pre-Existing Environmental Condition" means the presence, if any, of Hazardous Materials on or about the Project Land on the Initial Closing Date which at any subsequent time constitutes a violation of Environmental Laws or which subjects or is reasonably expected to subject the Company or its Members or Managers to liability to any Person. (zzz) "Pre-Existing Environmental Condition Liability" means any liability, loss, damage or cost incurred by the Company prior to the Final Closing Date arising from a Pre-Existing Environmental Condition, including without limitation, any increase in Development Costs or Operating Expenses arising directly from a Pre-Existing Environmental Condition. (aaaa) "Profits" and "Losses" for any Fiscal Year or other period means an amount equal to the Company's taxable income or loss for such year or period determined in accordance with Code Section 703(a) and the Regulations thereunder with the following adjustments: (i) All items of income, gain, loss and deduction of the Company required to be stated separately shall be included in taxable income or loss; (ii) Income of the Company exempt from federal income tax shall be treated as taxable income; (iii) Expenditures of the Company described in Code Section 705(a)(2)(B) or treated as such expenditures under Regulation Section 1.704-1(b)(2)(iv)(i) shall be subtracted from taxable income; (iv) The difference between Basis and Asset Value shall be treated as gain or loss upon the happening of any event described in Article 1(h)(i), (ii) or (iii); (v) Gain or loss resulting from the disposition of Property from which gain or loss is recognized for federal income tax purposes shall be determined with reference to the Asset Value of such Property; (vi) Depreciation shall be determined based upon Asset Value instead of as determined for federal income tax purposes; and (vii) Items which are specially allocated under Article 9 of this Agreement shall not be taken into account. (bbbb) "Project" means the 424-unit apartment complex and related facilities and amenities to be constructed on the Project Land in accordance with the Plans and Specifications. Project does not include the Infrastructure. (cccc) "Project Budget" means the budget for construction and development of the Project by the Company. As described in Section 5.2.3 hereof, in connection with the Construction Loan Closing, the Members shall agree upon the "Final Project Budget." (dddd) "Project Land" means the Land, excluding the Infrastructure Land. (eeee) "Property" means all real and personal property, tangible and intangible, owned by the Company. (ffff) "Property Management Agreement" means the Property Management Agreement to be entered into between the Company and The Feld Company, an Affiliate of Feld, in the form attached hereto as Exhibit J. The Property Management Agreement provides that it shall terminate on the first to occur of the following: (i) at the option of either party, upon the Removal of Feld; and (ii) on the Final Closing Date. (gggg) "Put Option" means the put option of Feld with respect to the Interest of Feld as described in Section 16.2.2 hereof. (hhhh) "Regulations" means the federal income tax regulations, including temporary (but not proposed) regulations, promulgated under the Code. (iiii) "Removal" means the removal of Feld pursuant to Section 12.12 hereof. (jjjj) "Removal Event" has the meaning set forth in Section 12.12 hereof. (kkkk) "Restricted Party" has the meaning set forth in Section 14.6.4 hereof. (llll) "Sales or Refinancing Cash Flow" means, for any given period, the cash proceeds received from the Company from the sale, other disposition, or refinancing of any or all of the Property (including payments of principal and interest on obligations received by the Company in connection with such sale or other disposition) in excess of amounts necessary to discharge Company obligations with respect to such Property. (mmmm) "Substantial Completion" means satisfaction of all of the following: (i) completion of construction of the Project in compliance with the Plans and Specifications (subject only to minor and inconsequential field changes and other changes consented to by WPHC, punch list items and seasonal items such as landscaping which do not interfere with the occupancy and use of the Project, and liens of subcontractors, materialmen, and other providers of labor, equipment, material and/or services to the Property and the Project not yet due and payable or for which either a surety bond or title insurance reasonably acceptable to WPHC is provided by Feld), as evidenced by temporary or permanent certificate(s) of occupancy, or the equivalent, issued by the applicable governmental authority for all buildings which are part of the Project, which permit the occupancy and use of all the apartment units; and (ii) each unit in the Project having been made rent-ready, including, without limitation, the installation of all appliances (including, without limitation, refrigerators and ranges), light fixtures, floor coverings and window coverings required by the Plans and Specifications or otherwise required for the use, occupancy, and operation of the units. (nnnn) "Substitute Member" shall mean any Person who or which is admitted to the Company as a substitute Member pursuant to Colo. Rev. Stat.ss.7-80-702(2) (1991), as it may be amended. (oooo) "Total Budgeted Development Costs" means the Total Development Costs as shown on the Final Project Budget. (pppp) "WRP" shall mean Wellsford Real Properties, Inc., a Delaware corporation. (qqqq) "WPHC" means Wellsford Park Highlands Corp., a Colorado corporation. 2 FORMATION OF COMPANY 2.1 FORMATION. On November 12, 1999, the parties hereto caused the Company to be organized as a Colorado limited liability company under and pursuant to the Act. 2.2 NAME. The name of the Company is Green River at Palomino Park LLC, a Colorado limited liability company. 2.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Company within the State of Colorado shall be 1623 Blake Street, Suite 270, Denver, Colorado 80202. The Company may locate its places of business and registered office at any other place or places as the Managers may from time to time deem advisable. 2.4 REGISTERED OFFICE AND REGISTERED AGENT. The Company's registered office shall be at the office of its registered agent at Corporation Service Company, 1560 Broadway, Denver, Colorado 80202 and the name of its initial registered agent at such address shall be Corporation Service Company. The registered agent shall provide promptly to the Managers copies of all written notices, summonses and other documents received by the registered agent on behalf of the corporation (other than general advertising and promotional materials) and, in any event, such copies shall be provided not more than ten (10) business days after receipt thereof by such registered agent. The Managers shall have no liability for the effects of any failure by the registered agent to timely deliver any such items to the Managers except to the extent the Managers had actual notice of such items prior to delivery by the registered agent. In any contracts, subcontracts, loan agreements or other documents entered into by the Company, the Managers shall provide that the addresses for notice to be given under any such agreements shall include both the registered agent and the Managers. 2.5 ARTICLES OF ORGANIZATION. The Articles of Organization filed for the Company with the Secretary of State of the State of Colorado (the "Articles of Organization") are hereby adopted and incorporated by reference into this Agreement. In the event of any inconsistency between the Articles of Organization and this Agreement, the terms of the Articles of Organization shall govern. 2.6 TERM. The term of the Company shall be thirty (30) years from the date of filing of Articles of Organization with the Secretary of State of the State of Colorado, unless the Company is earlier dissolved in accordance with either the provisions of this Agreement or the Act. 3 BUSINESS OF COMPANY 3.1 PERMITTED BUSINESSES. The business of the Company shall be: 3.1.1 To acquire the Land and to construct, develop, own, operate, manage, lease, finance, improve and sell or otherwise dispose of the Project; and 3.1.2 To engage in all activities necessary, customary, convenient, or incidental to any of the foregoing. 3.2 OTHER ACTIVITY OR BUSINESS. The Company shall not engage in any other activity or business unless approved by all Members. 4 CAPITAL CONTRIBUTIONS, CAPITAL ACCOUNTS AND LOANS TO THE COMPANY 4.1 CAPITAL CONTRIBUTIONS. Subject to the provisions of this Agreement, the Members shall be obligated to make the following Capital Contributions to the Company: 4.1.1 CAPITAL CONTRIBUTIONS BY FELD. At the Initial Closing, Feld shall make a Capital Contribution of $1,000. 4.1.2 CAPITAL CONTRIBUTIONS BY WPHC. WPHC shall make the following Capital Contributions: (a) At the Initial Closing, WPHC shall make a Capital Contribution by conveying the Land to the Company, which Capital Contribution the parties agree shall be valued at $3,167,389 for the Land purchase price plus pre-development costs and carrying costs of $1,965,796, for a total of $5,133,185. (b) WPHC shall have the right, but not the obligation, to make Capital Contributions from time to time in its sole and absolute discretion to fund Operating Deficits or other expenses incurred by the Company. Notwithstanding the foregoing, so long as: (i) Feld is not in material default under this Agreement, and (ii) Feld has personally guaranteed the Construction Loan pursuant to Section 5.2.4 and is not in material default under such guaranty, then WPHC shall be obligated to make Capital Contributions to fund: (y) prior to Substantial Completion, the amount (if any) by which Operating Expenses exceed Gross Operating Revenue, and (z) Operating Deficits which were incurred during the period between Substantial Completion and payment in full of the Construction Loan. (c) At the Final Closing and contingent on satisfaction of all of the Final Closing Funding Conditions, WPHC shall make the Final Closing Capital Contribution in an amount equal to the following: (i) the Total Budgeted Development Costs, minus (ii) any Capital Contributions made prior to the Final Closing Date by WPHC, plus (iii) any distributions made to WPHC pursuant to Section 10.3 hereof, minus (iv) an amount equal to sixty percent (60%) of Cost Savings in excess of $212,000, if any; or WPHC shall otherwise satisfy its obligations under Section 8.3.1 hereof. WRP shall guaranty the obligation of WPHC to make the Final Closing Capital Contribution by executing the Guaranty attached hereto. 4.2 WITHDRAWAL OR REDUCTION OF MEMBERS' CONTRIBUTIONS TO CAPITAL. 4.2.1 A Member shall not receive out of the Company's Property any part of such Member's Capital Contributions in violation of the Act. 4.2.2 A Member, irrespective of the nature of such Member's Capital Contribution, has the right to demand and receive only cash in return for such Member's Capital Contribution and then only in accordance with the terms of this Agreement. 4.3 DEVELOPMENT DEFICIT PAYMENTS. Feld shall have the obligation to make Development Deficit Payments when and as required under Article 6 of this Agreement. 4.4 OPERATING DEFICIT PAYMENTS. [INTENTIONALLY DELETED]. 4.5 ADDITIONAL CAPITAL CONTRIBUTIONS. Except as expressly described in this Article 4, no Member has an obligation to make any Capital Contributions or loans or advances to the Company. 4.6 MISCELLANEOUS. 4.6.1 NO INTEREST ON CAPITAL CONTRIBUTION. No Member shall be entitled to or shall receive interest on such Member's Capital Contribution. 4.6.2 NO WITHDRAWAL OF CAPITAL CONTRIBUTION. No Member may withdraw any capital from the capital of the Company except as expressly provided herein or under the Act. 4.6.3 NO PRIORITY OF RETURN OF CAPITAL CONTRIBUTION. No Member shall have any priority over any other Member with respect to the return of any Capital Contribution, except as expressly provided herein. 4.6.4 NO THIRD PARTY BENEFICIARIES. The provisions of this Article 3 are not intended to be for the benefit of and shall not confer any rights on any creditor or other Person (other than a Member in such Member's capacity as a Member) to whom any debts, liabilities or obligations are owed by the Company or any of the Members. 5 INITIAL CLOSING; INFRASTRUCTURE LAND CLOSING; CONSTRUCTION LOAN CLOSING 5.1 INITIAL CLOSING. The Members of the Company shall cooperate to cause an Initial Closing at which the following shall occur: 5.1.1 LAND CLOSING. The Company shall acquire the Land from WPHC. The Company shall obtain an Owner's Policy of Title Insurance from a title insurer acceptable to the Members (the "Title Company"). 5.1.2 REIMBURSEMENT OF FELD EXPENSES. Notwithstanding anything to the contrary herein, only those Reimbursable Expenses which constitute actual, third party costs of Feld shall be paid at the Initial Closing. Any Reimbursable Expenses for in-house architectural services or other services provided by Feld or The Feld Company ("In House Reimbursable Expenses") shall be paid only if and when a Construction Loan Closing occurs. In connection with any request for the payment of In House Reimbursable Expenses, Feld shall submit to WPHC for approval the following: (i) detailed invoices setting forth the services performed and work delivered by Feld and its Affiliates; and (ii) receipts, releases and documents of transfer and conveyance in connection with the work performed and services provided as may be reasonably requested by WPHC. The payment of any In House Reimbursable Expenses shall be subject to the approval of WPHC, which approval shall not be unreasonably withheld. If Feld is removed or withdraws as a Member and a Construction Loan Closing has not occurred by the date of such removal or withdrawal, then the Company shall have no obligation to pay Feld, The Feld Company or their Affiliates for any In House Reimbursable Expenses. Except as set forth in this Section 5.1.2, neither Feld nor The Feld Company shall have any right of reimbursement from the Company with respect to any other costs and expenses incurred in connection with the Project prior to the Initial Closing Date. 5.1.3 APPROVAL OF LAND DOCUMENTS. The Company shall not proceed with the Initial Closing unless and until the form of documents related to the closing of the acquisition of the Land by the Company have been approved by all the Members. 5.1.4 PLEDGE OF INTEREST. 5.1.4.1 As collateral for the performance by Feld of its obligations under this Agreement, at the Initial Closing Feld shall execute a Pledge and Security Agreement in the form of Exhibit L attached hereto, wherein Feld grants WPHC a first lien security interest in Feld's Interest in the Company and in Feld's right to receive all fees, payments and distributions from the Company. Any uncured default under this Agreement shall constitute an Event of Default (as such term is defined in said Pledge and Security Agreement) under said Pledge and Security Agreement, and any Event of Default under said Pledge and Security Agreement shall be a default under this Agreement. 5.1.4.2 As collateral for the performance by WPHC of their obligations to make Capital Contributions as required under this Agreement, at the Initial Closing WPHC shall execute a Pledge and Security Agreement in the form of Exhibit M attached hereto, wherein it grants Feld a first lien security interest in its Interest in the Company and in its right to receive all fees, payments and distributions from the Company. Any uncured default under this Agreement shall constitute an Event of Default (as such term is defined in said Pledge and Security Agreement) under said Pledge and Security Agreement, and any Event of Default under said Pledge and Security Agreement shall be a default under this Agreement. 5.2 CONSTRUCTION PROCEDURES AND CLOSING. 5.2.1 PREDEVELOPMENT ACTIVITIES. 5.2.1.1 Feld shall pursue, with reasonable diligence and subject to the reasonable direction of WPHC, all approvals required to commence construction of the Project. Subject to the input and approval of WPHC, Feld shall develop appropriate site plans and other plans as may be required to obtain such approvals. Feld shall not submit any proposed plans or other materials to any governmental agency without the prior approval of WPHC. In addition, Feld shall not incur any third party expense without the prior approval of WPHC. WPHC agrees to reasonably cooperate with Feld in obtaining the Approvals, which cooperation shall include, without limitation, prompt review of any matters submitted to WPHC and prompt response to Feld in connection with any matters submitted to WPHC. Copies of all reports, studies and other information and material generated for or on behalf of Feld in connection with its review and evaluation of the Property shall promptly be delivered to WPHC, including, without limitation, the full text of all drawings, reports and memoranda supplied by engineers and other consultants and any memoranda of discussions with governmental officials and neighborhood groups. 5.2.1.2 Feld shall prepare and submit to WPHC for approval a pre- development budget for the activities of the Company prior to the Construction Loan Closing Date. If and when WPHC approves in writing a pre-development budget, Feld shall be authorized to incur costs in accordance with such pre-development budget and WPHC shall be obligated to fund such approved pre-development budget. 5.2.2 PLANS AND SPECIFICATIONS. Prior to the Construction Loan Closing and after consultation with WPHC, Feld shall cause to be prepared detailed construction Plans and Specifications for the Project, and shall submit such Plans and Specifications to WPHC for approval. If and when WPHC approves the Plans and Specifications, the Members shall initial a description of the Plans and Specifications and attach the description to this Agreement as Exhibit N. 5.2.3 PROJECT BUDGET. Prior to the Construction Loan Closing and after consultation with WPHC, Feld shall cause to be prepared a revised Project Budget based on the approved Plans and Specifications, and shall submit such Project Budget to WPHC for approval. If and when WPHC approves the revised Project Budget, the Members shall initial such Project Budget and attach it to this Agreement as Exhibit O. Upon approval, such revised Project Budget shall for all purposes be the "Final Project Budget." 5.2.4 OBTAINING A CONSTRUCTION LOAN. Feld shall use its best efforts to cause the Company to obtain a Construction Loan for construction of the Project on terms and from a Construction Lender acceptable to the Members, including, but not limited to, the following: (a) the Construction Loan amount must be acceptable to WPHC and sufficient to reimburse WPHC at the Construction Loan Closing for the acquisition cost of the Project Land and any advances it made to the Company for predevelopment activities; (b) the interest rate shall be a variable rate equal to LIBOR plus a spread reasonably acceptable to the Members; (c) the Construction Loan Closing must take place on or before January 31, 2000, provided, however, such date shall be extended to a date not later than February 29, 2000, if Feld is diligently pursuing his obligations and if the delay is not attributable to a default by Feld (such date as it may be extended is referred to herein as the "Construction Loan Outside Date"); (d) Feld shall personally guarantee the Construction Loan and shall guarantee Operating Deficits, all to the extent required by the Construction Lender; (e) the Construction Loan shall have a maturity date of at least twenty-eight (28) months from the date of the Construction Loan Closing; and (f) the other terms shall be reasonably acceptable to WPHC. 5.2.5 CONSTRUCTION LOAN DOCUMENTS. The Company shall not proceed with the Construction Loan Closing unless and until the form of documents related to the Construction Loan have been approved by all the Members. There shall be no modification to the Construction Loan documents without the prior written approval of all Members. 5.2.6 APPROVED AFFILIATE AGREEMENTS. On or prior to the Construction Loan Closing Date and only with the approval of all of the Members, the Company shall enter into (a) a construction management agreement with Tricor Construction Company, an Affiliate of Feld ("Contractor"), (b) a construction contract with Contractor, and (c) the Architect's Agreement with Architect. Except for a reasonable fee to be paid pursuant to the Architect's Agreement with the approval of WPHC, no fees or other compensation, profit or cost savings shall be paid to Contractor under such agreements except the fees provided for in Article 7 below. The Company hereby agrees that Contractor may enter into a landscape design contract and an interior design contract with Architect, and all subcontracts entered into by Contractor and/or Architect shall be included in the Final Project Budget, but such subcontracts shall provide for the subcontractor to look only to Contractor or Architect, as applicable, for payment under the subcontracts. Fees or other profit, compensation or sharing of cost savings under such subcontracts shall not exceed the amount a prudent owner would pay in a bona fide arm's length transaction after obtaining competitive bids. The agreements described in this Section 5.2.6, together with the Property Management Agreement, are hereinafter called the "Approved Affiliate Agreements." Neither Feld nor Contractor nor Architect shall enter into any other agreements with parties affiliated with Feld without specific disclosure to all Members in writing of such affiliation and without prior written consent of all the Members in each instance. In the event of any conflict between this Agreement and such Approved Affiliate Agreements, this Agreement shall control. In the event of an uncured default by Feld under this Agreement, the Approved Affiliate Agreements may be terminated at the option of WPHC. Any default by Feld under any Approved Affiliate Agreement which is not timely cured shall be a default hereunder. There shall be no modification to the Approved Affiliate Agreements without the prior written approval of all Members. Each Approved Affiliate Agreement shall provide that the Company shall have the right to terminate such agreement upon the Removal of Feld without such termination constituting a default. 5.2.7 FELD GUARANTEE. Feld shall personally guarantee to the Construction Lender the payment and performance of all obligations of the Company under the Construction Loan, subject to such limitations on liability of Feld and guaranty termination provisions as are acceptable to the Construction Lender. Subject to the requirements of the Construction Lender, Feld's obligation to the Company and to WPHC to guarantee interest payments on the Construction Loan applies to payments which are due and payable through Substantial Completion; Feld shall not be responsible for guaranteeing payments which come due after Substantial Completion. Nothing in this Section 5.2.7 shall relieve Feld of any other obligations which accrue prior to Final Completion. 5.2.8 [INTENTIONALLY DELETED] 5.2.9 PROPERTY MANAGEMENT AGREEMENT. At the Construction Loan Closing, the Company shall enter into the Property Management Agreement with The Feld Company, an Affiliate of Feld. 5.3 INFRASTRUCTURE LAND CLOSING AND BOND FINANCING OF INFRASTRUCTURE. It is the intent of the Members that the Infrastructure Land be acquired and developed by Palomino Park Public Improvements Corporation, a Colorado non-profit corporation ("PPPIC"), which has financed acquisition and development and certain land and Infrastructure improvements through the issuance of tax-exempt bonds (the "Bonds"). 5.3.1 [INTENTIONALLY DELETED]. 5.3.2 CONTROL OVER MATTERS RELATED TO INFRASTRUCTURE AND BONDS. Notwithstanding anything to the contrary herein, WPHC shall have sole and exclusive control over all decisions of the Company relating to the Bonds, to the subdivision and sale of the Infrastructure Land and to the financing, construction, use and development of the Infrastructure. In order to procure for the Project the benefits of the use and enjoyment of the Infrastructure to be constructed by PPPIC, the Company shall enter into such agreements with PPPIC as WPHC may require, in form and content acceptable to WPHC in its sole discretion, providing, among other things, for the encumbering of the Land by liens securing payment of the Bonds, operation and maintenance of the Infrastructure and satisfaction of certain indemnification obligations undertaken by PPPIC with respect to the Infrastructure. 5.3.3 CONSTRUCTION OF INFRASTRUCTURE. An Affiliate of Feld, has entered into one or more agreements and may enter into additional agreements (collectively, the "Infrastructure Improvements Agreement") with PPPIC (or its contractor) to construct the Infrastructure for a guaranteed maximum price, including a fee to Feld not to exceed three percent (3%) of the hard costs of construction of the Infrastructure. A default by Feld in the performance of its obligations under that contract not cured within any applicable cure period shall constitute a default under this Agreement. WPHC may in its discretion cause the phasing of the construction of the Infrastructure Improvements. 5.4 FAILURE OF CONSTRUCTION LOAN CLOSING TO OCCUR. Feld covenants to cause the Construction Loan Closing to occur by the Construction Loan Outside Date. If for any reason the Construction Loan Closing has not occurred by the Construction Loan Outside Date, then WPHC shall have the right to remove Feld as a Member and Manager of the Company in accordance with the provisions of Section 12.12. 6 DEVELOPMENT OF PROJECT; OPERATIONS PRIOR TO THE FINAL CLOSING DATE 6.1 DUTIES OF FELD. Feld shall have the authority, duty and the obligation to: 6.1.1 act on behalf of the Company in relation with any governmental agency or authority, the Construction Lender, and all contractors and subcontractors with respect to all matters relating to the construction and development of the Project; 6.1.2 use its best efforts to cause the Company to obtain a commitment for the Construction Loan on terms and conditions acceptable to all the Members and satisfy the conditions for the Construction Loan Closing; 6.1.3 coordinate with Architect the preparation of the Plans and Specifications, ensure that the Plans and Specifications are in compliance with all applicable codes, laws, ordinances, rules and regulations, and recommend alternative solutions whenever design details affect construction feasibility or schedules; 6.1.4 negotiate all necessary contracts and subcontracts for the construction of the Project and monitor disbursement and payment of amounts owed the Architect, Contractor and subcontractors; 6.1.5 choose the products and materials necessary to equip the Project in a manner which satisfies all requirements of the Construction Lender and the Plans and Specifications; 6.1.6 secure all building code approvals and obtain certificates of occupancy for all of the apartment units of the Project; 6.1.7 cause the Project to be commenced not more than thirty (30) days after the Construction Loan Closing, or by such earlier date as may be required under the Construction Loan documents, and completed in a prompt and expeditious manner, consistent with good workmanship, and in compliance, without any material deviation, with the following: (a) the Plans and Specifications as they may be amended in accordance with the terms of this Agreement; (b) any and all zoning regulations, county ordinances, including health, fire and safety regulations, and any other requirements of federal, state and local laws, rules, regulations and ordinances applicable to construction of the Project; 6.1.8 cause to be performed in a diligent and efficient manner the following: (a) construction of the Project pursuant to and in accordance, without any material deviation, with the Plans and Specifications, free and clear (except as otherwise permitted herein) of all mechanics and materialmen's liens; and (b) general administration and supervision of construction of the Project, including but not limited to activities of subcontractors and their employees and agents, and others employed as to the Project in a manner which complies in all material respects with the Construction Loan, the Plans and Specifications and the Construction Procedures; 6.1.9 keep, or cause to be kept, accounts and cost records as to the construction of the Project and make available to WPHC, during normal business hours copies of all material contracts and subcontracts; 6.1.10 provide regular monitoring, and periodically (at least monthly, or more often if requested by any Member) update the Project construction time schedule and summarize potential variances between scheduled and probable completion dates, the schedule for work not started or incomplete; 6.1.11 revise and refine the approved estimate of Development Costs, incorporate changes as they occur, and develop cash flow reports and forecasts as needed; 6.1.12 develop and implement a system for review and processing of change orders as to construction of the Project; 6.1.13 develop and implement a procedure for the review and processing of applications by subcontractors for progress and final payments; and 6.1.14 record the progress of the Project and submit written progress reports to WPHC, including the percentage of completion and the number and amounts of change orders. 6.2 CONSTRUCTION COMPLETION. Feld hereby unconditionally covenants and warrants as follows: (i) the Project shall be constructed in a good and workmanlike manner and all work shall be performed in accordance with the terms of Section 6.11 hereof; (ii) Feld shall fully and timely perform all of its other obligations under this Agreement; and (iii) subject to Force Majeure, it shall cause (a) Substantial Completion of the Project to occur within twenty-seven (27) months after the Construction Loan Closing Date; (b) Final Completion to occur within twenty-nine (29) months after the Construction Loan Closing Date; and (c) all Final Closing Funding Conditions shall be satisfied prior to the Outside Date. 6.3 DEVELOPMENT DEFICIT GUARANTY. Feld hereby guarantees Feld shall advance to or for the account of the Company amounts equal to all Development Deficits at such time as such Development Deficits occur ("Development Deficit Payments"). Feld shall make Development Deficit Payments required of him by the earlier of (A) the date required to avoid a default under Company obligations, including without limitation the Construction Loan, and (B) the date required to keep all sources of funding for the Project "in balance" as adequate sources of funds to timely cause Final Completion of the Project and satisfaction of other obligations of the Company. In any event, all Development Deficits shall be paid by Feld in full prior to the Final Closing Date. All Development Deficit Payments made to the Company shall be non-reimbursable payments, and Feld shall not be entitled to any repayment from the Company (unless advances of the Construction Loan are later available to reimburse Feld for the same), and the Capital Account of Feld shall not be affected by any Deficit Payments made by Feld. Without limiting the generality of the foregoing, Feld shall not be entitled to reimburse himself for any Development Deficits. Notwithstanding anything to the contrary in this Agreement, the Members agree that, prior to Substantial Completion, all debt service expenses shall be paid only from the funds reserved for Budgeted Construction Loan Interest and from Development Deficit Payments, not from any other funds of the Company (including, without limitation, Net Operating Income); provided, however, that Net Operating Income shall be used to pay debt service expenses if so requested by the Construction Lender (such payments are herein referred to as "NOI Construction Loan Interest Payments"). If any such payments are requested by the Construction Lender, such payments will be included in the calculation of the Completion Fee to the extent any Budgeted Construction Loan Interest remains undisbursed. Without the prior written consent of WPHC, the funds reserved as Budgeted Construction Loan Interest will be used for the sole purpose of debt service expenses on the Construction Loan and for no other purpose (including, without limitation, the payment of Development Deficits). Any funds remaining after the payment of debt service on the Construction Loan will be treated as net Cash Flow. 6.4 OPERATING DEFICIT GUARANTY. [INTENTIONALLY DELETED]. 6.5 LIABILITIES OF THE COMPANY. Feld covenants that by the earlier of the Final Closing Date or the Outside Date, provided WPHC has satisfied its obligation to make the Final Closing Capital Contribution, or has otherwise satisfied its obligation under Section 8.3.1 hereof, Feld shall cause the Company to have no unsatisfied debts or liabilities other than obligations under service contracts and other agreements relating to the Project permitted by this Agreement related to the period after the Final Closing, or related to the period prior to the Final Closing if adequate cash reserves are held by the Company to pay such liabilities. 6.6 CONSTRUCTION CONTRACTS. Feld shall obtain and the Company shall enter into such contracts, agreements or obligations, as are necessary to construct and develop the Project. Feld shall not, without the consent of WPHC, which consent shall not be unreasonably withheld, do or permit to be done any of the following: 6.6.1 Enter into or cause the Company to enter into any other primary contract relating to the construction of the Project; and 6.6.2 Amend or modify any Approved Affiliate Agreements. 6.7 ADMINISTRATION OF THE CONSTRUCTION LOAN. Feld shall administer the Construction Loan on behalf of the Company and in accordance with the Construction Procedures. The Company shall engage the Construction Consultant to monitor the progress of construction of the Project and to review draw requests on behalf of WPHC. Feld shall cooperate with the Construction Consultant and shall provide access to the Construction Consultant for inspection of the construction work of the Project as it progresses. Feld shall approve and submit Construction Loan draw requests to the Construction Lender on behalf of the Company, which requests shall be accompanied by those items of information required by the Construction Lender and the Title Company. Copies of all draw requests and of the monthly construction ledger shall be delivered to WPHC simultaneously with delivery to the Construction Lender. If the Construction Consultant determines that a draw request is not justified on a percentage of completion basis and the draw would result in construction funding being out of balance by an amount in excess of $250,000, WPHC shall have the right to disapprove such draw request in its sole discretion unless Feld modifies such draw request to correspond to percentage of completion and/or makes a Development Deficit Payment such that the Construction Loan shall not be out of balance by more than $250,000. After any such disapproval of a draw request by WPHC, all subsequent draw requests shall require the prior approval of WPHC unless and until such right to prior approval is waived in writing by WPHC. 6.8 CHANGE ORDERS. No change orders with respect to the Plans and Specifications may be made without the prior written consent of WPHC, except that Feld shall have the right to approve minor change orders which comply with the Construction Procedures, do not have a material adverse effect on the Project, do not increase Total Development Costs, do not reduce the amount available from the Construction Loan for payment of interest on the Construction Loan, and do not exceed $10,000 as to any one change order or $250,000 in the aggregate. Unless expressly approved in writing by all Members, no change order shall be permitted or approved that would cause total Development Costs to exceed Total Budgeted Development Costs. 6.9 RETAINAGE. Feld shall cause all agreements with contractors and subcontractors to provide for retainages at levels acceptable to Construction Lender and the release of retainages as set forth in the Construction Loan documents as executed at the Construction Loan Closing. 6.10 AGREEMENTS WITH AFFILIATES. Feld shall cause the Company to enforce each Approved Affiliate Agreement to which the Company is a party as would a prudent manager of a limited liability company, and Feld shall cause each other Approved Affiliate Agreement to be enforced in a prudent manner and for the benefit of the Company. Feld hereby agrees, for himself and on behalf of each Person affiliated with Feld that is a party to an Approved Affiliate Agreement: (i) in the event of any conflict between this Agreement and any Approved Affiliate Agreement, this Agreement shall control; (ii) in the event of any uncured material default by Feld under this Agreement, the Company shall have the right to terminate any or all of the Approved Affiliate Agreements; (iii) an uncured default by Feld or any person affiliated with Feld under an Approved Affiliate Agreement shall constitute a default by Feld under this Agreement; and (iv) Feld shall defend, indemnify and hold the Company harmless with respect to the effects of any default by any Person affiliated with Feld under such Approved Affiliate Agreements, including, without limitation, any mechanics liens with respect to claims under any Approved Affiliate Agreements. 6.11 WARRANTY BY FELD. If, within one (1) year after the date of Final Completion of the Project, any of the structural or non-structural work performed to construct the Project is found to be materially defective or not in accordance in all material respects with the Plans and Specifications and with all applicable building codes, laws, rules and regulations, Feld shall correct or shall cause the construction contractor to correct such defect promptly after receipt of written notice from WPHC to do so, unless WPHC has previously given Feld specific written acceptance of such defective condition. With respect to portions of the work first performed after Final Completion, this period of one (1) year shall be extended by the period of time between Final Completion and the actual performance of the work. The obligation under this Section shall survive acceptance of the work performed to construct the Project. WPHC shall give such notice promptly after discovery of the condition. In the event a material defect is discovered more than one (1) year after the date of Final Completion, as such period may be extended under this Section 6.11, and such defect was known to Feld or a Person affiliated with Feld and was not disclosed to WPHC or was intentionally concealed by Feld or such affiliated Person, then Feld shall promptly take such action as may be necessary at Feld's sole expense to correct such defective work. WPHC shall report to Feld within thirty (30) days after discovery any such defective condition discovered more than one (1) year after Final Completion, as such period may be extended under this Section 6.11. Nothing contained herein shall require Feld to correct defective work that is discovered more than three (3) years following Final Completion, as such period may be extended under this Section 6.11. 6.12 INSURANCE. Feld shall at all times keep in force the following policies of insurance naming the Company as the insured: 6.12.1 During the construction period (which ends on the date a certificate of occupancy for each building comprising the Project is issued), "Builder's Risk" insurance as required by the holder(s) of the Construction Loan; 6.12.2 After issuance of a certificate of occupancy for each building comprising the Project, all risk property and, if applicable, boiler and machinery insurance against loss or damage to the Property or the Project (including contents) including but not limited to fire and extended coverage perils (but excluding flood and earthquake unless either or both are required by the Construction Lender) as WPHC may from time to time require, but in no event less than one hundred percent (100%) of the full replacement cost of the Property or the Project without deduction for physical depreciation, or the unpaid balance of any loans secured by the Property or the Project, whichever is greater; 6.12.3 After issuance of a certificate of occupancy for each building comprising the Project, insurance against the loss of "rental value" of the improvements on a "rented or vacant basis" arising out of the perils insured against pursuant to Section 6.12.2 above, in any reasonable amount required by WPHC but in no event less than 100% of one year's gross "rental value" of the improvements with co-insurance waived. "Rental value" as used herein is defined as the sum of (A) the total anticipated gross rental income from tenant occupancy of the Project, (B) the amount of all charges which are the legal obligation of tenants, and (C) the fair rental value of any portion of the Project occupied by the Company, if any; and 6.12.4 At all times, (i) commercial general liability insurance in an amount of not less than Five Million Dollars ($5,000,000) against claims for personal injury, death or property damage occurring on, in or about the Property or the Project or arising from or connected with use, conduct or operation of the Company's business in the amount from time to time required by WPHC; (ii) automobile liability insurance with a combined single limit of One Million Dollars ($1,000,000); and (iii) workers compensation coverage with statutory limits and employers liability insurance with limits of One Million Dollars ($1,000,000). Any workers compensation insurance shall be accompanied by a waiver of subrogation from the insurer endorsed on the policy. All insurance policies and renewals thereof shall be in a form and issued by insurers acceptable to WPHC and shall provide for deductibles not to exceed $2,500.00. WPHC and Feld (but only as long as Feld is a Manager and a Member of the Company) shall each be additional named insureds on all such policies and renewals. Feld hereby irrevocably appoints WPHC as Feld's attorney in fact for purposes of endorsing payments, submitting claims and otherwise dealing with all such insurance and the proceeds thereof in the name, place and stead of Feld, such power of attorney to take effect immediately upon withdrawal, Removal or resignation of Feld as Manager of the Company and member of the LLC, and Feld agrees that such power shall be coupled with an interest and shall survive the disability or death of Feld. Each policy shall provide that it will not be modified or canceled without thirty (30) days prior written notice to WPHC. Feld shall promptly furnish to WPHC all renewal notices and all receipts of paid premiums. At least thirty (30) days prior to the expiration date of a policy, Feld shall deliver to WPHC a renewal policy in form satisfactory to WPHC, together with a receipt showing payment of annual premiums. Any excess insurance proceeds or refunds of insurance premiums shall be the property of the Company. 6.13 PERSONAL OBLIGATION. The obligations of Feld under this Agreement are personal recourse obligations of Feld, as limited by Section 14.1.3 of this Agreement, for which Feld shall be fully responsible to the Company and WPHC. 6.14 FORCE MAJEURE. Feld shall not be liable for delay in performance of his obligations under this Agreement to the extent such failure or delay results solely from an event of Force Majeure, and in no event shall any delay for an event of Force Majeure exceed one hundred twenty (120) days. 6.15 LIMITATIONS OF FELD'S AUTHORITY. Anything to the contrary herein notwithstanding, Feld shall not have the power or authority to do any of the following without the prior written consent of all the other Members: 6.15.1 to commit any act contrary to the purpose of the Company; 6.15.2 to refinance the Project or incur any indebtedness other than the Construction Loan; 6.15.3 to enter into any agreements with affiliates of Feld except as specified above; 6.15.4 to modify the Construction Loan documents or any agreement with any affiliate of Feld which previously was consented to by the other Members; or 6.15.5 to sell or dispose of any portion of the Project. 6.16 PRE-EXISTING ENVIRONMENTAL CONDITION LIABILITY. Feld agrees to promptly disclose to WPHC in writing if it becomes aware of any Pre-Existing Environmental Condition Liability. If the Company incurs any Pre-Existing Environmental Condition Liability, it shall use any available contingency in the Project Budget or any Cost Savings to satisfy such Pre-Existing Environmental Condition Liability. If such sources of funds are not adequate to satisfy the Pre-Existing Environmental Condition Liability, then WPHC shall make a Capital Contribution to the Company equal to one-half of the amount of the Pre-Existing Environmental Condition Liability which is then due and Feld shall make a Development Deficit Payment equal to one-half of the amount of such Pre-Existing Environmental Condition Liability. This provision is solely for the benefit of the members and no other Person shall have the right to rely on or enforce this provision. A Pre- Existing Environmental Condition Liability shall not be satisfied from Net Operating Income. 7 COMPENSATION TO FELD In consideration of the performance by Feld of his obligations under Article 6 of this Agreement, the Company shall pay Feld or his designee the fees described in this Article 7 at the time, in the manner and subject to the conditions set forth herein. 7.1 DEVELOPMENT MANAGEMENT FEE. Feld shall receive a development management fee equal to $1,500 per unit. Such development management fee shall be payable from monthly draws on the Construction Loan, on a percentage of completion basis as certified by the Construction Consultant. 7.2 CONSTRUCTION MANAGEMENT FEE. Contractor shall receive a construction management fee under the construction management agreement to be executed at or before the Construction Loan Closing equal to $2,000 per unit, payable from monthly draws on the Construction Loan based on percentage of completion as certified by the Construction Consultant as certified by the Construction Consultant, minus $49,000. All amounts paid to Contractor under the construction management agreement described in Section 5.2.6 above shall be applied against and reduce the amount due under this Section 7.2. 7.3 CONSTRUCTION LOAN GUARANTEE FEE. Feld shall receive a construction loan guarantee fee equal to 1.0% of the final committed loan amount of the Construction Loan, payable at the Construction Loan Closing from a draw on the Construction Loan. 7.4 COST SAVINGS FEE. The Company shall pay Feld at Final Closing a Cost Savings Fee equal to the first $212,000 of Cost Savings, if any. If Cost Savings exceed $212,000, the excess shall be distributed 60% to WPHC and 40% to Feld. Feld shall submit to WPHC a proposed calculation of the amount of the fee to be paid under this Section 7.4. WPHC shall be entitled, at its sole discretion, to submit such calculation to the Company's Accountants for verification or auditing prior to approving such calculation. For a period of twelve (12) months after the Final Closing Date, each Member shall have the right to cause the recalculation of the Cost Savings Fee and the post- closing adjustment of the amount of the Cost Savings Fee, if such Member pays the costs of the Company's Accountants in making such recalculation and if the amount of the adjustment is in excess of $5,000. No post-closing adjustment shall be made for amounts of $5,000 or less or based on a recalculation made more than twelve (12) months after the Final Closing Date. 7.5 INCENTIVE FEE. [INTENTIONALLY DELETED]. 7.6 COMPLETION FEE. The Company shall pay Feld at Final Closing a fee (the "Completion Fee") equal to 100% of Net Operating Income for the period beginning with the Construction Loan Closing and ending with Substantial Completion, less (i) an amount equal to all interest accrued or paid on the Construction Loan from the date on which Budgeted Construction Loan Interest is exhausted to the date of Substantial Completion; and less (ii) an amount equal to interest at the rate of seven and one half percent (7 1/2%) per annum on the total Capital Contributions made by WPHC, such interest to be calculated for the period described in (i) above; provided, however, that in no event shall the Completion Fee exceed $500,000. 7.7 CONDITIONS TO PAYMENT OF FEES; RIGHT OF OFFSET. Each payment of fees described in this Article 7 shall be conditioned upon there being no uncured event of default by Feld under this Agreement or any Approved Affiliate Agreement. In the event of nonpayment of fees due to an uncured default, if such default is subsequently cured prior to withdrawal, resignation or removal of Feld as a Member and Manager, then the unpaid fees shall be payable, subject to all the terms and provisions of this Agreement. All fees will be included in the Final Project Budget to be approved by WPHC. With respect to fees payable prior to Final Closing, if the Construction Loan does not provide a source of funding for such fees, then payment of such fees shall be deferred until the later of the date(s) the Construction Loan permits such funding or until the Final Closing. All fees payable to Feld shall be subject to a right of offset in favor of the Company and WPHC with respect to any claims or damages they may have against Feld and for any Development Deficits. In the event of the withdrawal, resignation or Removal of Feld as a Member and Manager prior to the Final Closing Date, except in the case of Removal of Feld due to Feld failing to provide a Construction Loan acceptable to all the Members, in which case no fees shall have been earned by or be due to Feld, Feld shall be entitled to fees fully earned and accrued through the date of his Removal when and as such fees are otherwise payable pursuant to this Agreement, subject to the foregoing right of offset and provided that WPHC has been fully compensated for its out of pocket expenses with respect to the Project. In no event shall the Removal of Feld accelerate the due date for any fees earned by Feld during the period prior to his Removal. 8 FINAL CLOSING 8.1 CONDITIONS TO FINAL CLOSING. The obligation of WPHC to participate in the Final Closing shall be conditioned on all of the Final Closing Funding Conditions being satisfied either prior to the Final Closing or concurrently with the Final Closing. WPHC shall have the right, but not the obligation, to waive one or more of the Final Closing Funding Conditions. Any Member shall have the right to require an escrow closing to effect the Final Closing, and the other Members shall cooperate with regard to such escrow closing. 8.2 INITIATION OF FINAL CLOSING. Upon ten (10) days prior written notice from WPHC to Feld, the Final Closing shall be held on the date designated by WPHC. If WPHC has not designated a date for the Final Closing by the Outside Date, upon ten (10) days prior written notice from Feld to WPHC, the Final Closing shall be held on the date designated by Feld, provided such date for the Final Closing designated by Feld shall be not less than twenty-eight (28) months after the Construction Loan Closing Date. 8.3 ACTIONS AT THE FINAL CLOSING. Once the date for the Final Closing has been designated as provided herein and provided that the Final Closing Funding Conditions have been satisfied by Feld, the Members shall cooperate to cause a Final Closing at which the following shall occur: 8.3.1 WPHC shall either (i) fund its Final Closing Capital Contribution, (ii) obtain a release from the Construction Lender of Feld's obligation to guarantee the Construction Loan, or (iii) provide to Feld a written indemnity from WPHC, secured by the guaranty of WRP and by WPHC's interest in the Company, indemnifying and holding Feld harmless from any further liability under his guarantee of the Construction Loan, provided that such indemnity shall be subject to a right of offset in favor of WRP and WPHC with respect to any liability of Feld to WPHC or the Company arising under this Agreement. Such indemnity shall expire upon payment in full of the Construction Loan. The form of such indemnity agreement shall be reasonably acceptable to Feld. 8.3.2 The Company shall pay the Construction Loan in full or shall provide one of the items in 8.3.1(ii) or (iii) above. 8.3.3 Any accrued and unpaid fees due to Feld under this Agreement shall be paid. 8.3.4 If either WPHC or Feld has exercised its (his) option under the Put-Call provisions of Article 16 hereof, the closing of the transfer of the Interest of Feld to WPHC shall occur. 8.3.5 At the election of WPHC, the responsibility for maintaining insurance coverage on the Project or any portion thereof may be transferred to WPHC. 8.4 CERTAIN RIGHTS OF FELD UPON SATISFACTION OF FINAL CLOSING FUNDING CONDITIONS. At any time after Final Completion and satisfaction of all of the other Final Closing Funding Conditions but prior to the Outside Date, Feld may provide WPHC notice that all of the Final Closing Funding Conditions have been satisfied and that it is prepared to proceed with the Final Closing, which notice shall be accompanied by all documents necessary to verify that the Final Closing Funding Conditions have been satisfied. Within fifteen (15) days of its receipt of its notice, WPHC shall notify Feld of the election of WPHC to do one of the following by the date that is within forty-five (45) days of WPHC's receipt of notice from Feld: (the "Release Date"): (i) WPHC shall participate in the Final Closing and make its Final Closing Capital Contribution; (ii) WPHC shall cause Feld to be released from its guaranty of the Construction Loan; or (iii) WPHC shall deliver to Feld an indemnity agreement executed by WRP, wherein WRP agrees to indemnify Feld against any loss or liability it may suffer as a guarantor of the Construction Loan, provided that such indemnity shall be subject to a right of offset in favor of WRP and WPHC with respect to any liability of Feld to WPHC or the Company arising under this Agreement (the form of such indemnity agreement shall be reasonably acceptable to Feld). If all of the Final Closing Funding Conditions have been and remain satisfied on the Release Date, WPHC shall take the action specified in its notice to Feld. 9 ALLOCATIONS 9.1 PROFITS AND LOSSES. Subject to the special allocation provisions in this Article 9, the Members' distributive shares of the Profits or Losses of the Company for any Fiscal Year shall be as follows: 9.1.1 PROFITS. Profits shall be allocated to each Member pro rata in proportion with such Member's respective Percentage Interest. 9.1.2 LOSSES. Losses shall be allocated to each Member pro rata in proportion to such Member's respective Percentage Interest. 9.2 GENERAL PROVISIONS. 9.2.1 Except as otherwise provided in this Agreement, the Members' distributive shares of all items of Company income, gain, loss, and deduction are the same as their distributive shares of Profits and Losses. 9.2.2 The Managers shall allocate Profits, Losses, and other items properly allocable to any period using any method permitted by Code Section 706 and the Regulations thereunder. 9.2.3 To the extent permitted by Regulations Section 1.704-2(h) and Section 1.704- 2(i)(6), the Managers shall endeavor to avoid treating distributions of Operating Cash Flow and of Sales and Refinancing Cash Flow as being from the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Debt (as defined in Regulation Sections 1.704-2(b)(3) and 1.704-2(b)(4), respectively). 9.2.4 If there is a change in any Member's Interest in the Company during a Fiscal Year, each Member's distributive share of Profits or Losses or any item thereof for such Fiscal Year, shall be determined by any method prescribed by Code Section 706(d) or the Regulations thereunder that takes into account the varying Interests of the Members in the Company during such Fiscal Year. 9.2.5 The Members agree to report their shares of income and loss for federal income tax purposes in accordance with the provisions of this Agreement. 9.3 SPECIAL PROVISIONS. 9.3.1 MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this Article 9, if there is a net decrease in Partnership Minimum Gain (as defined in Regulation Section 1.704-2(d)) during any Fiscal Year, then each Member shall be allocated such amount of income and gain for such year (and subsequent years, if necessary) determined under and in the manner required by Regulation Section 1.704-2(f) as is necessary to meet the requirements for a minimum gain chargeback as provided in that Regulation. 9.3.2 PARTNER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this Article 9, except Section 9.3.1, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain (as defined in accordance with Regulation Section 1.704-2(i)(3)) attributable to a Partner Nonrecourse Debt (as defined in Regulation Section 1.704-2(b)(4)) during any Fiscal Year, any Member who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt determined in accordance with Regulation Section 1.704-2(i)(5), shall be allocated such amount of income and gain for such year (and subsequent years, if necessary) determined under and in the manner required by Regulation Section 1.704-2(i)(4) as is necessary to meet the requirements for a chargeback of Partner Nonrecourse Debt Minimum Gain as is provided in that Regulation. 9.3.3 QUALIFIED INCOME OFFSET. If a Member unexpectedly receives any adjustment, allocation or distribution described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be specifically allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 9.3.3 shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in Section 9.1 and this Section 9.3 of this Agreement tentatively have been made as if this Section 9.3.3 were not in this Agreement. 9.3.4 LIMITATION ON LOSSES. Notwithstanding anything else contained in this Agreement, Losses allocated to any Member pursuant to Section 9.1 of this Agreement shall not exceed the maximum amount of Losses that may be allocated without causing such Member to have an Adjusted Capital Account Deficit at the end of the Fiscal Year for which the allocation is made. 9.3.5 CODE SECTION 754 ADJUSTMENT. To the extent that an adjustment to the Basis of any asset pursuant to Code Section 734(b) or Code Section 743(b) is required to be taken into account in determining Capital Accounts as provided in Regulation Section 1.704-1(b)(2)(iv)(m), the adjustment shall be treated (if an increase) as an item of gain or (if a decrease) as an item of loss, and such gain or loss shall be allocated to the Members consistent with the allocation of the adjustment pursuant to such Regulation. 9.3.6 NONRECOURSE DEDUCTIONS. Nonrecourse Deductions (as determined under Regulation Section 1.704-2(c)) for any Fiscal Year shall be allocated among the Members in proportion to their Percentage Interests. 9.3.7 PARTNER NONRECOURSE DEDUCTIONS. Any Partner Nonrecourse Deductions (as defined under Regulation Section 1.704-2(i)(2)) shall be allocated pursuant to Regulation Section 1.704-2(i) to the Member who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which it is attributable. 9.3.8 PURPOSE AND APPLICATION. The purpose and the intent of the special allocations provided for in this Section 9.3 are to comply with the provisions of Regulation Sections 1.704-1(b) and 1.704-2, and such special allocations are to be made so as to accomplish that result. However, to the extent possible, the Managers, in allocating items of income, gain, loss, or deduction among the Members, shall take into account the special allocations in such a manner that the net amount of allocations to each Member shall be the same as such Member's distributive share of Profits and Losses would have been had the events requiring the special allocations not taken place. The Managers shall apply the provisions of this Section 9.3 in whatever order the Managers reasonably believe will minimize any economic distortion that otherwise might result from the application of the special allocations. 9.4 CODE SECTION 704(C) ALLOCATIONS. Solely for federal, state, and local income tax purposes and not with respect to determining any Member's Capital Account, distributive shares of Profits, Losses, other items, or distributions, a Member's distributive share of income, gain, loss, or deduction with respect to any Property (other than money) contributed to the Company, or with respect to any Property the Asset Value of which was adjusted as provided in Article 1(g)(iii) of this Agreement upon the acquisition of an additional Interest in the Company by a new Member or existing Member in exchange for a Capital Contribution, shall be determined in accordance with Code Section 704(c) and the Regulations thereunder or with the principles of such provisions. 9.5 ALLOCATIONS RELATING TO TAXABLE ISSUANCE OF INTEREST. Any income, gain, loss or deduction realized by the Company as a direct or indirect result of the issuance of an Interest by the Company (the "Issuance Items") shall be allocated among the Members so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Member, shall be equal to the net amount that would have been allocated to each such Member if the Issuance Items had not been realized. 10 DISTRIBUTIONS 10.1 CASH FLOW. Except when the Company is in the process of dissolution and winding up as provided in Article 18 of this Agreement and except as otherwise provided in Section 10.3 hereof, the Managers shall determine and distribute the Cash Flow on a quarterly basis, less reserves determined by the Managers for future expenditures, to the Members as follows: (i) first, to WPHC, until it has received aggregate distributions equal to the amount of Capital Contributions made by it pursuant to Section 4.1.2(b), (ii) then, to the Members in accordance with their respective Percentage Interests. Notwithstanding the foregoing, no distributions shall be made at or prior to the completion of the Final Closing without the consent of WPHC. 10.2 DIVISION AMONG MEMBERS. If there is a change in a Member's Interest in the Company during a Fiscal Year, any distributions thereafter shall be made so as to take into account the varying Interests of the Members during the period to which the distribution relates in any manner chosen by the Managers that is provided in Code Section 706(d) and the Regulations thereunder. 10.3 SPECIAL DISTRIBUTION TO WPHC. Immediately after the Construction Loan Closing, the Company shall make a distribution to WPHC as a return of its capital in the amount allowed for such purpose under the terms of the Construction Loan. 11 BOOKS, RECORDS, AND ACCOUNTING 11.1 BOOKS AND RECORDS. The Company shall maintain at its principal place of business books of account that accurately record all items of income and expenditure relating to the business of the Company and that accurately and completely disclose the results of the operations of the Company. Such books of account shall be maintained according to generally accepted accounting principles consistently applied and, unless otherwise agreed by the Members, on the basis of the Fiscal Year. Each Member shall have the right to inspect, copy, and audit the Company's books and records at any time during normal business hours without notice to any other Member. 11.2 REPORTS. Within thirty (30) days after the close of each Fiscal Year, the Managers shall furnish to each Member a copy of the income and loss statement and of the balance sheet of the Company for such Fiscal Year, and a statement disclosing all allocations of income, gain, loss, or deduction among the Members and distributions made by the Company to the Members during such year. The statements of income and loss and balance sheets to be delivered hereunder may be unaudited in the sole discretion of WPHC. 11.3 TAX RETURNS. The Managers shall cause independent certified public accountants of the Company to prepare and timely file all income tax and other tax returns of the Company. The Managers shall furnish to each Member a copy of all such returns together with all schedules thereto and such other information which each Member may request in connection with such Member's own tax affairs. 11.4 SPECIAL BASIS ADJUSTMENT. At the request of either the transferor or transferee in connection with a transfer of an Interest in the Company approved by the Members pursuant to Article 16 of this Agreement, the Managers shall cause the Company to make the election provided for in Code Section 754 and maintain a record of the adjustments to Basis of Property resulting from that election. Any such transferee shall pay all costs incurred by the Company in connection with such election and the maintenance of such records. 11.5 TAX MATTERS PARTNER. 11.5.1 WPHC is hereby designated the Tax Matters Partner (as defined in the Code) on behalf of the Company. 11.5.2 Without the unanimous consent of the Members, the Tax Matters Partner shall have no right to extend the statute of limitations for assessing or computing any tax liability against the Company or the amount of any Company tax item. 11.5.3 If the Tax Matters Partner elects to file a petition for readjustment of any Company tax item (in accordance with Code Section 6226(a)) such petition shall be filed in the United States Tax Court unless the Members unanimously agree otherwise. 11.5.4 The Tax Matters Partner shall, within ten (10) business days of receipt thereof, forward to each Member a photocopy of any correspondence relating to the Company received from the Internal Revenue Service. The Tax Matters Partner shall, within ten (10) business days thereof, advise each Member in writing of the substance of any conversation held with any representative of the Internal Revenue Service and of any petition for readjustment. 11.5.5 Any reasonable costs incurred by the Tax Matters Partner for retaining accountants and/or lawyers on behalf of the Company in connection with any Internal Revenue Service audit of the Company shall be expenses of the Company. Any accountants and/or lawyers retained by the Company in connection with any Internal Revenue Service audit of the Company shall be selected by the Tax Matters Partner and the fees therefor shall be expenses of the Company. 11.6 BANK ACCOUNTS. The Managers shall establish and maintain one or more separate accounts in the name of the Company in one or more federally insured banking institutions acceptable to all the Members into which shall be deposited all funds of the Company and from which all Company expenditures and other disbursements shall be made. At least one such account shall be maintained at First Interstate Bank. Unless otherwise decided by the Managers, funds may be withdrawn from such accounts on the signatures of all of the Managers, collectively and not individually, or such other Person or Persons that the Managers shall determine, provided, however, that two signatures shall be required on all checks. 12 MANAGEMENT 12.1 MANAGEMENT. The business and affairs of the Company shall be managed by the designated Managers. Subject to the terms and limitations of this Agreement, the Managers shall direct, manage and control the business of the Company to the best of such Managers' ability with reasonable diligence and prudence and, subject to the terms and limitations of this Agreement, shall have the authority, power and discretion to make any and all decisions and to do any and all things which the Managers shall deem to be reasonably required in light of the Company's business and objectives. 12.2 NUMBER, TENURE AND QUALIFICATIONS. The number of Managers of the Company and the length of the term of each Manager shall be fixed from time to time by the Members who hold a Majority In Interest. Each Manager shall hold office until removed pursuant to Section 12.12 hereof or until such Manager's successor shall have been selected. Managers need not be residents of the State of Colorado or Members of the Company. 12.3 APPOINTMENT OF FELD AS MANAGER. Feld is appointed as the Manager to serve from the date hereof until the earliest to occur of (i) the Final Closing Date, (ii) his withdrawal or Removal as a Member and Manager, or (iii) the Outside Date. Notwithstanding the provisions of Section 12.2, Feld shall serve as Manager for the duration of his initial term unless and until removed in accordance with the terms of this Agreement. 12.4 CERTAIN POWERS OF MANAGERS. Without limiting the generality of Section 12.1, the Managers shall have the power and authority, upon the unanimous agreement of all Managers, on behalf of the Company: 12.4.1 To cause the Company to develop the Project in accordance with the Plans and Specifications without any material deviation therefrom; 12.4.2 To purchase liability and other insurance to protect the Company's Property and business; 12.4.3 To hold and own any and all Company Property on behalf of and in the name of the Company; 12.4.4 To invest any Company funds temporarily in time deposits with federally insured financial institutions or short-term United States governmental obligations; 12.4.5 Subject to the provisions of this Agreement, to employ accountants, legal counsel, managing agents or other experts to perform services for the Company and to compensate them from Company funds; and 12.4.6 To do and perform all other acts as may be necessary or appropriate to the conduct of the Company's ordinary course of business. Unless authorized to do so by this Agreement or by the Managers of the Company, no Member, agent, or employee of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. However, the Managers may act by a duly authorized attorney-in-fact. 12.5 MEMBER APPROVAL OF CERTAIN ACTS. The Managers shall have the power and authority, but only upon the unanimous written consent of all Members, on behalf of the Company: 12.5.1 to amend or modify any of the documents executed in connection with the Construction Loan at the Construction Loan Closing or to waive any rights under such documents; 12.5.2 to borrow money or incur any indebtedness (other than the Construction Loan) or to grant any liens on any assets of the Company; 12.5.3 to enter into any agreements with affiliates of the Managers other than Palomino Park Telecom LLC, a Colorado limited liability company, and other than the Approved Affiliate Agreements; 12.5.4 to amend or modify the Approved Affiliate Agreements or to waive any rights thereunder; 12.5.5 except for the Management Agreement, to execute any agreement which will impose any obligations on the Company which will survive the Final Closing Date; and 12.5.6 to sell or dispose of any portion of the Project or any other material assets of the Company. 12.6 LIABILITY FOR CERTAIN ACTS. A Manager of the Company shall perform such Manager's duties, including duties as a member of any committee upon which such Manager may serve, in good faith, in a manner such Manager reasonably believes to be in the best interests of the Company, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. A Person who so performs such Person's duties shall not have any liability by reason of being or having been a Manager of the Company except as otherwise provided in this Agreement. Nothing in this Section 12.6 shall limit Feld's liability to the other Members to perform its obligations with respect to the development of the Project, to make Development Deficit Payments and to perform its other obligations to the other Members arising under this Agreement. 12.7 INDEMNITY OF THE MEMBERS AND THE MANAGERS. 12.7.1 The Company shall indemnify every Member and Manager in respect to the payments made and personal liabilities reasonably incurred by that Member or Manager in the ordinary and proper conduct of the Company's business or property. No indemnification shall be provided if and to the extent that such liability was incurred based on the breach of this Agreement by the Manager, his negligence (to the extent not reimbursed by insurance), fraud or misconduct. 12.7.2 Provided that Feld has fully and timely performed his obligations under this Agreement, the Company shall indemnify Feld against any liability he may incur as a result of his guaranty of the Construction Loan; the Company shall, nevertheless, have a right of offset with respect to all damages incurred by the Company or any Member resulting from any breach by Feld of his obligations hereunder, in addition to all other rights and remedies that the Company and the other Members may have with respect to such breach by Feld. 12.7.3 The indemnification set forth in this Article 12 shall in no event cause the Members to incur any liability, or result in any liability of the Members to any third party, beyond those liabilities specifically enumerated in the Articles of Organization, the Act or this Agreement. 12.8 MANNER OF ACTING. In all actions to be taken by the Managers pursuant to this Agreement, the unanimous act of the Managers shall be required. 12.9 INFORMAL ACT BY MANAGERS. Any action required or permitted to be taken at a meeting of the Managers or of any committee designated by said Managers may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by each Manager or committee member, and delivered to the Person having custody of the Company records for inclusion in the minutes or for filing with the records. Action taken under this Section 12.9 is effective when all Managers or committee members have signed the consent, unless the consent specifies a different effective date. Such consent has the same force and effect as an unanimous vote of the Managers or committee members and may be stated as such in any document. 12.10 PARTICIPATION BY ELECTRONIC MEANS. Any Manager or any committee designated by the Managers may participate in a meeting of the Managers or committee by means of telephone conference or similar communications equipment by which all Persons participating in the meeting can hear each other at the same time. Such participation shall constitute presence in person at the meeting. 12.11 RESIGNATION. Feld covenants and agrees to serve as the sole Manager until the earlier of the Final Closing Date or the Outside Date. Otherwise, any Manager of the Company may resign at any time by giving written notice to the Members of the Company. The resignation of any Manager shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice. 12.12 REMOVAL. 12.12.1 CAUSES FOR REMOVAL. WPHC shall have the right to remove Feld as the Manager and as a Member ("Removal") and substitute WPHC as Manager or appoint a new Manager upon any of the following (a "Removal Event"): 12.12.1.1 [INTENTIONALLY DELETED.] 12.12.1.2 If the Construction Loan Closing has not occurred by the Construction Loan Closing Outside Date; 12.12.1.3 Delays in construction not caused by Force Majeure which result in the Project falling behind schedule by six (6) months or more based on the Construction Schedule approved by the parties prior to the Construction Loan Closing, or delays in construction, whether or not caused by Force Majeure which cause WPHC to reasonably conclude that the Project will not or cannot be completed by the Outside Date; 12.12.1.4 The Project having incurred Development Deficits in excess of $250,000 which have not been funded by Development Deficit Payments from Feld within thirty (30) days of notice from WPHC requiring such funding; 12.12.1.5 [INTENTIONALLY DELETED.] 12.12.1.6 The death or disability of Feld; 12.12.1.7 If the Final Closing has not occurred by the Outside Date; 12.12.1.8 If Feld shall be in Material Default Feld under this Agreement, and such Material Default is not cured within thirty (30) days after written notice thereof from WPHC or, if such Material Default cannot be cured within such 30-day period, Feld does not commence within such thirty (30) days and diligently proceed to cure such breach and actually completes such cure in any event within ninety (90) days after such notice; or 12.12.1.9 If any breach or default under the Construction Loan, which is not caused solely by the act or omission of WPHC, is not cured within any applicable cure period provided for under the Construction Loan. 12.12.2 DOCUMENTATION IN CONNECTION WITH REMOVAL. Upon Removal of Feld, Feld shall cease to have any interest in the Company and Feld shall cease to be a Member of the Company. Such removal shall be effective without the necessity of the execution of any documents by Feld. Nevertheless, Feld shall promptly execute such assignment and transfer documents as WPHC may reasonably request to evidence the Removal of Feld. 12.12.3 EFFECT OF REMOVAL ON CERTAIN OBLIGATIONS OF FELD. 12.12.3.1 If Feld is removed prior to the Construction Loan Closing Date, he shall have no continuing obligations for the performance of his obligations under Article 6 after the date of his Removal and no obligation to perform any continuing covenants set forth in Article 13. Feld shall be liable, however, for any breach of any representation or warranty which occurred prior to his Removal. 12.12.3.2 If Feld is removed after the Construction Loan Closing Date, Feld shall not be released from his ongoing performance obligations under Sections 6.3 or 6.10 or Article 13 of this Agreement and Feld shall be liable to WPHC for damages resulting from any breach by Feld of his obligations arising under Sections 6.1, 6.2, 6.3, 6.6, 6.7, 6.10 or 6.11 or Article 13 of this Agreement, including without limitation, damages relating to the period after Feld's Removal, unless such damages arise solely from acts or omissions of a party other than Feld. WPHC shall have the obligation to make reasonable efforts to mitigate its damages following a Removal of Feld after the Construction Loan Closing Date. 12.12.4 DEATH OR DISABILITY OF FELD. Prior to the Construction Loan Closing, Feld, WPHC and The Feld Company shall execute the "Substitution Agreement" in the form attached hereto as Exhibit U. The Substitution Agreement shall include the following principle terms: (i) upon the death or disability of Feld, at the written request of WPHC, The Feld Company shall acquire from Feld (or his estate) the entire interest of Feld in the Company, The Feld Company shall be admitted as the Managing Member, and The Feld Company shall assume in writing all of the obligations of the Managing Member hereunder; (ii) Feld (or his estate) shall remain obligated for the performance of all of the obligations of the Managing Member, whether relating to the period before or after Feld's Removal; and (iii) if WPHC fails to exercise its option under this Section 12.13 to cause The Feld Company to be substituted as the Managing Member within ninety (90) days of the date of Removal, then such option shall lapse and Feld (or his estate) shall be released from any obligation hereunder related to the period after his withdrawal in connection with his death or disability. 12.13 VACANCIES. Any vacancy occurring for any reason in the number of Managers of the Company may be filled by WPHC or a Manager appointed by WPHC. 12.14 PROHIBITION AGAINST PUBLICLY TRADED PARTNERSHIP. The Manager shall take all action necessary to prevent the Company from qualifying as a publicly traded partnership within the meaning of Code Section 7704, including, without limitation, limiting the number of Members to less than 500 in compliance with the safe harbor under IRS Notice 88-75. 13 REPRESENTATIONS, WARRANTIES AND COVENANTS 13.1 REPRESENTATIONS AND WARRANTIES OF EACH MEMBER. Each Member hereby represents and warrants as of the date hereof as follows: 13.1.1 Such Member, if other than an individual, is a duly organized entity under the laws of its state of organization and has the requisite power and authority to enter into and carry out the terms of this Agreement, and all required action has been taken to authorize such Member to execute and consummate this Agreement. 13.1.2 Such Member has been duly authorized to enter into this Agreement, and such Member is not a foreign person as defined under Code Section 1445(f)(3). 13.1.3 To the best of such Member's knowledge, neither the execution of nor the compliance with this Agreement has resulted or will result in a default under, or will create, any encumbrance on the Property, and there is no action pending or threatened which questions the validity or enforceability of this Agreement as to such Member. 13.1.4 The Interests to be acquired hereunder are being acquired by the Member for investment only and for such Member's own account; no Person other than the Member has or shall have any beneficial interest in the Interests; and the Member has no present intention of distributing, reselling or assigning the Interests. 13.1.5 Such Member understands that the Interests have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), or under the laws of any jurisdiction; that the Company does not intend and is under no obligation to so register the Interests; that the Interests may not be sold, assigned, pledged or otherwise transferred except upon delivery to the Company of an opinion of counsel satisfactory to the Managers that registration under the 1933 Act is not required for such transfer, or the submission to the Managers of such other evidence as may be satisfactory to the Managers, to the effect that any such transfer will not be in violation of the 1933 Act, applicable state securities laws or any rule or regulation promulgated thereunder; and that legends to the foregoing effect will be placed on all documents evidencing the Interests. The Member understands that the foregoing does not limit other restrictions regarding the transfer of its Interests set forth in this Agreement or in the Act. 13.1.6 Such Member, either itself or through its shareholders, partner or advisors, is sophisticated and experienced in investment matters, and, as a result, is in a position to evaluate the merits and risks of an investment in the Company. 13.1.7 Such Member is an "Accredited Investor" as defined in Regulation D promulgated under the 1933 Act. 13.1.8 Except as may be disclosed in the Environmental Report, each Member represents that it does not have current actual knowledge of any Pre-existing Environmental Condition. 13.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF FELD. In addition to the warranties provided for in Article 6 of this Agreement, as of the date hereof and as of the date of Final Closing, Feld hereby represents, warrants and covenants to the Company and the Members as follows: 13.2.1 To the best of Feld's knowledge, the Master Development Land is zoned to permit its use as a matter of right for multi-family residential use, subject to compliance with statutory requirements regarding obtaining approval of a site development plan. Under the Land Contract and the closing documents executed in connection therewith, Mission Viejo Company has irrevocably allocated the right to build 1880 multi-family residential units on the Master Development Land. 13.2.2 Feld shall use his best efforts to cause the approval by Douglas County and any other governmental authority whose approval may be required of a site development plan for the Land (the "Land Use Approval"), which approval will permit as a matter of right the construction of a multi-family project having not less than 424 units on the Project Land. 13.2.3 Feld shall use its best efforts to cause by the earlier of the Construction Loan Closing Date and the Construction Loan Outside Date, the County of Douglas to approve the Plans and Specifications for issuance of building permits for construction of the Project (the "Building Permits") and to issue all of the Building Permits necessary for construction of the Project. 13.2.4 Feld shall use its best efforts to cause the Company to obtain prior to the earlier of the starting construction of the Project or the Construction Loan Outside Date, such permits licenses, waivers, consents, approvals and authorizations, and Feld will make such material registrations, qualifications, designations, declarations and filings required (collectively, the "Approvals") as determined or as may be determined necessary by Feld to the best of his knowledge so that the Project may be constructed and, subject only to the issuance of customary temporary or permanent certificates of occupancy by the County of Douglas and any other necessary operating permits, operated as a multi-family housing development with related facilities as depicted on the Plans and Specifications. As of the date hereof, Feld has no reason to believe such certificates of occupancy will not be issued in the ordinary course of business following completion of construction of the Project substantially in accordance with the Plans and Specifications. Feld shall use its best efforts to cause all of the Approvals at the commencement of construction of the Project to be in full force and effect. Feld shall, promptly upon receipt of any Approvals, deliver to WPHC true, correct and complete copies of all such Approvals. 13.2.5 The Land is, and at the Final Closing shall be, free from delinquent water charges, sewer rents, taxes and assessments. 13.2.6 To the best knowledge of Feld, all utility services, including but not limited to storm and sanitary sewer, water, gas, electric power and telephone service will be prior to the earlier of Substantial Completion of the Project or the Outside Date, available to the Project Land in form and capacity sufficient for the useful enjoyment and operation of the Project and there will be no unpaid assessments, impact fees, development fees, tap-on fees or recapture costs payable in connection therewith except for charges shown on the tax certificates and the usual and customary charges involved in the ordinary course of business and specifically identified in the Final Project Budget. 13.2.7 To the best of Feld's knowledge, when constructed substantially in accordance with the Plans and Specifications, the Project shall not violate in any material respects all applicable covenants, conditions and restrictions, zoning ordinances and regulations, building codes, environmental and all other federal, state and local laws, ordinances, statutes, rules and regulations applicable to the Project. To the best of Feld's knowledge, as of the date hereof, the Project is not subject to any laws, rules, regulations, orders or requirements, which require the Company to designate any of the Project as affordable housing, low income housing or moderate income housing. 13.2.8 The construction and development of the Project shall be undertaken and shall be completed in a timely and workmanlike manner in substantial compliance with (a) all applicable requirements of the Construction Loan, (b) to the best of Feld's knowledge, all applicable requirements of all appropriate governmental entities, the violation of which would have, or would be likely to have, an adverse effect on the Project or the Company, and (c) the Plans and Specifications for the Project that have been or shall be hereafter approved by the Construction Lender, WPHC, and if required, any applicable governmental entities, as such Plans and Specifications may be changed from time to time with the approval of the Construction Lender, WPHC, and any applicable governmental entities, if such approval shall be required. 13.2.9 To the best of Feld's knowledge and based on Feld's review of the Environmental Reports, copies of which have been provided to the, Land is not designated by any governmental or quasi-governmental authority to be subject to environmental, wetlands or other regulation that would materially adversely affect the use of the Land for the Project as contemplated by this Agreement, and at the Final Closing the Land and the Project shall be in compliance with all Environmental Laws and free of Hazardous Materials except for those necessary for and lawfully used in operation and maintenance of the Project, and then only in reasonable amounts which shall be labeled, stored and used in compliance with Environmental Laws. 13.2.10 To the best of Feld's knowledge, the Land is or will be prior to Final Closing benefitted by such easements of unlimited duration as are necessary for the operation of the Project. As of the Final Closing, no additional easements will be required, subsequent to the Final Closing, for the provision of utilities, access, egress and drainage to or for the benefit of the Land or the Project in connection with the use and operation of the Land as the Project contemplated by this Agreement. 13.2.11 Feld shall use his best efforts to cause the Company to obtain, prior to the earlier of the date of Final Closing or the Outside Date, all permanent certificates of occupancy and other consents and approvals required from the County of Douglas and other governmental authorities and associations and boards with jurisdiction over the Project and such consents, approvals and certificates shall be in full force and effect without the presence or existence of any unsatisfied conditions or requirements with respect thereto, and true, correct and complete copies of such consents, approvals and certificates of occupancy shall be delivered to WPHC upon issuance thereof. 13.2.12 For the purpose of this Section 13.2, the terms "to the best of Feld's knowledge," "to the best of his knowledge" and "to the best knowledge of Feld" shall mean and include such information as is actually known to Feld or should have been known to him upon diligent inquiry or of which Feld has received constructive notice. If, prior to the Final Closing, any of the foregoing representations, warranties or covenants become incorrect or misleading in any material respect, Feld shall immediately notify WPHC in writing and such representation, warranty or covenant shall be deemed remade by Feld as of the date of such notification based upon such new information. 13.2.13 Feld, all Affiliates of Feld and all other parties related to or affiliated with Feld or with such Affiliates shall receive no fees, compensation or other profit or share of cost savings with respect to the Project except the amounts set forth in Article 7 hereof or in any Approved Affiliate Agreement. In the event of any breach of this Section 13.2.13, any amount improperly received by such parties shall be immediately paid over to the Company, together with interest thereon from the date received at twelve percent (12%) per annum, compounded monthly. 13.2.14 Feld shall cause the Project to be at least 75% leased on terms reasonably acceptable to WPHC within thirty-six (36) months after the Construction Loan Closing. Failure to do so shall be a default under this Agreement and shall give WPHC the right to cause the Removal of Feld. 13.3 GENERAL REPRESENTATION. No representation, warranty or statement of Feld in this Agreement or in any document, certificate or schedule furnished or to be furnished by Feld or its agents or contractors to WPHC pursuant hereto contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements or facts contained therein not misleading. 13.4 SURVIVAL; INDEMNITY. All of the representations, warranties and covenants of Feld contained in this Article 13 shall survive the resignation or withdrawal of Feld as Manager and/or Member of the Company and shall survive the Final Closing Date for a period of one (1) year after the Final Closing Date except that, in the case of any material matter intentionally concealed or intentionally not disclosed by Feld, such period shall be extended to three (3) years after the Final Closing Date. Feld shall defend, indemnify and hold harmless WPHC against a breach of any of the foregoing representations, warranties and covenants and any damage, loss or claim caused thereby, including reasonable attorneys' fees and costs and expenses of litigation and collection. 14 RIGHTS AND OBLIGATIONS OF MEMBERS 14.1 LIMITATION OF LIABILITY. 14.1.1 Each Member's liability to Persons other than the other Members shall be limited as set forth in the Act and other applicable law. 14.1.2 No officer, director or shareholder of WPHC shall be bound by or have any personal liability hereunder or under any document, agreement, understanding or arrangement relating to this transaction. The parties to this Agreement shall look solely to the assets of WPHC for satisfaction of any liability of WPHC in respect of this Agreement and all documents, agreements, understandings and arrangements relating to this transaction and will not seek recourse or commence any action against any of the directors, officers or shareholders of WPHC or any of their personal assets for the performance or payment of any obligation hereunder or thereunder. The foregoing shall also apply to any and all future documents, agreements, understandings, arrangements and transactions between the parties hereto with respect to the Project or this Agreement. 14.1.3 The Members acknowledge that Feld has made certain transfers to the LES Trust and the LF Trust prior to November 4, 1991, and agree that no Member will assert any right to recover against either of such trusts by reason of any transfer made prior to November 4, 1991, regardless of the consideration or lack of consideration for such transfer. Feld shall make no further transfers to either of such trusts as long as all or any part of Feld's obligations under this Agreement remain outstanding. In addition to the foregoing, the Members hereby agree that the personal residence of Feld located at 1011 South Valentia, Unit 37, Denver, Colorado and Feld's vacation home at 19 Creekside Drive in Palm Desert, California (the "Palm Desert Residence") are not available to support the obligations of Feld under this Agreement and agree not to assert any right to recover against such personal residence or the Palm Desert Residence, and the Members hereby disclaim, quitclaim, release and relinquish any right to proceed against such personal residence or the Palm Desert Residence for amounts owed by Feld under this Agreement. It is understood and acknowledged that Al Feld intends to replace his secondary residence in Palm Springs with a residence located at 101 Wanish in Palm Desert, California, and upon Al Feld's acquisition of the residence located at 101 Wanish in Palm Desert, the same will be automatically substituted as the Palm Springs Residence hereunder. 14.2 COMPANY DEBT LIABILITY. A Member will not personally be liable for any debts or losses of the Company, except as provided herein or in the Act. 14.3 LIST OF MEMBERS. Upon written request of any Member, the Managers shall provide a list showing the names, addresses and Percentage Interests of all Members in the Company. 14.4 COMPANY BOOKS. The Managers shall maintain and preserve, during the term of the Company, and for five (5) years thereafter, all accounts, books, and other relevant Company documents. Upon reasonable request, each Member shall have the right, during ordinary business hours, to inspect and copy such Company documents at the Member's expense. 14.5 PRIORITY AND RETURN OF CAPITAL. Except as specifically provided herein, no Member shall have priority over any other Member, either as to the return of Capital Contributions or as to Profits, Losses or distributions; provided that this Section shall not apply to loans (as distinguished from Capital Contributions) which a Member may make to the Company. 14.6 OUTSIDE ACTIVITY. 14.6.1 Except for the limitations on the activities of Feld and certain Affiliates set forth herein, each Member, including but not limited to the Manager, may engage in any capacity (as owner, employee, consultant, or otherwise) in any activity, whether or not such activity competes with or is benefitted by the business of the Company, without being liable to the Company or the other Members for any income or profit derived from such activity. 14.6.2 [INTENTIONALLY DELETED.] 14.6.3 From the date hereof until the date that Feld ceases to be a Member of the Company, neither Feld nor any other Restricted Party shall (i) purchase, construct or commence construction of any Multi-Family Project any part of which Multi-Family Project is located within three (3) miles of any portion of the Land, or (ii) purchase, construct or commence construction of any Multi-Family Project outside said three-mile area without giving prior written notice to WPHC. 14.6.4 "Restricted Parties" shall mean Feld, The Feld Company and any entity in which they individually or collectively, directly or indirectly, have an ownership interest of in excess of 20 percent of any class of security. Feld covenants that it shall cause each Restricted Party to comply with the restrictions in this Section 14.6, and a failure of a Restricted Party to comply with the terms of this Agreement shall constitute a breach of this Agreement by Feld. Feld shall comply with the restrictions set forth in this Section 14.6 in good faith and shall not employ any artifice or device to evade the intent of this provision. The restrictions in Subsections 14.6.2 and 14.6.3 are cumulative, and shall apply to a Restricted Party as an owner for its own account or as a developer, construction manager, general contractor or partner of any other Person. This Section 14.6 shall not prohibit any Restricted Party from conducting pre-development activities in connection with a Multi- Family Project, provided that construction activity (including any activity for which a building permit is required) has not commenced on such Multi-Family Project. 15 MEETINGS OF MEMBERS 15.1 ANNUAL MEETING. The annual meeting of the Members shall be held on the first business day of May or at such other time as shall be determined by resolution of the Members, commencing with the year 2000, for the purpose of the transaction of such business as may come before the meeting. 15.2 SPECIAL MEETINGS. Special meetings of the Members, for any purpose or purposes, unless otherwise prescribed by statute, may be called by any Manager or by any Member or Members holding at least 1% of the Percentage Interests. 15.3 PLACE OF MEETINGS. The Members may designate any place, either within or outside the State of Colorado, as the place of meeting for any meeting of the Members. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal business office of the Company in the State of Colorado. 15.4 NOTICE OF MEETINGS. Except as otherwise provided for herein, written notice stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the Managers or Person calling the meeting, to each Member entitled to vote at such meeting. 15.5 MEETING OF ALL MEMBERS. If all of the Members shall meet at any time and place, either within or outside of the State of Colorado, and consent to the holding of a meeting at such time and place, such meeting shall be valid without call or notice, and at such meeting lawful action may be taken. 15.6 RECORD DATE. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Members entitled to receive payment of any distribution, or in order to make a determination of Members for any other purpose, the date on which notice of the meeting is sent or the date on which the resolution declaring such distribution is adopted, as the case may be, shall be the record date for such determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this Section, such determination shall apply to any adjournment thereof. 15.7 QUORUM. Members holding at least a Majority In Interest, represented in person or by proxy, shall constitute a quorum at any meeting of Members. In the absence of a quorum at any such meeting, a majority of the Percentage Interests so represented may adjourn the meeting from time to time for a period not to exceed sixty (60) days without further notice. However, if the adjournment is for more than sixty (60) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of Members owning that number of Percentage Interests whose absence would cause less than a quorum. 15.8 MANNER OF ACTING. If a quorum is present, the affirmative vote of Members holding at least a Majority In Interest and entitled to vote on the subject matter shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Act, by the Articles of Organization, or by this Agreement. 15.9 PROXIES. At all meetings of Members, a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Managers of the Company before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. 15.10 ACTION BY MEMBERS WITHOUT A MEETING. Action required or permitted to be taken at a meeting of Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by each Member entitled to vote and delivered to the Managers of the Company for inclusion in the minutes or for filing with the Company records. Action taken under this Section 15.10 is effective when all Members entitled to vote have signed the consent, unless the consent specifies a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent. 15.11 VOTING BY BALLOT. Voting on any question or in any election may be by voice vote unless the Managers or any Member shall demand that voting be by ballot. 15.12 WAIVER OF NOTICE. When any notice is required to be given to any Member, a waiver thereof in writing signed by the Person entitled to such notice, whether before, at, or after the time stated therein, shall be equivalent to the giving of such notice. 16 TRANSFERABILITY; PUT-CALL PROVISIONS 16.1 RESTRICTIONS ON TRANSFERABILITY. Except as provided in Section 16.2 and Section 16.6, no transfer, pledge or assignment of all or any part of a Member's Interest in the Company (including the transfer of any rights to receive or share in profits, losses, income or the return of contributions) shall be effective unless and until written notice (including the name and address of the proposed purchaser, transferee, or assignee and the date of such transfer) has been provided to the Company and the non-transferring Members approve of the proposed sale, pledge or assignment of a selling, pledging or assigning Member's Interest by unanimous written consent, which may be withheld in their sole discretion. 16.2 PUT-CALL RIGHTS. 16.2.1 WPHC shall have the option (the "Call Option") to acquire the Interest of Feld in the Company, including his right to receive any distributions related to any periods prior to and including the Option Closing Date: (i) on and after the Final Closing for the Option Price, or (ii) on or after the Construction Loan Outside Date, for $100.00 if the Construction Loan Closing has not occurred by the Construction Loan Outside Date for any reason whatsoever, or (iii) at any time for $100.00 if Feld fails to timely cure any default by Feld under this Agreement. The exercise by WPHC of the Call Option described in item (i) of this Section is conditioned on WPHC performing its obligation under Section 8.3.1 hereof when and as required under this Agreement. To exercise its Call Option, WPHC shall provide written notice of exercise to Feld. 16.2.2 Feld shall have the right to cause WPHC to acquire the Interest of Feld in the Company, including his right to receive any distributions related to any periods prior to and including the Option Closing Date, at Final Closing for the Option Price (the "Put Option") by providing written notice to WPHC of Feld's intention to exercise the Put Option, provided that all the Final Closing Funding Conditions have been satisfied. 16.2.3 If the Call Option or Put Option is exercised, Feld shall forthwith upon request of WPHC execute an Assignment of Interest in the form of Exhibit Q or Exhibit R, as applicable, attached hereto, wherein Feld shall assign its Interest in the Company free and clear of all liens, security interests and competing claims. Feld shall execute such other instruments of transfer and of due authorization, execution and delivery and of the absence of any such liens, security interests or competing claims as WPHC may reasonably request. Feld shall have no duty, obligation or right to continue as Manager of the Company after such transfer of its Interest. 16.3 CALCULATION OF OPTION PRICE. 16.3.1 The Members shall use their respective, good faith efforts to determine the Option Price prior to the Option Closing Date. For a period of at least ten (10) business days prior to ordering an appraisal in connection with the determination of the Option Price, WPHC and Feld shall attempt in good faith to negotiate the fair market value of the Project to be used in such determination. Each of WPHC and Feld shall be entitled to submit the calculation of the Option Price to the Company's Accountants for verification or auditing. If WPHC and Feld are unable to determine the Option Price by the Option Closing Date, then WPHC shall pay Feld the Minimum Option Price as estimated by WPHC in its good faith judgment. The parties shall make a determination of the Option Price promptly after the Option Closing, and (i) if the Option Price as so determined exceeds the estimated Minimum Option Price paid at the Option Closing, then WPHC shall pay Feld such excess within five (5) business days after the determination of the Option Price, or (ii) if the Option Price as so determined is less than the estimated Minimum Option Price paid at the Option Closing, then Feld shall pay the difference to WPHC within five (5) business days after the determination of the Option Price. In addition, for a period of twelve (12) months after the Final Closing Date, WPHC and Feld shall each have the right to cause the recalculation of the Option Price, if such Member pays the costs of the Company's Accountants in making such recalculation. If the amount of the adjustment is in excess of $5,000, then WPHC and Feld shall adjust the Option Price within five (5) business days after the recalculation of the Option Price. No post-closing adjustment in the Option Price shall be made for amounts of $5,000 or less or based on a recalculation made more than twelve (12) months after the Option Closing Date. Notwithstanding anything to the contrary herein, the appraised value of the Project as determined shall be final and shall not be subject to challenge or recalculation by any Member. 16.4 RIGHT OF OFFSET. Payment of the Option Price shall be subject to a right of offset in favor of the Company and WPHC with respect to any claims or damages they may have against Feld. 16.5 RESTRICTIONS ON RESIGNATION. Notwithstanding anything to the contrary contained herein or under the Act, no Member shall have the right to resign from the Company. In the event a Member does resign in violation of the foregoing provision, (i) the Company shall not be obligated to pay any amounts to the Member, nor to distribute any of the Property to the Member or any interest therein, (ii) the Member shall be deemed to have forfeited any rights to legal or beneficial ownership of its Interest, and (iii) the Company may recover from the resigning Member damages for breach of this Agreement. 16.6 PERMITTED WPHC TRANSFER. WPHC shall have the right to transfer a portion of WPHC's Interest in the Company (a "WPHC Permitted Transfer") to a Person (a "WPHC Permitted Transferee"), provided that WPHC at all times during the term of this Agreement shall retain an Interest in the Company of at least twenty-one percent (21%) of the total Interests in capital, income, gain, loss, deduction and credit. WPHC acknowledges that any transfer pursuant to this Section 16.6 shall be solely from the Interest of WPHC and shall not result in the dilution of the Interest of Feld. In the event of a Permitted WPHC Transfer, (I) WPHC shall have the exclusive authority to communicate all decisions, votes and elections ("Decisions") made by it and by the WPHC Permitted Transferee with respect to the Interest of WPHC and such transferee in the Company, (II) Feld shall be entitled to rely exclusively on communications made by WPHC with respect to all such Decisions, and any communications by a WPHC Permitted Transferee with respect to a Decision other than through WPHC shall be invalid, and (III) prior to and as a condition to the admission of a WPHC Permitted Transferee as a Member, the WPHC Permitted Transferee shall execute an admission agreement wherein it agrees to be bound by all the terms of this Agreement, including without limitation, this Section 16.6. 17 ADMISSION OF ADDITIONAL MEMBERS From the date of the formation of the Company, with the unanimous written consent of the Members, any Person acceptable to the Members may, subject to the terms and conditions of this Agreement: (i) become an additional Member in this Company by the sale of new Interests for such consideration as the Members by unanimous vote shall determine, or (ii) become a Substitute Member as a transferee of a Member's Interest or any portion thereof. 18 DISSOLUTION AND TERMINATION 18.1 DISSOLUTION. 18.1.1 The Company shall be dissolved upon the occurrence of any of the following events ("Dissolution Event"): (a) When the period fixed for the duration of the Company shall expire; (b) by the unanimous written agreement of all Members; or (c) upon the death, retirement, resignation, expulsion, Removal, bankruptcy, dissolution of a Member or occurrence of any other event which terminates the continued membership of a Member in the Company (a "Withdrawal Event"), unless the business of the Company is continued by the consent of a majority of the Interests of the remaining Members in the capital and profits of the Company, as determined in accordance with Revenue Procedure 94- 46 within ninety (90) days after the termination. 18.1.2 As soon as possible following the occurrence of any of the events specified in this Section effecting the dissolution of the Company, the appropriate representative of the Company shall execute a statement of intent to dissolve in such form as shall be prescribed by the Colorado Secretary of State and file duplicate originals of the same with the Colorado Secretary of State's office. 18.2 EFFECT OF FILING OF DISSOLVING STATEMENT. Upon the filing with the Colorado Secretary of State of a statement of intent to dissolve, the Company shall cease to carry on its business, except insofar as may be necessary for the winding up of its business, but its separate existence shall continue until articles of dissolution have been filed with the Secretary of State or until a decree dissolving the Company has been entered by a court of competent jurisdiction. 18.3 DISTRIBUTION OF ASSETS UPON DISSOLUTION. In settling accounts after dissolution, the liabilities of the Company shall be entitled to payment in the following order: 18.3.1 to creditors, in the order of priority as provided by law (except to Members on account of their Capital Contributions); 18.3.2 to Members and former Members in satisfaction of liabilities for distributions under Section 7-80-601 or 7-80-603 of the Act; and 18.3.3 to Members pro rata in accordance with the positive balances in their Capital Accounts after taking into account all adjustments to the Capital Accounts for all periods. 18.4 ARTICLES OF DISSOLUTION. When all debts, liabilities and obligations have been paid and discharged or adequate provisions have been made therefor and all of the remaining Property and assets have been distributed to the Members, articles of dissolution shall be executed in duplicate and verified by the Person signing the articles, which articles shall set forth the information required by the Act. 18.5 FILING OF ARTICLES OF DISSOLUTION. 18.5.1 Duplicate originals of such articles of dissolution shall be delivered to the Colorado Secretary of State. 18.5.2 Upon the filing of the articles of dissolution, the existence of the Company shall cease, except for the purpose of suits, other proceedings and appropriate action as provided in the Act. The Managers shall thereafter be trustees for the Members and creditors of the Company and as such shall have authority to distribute any Property of the Company discovered after dissolution, convey real estate and take such other action as may be necessary on behalf of and in the name of the Company. 18.6 WINDING UP. If the Property of the Company remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the Capital Contribution of each Member, such Member shall have no recourse against any other Member. The winding up of the affairs of the Company and the distribution of its assets shall be conducted exclusively by the Managers, who are hereby authorized to take all actions necessary to accomplish such distribution, including without limitation, selling the assets of the Company. In the discretion of the Managers, a pro rata portion of the amounts that otherwise would be distributed to the Members under this Article 18 may be withheld to provide a reasonable reserve for unknown or contingent liabilities of the Company. 18.7 NO RESTORATION OF DEFICIT CAPITAL ACCOUNTS. If the Company is deemed to be liquidated for federal income tax purposes within the meaning of Regulation Section 1.704- 1(b)(2)(ii)(g), distributions under Section 14.3(c) shall be made in compliance with Regulation Section 1.704-1 (b)(2)(ii)(b)(2) to those Members who have positive Capital Accounts. If the Capital Account of any Member has a deficit balance after such distributions (after giving effect to all contributions, distributions, and allocations for all taxable years), such Member shall have no obligation to make any contribution to the capital of the Company with respect to such deficit and such deficit shall not be considered a debt owed to the Company or any other Person for any purpose whatsoever. 18.8 DEEMED LIQUIDATION. If no Dissolution Event has occurred, but the Company is deemed liquidated for federal income tax purposes within the meaning of Regulation Section 1.704-1 (b)(2)(ii)(g), the Company shall not be wound up and dissolved but its assets and liabilities shall be deemed to have been distributed to the Members and contributed to a new limited liability company which shall operate and be governed by the terms of this Agreement. 18.9 PERMITTED WITHDRAWAL BY FELD. If the Construction Loan Closing has not occurred by the Construction Loan Outside Date, upon not less than ten (10) days prior written notice to WPHC, Feld may withdraw as the Manager and as a Member without such withdrawal (a "Permitted Withdrawal") constituting a breach of this Agreement. In the event of a Permitted Withdrawal, Feld shall not have any obligation under the Development Deficit Guaranty, and Feld shall be released from any obligation hereunder related to the period after his Withdrawal. Upon a Permitted Withdrawal, Feld shall have no right to any fees or payments from the Company or any interest in any property of the Company. Feld shall execute such documents or instruments evidencing his withdrawal as WPHC may reasonably request. Except for a Permitted Withdrawal or a withdrawal upon the death or disability of Feld, any withdrawal by Feld from the Company shall constitute a default by Feld under this Agreement and WPHC shall be entitled to damages and any other legally available relief based upon such default. 19 MISCELLANEOUS PROVISIONS 19.1 STATEMENT OF INTENT OF PARTIES. It is the present intent of WPHC and Feld to jointly develop the Project as the fourth phase leading to the eventual development of the Master Development. Due to the changes that may take place in the capital and real estate markets and other events, unknown at this time, which may alter either WPHC's or Feld's interest in or outlook on future phases, no specific provision is made in this Agreement in regard to future phases. It is the present intent of the parties to use the basic economic and transaction structure of this Operating Agreement on future phases. However, either party may require changes or elect not to participate in the joint development of future phases. It is imperative to WPHC that it control the future of this development in regard to all issues, including timing, cost, design, etc. While this control is absolute, it is WRP's and Feld's present intent that Feld continue as development partner. Notwithstanding the foregoing statement of intent, the provisions of this Agreement and related documents governing the duties and relationships among the parties shall control over the foregoing statement of intent and neither party shall have any obligation, express or implied, to jointly develop another phase of the Master Development with the other party. 19.2 NOTICES. Any notice or communication required or permitted to be given by any provision of this Agreement, including but not limited to any consents, shall be in writing and shall be deemed to have been given and received by the Person to whom directed (a) when delivered personally to such Person or to an officer or partner of the Member to which directed, (b) twenty-four (24) hours after transmitted by facsimile, evidence of transmission attached, to the facsimile number of such Person who has notified the Company and all of the Members of its facsimile number, or (c) three (3) business days after being posted in the United States mails if sent by registered or certified mail, return receipt requested, postage and charges prepaid, or one (1) business day after deposited with overnight courier, return receipt requested, delivery charges prepaid, in either case addressed to the Person to which directed at the address of such Person as it appears in this Agreement or such other address of which such Person has notified the Company and all of the Members. WPHC: c/o Wellsford Real Properties, Inc. 1623 Blake Street, Suite 270 Denver, Colorado 80202 Attention: David M. Strong Facsimile No. (303) 534-4398 with copies to: Lynda A. McNeive, Esq. Brownstein Hyatt & Farber, P.C. 410 17th Street, 22nd Floor Denver, Colorado 80202 Facsimile No. (303) 623-1956 Feld: Mr. Al Feld The Feld Company 4600 South Ulster Street, Suite 350 Denver, Colorado 80237 Facsimile No. (303) 721-9418 with a copy to: Alan B. Lottner, Esq. Haligman & Lottner, P.C. 633 17th Street, Suite 2700, North Tower Denver, Colorado 80202 Facsimile No. (303) 292-1300 19.3 APPLICATION OF COLORADO LAW. This Agreement, and the application or interpretation hereof, shall be governed exclusively by its terms and by the laws of the State of Colorado, and specifically by the Act. 19.4 WAIVER OF ACTION FOR PARTITION. Each Member irrevocably waives during the term of the Company any right that such Member may have to maintain any action for partition with respect to the Property of the Company. 19.5 AMENDMENTS. This Agreement may be amended only upon the written Agreement of all of the Members. 19.6 CONSTRUCTION. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders, and vice versa. 19.7 HEADINGS. The headings in this Agreement are inserted for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent or intent of this Agreement or any provision hereof. 19.8 WAIVERS. The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation. 19.9 TIME OF THE ESSENCE. Time is of the essence in regard to the obligations of the parties set forth in this Agreement. 19.10 REMEDIES FOR DEFAULT. If any party hereto fails to perform any of its obligations under this Agreement, at the time and in the manner set forth herein, and such failure continues uncured after any applicable notice and cure period, then any other party may assert a claim against the defaulting party for damages and, to the extent damages are not an adequate remedy, for specific performance of this Agreement. 19.11 RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive the right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. 19.12 SEVERABILITY. If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid, illegal or unenforceable to any extent, the remainder of this Agreement and the application thereof shall not be affected and shall be enforceable to the fullest extent permitted by law. 19.13 HEIRS, SUCCESSORS AND ASSIGNS. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Agreement, their respective heirs, legal representatives, successors and assigns. 19.14 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 19.15 FURTHER ASSURANCES. The Members and the Company agree that they and each of them will take whatever action or actions as are reasonably necessary or desirable from time to time to effectuate the provisions or intent of this Agreement, and to that end, the Members and the Company agree that they will execute, acknowledge, seal, and deliver any further instruments or documents which may be necessary to give force and effect to this Agreement or any of the provisions hereof, or to carry out the intent of this Agreement or any of the provisions hereof. 19.16 ENTIRE AGREEMENT. This Agreement and each of the exhibits attached hereto set forth all (and are intended by all parties hereto to be an integration of all) of the promises, agreements, conditions, understandings, warranties, and representations among the parties hereto with respect to the formation and operations of the Company; and there are no promises, agreements, conditions, understandings, warranties, or representations, oral or written, express or implied, among them other than as set forth herein. The exhibits attached hereto are incorporated herein by reference. 19.17 ATTORNEYS FEES. Should any party hereto institute any legal action or proceeding to enforce any provision of the Operating Agreement or for damages by reason of any alleged breach of any provision of the Operating Agreement or for any other judicial remedy, the prevailing party shall be entitled to receive from the non-prevailing party all reasonable attorneys' fees and all court costs in connection with said action or proceeding, in addition to any other award. CERTIFICATE The undersigned hereby agree, acknowledge and certify that the foregoing Agreement constitutes the Operating Agreement of Green River at Palomino Park LLC adopted by the Members of the Company effective as of January 5, 2000. /s/ Al Feld ----------------------------------- Al Feld WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: /s/ David M. Strong ------------------------------- David M. Strong, Vice President STATE OF COLORADO ) ) ss. COUNTY OF DENVER ) The foregoing operating agreement was acknowledged before me this 5th day of January, 2000, by Al Feld. WITNESS my hand and official seal. My commission expires: June 21, 2003 /s/ Christopher Jeremy Vernon ------------------------------------------ Notary Public STATE OF COLORADO ) ) ss. COUNTY OF DENVER ) The foregoing operating agreement was acknowledged before me this 21st day of January, 2000, by David M. Strong as Vice President of Wellsford Park Highlands Corp., a Colorado corporation. WITNESS my hand and official seal. My commission expires: September 6,2002 /s/ Susan M. Messenger ------------------------------------------ Notary Public GUARANTY By its execution hereof, WELLSFORD REAL PROPERTIES, INC., a Colorado corporation ("WRP"), hereby guarantees to Al Feld ("Feld") that Wellsford Park Highlands Corp., a Colorado corporation, shall timely and fully satisfy its obligation to fund the Final Closing Capital Contribution or otherwise to satisfy its obligation under Section 8.3.1 of the foregoing Operating Agreement when, as and if required by the foregoing Operating Agreement, as such Agreement may be amended from time to time (the "Obligation"). This guaranty is a guaranty of payment and performance of the Obligations, not merely of collection. Any amendment or modification of the Obligations made by WPHC and Feld shall not release the duties and obligations of WRP hereunder, and this Guaranty shall extend to the Obligations as so amended or modified. This Guaranty shall be continuing and irrevocable until the Obligations have been satisfied in full. WRP hereby waives notice of acceptance of this Guaranty. WRP waives and agrees not to assert or take advantage of: (a) any right to require Feld to proceed against any other person or to proceed against or exhaust any security held by Feld at any time or to pursue any other remedy in Feld's power before proceeding against WRP; (b) any right to require Feld to proceed against WPHC or any other person or to proceed against or exhaust any security held by Feld at any time or to pursue any other remedy in Feld's power before proceeding against WRP; and (c) any requirement that notice be provided to WRP. This Guaranty and all documents, agreements, understandings and arrangements relating to this Guaranty have been executed by the undersigned on behalf of WRP in his/her capacity as an officer of WRP, and not individually, and neither the officers or shareholders of WRP shall be bound by or have any personal liability hereunder or thereunder. The beneficiary of this Guaranty shall look solely to the assets of WRP for satisfaction of any liability of WRP in respect of this Agreement and all documents, agreements, understandings and arrangements relating to this transaction and will not seek recourse or commence any action against any of the officers or shareholders of WRP or any of their personal assets for the performance or payment of any obligation hereunder or thereunder. The foregoing shall also apply to all and any future documents, agreements, understandings, arrangements and transactions between the parties hereto with respect to the this Guaranty or any matter related thereto. Should any one or more provisions of this Guaranty be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. This Guaranty shall be governed by and construed in accordance with the laws of the State of Colorado. EXECUTED as of January 5, 1999. WELLSFORD REAL PROPERTIES, INC., a Delaware corporation By: /s/ David M. Strong ------------------------------- David M. Strong, Vice President STATE OF COLORADO ) ) ss. CITY AND COUNTY OF DENVER ) The foregoing guaranty was acknowledged before me this 21st day of January, 2000, by David M. Strong, as Vice President of Wellsford Real Properties, Inc., a Delaware corporation. WITNESS my hand and official seal. My commission expires: September 6, 2002 /s/ Susan M. Messenger ------------------------------------------ Notary Public EXHIBITS EXHIBIT A [INTENTIONALLY OMITTED] EXHIBIT B Construction Procedures EXHIBIT C Deposit and Contract Administration Agreement EXHIBIT D Final Closing Funding Conditions EXHIBIT E Description of Infrastructure EXHIBIT F Description of Infrastructure Land EXHIBIT G Description of the Land EXHIBIT H Description of the Master Development Land EXHIBIT I [INTENTIONALLY OMITTED] EXHIBIT J Property Management Agreement EXHIBIT K Release and Waiver EXHIBIT L Pledge and Security Agreement -- Feld to WPHC EXHIBIT M Pledge and Security Agreement -- WPHC to Feld EXHIBIT N Description of Plans and Specifications EXHIBIT O Final Project Budget EXHIBIT P Calculation of the Feld Incentive Fee EXHIBIT Q Assignment of Interest -- Call Option EXHIBIT R Assignment of Interest -- Put Option EXHIBIT S-1 Architect's Certificate EXHIBIT S-2 Engineer's Certificate EXHIBIT T [INTENTIONALLY OMITTED] EXHIBIT U Substitution Agreement EXHIBIT A [INTENTIONALLY OMITTED] EXHIBIT B CONSTRUCTION PROCEDURES 1. Requests for advances by the Construction Lender for payment of costs of labor, materials, and services supplied for the construction of the improvements and other items shown in the Project Budget shall be submitted by Feld, not more frequently then as specified in the Construction Loan, after actual commencement of construction of the improvements. WPHC, and the Construction Consultant shall be provided with copies of the application for advance simultaneously with delivery to the Construction Lender, except as otherwise provided in Section 6.6 of the Operating Agreement. 2. WPHC and the Construction Consultant shall have the right and Feld shall permit them to enter upon the Property and any location where materials which are intended to be utilized in the construction of the improvements are stored for purpose of inspection of the Property and such materials at all reasonable times. 3. Feld shall timely comply with and promptly furnish to WPHC and Construction Consultant a true and complete copy of any notice or claim by any governmental authority pertaining to the Property and of any notice or claim from the Construction Lender or any subcontractor or supplier with respect to the Project. 4. Feld shall disburse all advances for payment of costs and expenses for purposes specified in the Project Budget, and for no other purpose. 5. WPHC and Construction Consultant shall be advised, in advance of, and shall have the right to attend all meetings pertaining to the construction of the improvements. Feld agrees to use his best efforts to attempt to notify WPHC and Construction Consultant reasonably in advance of such meetings in order to allow attendance at such meeting by representatives of WPHC and the Construction Consultant. 6. Feld shall not reallocate to other line items any portion of the line items in the Project Budget that relate to Construction Loan interest or loan fees. 7. Feld shall deliver copies of the monthly construction ledger to WPHC on or before the 10th day of the following month. 8. Change orders shall be dealt with as provided in Section 6.7 of the Operating Agreement. EXHIBIT C DEPOSIT AND CONTRACT ADMINISTRATION AGREEMENT EXHIBIT D FINAL CLOSING FUNDING CONDITIONS (a) No Default; Certificate From Feld. There shall be no uncured default by Feld under this Agreement and no uncured default under the Construction Loan, and WPHC shall have received a certificate from Feld that the representations, warranties and covenants of Feld in Articles 6 and 13 are materially true and accurate as of the date of the proposed Final Closing and that Feld and the Company are not in default of any of their obligations hereunder or under any contracts or agreements relating to the Project as of the date of the proposed Final Closing. (b) Construction Loan. Feld shall provide evidence satisfactory to WPHC that the principal amount of the Construction Loan and all accrued interest thereon have either been paid in full or will be paid in full from the proceeds of the Final Closing Capital Contribution immediately upon the funding of the Final Closing Capital Contribution. Such evidence may consist of a payoff letter in form sufficient to allow the title insurer to insure over the lien of the Construction Loan. (c) Physical Inspection. The Construction Consultant shall have prepared a physical inspection report reasonably satisfactory to WPHC. (d) Final Completion; Development Deficits. Final Completion of the Project shall have occurred, and all Development Deficit Payments shall have been made by Feld. (e) Lien Waivers. Feld shall obtain and provide copies to WPHC of unconditional lien releases from all subcontractors, materialmen and providers of labor, equipment, material and/or services to the Property and the Project, as to all work performed and materials purchased in connection with the construction of the Project, in form reasonably satisfactory to WPHC or, with respect to any liens not so released, Feld shall have provided surety bonds to which any contested liens are transferred (and released from the Property) and title insurance over any such liens. (f) Title Policy. The title insurance company shall have issued the following endorsements to the Company's title policy: (1) an endorsement indicating that the Company owns fee simple title to the Project Land and that the Project Land will be free and clear of the Construction Loan upon payment of the Final Closing Capital Contribution; (2) a "date down" endorsement to the title policy extending the effective date of the title policy to the date of Final Closing and showing no exceptions to title other than the exceptions reflected on the title policy as of Initial Closing, except as shall be acceptable to WPHC in its reasonable judgment; (3) an endorsement affording mechanics lien coverage; (4) an endorsement increasing the amount of insurance by an amount equal to the Final Closing Capital Contribution; and (5) such other endorsements as WPHC may reasonably require, including without limitation, the following: (i) 103.1 and 103.2 (Encroachments) to the extent required and available; (ii) 103.7 (Property Abuts Open Street); (iii) 107.2 (Increase Policy Amount) for the amount of the Final Closing Capital Contribution plus the Initial Closing Capital Contribution; (iv) 110.1 (Deleting Standard Exceptions) if not already provided; (v) 110.2 (Special Exceptions) if any new exceptions appear that are not acceptable to WPHC in its sole discretion; (vi) 115.2 (PUD); (vii) 116.1 (Survey); (viii) 123.2 (Zoning). (g) Survey. WPHC shall have received and approved an updated and recertified as-built survey reasonably satisfactory to WPHC dated no more than thirty (30) days prior to the date of Final Closing, showing no encroachments or other adverse matters affecting title to the Project, except as shall be reasonably acceptable to or have been previously approved in writing by WPHC. (h) As-Built Plans and Specifications. Feld shall have submitted to WPHC a written document executed by Feld, the architect and the general contractor certifying no material change to the approved "for-construction" Plans and Specifications except any changes stated therein that have previously been approved by WPHC. (i) Permits, Licenses and Certificates of Occupancy. WPHC shall have received a copy of the final and unconditional certificate or certificates of occupancy issued by the appropriate governmental authorities for the Project in its entirety and a copy of any permits and licenses which are required for the operation and use of the Project. (j) Architect's and Engineer's Certificates. Feld shall have delivered to WPHC an architect's certificate in the form attached hereto as Exhibit S-1 and an Engineer's Certificate in the form attached hereto as Exhibit S-2. (k) Payment of Taxes. WPHC shall have received satisfactory evidence (which may be included in the title policy described in subsection (f) of these Final Closing Funding Conditions) that all real property taxes and assessments for the Project due and payable through the date of funding have been timely and fully paid. (l) Release and Waiver. Feld and each affiliate of Feld that is a party to an Approved Affiliate Agreement shall have executed for the benefit of the Members a Release and Waiver, substantially in the form attached hereto as Exhibit K with respect to all liabilities incurred by Feld during its period of membership in the Company, including, without limitation, all liabilities incurred by Feld under the Architect's Agreement, the construction contract for the construction of the Project, and any contracts, agreements, or other instruments entered into by Feld in connection with the construction of the Project or the business of the Company. EXHIBIT E DESCRIPTION OF INFRASTRUCTURE EXHIBIT F DESCRIPTION OF INFRASTRUCTURE LAND EXHIBIT G DESCRIPTION OF THE LAND PARCEL 1 LOT 4A, HIGHLANDS RANCH FILING NO. 126-A, 6TH AMENDMENT, RECORDED AT REC. NO. 99084341 IN THE OFFICE OF THE CLERK AND RECORDER OF THE COUNTY OF DOUGLAS, STATE OF COLORADO. PARCEL 2 THAT CERTAIN PERPETUAL EASEMENT INTEREST AND ESTATE APPURTENANT TO PARCEL 1 AND ALL RIGHTS AND PRIVILEGES IN CONNECTION THEREWITH, RESERVED BY PARK AT HIGHLANDS LLC, A COLORADO LIMITED LIABILITY COMPANY, ITS SUCCESSORS, ASSIGNS AND DESIGNEES, UNDER AND PURSUANT TO THE TERMS OF THAT CERTAIN SPECIAL WARRANTY DEED, EXECUTED BY PARK AT HIGHLANDS LLC, GRANTOR, TO PALOMINO PARK PUBLIC IMPROVEMENTS CORPORATION, A COLORADO NON-PROFIT CORPORATION, GRANTEE, RECORDED JANUARY 3, 1996, UNDER RECEPTION NO. 9600509 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO, COVERING THE REAL PROPERTY MORE PARTICULARLY DESCRIBED AS FOLLOWS: TRACT A, HIGHLANDS RANCH FILING NO. 126-A, 1ST AMENDMENT, AS FILED ON DECEMBER 19, 1995 UNDER RECEPTION NO. 9560621 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO. EXHIBIT H DESCRIPTION OF THE MASTER DEVELOPMENT LAND LOT 5A, HIGHLANDS RANCH FILING 126-A, 6TH AMENDMENT, RECORDED AT REC. NO. 99084341 IN THE OFFICE OF THE CLERK AND RECORDER OF DOUGLAS COUNTY, COLORADO. EXHIBIT I [INTENTIONALLY OMITTED] EXHIBIT J PROPERTY MANAGEMENT AGREEMENT EXHIBIT K RELEASE AND WAIVER - FINAL CLOSING EXHIBIT L PLEDGE AND SECURITY AGREEMENT BY FELD EXHIBIT M PLEDGE AND SECURITY AGREEMENT BY WPHC EXHIBIT N PLANS AND SPECIFICATIONS (to be approved by all Members prior to the closing of the Construction Loan and a description thereof to be attached hereto at or before Construction Loan Closing) EXHIBIT O FINAL PROJECT BUDGET EXHIBIT P CALCULATION AND PAYMENT OF THE INCENTIVE FEE NOTE:This Exhibit is retained solely for the purpose of calculating the allocation of Infrastructure costs. No Incentive Fee shall be due or payable under this Agreement. 1. Definitions. The following definitions shall apply for the purpose of calculation of the Incentive Fee: a. "Cost Recovery" shall mean that (I) the sum of Disposition Recovery, Land Recovery, and Ownership Recovery, exceeds (II) Infrastructure Costs for any an all phases of the Infrastructure, plus interest on Infrastructure Costs at an annual rate of nine percent, compounded monthly. Cost Recovery shall be determined on a calendar year basis; such determination shall be made by March 31 of each year for the preceding calendar year. b. "Disposition Recovery" shall mean (I) the sale proceeds net of all costs of closing and brokerage costs received by the Company from a sale of the Project by the Company, plus (II) the sale proceeds net of all costs of closing and brokerage costs received from the sale of Future Projects by the initial owner(s) of such Future Projects, minus (III) Total Development Costs for the Project (if sold by the Company) and Total Development Costs for all Future Projects (which have been sold). c. "Future Project" shall mean any apartment project constructed by WPHC, WRP or an Affiliate of them (provided that WPHC or WRP directly or indirectly owns 50% or more of such Affiliate), which project is constructed on the Master Development Land. "Future Project" shall not include, however, the Project which is the subject of the Operating Agreement. d. "Incentive Cap" shall mean the lesser of $1,957,447.00 or the product of $4,255.32 and the number of apartment units actually constructed in Phase I. If subsequent phases are developed, each will have an Incentive Cap based on the number of units in such phases and a per unit limit of $4,255,32. In no event shall the Incentive Cap for all phases exceed an aggregate of $8,000,000. e. "Land Recovery" shall mean (I) the amount(s) received by WPHC in connection with the sale(s) of all or a portion of its interest in the Land Contract or in the Master Development Land acquired by it pursuant to the Land Contract, minus (II) the purchase price paid by the WPHC or its Affiliates for such Master Development Land, plus all closing costs and incidental holding and carrying costs at an assumed annual interest rate of nine percent (9%), and the earnest money deposit in connection with the Land Contract unless and until such earnest money deposit is applied against the purchase price of Master Development Land. Land Recovery shall not include any amounts received from the sale of the Project or a Future Project. f. "Ownership Recovery" shall mean (I) the Project Value for the Project and any Future Projects, minus (II) Total Development Costs for the Project and all such Future Projects. If the Project or a Future Project is sold anytime during the calendar year preceding the date of determination of Cost Recovery, such Project or Future Project shall not be included in the calculation of Ownership Recovery for such calendar year. g. "Project NOI" shall mean the Net Operating Income for the Project or a Future Project for the calendar year preceding the date of determination of Cost Recovery. h. "Project Value" shall mean with respect to the Project or any Future Project the Project NOI for such Project or Future Project divided by ten percent (10.0%). i. "Stabilized NOI" shall mean the Net Operating Income for Phase II for the 12 month period following the Stabilization Date. j. "Stabilization Date" shall mean the first day of the month following the date on which any one of the following shall have occurred: (i) 93% occupancy in the operations of the Project at any point in time; (ii) 6 months after issuance of a certificate of occupancy for all of the apartments comprising the Project; or (iii) forty-two (42) months after the Initial Closing. k. "Total Development Costs" with respect to the Project shall mean Total Development Costs as set forth in the Operating Agreement, and with respect to any Future Phase shall have an equivalent meaning. Total Development Costs does not include an allocation of Infrastructure Costs. l. "Target Fee" shall mean an amount equal to 3% of Total Development Costs (including any Cost Saving Fee paid to Feld). m. "Yield" shall mean (i) Stabilized NOI, divided by (ii) the sum of (A) Total Development Costs (including any Cost Saving Fee paid to Feld), (B) the Incentive Fee, (C) the Infrastructure Costs allocable to the Project (i.e. for Phase I, 24.26% of total Infrastructure Cost), and (D) interest at 9%, compounded monthly, on the pro rata share of the Infrastructure Cost. 2. Calculation of Incentive Fee. The LLC's accountants shall calculate the Incentive Fee promptly after they have sufficient information to accurately calculate Stabilized NOI. The Incentive Fee shall equal the following, provided that in no event shall the Incentive Fee exceed the Incentive Cap: a. If the Yield is 9% or less, the Incentive Fee shall equal zero; b. If the Yield is greater than 9% and less than or equal to 10%, then the Incentive Fee shall equal (A) the Target Fee, multiplied by (B) the Yield minus 9%, multiplied by (C) 100. c. If the Yield is greater than 10% and less than or equal to 11.5%, then the Incentive Fee shall equal the following: (i) the Target Fee, plus (ii) (A) the Incentive Cap minus the Target Fee, multiplied by (B) the Yield minus 10%, divided by (C) 1.5, multiplied by (D) 100. d. If the Yield is greater than 11.5%, then the Incentive Fee shall equal the Incentive Cap. 3. Payment of Incentive Fee. The Incentive Fee shall be deemed earned at the time it is calculated but shall not be due or payable unless and until Cost Recovery has occurred. The Incentive Fee shall accrue simple interest at 9% per annum from the date it is deemed earned until paid. 4. Accelerated Payment of Incentive Fee. Notwithstanding anything to the contrary in this Exhibit P, if WPHC, in its sole discretion, causes the Final Closing to occur more than thirty (30) days prior to the Outside Date, then the Incentive Fee shall equal the Target Fee and the Company shall pay 50 percent of such Incentive Fee at the Final Closing and 50 percent of such Incentive Fee within two years of the date of Final Closing. 5. Allocation of Infrastructure Costs. The allocation of Infrastructure Costs for purposes of the calculation of the Incentive Fee is solely for such purpose and is distinct from and will not be modified by the actual allocation of Infrastructure Costs per unit. EXHIBIT Q EXERCISE OF CALL OPTION; ASSIGNMENT OF INTEREST POWER OF ATTORNEY THIS ASSIGNMENT OF INTEREST (this "Assignment") is made and entered into as of the ____ day of ______________ 2000, by and between Al Feld, an individual ("Assignor"), and Wellsford Park Highlands Corp., a Colorado corporation ("Assignee"). RECITALS b. Pursuant to that certain Operating Agreement (the "Operating Agreement") of Green River at Palomino Park LLC, a Colorado limited liability company (the "Company") dated as of January ____, 2000, by and among Assignor and Assignee, Assignee is the owner of an option (the "Call Option") to acquire the ownership interest of Assignor in the Company as of the date hereof (including the right of Assignor to receive any distributions related to any periods prior to and including the date hereof), which ownership interest includes the right of Assignor to any and all benefits to which Assignor may be entitled as a Member and as a Manager (each as defined in the Operating Agreement), as provided in the Operating Agreement or the version of the Colorado Limited Liability Company Act adopted by the State of Colorado, Co. Rev. Stat. ss.ss.7-80-101 to 7-80- 913, as amended from time to time (the "Act"), together with the unaccrued obligations of Assignor, in its capacity as a Member and Manager, to comply with all the terms and provisions of the Operating Agreement and the Act (collectively, the "Ownership Interest"). c. In accordance with Section 16.2.1 of the Operating Agreement, Assignee, by its execution and delivery of this Assignment to Assignor, hereby desires (i) to exercise the Call Option as contemplated therein and (ii) to cause Assignor to resign as Member and Manager of the Company. d. Assignor has agreed, concurrently with the exercise of the Call Option by Assignee: (i) to assign and sell the Ownership Interest to Assignee pursuant to the terms and conditions set forth in the Operating Agreement and (ii) to appoint Assignee as its true and lawful attorney-in-fact, as set forth herein. e. Terms not otherwise defined herein shall have the meanings set forth in the Operating Agreement. AGREEMENT In consideration of the receipt of Ten and no/100 Dollars ($10.00) and other good and valuable consideration in hand paid by Assignee to Assignor, the receipt and sufficiency of which are hereby acknowledged and confessed by Assignor, Assignor and Assignee hereby agree as follows: 1. Assignment and Assumption. Concurrently with and conditioned upon the satisfaction of all of the conditions and covenants of Section 16.2.1 of the Operating Agreement, Assignor hereby assigns, grants and conveys to Assignee all of Assignor's right, title and interest in and to the Ownership Interest. Assignee hereby assumes the Ownership Interest and agrees to be bound by and comply with and perform all of the obligations of Assignor in its capacity as a Member and as a Manager arising under the Operating Agreement which accrue after the date hereof. Assignor shall remain obligated to perform all of the obligations of Assignor under the Operating Agreement (i) which are not expressly assumed hereunder or (ii) which have accrued on or prior to the date hereof. Further, all benefits of the Operating Agreement relating to Assignor, including, without limitation, the right to receive any distributions related to any periods prior to and including the date hereof, shall inure to the benefit of Assignee. 2. Representation and Warranty of Assignor. Assignor represents and warrants that: (i) Assignor is the sole owner of the entire Ownership Interest; (ii) Assignor is not in default under or in breach of any of the terms, covenants or provisions of the Operating Agreement, and Assignor knows of no event which, but for the passage of time or the giving of notice, or both, would constitute an event of default under or a breach of the Operating Agreement by Assignor; (iii) Assignor is duly authorized to execute and deliver this Assignment; and (iv) the Ownership Interest is free and clear of any and all liens, security interests, encumbrances, and competing claims. 3. Appointment of Assignee as Attorney-in-Fact. Effective as of the date hereof, Assignor hereby irrevocably constitutes and appoints Assignee to be its true and lawful attorney-in- fact to act for Assignor, in the name, place and stead of Assignor, for the following purposes: to endorse any check or other instrument payable to Assignor in connection with the Project, to submit claims and otherwise deal with all insurance and insurance proceeds with respect to the Project, to execute and file with the appropriate governmental authority or office any and all certificates, reports or other evidence of the withdrawal of Assignor from the Company, and to perform such other acts as may be necessary to carry out the purpose and intent of the within assignment or to continue the business of the Company. Assignor hereby ratifies, acknowledges and confirms all acts taken by Assignee, as attorney-in-fact, pursuant to this appointment. Assignor hereby revokes, annuls and cancels any and all powers of attorney, if any, previously executed by Assignor with respect to such stated purposes, and the same shall be of no further force or effect. Assignor hereby acknowledges that such power shall be coupled with an interest and shall survive the disability or death of the Assignor. 4. Indemnity. Assignor hereby agrees to indemnify and defend Assignee and hold it harmless against any claim, loss or liability arising from any of the following: (i) any breach of any representation or warranty hereunder; or (ii) any assertion that Assignee is liable for any debts or obligations of Assignor, whether based on any act or omission of Assignor which occurs prior or subsequent to the date of this Assignment. 5. Governing Law. This Assignment shall be governed by and construed under the laws of the State of Colorado. 6. Successors and Assigns. This Assignment shall inure to the benefit and be binding upon the successors and assigns of Assignor and Assignee. 7. Counterparts. This Assignment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Assignment is executed to be effective as of the date first set forth above. ASSIGNOR: AL FELD, an individual ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: Name: Title: CONSENT: Pursuant to Section 18.1.1 of the Operating Agreement and Section 7-80-801(1)(c) of the Act, Assignee hereby consents to the continuation of the business of the Company, notwithstanding the withdrawal and resignation of Assignor as a Member of the Company. ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: Name: Title: [NOTE: Continuing Members to execute Unanimous Written Consent per Schedule A attached hereto.] STATE OF COLORADO } }ss COUNTY OF ______________ } The foregoing instrument was acknowledged before me on ____________, 2000, by AL FELD, an individual. My Commission expires: __________________________ ------------------------------------------ Notary Public STATE OF COLORADO } }ss COUNTY OF _____________ } The foregoing instrument was acknowledged before me on _____________, 2000, by ______________, as ___________________ of Wellsford Park Highlands Corp., a Colorado corporation. My Commission expires: __________________________ ------------------------------------------ Notary Public SCHEDULE A TO EXHIBIT Q UNANIMOUS WRITTEN CONSENT IN LIEU OF MEETING BY THE MEMBERS OF GREEN RIVER AT PALOMINO PARK LLC, a Colorado Limited Liability Company __________________ ___, 2000 Section 7-80-711 of the Colorado Limited Liability Company Act, as amended (the "Act") provides that any action required or permitted to be taken at a meeting of the members of a limited liability company may be taken without a meeting if a written consent, setting forth the action so taken, shall be signed by all the members entitled to vote with respect to the subject matter thereof and delivered to the limited liability company in the manner described in the Act. Section 15.10 of that certain Operating Agreement ("Operating Agreement") of Green River at Palomino Park LLC (the "Company"), a Colorado limited liability company, dated as of January ____, 2000, by and between Al Feld and Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"), provides that action required or permitted to be taken at a meeting of Members of the Company, may be taken without a meeting under similar circumstances. The undersigned, which constitute all of the Remaining Members (defined below) of the Company, by signing this document, waive any and all notice that may be required for a meeting of the members of the Company and take the following action: WHEREAS, pursuant to Section 16.2.1 of the Operating Agreement, WPHC, by executing the attached Exercise of Call Option, Assignment of Interest and Power of Attorney attached hereto as Exhibit L-1, has given notice to the Company of its desire (i) to exercise the Call Option as contemplated in the Operating Agreement and (ii) to cause Al Feld to resign as Member and Manager of the Company; and WHEREAS, the Members other than Al Feld (the "Remaining Members") desire (i) to accept the withdrawal and resignation of Al Feld as Member and Manager of the Company, (ii) to consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (iii) to appoint and elect WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; and (iv) to consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; RESOLVED, that the Remaining Members hereby accept the withdrawal and resignation of Al Feld as Member and Manager of the Company; and FURTHER RESOLVED, that the Remaining Members hereby (i) consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (ii) appoint, elect and qualify WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; (iii) consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; and (iv) authorize the Members to execute, deliver and take all action necessary to effectuate the actions contemplated under the attached Exhibit L-1. This Consent, when signed by all of the Remaining Members of the Company and delivered to the Company in the manner prescribed in the Act, shall have the same force and effect as a unanimous vote, and may be stated as such in any document. IN WITNESS WHEREOF, the undersigned have executed this Consent as of the date above written. WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation, Member By: Title: EXHIBIT R EXERCISE OF PUT OPTION; ASSIGNMENT OF INTEREST POWER OF ATTORNEY This ASSIGNMENT OF INTEREST (this "Assignment") is made and entered into as of the ____ day of ___________________ , 2000, by and between Al Feld, an individual ("Assignor"), and Wellsford Park Highlands Corp., a Colorado corporation ("Assignee"). RECITALS A. Pursuant to that certain Operating Agreement (the "Operating Agreement") of Green River at Palomino Park LLC, a Colorado limited liability company (the "Company") dated as of January ___, 2000, by and between Assignor and Assignee, Assignor is the owner of an option (the "Put Option") to cause Assignee to acquire the ownership interest of Assignor in the Company as of the date hereof (including the right of Assignor to receive any distributions related to any periods prior to and including the date hereof), which ownership interest includes the right of Assignor to any and all benefits to which Assignor may be entitled as a Member and as a Manager (each as defined in the Operating Agreement), as provided in the Operating Agreement or the version of the Colorado Limited Liability Company Act adopted by the State of Colorado, Co. Rev. Stat. ss.ss.7-80- 101 to 7-80-913, as amended from time to time (the "Act"), together with the unaccrued obligations of Assignor, in its capacity as a Member and Manager, to comply with all the terms and provisions of the Operating Agreement and the Act (collectively, the "Ownership Interest"). B. In accordance with Section 16.2.2 of the Operating Agreement, Assignor, by its execution and delivery of this Assignment to Assignee, hereby desires (i) to exercise the Put Option as contemplated therein and (ii) to resign as Member and Manager of the Company. C. At Final Closing (as defined in the Operating Agreement), concurrently with the above exercise of the Put Option by Assignor, (i) Assignee has agreed to acquire and buy the Ownership Interest from Assignor pursuant to the terms and conditions set forth in the Operating Agreement, provided that all of the Final Closing Funding Conditions have been satisfied and (ii) Assignor has agreed to appoint Assignee as its true and lawful attorney-in-fact, as set forth herein. D. Terms not otherwise defined herein shall have the meanings set forth in the Operating Agreement. AGREEMENT In consideration of the receipt of Ten and no/100 Dollars ($10.00) and other good and valuable consideration in hand paid by Assignor to Assignee, the receipt and sufficiency of which are hereby acknowledged and confessed by Assignee, Assignor and Assignee hereby agree as follows: 1. Assignment and Assumption. At Final Closing (as defined in the Operating Agreement), concurrently with and conditioned upon the satisfaction of all of the conditions and covenants of Section 16.2.2 of the Operating Agreement, (i) Assignor hereby assigns, grants and conveys to Assignee all of Assignor's right, title and interest in and to the Ownership Interest and (ii) Assignee hereby assumes the Ownership Interest and agrees to be bound by and comply with and perform all of the obligations of Assignor in its capacity as a Member and as Manager, arising under the Operating Agreement which accrue after the date hereof. Assignor shall remain obligated to perform all of the obligations of Assignor under the Operating Agreement (i) which are not expressly assumed hereunder or (ii) which have accrued on or prior to the date hereof. Further, all benefits of the Operating Agreement relating to Assignor, including, without limitation, the right to receive any distributions related to any periods prior to and including the date hereof, shall inure to the benefit of Assignee. 2. Representation and Warranty of Assignor. Assignor represents and warrants that: (i) Assignor is the sole owner of the entire Ownership Interest; (ii) Assignor is not in default under or in breach of any of the terms, covenants or provisions of the Operating Agreement, and Assignor knows of no event which, but for the passage of time or the giving of notice, or both, would constitute an event of default under or a breach of the Operating Agreement by Assignor; (iii) Assignor is duly authorized to execute and deliver this Assignment; and (iv) the Ownership Interest is free and clear of any and all liens, security interests, encumbrances, and completing claims. 3. Appointment of Assignee as Attorney-in-Fact. Effective as of the date hereof, Assignor hereby constitutes and appoints Assignee to be its true and lawful attorney-in-fact to act for Assignor, in the name, place and stead of Assignor, for the following purposes: to endorse any check or other instrument payable to Assignor in connection with the Project, to submit claims and otherwise deal with all insurance and insurance proceeds with respect to the Project, to execute and file with the appropriate governmental authority or office any and all certificates, reports or other evidence of the withdrawal of Assignor from the Company, and to perform such other acts as may be necessary to carry out the purpose and intent of the within assignment or to continue the business of the Company. Assignor hereby ratifies, acknowledges and confirms all acts taken by Assignee, as attorney-in-fact, pursuant to this appointment. Assignor hereby revokes, annuls and cancels any and all powers of attorney, if any, previously executed by Assignor with respect to such stated purposes, and the same shall be of no further force or effect. Assignor hereby acknowledges that such power shall be coupled with an interest and shall survive the disability or death of the Assignor. 4. Indemnity. Assignor hereby agrees to indemnify and defend Assignee and hold it harmless against any claim, loss or liability arising from any of the following: (i) any breach of any representation or warranty hereunder; or (ii) any assertion that Assignee is liable for any debts or obligations of Assignor, whether based on any act or omission of Assignor which occurs prior or subsequent to the date of this Assignment. 5. Governing Law. This Assignment shall be governed by and construed under the laws of the State of Colorado. 6. Successors and Assigns. This Assignment shall inure to the benefit and be binding upon the successors and assigns of Assignor and Assignee. 7. Counterparts. This Assignment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Assignment is executed to be effective as of the date first set forth above. ASSIGNOR: AL FELD, an individual ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: Name: Title: CONSENT: Pursuant to Section 18.1.1 of the Operating Agreement and Section 7-80-801(1)(c) of the Act, Assignee hereby consents to the continuation of the business of the Company, notwithstanding the withdrawal and resignation of Assignor as a Member of the Company. ASSIGNEE: WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: Name: Title: [NOTE: Continuing Members to execute Unanimous Written Consent per Schedule A attached hereto.] STATE OF COLORADO } }ss COUNTY OF _____________ } The foregoing instrument was acknowledged before me on ____________, 2000, by AL FELD, an individual. My Commission expires: __________________________ ------------------------------------------ Notary Public STATE OF COLORADO } }ss COUNTY OF _____________ } The foregoing instrument was acknowledged before me on _____________, 2000, by ______________, as ___________________ of Wellsford Park Highlands Corp., a Colorado corporation. My Commission expires: __________________________ ------------------------------------------ Notary Public SCHEDULE A TO EXHIBIT R UNANIMOUS WRITTEN CONSENT IN LIEU OF MEETING BY THE MEMBERS OF GREEN RIVER AT PALOMINO PARK LLC, a Colorado Limited Liability Company __________________ ___, 2000 Section 7-80-711 of the Colorado Limited Liability Company Act, as amended (the "Act") provides that any action required or permitted to be taken at a meeting of the members of a limited liability company may be taken without a meeting if a written consent, setting forth the action so taken, shall be signed by all the members entitled to vote with respect to the subject matter thereof and delivered to the limited liability company in the manner described in the Act. Section 15.10 of that certain Operating Agreement ("Operating Agreement") of Green River at Palomino Park LLC (the "Company"), a Colorado limited liability company, dated as of January ____, 2000, by and between Al Feld and Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"), provides that action required or permitted to be taken at a meeting of Members of the Company, may be taken without a meeting under similar circumstances. The undersigned, which constitute all of the Remaining Members (defined below) of the Company, by signing this document, waive any and all notice that may be required for a meeting of the members of the Company and take the following action: WHEREAS, pursuant to Section 16.2.2 of the Operating Agreement, Al Feld, by executing the attached Exercise of Put Option, Assignment of Interest and Power of Attorney attached hereto as Exhibit L-2, has given notice to the Company of its desire (i) to exercise the Put Option as contemplated in the Operating Agreement and (ii) to resign as Member and Manager of the Company; and WHEREAS, the Members other than Al Feld (the "Remaining Members") desire (i) to accept the withdrawal and resignation of Al Feld as Member and Manager of the Company, (ii) to consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (iii) to appoint and elect WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; and (iv) to consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; RESOLVED, that the Remaining Members hereby accept the withdrawal and resignation of Al Feld as Member and Manager of the Company; and FURTHER RESOLVED, that the Remaining Members hereby (i) consent to the transfer and assignment of the Ownership Interest (as defined in the attached exhibit) of Al Feld to WPHC, (ii) appoint, elect and qualify WPHC as the successor Manager to Al Feld, to hold office until removed pursuant to Section 12.12 of the Operating Agreement or until its successor has been elected and qualified; (iii) consent to continue the business of the Company after the resignation and termination of Al Feld as Member and Manager of the Company; and (iv) authorize the Members to execute, deliver and take all action necessary to effectuate the actions contemplated under the attached Exhibit L-2. This Consent, when signed by all of the Remaining Members of the Company and delivered to the Company in the manner prescribed in the Act, shall have the same force and effect as a unanimous vote, and may be stated as such in any document. IN WITNESS WHEREOF, the undersigned have executed this Consent as of the date above written. WELLSFORD PARK HIGHLANDS CORP., a Colorado Corporation, Member By: Title: EXHIBIT S-1 FORM OF ARCHITECT'S CERTIFICATE (Letterhead of Architect) CERTIFICATE OF ARCHITECT ______________, 2000 Green River at Palomino Park LLC Wellsford Real Properties, Inc. Wellsford Park Highlands Corp. l623 Blake Street, Suite 270 Denver, Colorado 80202 Reference: ______________________ ____________, Colorado Ladies and Gentlemen: Please refer to the final architectural plans, specifications and Architectural Supplemental Instructions (the "Plans") described in the attached Exhibit A. The undersigned understands that Wellsford Real Properties, Inc. or its designee ("Wellsford") is acquiring an interest in a residential project owned by Green River at Palomino Park LLC, a Colorado limited liability company ("Owner"), located on a parcel of real property in the County of Douglas, State of Colorado, and described on Exhibit B attached hereto (the "Site"), on which Owner has constructed a complex of 264 apartment units known as Green River at Palomino Park (the "Project"). This Certificate is a condition precedent to Wellsford acquiring the Project, and the undersigned acknowledges that Wellsford will be relying upon this Certificate in consummating such transaction. With such understanding, the undersigned has reviewed the Plans, the construction of the Project in relationship to the Plans, and its conformity and compliance with applicable laws and regulations (i.e., applicable federal, state, county and municipal laws and regulations and ordinances, including without limitation, governing building and fire codes, zoning, subdivision and land use laws and regulations, environmental and safety statutes and regulations, and the rules and regulations of other governmental agencies having jurisdiction over the Site or the Project ("Applicable Laws"). Based upon these reviews and upon due professional investigation, the undersigned declares on its behalf and certifies to and for the benefit of only Owner and Wellsford that: 1. The undersigned is the architect who prepared the Plans and coordinated and supervised the construction of the Project. 2. The Project contains 424 apartment units in __ buildings with a total of approx. _______ square feet of gross leasable living area ("GLA"), and _______ parking spaces (including ____ detached garage spaces), with related amenities and facilities. The GLA is calculated from the Plans and the square footage includes the outside face of frame and the interior stairs, but excludes the interior storage space and any non-usable space. 3. We have examined all applicable materials relative to those types of restrictions and requirements sometimes referred to as use, dimensional, bulk and parking restrictions, jurisdictional wetlands requirements, setback and buffering requirements, density restraints, landscaping and vegetation preservation ordinances, laws, rules and regulations and environmental restraints, which relate to the Site (hereinafter referred to as "Development Constraints") and have determined, to the best of our knowledge, that the Project and Site are in compliance with the Development Constraints and are permitted as a matter of right. 4. The Site is zoned Highlands Ranch Planned Development - Planning areas 73 (Town Center) and 67 (High Density Residential) under the applicable regulations of the County of Douglas, Colorado. 5. The improvements contemplated by the Plans have been completed in substantial compliance therewith with no material changes, except for Architectural Supplemental Instructions ____________________________________________; and except for Change Orders _____________________ which have been approved by Wellsford; and except for the items in the attached Exhibit C and estimated cost-to-complete as shown. 6. We are of the opinion that the Project has been designed in accordance with the applicable provisions of Colorado law, the Americans with Disabilities Act of 1990, 42 U.S.C. Section 12101, et seq., as amended, and any other applicable law, rule or regulation of any kind or description relating to the elimination of architectural barriers for the handicapped. 7. All amounts due and payable to us under or in connection with the Standard form of Agreement between Owner and Architect for Housing Services dated _________, 19__, and all amendments thereto, with regard to the Project have been paid in full. 8. The Project, the Plans and all improvements comply with known Applicable Laws, including without limitation, the applicable Plat, and all necessary and required notices, permits or license agreements in connection with the Plans. To the best of our knowledge, all permits, licenses and approvals required for the construction of the improvements contemplated by the Plans and for the use and occupancy of the Project, including, without limitation, all final certificates of occupancy, have been obtained from the applicable governmental or quasi- governmental agency having jurisdiction or any private party from whom any license is required. 9. The improvements are ready for occupancy. 10. The undersigned is a licensed architect and has the power and authority to render this Certificate and to execute and deliver it on behalf of _______________. For the purposes of this Certificate, the terms "known" and "to the best of our knowledge" shall mean and include information actually known to the undersigned or should have been known to it upon diligent inquiry or of which the undersigned has received constructive notice. Very truly yours, By: Supervising Architect Dated:________________________ EXHIBIT A TO CERTIFICATE OF ARCHITECT DRAWING LIST ARCHITECTURAL: STRUCTURAL: FOUNDATION: MECHANICAL: PLUMBING: ELECTRICAL: LANDSCAPING: EXHIBIT B TO CERTIFICATE OF ARCHITECT LEGAL DESCRIPTION LOT 4A, HIGHLANDS RANCH FILING NO. 126-A, 6TH AMENDMENT, RECORDED AT REC. NO. 99084341 IN THE OFFICE OF THE CLERK AND RECORDER OF THE COUNTY OF DOUGLAS, STATE OF COLORADO. EXHIBIT C TO CERTIFICATE OF ARCHITECT Incomplete Items Cost of Completion EXHIBIT S-2 FORM OF ENGINEER'S CERTIFICATE (Letterhead of Project Engineer) ENGINEER'S CERTIFICATE __________________, 2000 Green River at Palomino Park LLC Wellsford Real Properties, Inc. Wellsford Park Highlands Corp. l623 Blake Street, Suite 270 Denver, Colorado 80202 Reference: ______________ _________________, Colorado Ladies and Gentlemen: The undersigned understands that __________________________ or its designee ("Wellsford") is acquiring an interest in or is causing the repayment of the construction loan for a residential complex owned by Green River at Palomino Park LLC, a Colorado limited liability company ("Owner"), located on that certain parcel of real property having an address of ______________________ in the City of ___________, County of __________, State of Colorado and described on Exhibit A attached hereto (the "Site"), on which Owner has constructed a complex of ______ apartment units known as ______________ (the "Project"). This Certificate is a condition precedent to Wellsford's acquiring the Project or repaying such loan, and the undersigned acknowledges that Wellsford will be relying upon this Certificate in consummating such transaction. With such understanding, the undersigned has reviewed those portions of the plans and specifications for the Project that are listed on Exhibit B attached hereto (the "Engineering Plans"), the construction of the Project in relationship to the Engineering Plans, and its conformity and compliance with certain applicable laws and regulations. Based upon these reviews and upon due professional investigation, the undersigned declares and certifies to and for the benefit of Owner and Wellsford that: 1. Satisfactory methods of access to and egress from the Site and the Project and adjoining or nearby public ways are available and are sufficient to meet the reasonable needs of the Project and all applicable requirements of public authorities. Sanitary water supply and storm sewer and sanitary sewer facilities and other required utilities (gas, electricity, telephone, etc.) are likewise available and are sufficient to meet the reasonable needs of the Project and all applicable requirements of public authorities. 2. We are of the opinion that the Property is not located in a 100-Year Flood Plain or in an identified "flood prone area," as defined by the U.S. Department of Housing and Urban Development, pursuant to the Flood Disaster Protection Act of 1973, as amended, and is not subject to any federal, state or local "wetlands" rules, regulations, ordinances or requirements. 3. We have reviewed and are familiar with all tests and analyses performed and professional recommendations made by soil engineers and other consultants regarding the condition of the soil of the Site. In our professional opinion, the condition of the soil of the Site is adequate to support the Project as completed. 4. We have reviewed the locations of all easements, rights-of-way, subsurface rights or jurisdictional wetlands, and all rules and regulations pertaining to the same in force relating to the Site, and the Plans are prepared so that the Project does not encroach over, across or upon any such easements, rights-of-way, subsurface rights or jurisdictional wetlands and the like, and all necessary permits and approvals required for the Project have been obtained. 5. We have reviewed all deeds, easements, covenants, restrictions and other matters set forth in Schedule B of Title Commitment No. __________ issued by Land Title Guaranty Company, and the Project satisfies and/or does not violate any provisions concerning construction of improvements on the Site set forth in such deeds, easements, covenants, restrictions and other matters. This Certificate may be relied upon only by Owner and Wellsford. Very Truly yours, [ENGINEER] By: Title: Dated: EXHIBIT A TO CERTIFICATE OF ENGINEERING LEGAL DESCRIPTION LOT 4A, HIGHLANDS RANCH FILING NO. 126-A, 6TH AMENDMENT, RECORDED AT REC. NO. 99084341 IN THE OFFICE OF THE CLERK AND RECORDER OF THE COUNTY OF DOUGLAS, STATE OF COLORADO. EXHIBIT B TO CERTIFICATE OF ENGINEERING ______________, Colorado DRAWING LIST CIVIL ENGINEERING DRAWINGS: STRUCTURAL: FOUNDATION: MECHANICAL: PLUMBING: ELECTRICAL: LANDSCAPING: EXHIBIT T [INTENTIONALLY DELETED] EXHIBIT U SUBSTITUTION AGREEMENT EX-10.100 11 ex10-100.txt 1ST AMENDT TO OP. AGRMT-GREEN RIVER 02/11/02 FIRST AMENDMENT TO OPERATING AGREEMENT OF GREEN RIVER AT PALOMINO PARK LLC THIS FIRST AMENDMENT TO OPERATING AGREEMENT OF GREEN RIVER AT PALOMINO PARK LLC (this "Amendment") is made as of the 11th day of February, 2002, by and between AL FELD, an individual ("Feld"), and WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation ("WPHC"). RECITALS A. Feld and WPHC constitute all of the members (collectively, the "Members") of Green River at Palomino Park LLC, a Colorado limited liability company (the "Company"), which is governed by that certain Operating Agreement of Green River at Palomino Park LLC dated as of January 5, 2000 (the "Operating Agreement"). B. The Members now desire to amend the Operating Agreement as set forth herein. C. Capitalized terms not otherwise defined herein shall have the definitions set forth in the Operating Agreement. NOW, THEREFORE, for and in consideration of the above recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Feld and WPHC hereby agree to amend the Operating Agreement as follows: 1. Single-Member LLC. Feld and WPHC hereby agree that, notwithstanding any provisions to the contrary in the Operating Agreement, the Company shall continue in existence and its business shall be continued after the transfer to WPHC of all of Feld's interest in the Company pursuant to the Call Option. The Articles of Organization shall be amended to permit continuation of the Company as a single- member limited liability company and, upon such amendment to the Articles of Organization, the Operating Agreement shall be and hereby is amended to conform thereto. 2. Full Force and Effect. The Operating Agreement, as specifically amended herein, is hereby ratified by the Members and shall remain in full force and effect. 3. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall constitute one agreement binding on the parties hereto, notwithstanding that all the parties may not have signed the same counterpart. Signature pages from one counterpart may be removed and attached to another counterpart to create one fully-executed document. IN WITNESS WHEREOF, the parties hereto, being all of the Members of the Company, have executed this Amendment as of the date first written above. /s/ Al Feld ----------------------------------------- Al Feld WELLSFORD PARK HIGHLANDS CORP., a Colorado corporation By: /s/ David M. Strong ----------------------------------------- David M. Strong, Vice President EX-10.101 12 ex10-101.txt NOTE-GMAC & RED CANYON 11/20/98 FHLMC Loan No. 981217192 MULTIFAMILY NOTE (COLORADO) (Red Canyon Apartments at Palomino Park) - -------------------------------------------------------------------------------- US $27,000,000.00 November 20, 1998 - -------------------------------------------------------------------------------- FOR VALUE RECEIVED, the undersigned ("BORROWER") jointly and severally (if more than one) promises to pay to the order of GMAC COMMERCIAL MORTGAGE CORPORATION, a a California corporation, the principal sum of Twenty-Seven Million and 00/100 Dollars (US $27,000,000.00), with interest on the unpaid principal balance at the annual rate of Six and 68/100 percent (6.68%). 1. DEFINED TERMS. As used in this Note, (i) the term "LENDER" means the holder of this Note, and (ii) the term "INDEBTEDNESS" means the principal of, interest on, or any other amounts due at any time under, this Note, the Security Instrument or any other Loan Document, including prepayment premiums, late charges, default interest, and advances to protect the security of the Security Instrument under Section 12 of the Security Instrument. "Event of Default" and other capitalized terms used but not defined in this Note shall have the meanings given to such terms in the Security Instrument. 2. ADDRESS FOR PAYMENT. All payments due under this Note shall be payable at 650 Dresher Road, Horsham, Pennsylvania 19044, or such other place as may be designated by written notice to Borrower from or on behalf of Lender. 3. PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall be paid as follows: (a) Unless disbursement of principal is made by Lender to Borrower on the first day of the month, interest for the period beginning on the date of disbursement and ending on and including the last day of the month in which such disbursement is made shall be payable simultaneously with the execution of this Note. Interest under this Note shall be computed on the basis of a 360-day year consisting of twelve 30-day months. (b) Consecutive monthly installments of principal and interest, each in the amount of One Hundred Seventy-Three Thousand Eight Hundred Sixty-Seven and 01/100 Dollars (US $173,867.01), shall be payable on the first day of each month beginning on January 1, 1999, until the entire unpaid principal balance evidenced by this Note is fully paid. Any accrued interest remaining past due for 30 days or more shall be added to and become part of the unpaid principal balance and shall bear interest at the rate or rates specified in this Note, and any reference below to "accrued interest" shall refer to accrued interest which has not become part of the unpaid principal balance. Any remaining principal and interest shall be due and payable on December 1, 2008, or on any earlier date on which the unpaid principal balance of this Note becomes due and payable, by acceleration or otherwise (the "MATURITY DATE"). The unpaid principal balance shall continue to bear interest after the Maturity Date at the Default Rate set forth in this Note until and including the date on which it is paid in full. (c) Any regularly scheduled monthly installment of principal and interest that is received by Lender before the date it is due shall be deemed to have been received on the due date solely for the purpose of calculating interest due. 4. APPLICATION OF PAYMENTS. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, Lender may apply that payment to amounts then due and payable in any manner and in any order determined by Lender, in Lender's discretion. Borrower agrees that neither Lender's acceptance of a payment from Borrower in an amount that is less than all amounts then due and payable nor Lender's application of such payment shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. 5. SECURITY. The Indebtedness is secured, among other things, by a multifamily mortgage, deed to secure debt or deed of trust dated as of the date of this Note (the "SECURITY INSTRUMENT"), and reference is made to the Security Instrument for other rights of Lender as to collateral for the Indebtedness. 6. ACCELERATION. If an Event of Default has occurred and is continuing, the entire unpaid principal balance, any accrued interest, the prepayment premium payable under Paragraph 10, if any, and all other amounts payable under this Note and any other Loan Document shall at once become due and payable, at the option of Lender, without any prior notice to Borrower. Lender may exercise this option to accelerate regardless of any prior forbearance. 7. LATE CHARGE. If any monthly amount payable under this Note or under the Security Instrument or any other Loan Document is not received by Lender within ten (10) days after the amount is due, Borrower shall pay to Lender, immediately and without demand by Lender, a late charge equal to five percent (5%) of such amount. Borrower acknowledges that its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the loan evidenced by this Note (the "Loan"), and that it is extremely difficult and impractical to determine those additional expenses. Borrower agrees that the late charge payable pursuant to this Paragraph represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Note, of the additional expenses Lender will incur by reason of such late payment. The late charge is payable in addition to, and not in lieu of, any interest payable at the Default Rate pursuant to Paragraph 8. 8. DEFAULT RATE. So long as (a) any monthly installment under this Note remains past due for 30 days or more, or (b) any other Event of Default has occurred and is continuing, interest under this Note shall accrue on the unpaid principal balance from the earlier of the due date of the first unpaid monthly installment or the occurrence of such other Event of Default, as applicable, at a rate (the "DEFAULT RATE") equal to the lesser of 4 percentage points above the rate stated in the first paragraph of this Note or the maximum interest rate which may be collected from Borrower under applicable law. If the unpaid principal balance and all accrued interest are not paid in full on the Maturity Date, the unpaid principal balance and all accrued interest shall bear interest from the Maturity Date at the Default Rate. Borrower also acknowledges that its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the Loan, that, during the time that any monthly installment under this Note is delinquent for more than 30 days, Lender will incur additional costs and expenses arising from its loss of the use of the money due and from the adverse impact on Lender's ability to meet its other obligations and to take advantage of other investment opportunities, and that it is extremely difficult and impractical to determine those additional costs and expenses. Borrower also acknowledges that, during the time that any monthly installment under this Note is delinquent for more than 30 days or any other Event of Default has occurred and is continuing, Lender's risk of nonpayment of this Note will be materially increased and Lender is entitled to be compensated for such increased risk. Borrower agrees that the increase in the rate of interest payable under this Note to the Default Rate represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Note, of the additional costs and expenses Lender will incur by reason of the Borrower's delinquent payment and the additional compensation Lender is entitled to receive for the increased risks of nonpayment associated with a delinquent loan. 9. LIMITS ON PERSONAL LIABILITY. (a) Except as otherwise provided in this Paragraph 9, Borrower shall have no personal liability under this Note, the Security Instrument or any other Loan Document for the repayment of the Indebtedness or for the performance of any other obligations of Borrower under the Loan Documents, and Lender's only recourse for the satisfaction of the Indebtedness and the performance of such obligations shall be Lender's exercise of its rights and remedies with respect to the Mortgaged Property and any other collateral held by Lender as security for the Indebtedness. This limitation on Borrower's liability shall not limit or impair Lender's enforcement of its rights against any guarantor of the Indebtedness or any guarantor of any obligations of Borrower. (b) Borrower shall be personally liable to Lender for the repayment of a portion of the Indebtedness equal to zero percent (0%) of the original principal balance of this Note, plus any other amounts for which Borrower has personal liability under this Paragraph 9. (c) In addition to Borrower's personal liability under Paragraph 9(b), Borrower shall be personally liable to Lender for the repayment of a further portion of the Indebtedness equal to any loss or damage suffered by Lender as a result of (1) failure of Borrower to pay to Lender upon demand after an Event of Default all Rents to which Lender is entitled under Section 3(a) of the Security Instrument and the amount of all security deposits collected by Borrower from tenants then in residence; (2) failure of Borrower to apply all insurance proceeds and condemnation proceeds as required by the Security Instrument; or (3) failure of Borrower to comply with Section 14(d) or (e) of the Security Instrument relating to the delivery of books and records, statements, schedules and reports. (d) For purposes of determining Borrower's personal liability under Paragraph 9(b) and Paragraph 9(c), all payments made by Borrower or any guarantor of this Note with respect to the Indebtedness and all amounts received by Lender from the enforcement of its rights under the Security Instrument shall be applied first to the portion of the Indebtedness for which Borrower has no personal liability. (e) Borrower shall become personally liable to Lender for the repayment of all of the Indebtedness upon the occurrence of any of the following Events of Default: (1) Borrower's acquisition of any property or operation of any business not permitted by Section 33 of the Security Instrument; (2) a Transfer (including, but not limited to, a lien or encumbrance) that is an Event of Default under Section 21 of the Security Instrument, other than a Transfer consisting solely of the involuntary removal or involuntary withdrawal of a general partner in a limited partnership or a manager in a limited liability company; or (3) fraud or written material misrepresentation by Borrower or any officer, director, partner, member or employee of Borrower in connection with the application for or creation of the Indebtedness or any request for any action or consent by Lender. (f) In addition to any personal liability for the Indebtedness, Borrower shall be personally liable to Lender for (1) the performance of all of Borrower's obligations under Section 18 of the Security Instrument (relating to environmental matters); (2) the costs of any audit under Section 14(d) of the Security Instrument; and (3) any costs and expenses incurred by Lender in connection with the collection of any amount for which Borrower is personally liable under this Paragraph 9, including fees and out of pocket expenses of attorneys and expert witnesses and the costs of conducting any independent audit of Borrower's books and records to determine the amount for which Borrower has personal liability. (g) To the extent that Borrower has personal liability under this Paragraph 9, Lender may exercise its rights against Borrower personally without regard to whether Lender has exercised any rights against the Mortgaged Property or any other security, or pursued any rights against any guarantor, or pursued any other rights available to Lender under this Note, the Security Instrument, any other Loan Document or applicable law. For purposes of this Paragraph 9, the term "MORTGAGED PROPERTY" shall not include any funds that (1) have been applied by Borrower as required or permitted by the Security Instrument prior to the occurrence of an Event of Default or (2) Borrower was unable to apply as required or permitted by the Security Instrument because of a bankruptcy, receivership, or similar judicial proceeding. 10. VOLUNTARY AND INVOLUNTARY PREPAYMENTS. (a) A prepayment premium shall be payable in connection with any prepayment made under this Note as provided below: (1) Borrower may voluntarily prepay all of the unpaid principal balance of this Note on the last Business Day of a calendar month if Borrower has given Lender at least 30 days prior notice of its intention to make such prepayment. Such prepayment shall be made by paying (A) the amount of principal being prepaid, (B) all accrued interest, (C) all other sums due Lender at the time of such prepayment, and (D) the prepayment premium calculated pursuant to Schedule A. For all purposes including the accrual of interest, any prepayment received by Lender on any day other than the last calendar day of the month shall be deemed to have been received on the last calendar day of such month. For purposes of this Note, a "BUSINESS DAY" means any day other than a Saturday, Sunday or any other day on which Lender is not open for business. Borrower shall not have the option to voluntarily prepay less than all of the unpaid principal balance. (2) Upon Lender's exercise of any right of acceleration under this Note, Borrower shall pay to Lender, in addition to the entire unpaid principal balance of this Note outstanding at the time of the acceleration, (A) all accrued interest and all other sums due Lender, and (B) the prepayment premium calculated pursuant to Schedule A. (3) Any application by Lender of any collateral or other security to the repayment of any portion of the unpaid principal balance of this Note prior to the Maturity Date and in the absence of acceleration shall be deemed to be a partial prepayment by Borrower, requiring the payment to Lender by Borrower of a prepayment premium. The amount of any such partial prepayment shall be computed so as to provide to Lender a prepayment premium computed pursuant to Schedule A without Borrower having to pay out-of-pocket any additional amounts. (b) Notwithstanding the provisions of Paragraph 10(a), no prepayment premium shall be payable with respect to (A) any prepayment made no more than ninety (90) days before the Maturity Date, or (B) any prepayment occurring as a result of the application of any insurance proceeds or condemnation award under the Security Instrument. (c) Schedule A is hereby incorporated by reference into this Note. (d) Any permitted or required prepayment of less than the unpaid principal balance of this Note shall not extend or postpone the due date of any subsequent monthly installments or change the amount of such installments, unless Lender agrees otherwise in writing. (e) Borrower recognizes that any prepayment of the unpaid principal balance of this Note, whether voluntary or involuntary or resulting from a default by Borrower, will result in Lender's incurring loss, including reinvestment loss, additional expense and frustration or impairment of Lender's ability to meet its commitments to third parties. Borrower agrees to pay to Lender upon demand damages for the detriment caused by any prepayment, and agrees that it is extremely difficult and impractical to ascertain the extent of such damages. Borrower therefore acknowledges and agrees that the formula for calculating prepayment premiums set forth on Schedule A represents a reasonable estimate of the damages Lender will incur because of a prepayment. (f) Borrower further acknowledges that the prepayment premium provisions of this Note are a material part of the consideration for the Loan, and acknowledges that the terms of this Note are in other respects more favorable to Borrower as a result of the Borrower's voluntary agreement to the prepayment premium provisions. 11. COSTS AND EXPENSES. Borrower shall pay all expenses and costs, including fees and out-of-pocket expenses of attorneys and expert witnesses and costs of investigation, incurred by Lender as a result of any default under this Note or in connection with efforts to collect any amount due under this Note, or to enforce the provisions of any of the other Loan Documents, including those incurred in post-judgment collection efforts and in any bankruptcy proceeding (including any action for relief from the automatic stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure proceeding. 12. FORBEARANCE. Any forbearance by Lender in exercising any right or remedy under this Note, the Security Instrument, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of that or any other right or remedy. The acceptance by Lender of any payment after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Lender's right to require prompt payment when due of all other payments or to exercise any right or remedy with respect to any failure to make prompt payment. Enforcement by Lender of any security for Borrower's obligations under this Note shall not constitute an election by Lender of remedies so as to preclude the exercise of any other right or remedy available to Lender. 13. WAIVERS. Presentment, demand, notice of dishonor, protest, notice of acceleration, notice of intent to demand or accelerate payment or maturity, presentment for payment, notice of nonpayment, grace, and diligence in collecting the Indebtedness are waived by Borrower and all endorsers and guarantors of this Note and all other third party obligors. 14. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower in connection with the Loan is interpreted so that any interest or other charge provided for in any Loan Document, whether considered separately or together with other charges provided for in any other Loan Document, violates that law, and Borrower is entitled to the benefit of that law, that interest or charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the unpaid principal balance of this Note. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all Indebtedness that constitutes interest, as well as all other charges made in connection with the Indebtedness that constitute interest, shall be deemed to be allocated and spread ratably over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 15. COMMERCIAL PURPOSE. Borrower represents that the Indebtedness is being incurred by Borrower solely for the purpose of carrying on a business or commercial enterprise, and not for personal, family or household purposes. 16. COUNTING OF DAYS. Except where otherwise specifically provided, any reference in this Note to a period of "days" means calendar days, not Business Days. 17. GOVERNING LAW. This Note shall be governed by the law of the jurisdiction in which the Land is located. 18. CAPTIONS. The captions of the paragraphs of this Note are for convenience only and shall be disregarded in construing this Note. 19. NOTICES. All notices, demands and other communications required or permitted to be given by Lender to Borrower pursuant to this Note shall be given in accordance with Section 31 of the Security Instrument. 20. CONSENT TO JURISDICTION AND VENUE. Borrower agrees that any controversy arising under or in relation to this Note shall be litigated exclusively in the jurisdiction in which the Land is located (the "PROPERTY JURISDICTION"). The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Note. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise. 21. WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS NOTE OR THE RELATIONSHIP BETWEEN THE PARTIES AS LENDER AND BORROWER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. ATTACHED SCHEDULES. THE FOLLOWING SCHEDULES ARE ATTACHED TO THIS NOTE: |X| SCHEDULE A PREPAYMENT PREMIUM (REQUIRED) |_| SCHEDULE B MODIFICATIONS TO MULTIFAMILY NOTE [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, Borrower has signed and delivered this Note or has caused this Note to be signed and delivered by its duly authorized representative. BORROWER: RED CANYON AT PALOMINO PARK LLC, a Colorado limited liability company By: /s/ Al Feld (SEAL) ------------------------- Al Feld Manager Borrower's Social Security/Employer ID Number PAY TO THE ORDER OF FEDERAL HOME LOAN MORTGAGE CORPORATION WITHOUT RECOURSE AS OF THE 20th DAY OF NOVEMBER, 1998. GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation By: /s/ J. Kevin McCormack (SEAL) --------------------------------- J. Kevin McCormack Vice President SCHEDULE A PREPAYMENT PREMIUM Any prepayment premium payable under Paragraph 10 of this Note shall be computed as follows: (a) If the prepayment is made between the date of this Note and the date that is 114 months after the first day of the first calendar month following the date of this Note (the "YIELD MAINTENANCE PERIOD"), the prepayment premium shall be the greater of: (i) 1.0% of the unpaid principal balance of this Note; or (ii) the product obtained by multiplying: (A) the amount of principal being prepaid, BY (B) the excess (if any) of the Monthly Note Rate over the Assumed Reinvestment Rate, BY (C) the Present Value Factor. For purposes of subparagraph (ii), the following definitions shall apply: MONTHLY NOTE RATE: one-twelfth (1/12) of the annual interest rate of the Note, expressed as a decimal calculated to five digits. PREPAYMENT DATE: in the case of a voluntary prepayment, the date on which the prepayment is made; in any other case, the date on which Lender accelerates the unpaid principal balance of the Note. ASSUMED REINVESTMENT RATE: one-twelfth (1/12) of the yield rate as of the date 5 Business Days before the Prepayment Date, on the 5.625% U.S. Treasury Security due 5/1/2008, as reported in THE WALL STREET JOURNAL, expressed as a decimal calculated to five digits. In the event that no yield is published on the applicable date for the Treasury Security used to determine the Assumed Reinvestment Rate, Lender, in its discretion, shall select the non-callable Treasury Security maturing in the same year as the Treasury Security specified above with the lowest yield published in THE WALL STREET JOURNAL as of the applicable date. If the publication of such yield rates in THE WALL STREET JOURNAL is discontinued for any reason, Lender shall select a security with a comparable rate and term to the Treasury Security used to determine the Assumed Reinvestment Rate. The selection of an alternate security pursuant to this Paragraph shall be made in Lender's discretion. PRESENT VALUE FACTOR: the factor that discounts to present value the costs resulting to Lender from the difference in interest rates during the months remaining in the Yield Maintenance Period, using the Assumed Reinvestment Rate as the discount rate, with monthly compounding, expressed numerically as follows: [OBJECT OMITTED] N = number of months remaining in Yield Maintenance Period ARR = Assumed Reinvestment Rate (b) If the prepayment is made after the expiration of the Yield Maintenance Period but more than 90 days before the Maturity Date, the prepayment premium shall be 1.0% of the unpaid principal balance of this Note. SCHEDULE B MODIFICATIONS TO MULTIFAMILY NOTE EX-10.102 13 ex10-102.txt DEED OF TRUST-RED CANYON 11/20/98 Prepared by, and after recording return to: Morgan, Lewis & Bockius LLP 1800 M Street, N.W. Washington, D.C. 20036-5869 Attn: Gary S. Smuckler, Esq. FHLMC Loan No. 98121792 MULTIFAMILY DEED OF TRUST, -------------------------- ASSIGNMENT OF RENTS ------------------- AND SECURITY AGREEMENT ---------------------- (COLORADO) (Red Canyon Apartments at Palomino Park) MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT (Red Canyon Apartments at Palomino Park) THIS MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT (the "INSTRUMENT") is made this 20th day of November, 1998, by RED CANYON AT PALOMINO PARK LLC, a limited liability company organized and existing under the laws of Colorado, whose address is 1623 Blake Street, Suite 270, Denver, Colorado 80202, as trustor ("BORROWER"), to the Public Trustee of Douglas County, Colorado as trustee ("TRUSTEE"), for the benefit of GMAC COMMERCIAL MORTGAGE CORPORATION, a corporation organized and existing under the laws of California, whose address is 650 Dresher Road, Horsham, Pennsylvania 19044 as beneficiary ("LENDER"). Borrower, in consideration of the Indebtedness and the trust created by this Instrument, irrevocably grants, conveys and assigns to Trustee, in trust, with power of sale, the Mortgaged Property, including the Land located in Douglas County, State of Colorado and described in Exhibit A attached to this Instrument. TO SECURE TO LENDER the repayment of the Indebtedness evidenced by Borrower's Multifamily Note payable to Lender, dated as of the date of this Instrument, and maturing on December 1, 2008, in the principal amount of $27,000,000.00, and all renewals, extensions and modifications of the Indebtedness, and the performance of the covenants and agreements of Borrower contained in the Loan Documents. Borrower represents and warrants that Borrower is lawfully seized of the Mortgaged Property and has the right, power and authority to grant, convey and assign the Mortgaged Property, and that the Mortgaged Property is unencumbered. Borrower covenants that Borrower will warrant and defend generally the title to the Mortgaged Property against all claims and demands, subject to any easements and restrictions listed in a schedule of exceptions to coverage in any title insurance policy issued to Lender contemporaneously with the execution and recordation of this Instrument and insuring Lender's interest in the Mortgaged Property. COVENANTS. Borrower and Lender covenant and agree as follows: 1. DEFINITIONS. The following terms, when used in this Instrument (including when used in the above recitals), shall have the following meanings: (a) "BORROWER" means all persons or entities identified as "Borrower" in the first paragraph of this Instrument, together with their successors and assigns. (b) "COLLATERAL AGREEMENT" means any separate agreement between Borrower and Lender for the purpose of establishing replacement reserves for the Mortgaged Property, establishing a fund to assure the completion of repairs or improvements specified in that agreement, or assuring reduction of the outstanding principal balance of the Indebtedness if the occupancy of or income from the Mortgaged Property does not increase to a level specified in that agreement, or any other agreement or agreements between Borrower and Lender which provide for the establishment of any other fund, reserve or account. (c) "CONTROLLING ENTITY" means an entity which owns, directly or indirectly through one or more intermediaries, (A) a general partnership interest or more than 50% of the limited partnership interests in Borrower (if Borrower is a partnership or joint venture), (B) a manager's interest in Borrower or more than 50% of the ownership or membership interests in Borrower (if Borrower is a limited liability company), or (C) more than 50% of any class of voting stock of Borrower (if Borrower is a corporation). (d) "ENVIRONMENTAL PERMIT" means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Mortgaged Property. (e) "EVENT OF DEFAULT" means the occurrence of any event listed in Section 22. (f) "FIXTURES" means all property which is so attached to the Land or the Improvements as to constitute a fixture under applicable law, including: machinery, equipment, engines, boilers, incinerators, installed building materials; systems and equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air, or light; antennas, cable, wiring and conduits used in connection with radio, television, security, fire prevention, or fire detection or otherwise used to carry electronic signals; telephone systems and equipment; elevators and related machinery and equipment; fire detection, prevention and extinguishing systems and apparatus; security and access control systems and apparatus; plumbing systems; water heaters, ranges, stoves, microwave ovens, refrigerators, dishwashers, garbage disposers, washers, dryers and other appliances; light fixtures, awnings, storm windows and storm doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants; swimming pools; and exercise equipment. (g) "GOVERNMENTAL AUTHORITY" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over the Mortgaged Property or the use, operation or improvement of the Mortgaged Property. (h) "HAZARDOUS MATERIALS" means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground or above-ground storage tanks, whether empty or containing any substance; any substance the presence of which on the Mortgaged Property is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material or substance now or in the future defined as a "hazardous substance," "hazardous material," "hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous Materials Law. (i) "HAZARDOUS MATERIALS LAWS" means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Borrower or to the Mortgaged Property. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, ET SEQ., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, ET SEQ., the Toxic Substance Control Act, 15 U.S.C. Section 2601, ET SEQ., the Clean Water Act, 33 U.S.C. Section 1251, ET SEQ., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 5101, and their state analogs. (j) "IMPOSITIONS" and "IMPOSITION DEPOSITS" are defined in Section 7(a). (k) "IMPROVEMENTS" means the buildings, structures, improvements, and alterations now constructed or at any time in the future constructed or placed upon the Land, including any future replacements and additions. (l) "INDEBTEDNESS" means the principal of, interest on, and all other amounts due at any time under, the Note, this Instrument or any other Loan Document, including prepayment premiums, late charges, default interest, and advances as provided in Section 12 to protect the security of this Instrument. (m) "INITIAL OWNERS" means, with respect to Borrower or any other entity, the persons or entities who on the date of the Note own in the aggregate 100% of the ownership interests in Borrower or that entity. (n) "LAND" means the land described in Exhibit A. (o) "LEASES" means all present and future leases, subleases, licenses, concessions or grants or other possessory interests now or hereafter in force, whether oral or written, covering or affecting the Mortgaged Property, or any portion of the Mortgaged Property (including proprietary leases or occupancy agreements if Borrower is a cooperative housing corporation), and all modifications, extensions or renewals. (p) "LENDER" means the entity identified as "Lender" in the first paragraph of this Instrument, or any subsequent holder of the Note. (q) "LOAN DOCUMENTS" means the Note, this Instrument, all guaranties, all indemnity agreements, all Collateral Agreements, O&M Programs, and any other documents now or in the future executed by Borrower, any guarantor or any other person in connection with the loan evidenced by the Note, as such documents may be amended from time to time. (r) "LOAN SERVICER" means the entity that from time to time is designated by Lender to collect payments and deposits and receive notices under the Note, this Instrument and any other Loan Document, and otherwise to service the loan evidenced by the Note for the benefit of Lender. Unless Borrower receives notice to the contrary, the Loan Servicer is the entity identified as "Lender" in the first paragraph of this Instrument. (s) "MORTGAGED PROPERTY" means all of Borrower's present and future right, title and interest in and to all of the following: (1) the Land; (2) the Improvements; (3) the Fixtures; (4) the Personalty; (5) all current and future rights, including air rights, development rights, zoning rights and other similar rights or interests, easements, tenements, rights-of-way, strips and gores of land, streets, alleys, roads, sewer rights, waters, watercourses, and appurtenances related to or benefitting the Land or the Improvements, or both, and all rights-of-way, streets, alleys and roads which may have been or may in the future be vacated; (6) all proceeds paid or to be paid by any insurer of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property, whether or not Borrower obtained the insurance pursuant to Lender's requirement; (7) all awards, payments and other compensation made or to be made by any municipal, state or federal authority with respect to the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property, including any awards or settlements resulting from condemnation proceedings or the total or partial taking of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property under the power of eminent domain or otherwise and including any conveyance in lieu thereof; (8) all contracts, options and other agreements for the sale of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property entered into by Borrower now or in the future, including cash or securities deposited to secure performance by parties of their obligations; (9) all proceeds from the conversion, voluntary or involuntary, of any of the above into cash or liquidated claims, and the right to collect such proceeds; (10) all Rents and Leases; (11) all earnings, royalties, accounts receivable, issues and profits from the Land, the Improvements or any other part of the Mortgaged Property, and all undisbursed proceeds of the loan secured by this Instrument and, if Borrower is a cooperative housing corporation, maintenance charges or assessments payable by shareholders or residents; (12) all Imposition Deposits; (13) all refunds or rebates of Impositions by any municipal, state or federal authority or insurance company (other than refunds applicable to periods before the real property tax year in which this Instrument is dated); (14) all tenant security deposits which have not been forfeited by any tenant under any Lease; and (15) all names under or by which any of the above Mortgaged Property may be operated or known, and all trademarks, trade names, and goodwill relating to any of the Mortgaged Property. (t) "NOTE" means the Multifamily Note described on page 1 of this Instrument, including all schedules, riders, allonges and addenda, as such Multifamily Note may be amended from time to time. (u) "O&M PROGRAM" is defined in Section 18(a). (v) "PERSONALTY" means all furniture, furnishings, equipment, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in written or electronic form), computer equipment (hardware and software) and other tangible personal property (other than Fixtures) which are used now or in the future in connection with the ownership, management or operation of the Land or the Improvements or are located on the Land or in the Improvements, and any operating agreements relating to the Land or the Improvements, and any surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Land or the Improvements and all other intangible property and rights relating to the operation of, or used in connection with, the Land or the Improvements, including all governmental permits relating to any activities on the Land. (w) "PROPERTY JURISDICTION" is defined in Section 30(a). (x) "RENTS" means all rents (whether from residential or non-residential space), revenues and other income of the Land or the Improvements, including parking fees, laundry and vending machine income and fees and charges for food, health care and other services provided at the Mortgaged Property, whether now due, past due, or to become due, and deposits forfeited by tenants. (y) "TAXES" means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, will become a lien, on the Land or the Improvements. (z) "TRANSFER" means (A) a sale, assignment, transfer or other disposition (whether voluntary, involuntary or by operation of law); (B) the granting, creating or attachment of a lien, encumbrance or security interest (whether voluntary, involuntary or by operation of law); (C) the issuance or other creation of an ownership interest in a legal entity, including a partnership interest, interest in a limited liability company or corporate stock; (D) the withdrawal, retirement, removal or involuntary resignation of a partner in a partnership or a member or manager in a limited liability company; or (E) the merger, dissolution, liquidation, or consolidation of a legal entity or the reconstitution of one type of legal entity into another type of legal entity. "Transfer" does not include (i) a conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under this Instrument or (ii) the Mortgaged Property becoming part of a bankruptcy estate by operation of law under the United States Bankruptcy Code. For purposes of defining the term "Transfer," the term "partnership" shall mean a general partnership, a limited partnership, a joint venture and a limited liability partnership, and the term "partner" shall mean a general partner, a limited partner and a joint venturer. 2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is also a security agreement under the Uniform Commercial Code for any of the Mortgaged Property which, under applicable law, may be subject to a security interest under the Uniform Commercial Code, whether acquired now or in the future, and all products and cash and non-cash proceeds thereof (collectively, "UCC COLLATERAL"), and Borrower hereby grants to Lender a security interest in the UCC Collateral. Borrower shall execute and deliver to Lender, upon Lender's request, financing statements, continuation statements and amendments, in such form as Lender may require to perfect or continue the perfection of this security interest. Borrower shall pay all filing costs and all costs and expenses of any record searches for financing statements that Lender may require. Without the prior written consent of Lender, Borrower shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. If an Event of Default has occurred and is continuing, Lender shall have the remedies of a secured party under the Uniform Commercial Code, in addition to all remedies provided by this Instrument or existing under applicable law. In exercising any remedies, Lender may exercise its remedies against the UCC Collateral separately or together, and in any order, without in any way affecting the availability of Lender's other remedies. This Instrument constitutes a financing statement with respect to any part of the Mortgaged Property which is or may become a Fixture. 3. ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION. (a) As part of the consideration for the Indebtedness, Borrower absolutely and unconditionally assigns and transfers to Lender all Rents. It is the intention of Borrower to establish a present, absolute and irrevocable transfer and assignment to Lender of all Rents and to authorize and empower Lender to collect and receive all Rents without the necessity of further action on the part of Borrower. Promptly upon request by Lender, Borrower agrees to execute and deliver such further assignments as Lender may from time to time require. Borrower and Lender intend this assignment of Rents to be immediately effective and to constitute an absolute present assignment and not an assignment for additional security only. For purposes of giving effect to this absolute assignment of Rents, and for no other purpose, Rents shall not be deemed to be a part of the "Mortgaged Property" as that term is defined in Section 1(s). However, if this present, absolute and unconditional assignment of Rents is not enforceable by its terms under the laws of the Property Jurisdiction, then the Rents shall be included as a part of the Mortgaged Property and it is the intention of the Borrower that in this circumstance this Instrument create and perfect a lien on Rents in favor of Lender, which lien shall be effective as of the date of this Instrument. (b) After the occurrence of an Event of Default, Borrower authorizes Lender to collect, sue for and compromise Rents and directs each tenant of the Mortgaged Property to pay all Rents to, or as directed by, Lender. However, until the occurrence of an Event of Default, Lender hereby grants to Borrower a revocable license to collect and receive all Rents, to hold all Rents in trust for the benefit of Lender and to apply all Rents to pay the installments of interest and principal then due and payable under the Note and the other amounts then due and payable under the other Loan Documents, including Imposition Deposits, and to pay the current costs and expenses of managing, operating and maintaining the Mortgaged Property, including utilities, Taxes and insurance premiums (to the extent not included in Imposition Deposits), tenant improvements and other capital expenditures. So long as no Event of Default has occurred and is continuing, the Rents remaining after application pursuant to the preceding sentence may be retained by Borrower free and clear of, and released from, Lender's rights with respect to Rents under this Instrument. From and after the occurrence of an Event of Default, and without the necessity of Lender entering upon and taking and maintaining control of the Mortgaged Property directly, or by a receiver, Borrower's license to collect Rents shall automatically terminate and Lender shall without notice be entitled to all Rents as they become due and payable, including Rents then due and unpaid. Borrower shall pay to Lender upon demand all Rents to which Lender is entitled. At any time on or after the date of Lender's demand for Rents, Lender may give, and Borrower hereby irrevocably authorizes Lender to give, notice to all tenants of the Mortgaged Property instructing them to pay all Rents to Lender, no tenant shall be obligated to inquire further as to the occurrence or continuance of an Event of Default, and no tenant shall be obligated to pay to Borrower any amounts which are actually paid to Lender in response to such a notice. Any such notice by Lender shall be delivered to each tenant personally, by mail or by delivering such demand to each rental unit. Borrower shall not interfere with and shall cooperate with Lender's collection of such Rents. (c) Borrower represents and warrants to Lender that Borrower has not executed any prior assignment of Rents (other than an assignment of Rents securing indebtedness that will be paid off and discharged with the proceeds of the loan evidenced by the Note), that Borrower has not performed, and Borrower covenants and agrees that it will not perform, any acts and has not executed, and shall not execute, any instrument which would prevent Lender from exercising its rights under this Section 3, and that at the time of execution of this Instrument there has been no anticipation or prepayment of any Rents for more than two months prior to the due dates of such Rents. Borrower shall not collect or accept payment of any Rents more than two months prior to the due dates of such Rents. (d) If an Event of Default has occurred and is continuing, Lender may, regardless of the adequacy of Lender's security or the solvency of Borrower and even in the absence of waste, enter upon and take and maintain full control of the Mortgaged Property in order to perform all acts that Lender in its discretion determines to be necessary or desirable for the operation and maintenance of the Mortgaged Property, including the execution, cancellation or modification of Leases, the collection of all Rents, the making of repairs to the Mortgaged Property and the execution or termination of contracts providing for the management, operation or maintenance of the Mortgaged Property, for the purposes of enforcing the assignment of Rents pursuant to Section 3(a), protecting the Mortgaged Property or the security of this Instrument, or for such other purposes as Lender in its discretion may deem necessary or desirable. Alternatively, if an Event of Default has occurred and is continuing, regardless of the adequacy of Lender's security, without regard to Borrower's solvency and without the necessity of giving prior notice (oral or written) to Borrower, Lender may apply to any court having jurisdiction for the appointment of a receiver for the Mortgaged Property to take any or all of the actions set forth in the preceding sentence. If Lender elects to seek the appointment of a receiver for the Mortgaged Property at any time after an Event of Default has occurred and is continuing, Borrower, by its execution of this Instrument, expressly consents to the appointment of such receiver, including the appointment of a receiver EX PARTE if permitted by applicable law. Lender or the receiver, as the case may be, shall be entitled to receive a reasonable fee for managing the Mortgaged Property. Immediately upon appointment of a receiver or immediately upon the Lender's entering upon and taking possession and control of the Mortgaged Property, Borrower shall surrender possession of the Mortgaged Property to Lender or the receiver, as the case may be, and shall deliver to Lender or the receiver, as the case may be, all documents, records (including records on electronic or magnetic media), accounts, surveys, plans, and specifications relating to the Mortgaged Property and all security deposits and prepaid Rents. In the event Lender takes possession and control of the Mortgaged Property, Lender may exclude Borrower and its representatives from the Mortgaged Property. Borrower acknowledges and agrees that the exercise by Lender of any of the rights conferred under this Section 3 shall not be construed to make Lender a mortgagee-in-possession of the Mortgaged Property so long as Lender has not itself entered into actual possession of the Land and Improvements. (e) If Lender enters the Mortgaged Property, Lender shall be liable to account only to Borrower and only for those Rents actually received. Lender shall not be liable to Borrower, anyone claiming under or through Borrower or anyone having an interest in the Mortgaged Property, by reason of any act or omission of Lender under this Section 3, and Borrower hereby releases and discharges Lender from any such liability to the fullest extent permitted by law. (f) If the Rents are not sufficient to meet the costs of taking control of and managing the Mortgaged Property and collecting the Rents, any funds expended by Lender for such purposes shall become an additional part of the Indebtedness as provided in Section 12. (g) Any entering upon and taking of control of the Mortgaged Property by Lender or the receiver, as the case may be, and any application of Rents as provided in this Instrument shall not cure or waive any Event of Default or invalidate any other right or remedy of Lender under applicable law or provided for in this Instrument. 4. ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY. (a) As part of the consideration for the Indebtedness, Borrower absolutely and unconditionally assigns and transfers to Lender all of Borrower's right, title and interest in, to and under the Leases, including Borrower's right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease. It is the intention of Borrower to establish a present, absolute and irrevocable transfer and assignment to Lender of all of Borrower's right, title and interest in, to and under the Leases. Borrower and Lender intend this assignment of the Leases to be immediately effective and to constitute an absolute present assignment and not an assignment for additional security only. For purposes of giving effect to this absolute assignment of the Leases, and for no other purpose, the Leases shall not be deemed to be a part of the "Mortgaged Property" as that term is defined in Section 1(s). However, if this present, absolute and unconditional assignment of the Leases is not enforceable by its terms under the laws of the Property Jurisdiction, then the Leases shall be included as a part of the Mortgaged Property and it is the intention of the Borrower that in this circumstance this Instrument create and perfect a lien on the Leases in favor of Lender, which lien shall be effective as of the date of this Instrument. (b) Until Lender gives notice to Borrower of Lender's exercise of its rights under this Section 4, Borrower shall have all rights, power and authority granted to Borrower under any Lease (except as otherwise limited by this Section or any other provision of this Instrument), including the right, power and authority to modify the terms of any Lease or extend or terminate any Lease. Upon the occurrence of an Event of Default, the permission given to Borrower pursuant to the preceding sentence to exercise all rights, power and authority under Leases shall automatically terminate. Borrower shall comply with and observe Borrower's obligations under all Leases, including Borrower's obligations pertaining to the maintenance and disposition of tenant security deposits. (c) Borrower acknowledges and agrees that the exercise by Lender, either directly or by a receiver, of any of the rights conferred under this Section 4 shall not be construed to make Lender a mortgagee-in-possession of the Mortgaged Property so long as Lender has not itself entered into actual possession of the Land and the Improvements. The acceptance by Lender of the assignment of the Leases pursuant to Section 4(a) shall not at any time or in any event obligate Lender to take any action under this Instrument or to expend any money or to incur any expenses. Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm or corporation in or about the Mortgaged Property. Prior to Lender's actual entry into and taking possession of the Mortgaged Property, Lender shall not (i) be obligated to perform any of the terms, covenants and conditions contained in any Lease (or otherwise have any obligation with respect to any Lease); (ii) be obligated to appear in or defend any action or proceeding relating to the Lease or the Mortgaged Property; or (iii) be responsible for the operation, control, care, management or repair of the Mortgaged Property or any portion of the Mortgaged Property. The execution of this Instrument by Borrower shall constitute conclusive evidence that all responsibility for the operation, control, care, management and repair of the Mortgaged Property is and shall be that of Borrower, prior to such actual entry and taking of possession. (d) Upon delivery of notice by Lender to Borrower of Lender's exercise of Lender's rights under this Section 4 at any time after the occurrence of an Event of Default, and without the necessity of Lender entering upon and taking and maintaining control of the Mortgaged Property directly, by a receiver, or by any other manner or proceeding permitted by the laws of the Property Jurisdiction, Lender immediately shall have all rights, powers and authority granted to Borrower under any Lease, including the right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease. (e) Borrower shall, promptly upon Lender's request, deliver to Lender an executed copy of each residential Lease then in effect. All Leases for residential dwelling units shall be on forms approved by Lender, shall be for initial terms of at least six months and not more than two years, and shall not include options to purchase. (f) Borrower shall not lease any portion of the Mortgaged Property for non-residential use except with the prior written consent of Lender and Lender's prior written approval of the Lease agreement. Borrower shall not modify the terms of, or extend or terminate, any Lease for non-residential use (including any Lease in existence on the date of this Instrument) without the prior written consent of Lender. Borrower shall, without request by Lender, deliver an executed copy of each non-residential Lease to Lender promptly after such Lease is signed. All non-residential Leases, including renewals or extensions of existing Leases, shall specifically provide that (1) such Leases are subordinate to the lien of this Instrument; (2) the tenant shall attorn to Lender and any purchaser at a foreclosure sale, such attornment to be self-executing and effective upon acquisition of title to the Mortgaged Property by any purchaser at a foreclosure sale or by Lender in any manner; (3) the tenant agrees to execute such further evidences of attornment as Lender or any purchaser at a foreclosure sale may from time to time request; (4) the Lease shall not be terminated by foreclosure or any other transfer of the Mortgaged Property; (5) after a foreclosure sale of the Mortgaged Property, Lender or any other purchaser at such foreclosure sale may, at Lender's or such purchaser's option, accept or terminate such Lease; and (6) the tenant shall, upon receipt after the occurrence of an Event of Default of a written request from Lender, pay all Rents payable under the Lease to Lender. (g) Borrower shall not receive or accept Rent under any Lease (whether residential or non-residential) for more than two months in advance. 5. PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS; PREPAYMENT PREMIUM. Borrower shall pay the Indebtedness when due in accordance with the terms of the Note and the other Loan Documents and shall perform, observe and comply with all other provisions of the Note and the other Loan Documents. Borrower shall pay a prepayment premium in connection with certain prepayments of the Indebtedness, including a payment made after Lender's exercise of any right of acceleration of the Indebtedness, as provided in the Note. 6. EXCULPATION. Borrower's personal liability for payment of the Indebtedness and for performance of the other obligations to be performed by it under this Instrument is limited in the manner, and to the extent, provided in the Note. 7. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES. (a) Borrower shall deposit with Lender on the day monthly installments of principal or interest, or both, are due under the Note (or on another day designated in writing by Lender), until the Indebtedness is paid in full, an additional amount sufficient to accumulate with Lender the entire sum required to pay, when due (1) any water and sewer charges which, if not paid, may result in a lien on all or any part of the Mortgaged Property, (2) the premiums for fire and other hazard insurance, rent loss insurance and such other insurance as Lender may require under Section 19, (3) Taxes, and (4) amounts for other charges and expenses which Lender at any time reasonably deems necessary to protect the Mortgaged Property, to prevent the imposition of liens on the Mortgaged Property, or otherwise to protect Lender's interests, all as reasonably estimated from time to time by Lender, plus one-sixth of such estimate. The amounts deposited under the preceding sentence are collectively referred to in this Instrument as the "IMPOSITION DEPOSITS". The obligations of Borrower for which the Imposition Deposits are required are collectively referred to in this Instrument as "IMPOSITIONS". The amount of the Imposition Deposits shall be sufficient to enable Lender to pay each Imposition before the last date upon which such payment may be made without any penalty or interest charge being added. Lender shall maintain records indicating how much of the monthly Imposition Deposits and how much of the aggregate Imposition Deposits held by Lender are held for the purpose of paying Taxes, insurance premiums and each other obligation of Borrower for which Imposition Deposits are required. Any waiver by Lender of the requirement that Borrower remit Imposition Deposits to Lender may be revoked by Lender, in Lender's discretion, at any time upon notice to Borrower. (b) Imposition Deposits shall be held in an institution (which may be Lender, if Lender is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency. Lender shall not be obligated to open additional accounts or deposit Imposition Deposits in additional institutions when the amount of the Imposition Deposits exceeds the maximum amount of the federal deposit insurance or guaranty. Lender shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred and is continuing. Unless applicable law requires, Lender shall not be required to pay Borrower any interest, earnings or profits on the Imposition Deposits. Borrower hereby pledges and grants to Lender a security interest in the Imposition Deposits as additional security for all of Borrower's obligations under this Instrument and the other Loan Documents. Any amounts deposited with Lender under this Section 7 shall not be trust funds, nor shall they operate to reduce the Indebtedness, unless applied by Lender for that purpose under Section 7(e). (c) If Lender receives a bill or invoice for an Imposition, Lender shall pay the Imposition from the Imposition Deposits held by Lender. Lender shall have no obligation to pay any Imposition to the extent it exceeds Imposition Deposits then held by Lender. Lender may pay an Imposition according to any bill, statement or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement or estimate or into the validity of the Imposition. (d) If at any time the amount of the Imposition Deposits held by Lender for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Lender plus one-sixth of such estimate, the excess shall be credited against future installments of Imposition Deposits. If at any time the amount of the Imposition Deposits held by Lender for payment of a specific Imposition is less than the amount reasonably estimated by Lender to be necessary plus one-sixth of such estimate, Borrower shall pay to Lender the amount of the deficiency within 15 days after notice from Lender. (e) If an Event of Default has occurred and is continuing, Lender may apply any Imposition Deposits, in any amounts and in any order as Lender determines, in Lender's discretion, to pay any Impositions or as a credit against the Indebtedness. Upon payment in full of the Indebtedness, Lender shall refund to Borrower any Imposition Deposits held by Lender. 8. COLLATERAL AGREEMENTS. Borrower shall deposit with Lender such amounts as may be required by any Collateral Agreement and shall perform all other obligations of Borrower under each Collateral Agreement. 9. APPLICATION OF PAYMENTS. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, then Lender may apply that payment to amounts then due and payable in any manner and in any order determined by Lender, in Lender's discretion. Neither Lender's acceptance of an amount which is less than all amounts then due and payable nor Lender's application of such payment in the manner authorized shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Borrower's obligations under this Instrument and the Note shall remain unchanged. 10. COMPLIANCE WITH LAWS. Borrower shall comply with all laws, ordinances, regulations and requirements of any Governmental Authority and all recorded lawful covenants and agreements relating to or affecting the Mortgaged Property, including all laws, ordinances, regulations, requirements and covenants pertaining to health and safety, construction of improvements on the Mortgaged Property, fair housing, zoning and land use, and Leases. Borrower also shall comply with all applicable laws that pertain to the maintenance and disposition of tenant security deposits. Borrower shall at all times maintain records sufficient to demonstrate compliance with the provisions of this Section 10. Borrower shall take appropriate measures to prevent, and shall not engage in or knowingly permit, any illegal activities at the Mortgaged Property that could endanger tenants or visitors, result in damage to the Mortgaged Property, result in forfeiture of the Mortgaged Property, or otherwise materially impair the lien created by this Instrument or Lender's interest in the Mortgaged Property. Borrower represents and warrants to Lender that no portion of the Mortgaged Property has been or will be purchased with the proceeds of any illegal activity. 11. USE OF PROPERTY. Unless required by applicable law, Borrower shall not (a) except for any change in use approved by Lender, allow changes in the use for which all or any part of the Mortgaged Property is being used at the time this Instrument was executed, (b) convert any individual dwelling units or common areas to commercial use, (c) initiate or acquiesce in a change in the zoning classification of the Mortgaged Property, or (d) establish any condominium or cooperative regime with respect to the Mortgaged Property. 12. PROTECTION OF LENDER'S SECURITY. (a) If Borrower fails to perform any of its obligations under this Instrument or any other Loan Document, or if any action or proceeding is commenced which purports to affect the Mortgaged Property, Lender's security or Lender's rights under this Instrument, including eminent domain, insolvency, code enforcement, civil or criminal forfeiture, enforcement of Hazardous Materials Laws, fraudulent conveyance or reorganizations or proceedings involving a bankrupt or decedent, then Lender at Lender's option may make such appearances, disburse such sums and take such actions as Lender reasonably deems necessary to perform such obligations of Borrower and to protect Lender's interest, including (1) payment of fees and out of pocket expenses of attorneys, accountants, inspectors and consultants, (2) entry upon the Mortgaged Property to make repairs or secure the Mortgaged Property, (3) procurement of the insurance required by Section 19, and (4) payment of amounts which Borrower has failed to pay under Sections 15 and 17. (b) Any amounts disbursed by Lender under this Section 12, or under any other provision of this Instrument that treats such disbursement as being made under this Section 12, shall be added to, and become part of, the principal component of the Indebtedness, shall be immediately due and payable and shall bear interest from the date of disbursement until paid at the "DEFAULT RATE", as defined in the Note. (c) Nothing in this Section 12 shall require Lender to incur any expense or take any action. 13. INSPECTION. Lender, its agents, representatives, and designees may make or cause to be made entries upon and inspections of the Mortgaged Property (including environmental inspections and tests) during normal business hours, or at any other reasonable time. 14. BOOKS AND RECORDS; FINANCIAL REPORTING. (a) Borrower shall keep and maintain at all times at the Mortgaged Property or the management agent's offices, and upon Lender's request shall make available at the Mortgaged Property, complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the operation of the Mortgaged Property, and copies of all written contracts, Leases, and other instruments which affect the Mortgaged Property. The books, records, contracts, Leases and other instruments shall be subject to examination and inspection at any reasonable time by Lender. (b) Borrower shall furnish to Lender all of the following: (1) within 120 days after the end of each fiscal year of Borrower, a statement of income and expenses for Borrower's operation of the Mortgaged Property for that fiscal year, a statement of changes in financial position of Borrower relating to the Mortgaged Property for that fiscal year and, when requested by Lender, a balance sheet showing all assets and liabilities of Borrower relating to the Mortgaged Property as of the end of that fiscal year; (2) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, a rent schedule for the Mortgaged Property showing the name of each tenant, and for each tenant, the space occupied, the lease expiration date, the rent payable for the current month, the date through which rent has been paid, and any related information requested by Lender; (3) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, an accounting of all security deposits held pursuant to all Leases, including the name of the institution (if any) and the names and identification numbers of the accounts (if any) in which such security deposits are held and the name of the person to contact at such financial institution, along with any authority or release necessary for Lender to access information regarding such accounts; (4) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, a statement that identifies all owners of any interest in Borrower and any Controlling Entity and the interest held by each, if Borrower or a Controlling Entity is a corporation, all officers and directors of Borrower and the Controlling Entity, and if Borrower or a Controlling Entity is a limited liability company, all managers who are not members; (5) upon Lender's request, quarterly income and expense statements for the Mortgaged Property; (6) upon Lender's request at any time when an Event of Default has occurred and is continuing, monthly income and expense statements for the Mortgaged Property; (7) upon Lender's request, a monthly property management report for the Mortgaged Property, showing the number of inquiries made and rental applications received from tenants or prospective tenants and deposits received from tenants and any other information requested by Lender; and (8) upon Lender's request, a balance sheet, a statement of income and expenses for Borrower and a statement of changes in financial position of Borrower for Borrower's most recent fiscal year. (c) Each of the statements, schedules and reports required by Section 14(b) shall be certified to be complete and accurate by an individual having authority to bind Borrower, and shall be in such form and contain such detail as Lender may reasonably require. Lender also may require that any statements, schedules or reports be audited at Borrower's expense by independent certified public accountants acceptable to Lender. (d) If Borrower fails to provide in a timely manner the statements, schedules and reports required by Section 14(b), Lender shall have the right to have Borrower's books and records audited, at Borrower's expense, by independent certified public accountants selected by Lender in order to obtain such statements, schedules and reports, and all related costs and expenses of Lender shall become immediately due and payable and shall become an additional part of the Indebtedness as provided in Section 12. (e) If an Event of Default has occurred and is continuing, Borrower shall deliver to Lender upon written demand all books and records relating to the Mortgaged Property or its operation. (f) Borrower authorizes Lender to obtain a credit report on Borrower at any time. 15. TAXES; OPERATING EXPENSES. (a) Subject to the provisions of Section 15(c) and Section 15(d), Borrower shall pay, or cause to be paid, all Taxes when due and before the addition of any interest, fine, penalty or cost for nonpayment. (b) Subject to the provisions of Section 15(c), Borrower shall pay the expenses of operating, managing, maintaining and repairing the Mortgaged Property (including insurance premiums, utilities, repairs and replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added. (c) As long as no Event of Default exists and Borrower has timely delivered to Lender any bills or premium notices that it has received, Borrower shall not be obligated to pay Taxes, insurance premiums or any other individual Imposition to the extent that sufficient Imposition Deposits are held by Lender for the purpose of paying that specific Imposition. If an Event of Default exists, Lender may exercise any rights Lender may have with respect to Imposition Deposits without regard to whether Impositions are then due and payable. Lender shall have no liability to Borrower for failing to pay any Impositions to the extent that any Event of Default has occurred and is continuing, insufficient Imposition Deposits are held by Lender at the time an Imposition becomes due and payable or Borrower has failed to provide Lender with bills and premium notices as provided above. (d) Borrower, at its own expense, may contest by appropriate legal proceedings, conducted diligently and in good faith, the amount or validity of any Imposition other than insurance premiums, if (1) Borrower notifies Lender of the commencement or expected commencement of such proceedings, (2) the Mortgaged Property is not in danger of being sold or forfeited, (3) Borrower deposits with Lender reserves sufficient to pay the contested Imposition, if requested by Lender, and (4) Borrower furnishes whatever additional security is required in the proceedings or is reasonably requested by Lender, which may include the delivery to Lender of the reserves established by Borrower to pay the contested Imposition. (e) Borrower shall promptly deliver to Lender a copy of all notices of, and invoices for, Impositions, and if Borrower pays any Imposition directly, Borrower shall promptly furnish to Lender receipts evidencing such payments. 16. LIENS; ENCUMBRANCES. Borrower acknowledges that, to the extent provided in Section 21, the grant, creation or existence of any mortgage, deed of trust, deed to secure debt, security interest or other lien or encumbrance (a "LIEN") on the Mortgaged Property (other than the lien of this Instrument) or on certain ownership interests in Borrower, whether voluntary, involuntary or by operation of law, and whether or not such Lien has priority over the lien of this Instrument, is a "TRANSFER" which constitutes an Event of Default and subjects Borrower to personal liability under the Note. 17. PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY. Borrower (a) shall not commit waste or permit impairment or deterioration of the Mortgaged Property, (b) shall not abandon the Mortgaged Property, (c) shall restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition, or such other condition as Lender may approve in writing, whether or not insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, (d) shall keep the Mortgaged Property in good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality, (e) shall provide for professional management of the Mortgaged Property by a residential rental property manager satisfactory to Lender under a contract approved by Lender in writing, and (f) shall give notice to Lender of and, unless otherwise directed in writing by Lender, shall appear in and defend any action or proceeding purporting to affect the Mortgaged Property, Lender's security or Lender's rights under this Instrument. Borrower shall not (and shall not permit any tenant or other person to) remove, demolish or alter the Mortgaged Property or any part of the Mortgaged Property except in connection with the replacement of tangible Personalty. 18. ENVIRONMENTAL HAZARDS. (a) Except for matters covered by a written program of operations and maintenance approved in writing by Lender (an "O&M PROGRAM") or matters described in Section 18(b), Borrower shall not cause or permit any of the following: (1) the presence, use, generation, release, treatment, processing, storage (including storage in above ground and underground storage tanks), handling, or disposal of any Hazardous Materials on or under the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property; (2) the transportation of any Hazardous Materials to, from, or across the Mortgaged Property; (3) any occurrence or condition on the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or (4) any violation of or noncompliance with the terms of any Environmental Permit with respect to the Mortgaged Property or any property of Borrower that is adjacent to the Mortgaged Property. The matters described in clauses (1) through (4) above are referred to collectively in this Section 18 as "PROHIBITED ACTIVITIES OR CONDITIONS". (b) Prohibited Activities and Conditions shall not include the safe and lawful use and storage of quantities of (1) pre-packaged supplies, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable multifamily properties, (2) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by tenants and occupants of residential dwelling units in the Mortgaged Property; and (3) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Mortgaged Property's parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws. (c) Borrower shall take all commercially reasonable actions (including the inclusion of appropriate provisions in any Leases executed after the date of this Instrument) to prevent its employees, agents, and contractors, and all tenants and other occupants from causing or permitting any Prohibited Activities or Conditions. Borrower shall not lease or allow the sublease or use of all or any portion of the Mortgaged Property to any tenant or subtenant for nonresidential use by any user that, in the ordinary course of its business, would cause or permit any Prohibited Activity or Condition. (d) If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents, and contractors of Borrower and any other persons present on the Mortgaged Property to comply with the O&M Program. All costs of performance of Borrower's obligations under any O&M Program shall be paid by Borrower, and Lender's out-of-pocket costs incurred in connection with the monitoring and review of the O&M Program and Borrower's performance shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 12. (e) Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing: (1) Borrower has not at any time engaged in, caused or permitted any Prohibited Activities or Conditions; (2) to the best of Borrower's knowledge after reasonable and diligent inquiry, no Prohibited Activities or Conditions exist or have existed; (3) except to the extent previously disclosed by Borrower to Lender in writing, the Mortgaged Property does not now contain any underground storage tanks, and, to the best of Borrower's knowledge after reasonable and diligent inquiry, the Mortgaged Property has not contained any underground storage tanks in the past. If there is an underground storage tank located on the Property which has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws; (4) Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Mortgaged Property in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect; (5) no event has occurred with respect to the Mortgaged Property that constitutes, or with the passing of time or the giving of notice would constitute, noncompliance with the terms of any Environmental Permit; (6) there are no actions, suits, claims or proceedings pending or, to the best of Borrower's knowledge after reasonable and diligent inquiry, threatened that involve the Mortgaged Property and allege, arise out of, or relate to any Prohibited Activity or Condition; and (7) Borrower has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property. The representations and warranties in this Section 18 shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the loan evidenced by the Note, until the Indebtedness has been paid in full. (f) Borrower shall promptly notify Lender in writing upon the occurrence of any of the following events: (1) Borrower's discovery of any Prohibited Activity or Condition; (2) Borrower's receipt of or knowledge of any complaint, order, notice of violation or other communication from any Governmental Authority or other person with regard to present or future alleged Prohibited Activities or Conditions or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property; and (3) any representation or warranty in this Section 18 becomes untrue after the date of this Agreement. Any such notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Instrument, the Note, or any other Loan Document. (g) Borrower shall pay promptly the costs of any environmental inspections, tests or audits ("ENVIRONMENTAL INSPECTIONS") required by Lender in connection with any foreclosure or deed in lieu of foreclosure, or as a condition of Lender's consent to any Transfer under Section 21, or required by Lender following a reasonable determination by Lender that Prohibited Activities or Conditions may exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys and technical consultants whether incurred in connection with any judicial or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 12. The results of all Environmental Inspections made by Lender shall at all times remain the property of Lender and Lender shall have no obligation to disclose or otherwise make available to Borrower or any other party such results or any other information obtained by Lender in connection with its Environmental Inspections. Lender hereby reserves the right, and Borrower hereby expressly authorizes Lender, to make available to any party, including any prospective bidder at a foreclosure sale of the Mortgaged Property, the results of any Environmental Inspections made by Lender with respect to the Mortgaged Property. Borrower consents to Lender notifying any party (either as part of a notice of sale or otherwise) of the results of any of Lender's Environmental Inspections. Borrower acknowledges that Lender cannot control or otherwise assure the truthfulness or accuracy of the results of any of its Environmental Inspections and that the release of such results to prospective bidders at a foreclosure sale of the Mortgaged Property may have a material and adverse effect upon the amount which a party may bid at such sale. Borrower agrees that Lender shall have no liability whatsoever as a result of delivering the results of any of its Environmental Inspections to any third party, and Borrower hereby releases and forever discharges Lender from any and all claims, damages, or causes of action, arising out of, connected with or incidental to the results of, the delivery of any of Lender's Environmental Inspections. (h) If any investigation, site monitoring, containment, clean-up, restoration or other remedial work ("REMEDIAL Work") is necessary to comply with any Hazardous Materials Law or order of any Governmental Authority that has or acquires jurisdiction over the Mortgaged Property or the use, operation or improvement of the Mortgaged Property under any Hazardous Materials Law, Borrower shall, by the earlier of (1) the applicable deadline required by Hazardous Materials Law or (2) 30 days after notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete the work by the time required by applicable Hazardous Materials Law. If Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. Any reimbursement due from Borrower to Lender shall become part of the Indebtedness as provided in Section 12. (i) Borrower shall cooperate with any inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activity or Condition. (j) Borrower shall indemnify, hold harmless and defend (i) Lender, (ii) any prior owner or holder of the Note, (iii) the Loan Servicer, (iv) any prior Loan Servicer, (v) the officers, directors, shareholders, partners, employees and trustees of any of the foregoing, and (vi) the heirs, legal representatives, successors and assigns of each of the foregoing (collectively, the "INDEMNITEES") from and against all proceedings, claims, damages, penalties and costs (whether initiated or sought by Governmental Authorities or private parties), including fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial or administrative process or otherwise, arising directly or indirectly from any of the following: (1) any breach of any representation or warranty of Borrower in this Section 18; (2) any failure by Borrower to perform any of its obligations under this Section 18; (3) the existence or alleged existence of any Prohibited Activity or Condition; (4) the presence or alleged presence of Hazardous Materials on or under the Mortgaged Property or any property of Borrower that is adjacent to the Mortgaged Property; and (5) the actual or alleged violation of any Hazardous Materials Law. (k) Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. However, any Indemnitee may elect to defend any claim or legal or administrative proceeding at the Borrower's expense. (l) Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (a "CLAIM"), settle or compromise the Claim if the settlement (1) results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender; or (2) may materially and adversely affect Lender, as determined by Lender in its discretion. (m) Borrower's obligation to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower or any guarantor to receive notice of or consideration for any of the following: (1) any amendment or modification of any Loan Document; (2) any extensions of time for performance required by any Loan Document; (3) any provision in any of the Loan Documents limiting Lender's recourse to property securing the Indebtedness, or limiting the personal liability of Borrower or any other party for payment of all or any part of the Indebtedness; (4) the accuracy or inaccuracy of any representations and warranties made by Borrower under this Instrument or any other Loan Document; (5) the release of Borrower or any other person, by Lender or by operation of law, from performance of any obligation under any Loan Document; (6) the release or substitution in whole or in part of any security for the Indebtedness; and (7) Lender's failure to properly perfect any lien or security interest given as security for the Indebtedness. (n) Borrower shall, at its own cost and expense, do all of the following: (1) pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Section 18; (2) reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Section 18; and (3) reimburse Indemnitees for any and all expenses, including fees and out of pocket expenses of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Section 18, or in monitoring and participating in any legal or administrative proceeding. (o) In any circumstances in which the indemnity under this Section 18 applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned) may settle or compromise any action or legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements entered into in good faith, and the fees and out of pocket expenses of such attorneys and consultants. (p) The provisions of this Section 18 shall be in addition to any and all other obligations and liabilities that Borrower may have under applicable law or under other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Section 18 without regard to whether Lender or that Indemnitee has exercised any rights against the Mortgaged Property or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one person or entity, the obligation of those persons or entities to indemnify the Indemnitees under this Section 18 shall be joint and several. The obligation of Borrower to indemnify the Indemnitees under this Section 18 shall survive any repayment or discharge of the Indebtedness, any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of this Instrument. 19. PROPERTY AND LIABILITY INSURANCE. (a) Borrower shall keep the Improvements insured at all times against such hazards as Lender may from time to time require, which insurance shall include but not be limited to coverage against loss by fire and allied perils, general boiler and machinery coverage, and business income coverage. Lender's insurance requirements may change from time to time throughout the term of the Indebtedness. If Lender so requires, such insurance shall also include sinkhole insurance, mine subsidence insurance, earthquake insurance, and, if the Mortgaged Property does not conform to applicable zoning or land use laws, building ordinance or law coverage. If any of the Improvements is located in an area identified by the Federal Emergency Management Agency (or any successor to that agency) as an area having special flood hazards, and if flood insurance is available in that area, Borrower shall insure such Improvements against loss by flood. (b) All premiums on insurance policies required under Section 19(a) shall be paid in the manner provided in Section 7, unless Lender has designated in writing another method of payment. All such policies shall also be in a form approved by Lender. All policies of property damage insurance shall include a non-contributing, non-reporting mortgage clause in favor of, and in a form approved by, Lender. Lender shall have the right to hold the original policies or duplicate original policies of all insurance required by Section 19(a). Borrower shall promptly deliver to Lender a copy of all renewal and other notices received by Borrower with respect to the policies and all receipts for paid premiums. At least 30 days prior to the expiration date of a policy, Borrower shall deliver to Lender the original (or a duplicate original) of a renewal policy in form satisfactory to Lender. (c) Borrower shall maintain at all times commercial general liability insurance, workers' compensation insurance and such other liability, errors and omissions and fidelity insurance coverages as Lender may from time to time require. (d) All insurance policies and renewals of insurance policies required by this Section 19 shall be in such amounts and for such periods as Lender may from time to time require, and shall be issued by insurance companies satisfactory to Lender. (e) Borrower shall comply with all insurance requirements and shall not permit any condition to exist on the Mortgaged Property that would invalidate any part of any insurance coverage that this Instrument requires Borrower to maintain. (f) In the event of loss, Borrower shall give immediate written notice to the insurance carrier and to Lender. Borrower hereby authorizes and appoints Lender as attorney-in-fact for Borrower to make proof of loss, to adjust and compromise any claims under policies of property damage insurance, to appear in and prosecute any action arising from such property damage insurance policies, to collect and receive the proceeds of property damage insurance, and to deduct from such proceeds Lender's expenses incurred in the collection of such proceeds. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 19 shall require Lender to incur any expense or take any action. Lender may, at Lender's option, (1) hold the balance of such proceeds to be used to reimburse Borrower for the cost of restoring and repairing the Mortgaged Property to the equivalent of its original condition or to a condition approved by Lender (the "Restoration"), or (2) apply the balance of such proceeds to the payment of the Indebtedness, whether or not then due. To the extent Lender determines to apply insurance proceeds to Restoration, Lender shall do so in accordance with Lender's then-current policies relating to the restoration of casualty damage on similar multifamily properties. (g) Lender shall not exercise its option to apply insurance proceeds to the payment of the Indebtedness if all of the following conditions are met: (1) no Event of Default (or any event which, with the giving of notice or the passage of time, or both, would constitute an Event of Default) has occurred and is continuing; (2) Lender determines, in its discretion, that there will be sufficient funds to complete the Restoration; (3) Lender determines, in its discretion, that the rental income from the Mortgaged Property after completion of the Restoration will be sufficient to meet all operating costs and other expenses, Imposition Deposits, deposits to reserves and loan repayment obligations relating to the Mortgaged Property; and (4) Lender determines, in its discretion, that the Restoration will be completed before the earlier of (A) one year before the maturity date of the Note or (B) one year after the date of the loss or casualty. (h) If the Mortgaged Property is sold at a foreclosure sale or Lender acquires title to the Mortgaged Property, Lender shall automatically succeed to all rights of Borrower in and to any insurance policies and unearned insurance premiums and in and to the proceeds resulting from any damage to the Mortgaged Property prior to such sale or acquisition. 20. CONDEMNATION. (a) Borrower shall promptly notify Lender of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect (a "CONDEMNATION"). Borrower shall appear in and prosecute or defend any action or proceeding relating to any Condemnation unless otherwise directed by Lender in writing. Borrower authorizes and appoints Lender as attorney-in-fact for Borrower to commence, appear in and prosecute, in Lender's or Borrower's name, any action or proceeding relating to any Condemnation and to settle or compromise any claim in connection with any Condemnation. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 20 shall require Lender to incur any expense or take any action. Borrower hereby transfers and assigns to Lender all right, title and interest of Borrower in and to any award or payment with respect to (i) any Condemnation, or any conveyance in lieu of Condemnation, and (ii) any damage to the Mortgaged Property caused by governmental action that does not result in a Condemnation. (b) Lender may apply such awards or proceeds, after the deduction of Lender's expenses incurred in the collection of such amounts, at Lender's option, to the restoration or repair of the Mortgaged Property or to the payment of the Indebtedness, with the balance, if any, to Borrower. Unless Lender otherwise agrees in writing, any application of any awards or proceeds to the Indebtedness shall not extend or postpone the due date of any monthly installments referred to in the Note, Section 7 of this Instrument or any Collateral Agreement, or change the amount of such installments. Borrower agrees to execute such further evidence of assignment of any awards or proceeds as Lender may require. 21. TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER. [RIGHT TO UNLIMITED TRANSFERS -- WITH LENDER APPROVAL] (a) The occurrence of any of the following events shall constitute an Event of Default under this Instrument: (1) a Transfer of all or any part of the Mortgaged Property or any interest in the Mortgaged Property; (2) if Borrower is a limited partnership, a Transfer of (A) any general partnership interest, or (B) limited partnership interests in Borrower that would cause the Initial Owners of Borrower to own less than 51% of all limited partnership interests in Borrower; (3) if Borrower is a general partnership or a joint venture, a Transfer of any general partnership or joint venture interest in Borrower; (4) if Borrower is a limited liability company, a Transfer of (A) any membership interest in Borrower which would cause the Initial Owners to own less than 51% of all the membership interests in Borrower, or (B) any membership or other interest of a manager in Borrower; (5) if Borrower is a corporation, (A) the Transfer of any voting stock in Borrower which would cause the Initial Owners to own less than 51% of any class of voting stock in Borrower or (B) if the outstanding voting stock in Borrower is held by 100 or more shareholders, one or more transfers by a single transferor within a 12-month period affecting an aggregate of 5% or more of that stock; (6) if Borrower is a trust, (A) a Transfer of any beneficial interest in Borrower which would cause the Initial Owners to own less than 51% of all the beneficial interests in Borrower, or (B) the termination or revocation of the trust, or (C) the removal, appointment or substitution of a trustee of Borrower; and (7) a Transfer of any interest in a Controlling Entity which, if such Controlling Entity were Borrower, would result in an Event of Default under any of Sections 21(a)(1) through (6) above. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default in order to exercise any of its remedies with respect to an Event of Default under this Section 21. (b) The occurrence of any of the following events shall not constitute an Event of Default under this Instrument, notwithstanding any provision of Section 21(a) to the contrary: (1) a Transfer to which Lender has consented; (2) a Transfer that occurs by devise, descent, or by operation of law upon the death of a natural person; (3) the grant of a leasehold interest in an individual dwelling unit for a term of two years or less not containing an option to purchase; (4) a Transfer of obsolete or worn out Personalty or Fixtures that are contemporaneously replaced by items of equal or better function and quality, which are free of liens, encumbrances and security interests other than those created by the Loan Documents or consented to by Lender; (5) the grant of an easement, if before the grant Lender determines that the easement will not materially affect the operation or value of the Mortgaged Property or Lender's interest in the Mortgaged Property, and Borrower pays to Lender, upon demand, all costs and expenses incurred by Lender in connection with reviewing Borrower's request; and (6) the creation of a mechanic's, materialman's, or judgment lien against the Mortgaged Property which is released of record or otherwise remedied to Lender's satisfaction within 30 days of the date of creation. (c) Lender shall consent, without any adjustment to the rate at which the Indebtedness secured by this Instrument bears interest or to any other economic terms of the Indebtedness, to a Transfer that would otherwise violate this Section 21 if, prior to the Transfer, Borrower has satisfied each of the following requirements: (1) the submission to Lender of all information required by Lender to make the determination required by this Section 21(c); (2) the absence of any Event of Default; (3) the transferee meets all of the eligibility, credit, management and other standards (including but not limited to any standards with respect to previous relationships between Lender and the transferee and the organization of the transferee) customarily applied by Lender at the time of the proposed Transfer to the approval of borrowers in connection with the origination or purchase of similar mortgages on multifamily properties; (4) the Mortgaged Property, at the time of the proposed Transfer, meets all standards as to its physical condition that are customarily applied by Lender at the time of the proposed Transfer to the approval of properties in connection with the origination or purchase of similar mortgages on multifamily properties; (5) in the case of a Transfer of all or any part of the Mortgaged Property, (A) the execution by the transferee of an assumption agreement that is acceptable to Lender and that, among other things, requires the transferee to perform all obligations of Borrower set forth in the Note, this Instrument and any other Loan Documents, and may require that the transferee comply with any provisions of this Instrument or any other Loan Document which previously may have been waived by Lender, and (B) if a guaranty has been executed and delivered in connection with the Note, this Instrument or any of the other Loan Documents, the transferee causes one or more individuals or entities acceptable to Lender to execute and deliver to Lender a guaranty in a form acceptable to Lender; (6) in the case of a Transfer of any interest in a Controlling Entity, if a guaranty has been executed and delivered in connection with the Note, this Instrument or any of the other Loan Documents, the Borrower causes one or more individuals or entities acceptable to Lender to execute and deliver to Lender a guaranty in a form acceptable to Lender; and (7) Lender's receipt of all of the following: (A) a review fee in the amount of $2,000.00; (B) a transfer fee in an amount equal to 1.0% of the unpaid principal balance of the Indebtedness immediately before the applicable Transfer; and (C) the amount of Lender's out-of-pocket costs (including reasonable attorneys' fees) incurred in reviewing the Transfer request. 22. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an Event of Default under this Instrument: (a) any failure by Borrower to pay or deposit when due any amount required by the Note, this Instrument or any other Loan Document; (b) any failure by Borrower to maintain the insurance coverage required by Section 19; (c) any failure by Borrower to comply with the provisions of Section 33; (d) fraud or material misrepresentation or material omission by Borrower, any of its officers, directors, trustees, general partners or managers or any guarantor in connection with (A) the application for or creation of the Indebtedness, (B) any financial statement, rent roll, or other report or information provided to Lender during the term of the Indebtedness, or (C) any request for Lender's consent to any proposed action, including a request for disbursement of funds under any Collateral Agreement; (e) any Event of Default under Section 21; (f) the commencement of a forfeiture action or proceeding, whether civil or criminal, which, in Lender's reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Instrument or Lender's interest in the Mortgaged Property; (g) any failure by Borrower to perform any of its obligations under this Instrument (other than those specified in Sections 22(a) through (f)), as and when required, which continues for a period of 30 days after notice of such failure by Lender to Borrower. However, no such notice or grace period shall apply in the case of any such failure which could, in Lender's judgment, absent immediate exercise by Lender of a right or remedy under this Instrument, result in harm to Lender, impairment of the Note or this Instrument or any other security given under any other Loan Document; (h) any failure by Borrower to perform any of its obligations as and when required under any Loan Document other than this Instrument which continues beyond the applicable cure period, if any, specified in that Loan Document; (i) any exercise by the holder of any debt instrument secured by a mortgage, deed of trust or deed to secure debt on the Mortgaged Property of a right to declare all amounts due under that debt instrument immediately due and payable; and (j) Borrower voluntarily files for bankruptcy protection under the United States Bankruptcy Code or voluntarily becomes subject to any reorganization, receivership, insolvency proceeding or other similar proceeding pursuant to any other federal or state law affecting debtor and creditor rights, or an involuntary case is commenced against Borrower by any creditor (other than Lender) of Borrower pursuant to the United States Bankruptcy Code or other federal or state law affecting debtor and creditor rights and is not dismissed or discharged within 60 days after filing. 23. REMEDIES CUMULATIVE. Each right and remedy provided in this Instrument is distinct from all other rights or remedies under this Instrument or any other Loan Document or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order. 24. FORBEARANCE. (a) Lender may (but shall not be obligated to) agree with Borrower, from time to time, and without giving notice to, or obtaining the consent of, or having any effect upon the obligations of, any guarantor or other third party obligor, to take any of the following actions: extend the time for payment of all or any part of the Indebtedness; reduce the payments due under this Instrument, the Note, or any other Loan Document; release anyone liable for the payment of any amounts under this Instrument, the Note, or any other Loan Document; accept a renewal of the Note; modify the terms and time of payment of the Indebtedness; join in any extension or subordination agreement; release any Mortgaged Property; take or release other or additional security; modify the rate of interest or period of amortization of the Note or change the amount of the monthly installments payable under the Note; and otherwise modify this Instrument, the Note, or any other Loan Document. (b) Any forbearance by Lender in exercising any right or remedy under the Note, this Instrument, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Lender of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Lender's right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any remedies for any failure to make prompt payment. Enforcement by Lender of any security for the Indebtedness shall not constitute an election by Lender of remedies so as to preclude the exercise of any other right available to Lender. Lender's receipt of any awards or proceeds under Sections 19 and 20 shall not operate to cure or waive any Event of Default. 25. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower is interpreted so that any charge provided for in any Loan Document, whether considered separately or together with other charges levied in connection with any other Loan Document, violates that law, and Borrower is entitled to the benefit of that law, that charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all Indebtedness which constitutes interest, as well as all other charges levied in connection with the Indebtedness which constitute interest, shall be deemed to be allocated and spread over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 26. WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien of this Instrument or to any action brought to enforce any Loan Document. 27. WAIVER OF MARSHALLING. Notwithstanding the existence of any other security interests in the Mortgaged Property held by Lender or by any other party, Lender shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Instrument, the Note, any other Loan Document or applicable law. Lender shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of such remedies. Borrower and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Instrument waives any and all right to require the marshalling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this Instrument. 28. FURTHER ASSURANCES. Borrower shall execute, acknowledge, and deliver, at its sole cost and expense, all further acts, deeds, conveyances, assignments, estoppel certificates, financing statements, transfers and assurances as Lender may require from time to time in order to better assure, grant, and convey to Lender the rights intended to be granted, now or in the future, to Lender under this Instrument and the Loan Documents. 29. ESTOPPEL CERTIFICATE. Within 10 days after a request from Lender, Borrower shall deliver to Lender a written statement, signed and acknowledged by Borrower, certifying to Lender or any person designated by Lender, as of the date of such statement, (i) that the Loan Documents are unmodified and in full force and effect (or, if there have been modifications, that the Loan Documents are in full force and effect as modified and setting forth such modifications); (ii) the unpaid principal balance of the Note; (iii) the date to which interest under the Note has been paid; (iv) that Borrower is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Instrument or any of the other Loan Documents (or, if the Borrower is in default, describing such default in reasonable detail); (v) whether or not there are then existing any setoffs or defenses known to Borrower against the enforcement of any right or remedy of Lender under the Loan Documents; and (vi) any additional facts requested by Lender. 30. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. (a) This Instrument, and any Loan Document which does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the jurisdiction in which the Land is located (the "PROPERTY JURISDICTION"). (b) Borrower agrees that any controversy arising under or in relation to the Note, this Instrument, or any other Loan Document shall be litigated exclusively in the Property Jurisdiction. The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to the Note, any security for the Indebtedness, or any other Loan Document. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise. 31. NOTICE. (a) All notices, demands and other communications ("NOTICE") under or concerning this Instrument shall be in writing. Each notice shall be addressed to the intended recipient at its address set forth in this Instrument, and shall be deemed given on the earliest to occur of (1) the date when the notice is received by the addressee; (2) the first Business Day after the notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next Business Day delivery; or (3) the third Business Day after the notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. As used in this Section 31, the term "Business Day" means any day other than a Saturday, a Sunday or any other day on which Lender is not open for business. (b) Any party to this Instrument may change the address to which notices intended for it are to be directed by means of notice given to the other party in accordance with this Section 31. Each party agrees that it will not refuse or reject delivery of any notice given in accordance with this Section 31, that it will acknowledge, in writing, the receipt of any notice upon request by the other party and that any notice rejected or refused by it shall be deemed for purposes of this Section 31 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service. (c) Any notice under the Note and any other Loan Document which does not specify how notices are to be given shall be given in accordance with this Section 31. 32. SALE OF NOTE; CHANGE IN SERVICER. The Note or a partial interest in the Note (together with this Instrument and the other Loan Documents) may be sold one or more times without prior notice to Borrower. A sale may result in a change of the Loan Servicer. There also may be one or more changes of the Loan Servicer unrelated to a sale of the Note. If there is a change of the Loan Servicer, Borrower will be given notice of the change. 33. SINGLE ASSET BORROWER. Until the Indebtedness is paid in full, Borrower (a) shall not acquire any real or personal property other than the Mortgaged Property and personal property related to the operation and maintenance of the Mortgaged Property; (b) shall not operate any business other than the management and operation of the Mortgaged Property; and (c) shall not maintain its assets in a way difficult to segregate and identify. 34. SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and the rights granted by this Instrument shall inure to, the respective successors and assigns of Lender and Borrower. However, a Transfer not permitted by Section 21 shall be an Event of Default. 35. JOINT AND SEVERAL LIABILITY. If more than one person or entity signs this Instrument as Borrower, the obligations of such persons and entities shall be joint and several. 36. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY. (a) The relationship between Lender and Borrower shall be solely that of creditor and debtor, respectively, and nothing contained in this Instrument shall create any other relationship between Lender and Borrower. (b) No creditor of any party to this Instrument and no other person shall be a third party beneficiary of this Instrument or any other Loan Document. Without limiting the generality of the preceding sentence, (1) any arrangement (a "SERVICING ARRANGEMENT") between the Lender and any Loan Servicer for loss sharing or interim advancement of funds shall constitute a contractual obligation of such Loan Servicer that is independent of the obligation of Borrower for the payment of the Indebtedness, (2) Borrower shall not be a third party beneficiary of any Servicing Arrangement, and (3) no payment by the Loan Servicer under any Servicing Arrangement will reduce the amount of the Indebtedness. 37. SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any provision of this Instrument shall not affect the validity or enforceability of any other provision, and all other provisions shall remain in full force and effect. This Instrument contains the entire agreement among the parties as to the rights granted and the obligations assumed in this Instrument. This Instrument may not be amended or modified except by a writing signed by the party against whom enforcement is sought. 38. CONSTRUCTION. The captions and headings of the sections of this Instrument are for convenience only and shall be disregarded in construing this Instrument. Any reference in this Instrument to an "Exhibit" or a "Section" shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Instrument or to a Section of this Instrument. All Exhibits attached to or referred to in this Instrument are incorporated by reference into this Instrument. Any reference in this Instrument to a statute or regulation shall be construed as referring to that statute or regulation as amended from time to time. Use of the singular in this Agreement includes the plural and use of the plural includes the singular. As used in this Instrument, the term "including" means "including, but not limited to." 39. LOAN SERVICING. All actions regarding the servicing of the loan evidenced by the Note, including the collection of payments, the giving and receipt of notice, inspections of the Property, inspections of books and records, and the granting of consents and approvals, may be taken by the Loan Servicer unless Borrower receives notice to the contrary. If Borrower receives conflicting notices regarding the identity of the Loan Servicer or any other subject, any such notice from Lender shall govern. 40. DISCLOSURE OF INFORMATION. Lender may furnish information regarding Borrower or the Mortgaged Property to third parties with an existing or prospective interest in the servicing, enforcement, evaluation, performance, purchase or securitization of the Indebtedness, including but not limited to trustees, master servicers, special servicers, rating agencies, and organizations maintaining databases on the underwriting and performance of multifamily mortgage loans. Borrower irrevocably waives any and all rights it may have under applicable law to prohibit such disclosure, including but not limited to any right of privacy. 41. NO CHANGE IN FACTS OR CIRCUMSTANCES. All information in the application for the loan submitted to Lender (the "LOAN APPLICATION") and in all financial statements, rent rolls, reports, certificates and other documents submitted in connection with the Loan Application are complete and accurate in all material respects. There has been no material adverse change in any fact or circumstance that would make any such information incomplete or inaccurate. 42. SUBROGATION. If, and to the extent that, the proceeds of the loan evidenced by the Note are used to pay, satisfy or discharge any obligation of Borrower for the payment of money that is secured by a pre-existing mortgage, deed of trust or other lien encumbering the Mortgaged Property (a "PRIOR LIEN"), such loan proceeds shall be deemed to have been advanced by Lender at Borrower's request, and Lender shall automatically, and without further action on its part, be subrogated to the rights, including lien priority, of the owner or holder of the obligation secured by the Prior Lien, whether or not the Prior Lien is released. 43. ACCELERATION; REMEDIES. At any time during the existence of an Event of Default, Lender, at Lender's option, may declare the Indebtedness to be immediately due and payable without further demand, and may invoke the power of sale and any other remedies permitted by Colorado law or provided in this Instrument or in any other Loan Document. Lender shall be entitled to collect all costs and expenses incurred in pursuing such remedies, including attorneys' fees, costs of documentary evidence, abstracts and title reports. If Lender invokes the power of sale, Trustee shall give notice of sale in the manner required by Colorado law to Borrower and to all other persons who are entitled to receive such notice under Colorado law, and shall sell the Mortgaged Property according to Colorado law. Trustee may sell the Mortgaged Property at the time and place and under the terms designated in the notice of sale in one or more parcels and in such order as Trustee may determine. Trustee may postpone the sale of all or any part of the Mortgaged Property by public announcement at the time and place of any previously scheduled sale. Lender or Lender's designee may purchase the Mortgaged Property at any sale. Trustee shall deliver to the purchaser at the sale Trustee's certificate describing the Mortgaged Property and the time when the purchaser will be entitled to Trustee's deed to the Mortgaged Property. The recitals in Trustee's deed shall be prima facie evidence of the truth of the statements made in those recitals. Trustee shall apply the proceeds of the sale in the following order: (a) to all costs and expenses of the sale, including Trustee's fees not to exceed 5% of the gross sales price, attorneys' fees and costs of title evidence; (b) to the Indebtedness in such order as Lender, in Lender's discretion, directs; and (c) the excess, if any, to the person or persons legally entitled to the excess. 44. RELEASE. Upon payment of the Indebtedness, Lender shall request Trustee to release this Instrument and shall deliver to Trustee the canceled Note. Trustee shall release this Instrument without further inquiry or liability. Borrower shall pay all costs of recordation, if any, of the release and shall pay the statutory Trustee's fee. 45. WAIVER OF HOMESTEAD. Borrower waives all right of homestead exemption in the Mortgaged Property. 46. WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS INSTRUMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS BORROWER AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. ATTACHED EXHIBITS. The following Exhibits are attached to this Instrument: |X| Exhibit A Description of the Land (required). - |X| Exhibit B Modifications to Instrument - IN WITNESS WHEREOF, Borrower has signed and delivered this Instrument or has caused this Instrument to be signed and delivered by its duly authorized representative. BORROWER: RED CANYON AT PALOMINO PARK LLC, a Colorado limited liability company By: /s/ Al Feld (SEAL) ----------- Al Feld Manager STATE OF COLORADO, Denver County ss: The foregoing was acknowledged before me this 20th day of November, 1998, by Al Feld, Manager of RED CANYON AT PALOMINO PARK LLC, a Colorado limited liability company, on behalf of the organization. /s/ Susan M. Messenger ------------------------------- Notary Public My Commission expires: September 6,2002 EXHIBIT A [DESCRIPTION OF THE LAND] EXHIBIT B MODIFICATIONS TO INSTRUMENT The following modifications are made to the text of the Instrument that precedes this Exhibit: 1 In the fourth paragraph of page one: * at the end of the first sentence, add the phrase "except for those matters listed in a Schedule of Exceptions to Coverage in any title insurance policy to be issued to Lender contemporaneously with the execution and recordation of this Instrument and insuring Lender's interest in the Mortgaged Property". * in the second sentence, replace the phrase "easements and restrictions" with the word "matters". 2 In paragraph 1(f), insert the phrase "owned by Borrower" after the word "property". 3 At the end of paragraph 1(z)(C) insert after "stock": "(other than shares in a corporation having more than 100 shareholders)". Also in paragraph 1(z) after the phrase "Bankruptcy Code" insert "or the execution, delivery and recording at any time after recording of this Instrument of the "Right of First/Last Offer Agreement" as such term is defined in that certain Restrictive Covenant Agreement dated May 30, 1997 between Wellsford Park Highlands Corp. and ERP Operating Limited Partnership." 4 In paragraph 4(e), add the following sentence: Notwithstanding the foregoing, not more than 5% of the Leases may be for a term of less than 6 months but not less than 3 months, and not more than 10% of the Leases may be corporate leases of not less than one month. 5 In paragraph 10, add the following sentence: Notwithstanding the foregoing, so long as there does not otherwise exist a default under this Instrument or the Multifamily Note secured hereby, Borrower may, upon providing Lender with security satisfactory to Lender, proceed diligently and in good faith to contest the validity or applicability of any laws, ordinances, regulations and requirements of any Governmental Authority and all recorded covenants and agreements relating to or affecting the Mortgaged Property. 6 On the second line of paragraph 14(c), insert the phrase "in all material respects" after the word "accurate". 7 In the next to the last line of paragraph 17, replace the word "alter" with the phrase "materially alter as to appearance". 8 In paragraph 18(a)(2), insert the phrase "(except for the gas lines and sanitary sewer lines now in place)" after the word "Property". 9 In the tenth line of paragraph 18(g), replace the phrase "Borrower or any other" with the phrase "any party (other than Borrower, upon such Borrower's written request)". 10 In paragraph 18(j): * "and" is deleted from the end of subparagraph (4) * the period at the end of subparagraph (5) is replaced with the phrase "; and" * a new subparagraph (6) is added, as follows: (6) Notwithstanding anything in the above subparagraphs (1) through (5), Borrower is not obligated to indemnify, hold harmless or defend against Indemnitees' own gross negligence and willful misconduct. 11 In the fifth and sixth lines of paragraph 19(a), strike the phrase "sinkhole insurance, mine subsidence insurance, earthquake insurance, and,". 12 At the end of paragraph 19(f), add the following sentence: "Lender shall exercise the power described in this paragraph only if it has determined, in its discretion, that Borrower is not timely taking the actions described above". 13 At the end of paragraph 19(g)(2), add the phrase " (including any funds that Borrower may elect to contribute to the Restoration)". 14. Paragraph 21(b) is supplemented and modified by adding the following provisions: (7) Any transfer or series of transfers by one or more of the Initial Owners (each a "Transferor") of all or a portion of the Transferor's interests in the Borrower to any one or more of Wellsford Park Highlands Corp. or Wellsford Real Properties, Inc., a Maryland corporation ("WRP"), or ERP Operating Limited Partnership ("ERP"), or an entity owned and controlled by Wellsford Park Highlands Corp., WRP or ERP (collectively, the "Transferees") under the following conditions: (a) Lender has received and approved the documents transferring Transferor's interest in the Borrower to the Transferee; and (b) Lender has reviewed and approved the documents creating and governing the Transferee if the Transferee is an entity other than Wellsford Park Highlands Corp., WRP or ERP; and (c) The Initial Owners or WRP or ERP or any combination of them retain directly or indirectly at least 51% ownership interest in Borrower; and (d) There exists no breach by the Borrower of any covenant or agreement in this Instrument, the Note or any other instruments or documents executed and delivered in connection therewith; and (e) Borrower pays to Lender (1) at the time it requests Lender's consent, a review fee in the amount of $2,000 (which fee shall not be refundable); and (2) upon demand by Lender, all reasonable fees and out of pocket costs of Lender's legal counsel related to the transfer; and (8) The transfer by Al Feld of all his interest in the Borrower to Wellsford Park Highlands Corp. as contemplated under the Operating Agreement of the Borrower, and the resignation of Al Feld as a Member and Manager of the Borrower in connection with such transfer. 15. At the end of paragraph 22(f), add the phrase "(If such action or proceeding is not dismissed within 30 days thereof)". 16. In the 3rd line of paragraph 28, insert the word "reasonably" before the word "require". -----END PRIVACY-ENHANCED MESSAGE-----