-----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, HYZBVijglZ1P1swlgscMOIdhb7GqZYcOPO0eQT82cJGeI83NPlKEy5GLHBPAqhFU uDn5XuiIy3esitXIdrxx3Q== 0001038222-03-000004.txt : 20030326 0001038222-03-000004.hdr.sgml : 20030325 20030326164902 ACCESSION NUMBER: 0001038222-03-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 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: 03618690 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 form10k_123102.txt 12/31/02 YEAR-END EARNINGS 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, 2002 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 $.02 par value American Stock Exchange 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. |_| Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES |X| NO |_| The aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $124,232,000 based on the closing price on the American Stock Exchange for such shares on June 28, 2002. THE NUMBER OF THE REGISTRANT'S SHARES OF COMMON STOCK OUTSTANDING WAS 6,452,092 AS OF MARCH 25, 2003 (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 June 9, 2003 are incorporated by reference into Part III. Additionally, the Company's registration statement on Form S-3 (File No. 333-73874) filed with the Securities and Exchange Commission on December 14, 2001 is also incorporated by reference herein. 1 - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- FORM 10-K ITEM REPORT NO. PAGE --- ---- PART I 1. Business................................................................3 2. Properties..............................................................17 3. Legal Proceedings.......................................................21 4. Submission of Matters to a Vote of Security Holders.....................21 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters .................................................22 6. Selected Consolidated Financial Data....................................23 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...............................................24 7a. Quantitative and Qualitative Disclosures about Market Risk..............42 8. Consolidated Financial Statements and Supplementary Data................43 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................43 PART III 10. Directors and Executive Officers of the Registrant......................44 11. Executive Compensation..................................................44 12. Security Ownership of Certain Beneficial Owners and Management..........44 13. Certain Relationships and Related Transactions..........................44 14. Controls and Procedures.................................................44 PART IV 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........45 FINANCIAL STATEMENTS 15a. Consolidated Balance Sheets as of December 31, 2002 and 2001............F-4 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000.................................F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000.....................F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.................................F-7 Notes to Consolidated Financial Statements..............................F-9 Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes............................................F-51 FINANCIAL STATEMENT SCHEDULES III. Real Estate and Accumulated Depreciation................................S-1 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, 2002 includes: Commercial Property Operations--Wellsford/Whitehall Group, L.L.C. A 32.59% interest in a private joint venture that owned and operated 34 properties (substantially all office properties) at December 31, 2002 totaling approximately 3,874,000 square feet (including approximately 546,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland. Debt and Equity Activities--Wellsford Capital o Approximately $28,612,000 of direct debt investments which bore interest at a weighted average annual yield of 11.69% during 2002 and had an average remaining term to maturity of 4.2 years at December 31, 2002; o Approximately $31,797,000 of equity investments in companies which were organized to invest in debt instruments including $28,166,000 in Second Holding Company, LLC, 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 Approximately $6,792,000 invested in Reis, Inc. ("Reis"), a real estate information and database company; 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. Three phases aggregating 1,184 units are completed and operational as a rental property. A 264 unit fourth phase is being converted into condominiums. The Company has sold 153 units as of December 31, 2002 and 40 of the unsold units are available for rent and included in operations until the sales inventory has to be replenished. The land for the remaining approximate 352 unit fifth phase is being held for possible future development or sale. See the accompanying consolidated financial statements for certain financial information regarding the Company's industry segments. 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 3 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; web address, www.wellsford.com; e-mail, wrpny@wellsford.com. To access the Company's other documents filed with the Securities and Exchange Commission, visit www.wellsford.com. The Company has 17 employees as of December 31, 2002. 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 by and 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 32.59% interest in Wellsford/Whitehall as of December 31, 2002. The manager of the joint venture is a Whitehall affiliate. At December 31, 2002, Wellsford/Whitehall owned and operated 34 properties, including ten properties held for sale (substantially all office properties) totaling approximately 3,874,000 square feet (including approximately 546,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland. Subsequent to February 28, 2003, after the completion of certain sales, Wellsford/Whitehall owned 27 properties totaling approximately 2,908,000 square feet. 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 in the future. The Company's investment in Wellsford/Whitehall, which is accounted for on the equity method, was approximately $55,592,000 and $57,790,000 at December 31, 2002 and 2001, respectively. The Company's share of (loss) income from Wellsford/Whitehall was approximately $(1,292,000), $4,367,000 and $1,675,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Wellsford/Whitehall was formed in August 1997 as a private real estate operating company. The Company contributed six properties and Whitehall contributed four 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 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 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 provides management, 4 construction, development and leasing services to Wellsford/Whitehall based upon an agreed fee schedule. WP Commercial also provides similar services to a new venture formed by Whitehall (the "New Venture") as well as other affiliates of Whitehall and to third parties, including tenants of Wellsford/Whitehall and new owners of properties disposed of by Wellsford/Whitehall. WP Commercial receives an administrative management fee of 93 basis points on a predetermined value for each asset owned at the time of the Amendments. As Wellsford/Whitehall sells assets, the basis used to determine the fee is reduced by the respective asset's predetermined value six months after the completion of such sales. The fees earned by WP Commercial related to this service were approximately $5,826,000 and $6,422,000 for the years ended December 31, 2002 and 2001, respectively. 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 disposed of 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 acquisition of real estate made by certain other affiliates of Whitehall, until such acquisitions aggregate $400,000,000. The following table presents fees earned by the Company related to this provision: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 ---- ---- Asset disposition fees....... $ 7,000 $365,000 Asset acquisition fees....... 22,000 23,000 -------- -------- Total fees................... $ 29,000 $388,000 ======== ======== 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 of equity interests between the Company and Whitehall effective after December 31, 2003 with respect to the venture (the "Buy/Sell Agreement"). 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. 5 During the years ended December 31, 2002, 2001 and 2000, Wellsford/Whitehall participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts) 2002 ACTIVITY Sales: Gross Leasable Sales Price per Square Number of Sales Square Gain Month Location Feet Properties Price Foot (Loss) ----- -------- ---- ---------- ----- ---- ------ June ......... Owings Mills, MD 31,732 1 $ 2.9 $ 91.39 $ (0.3) ====== = ======== ========== ======== 2001 ACTIVITY Purchases (1): Gross Leasable Purchase Price per Square Number of Purchase Square Month Location Feet Properties Price 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 Sales Price per Square Number of Sales Square Gain Month Location Feet Properties Price Foot (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 Sales Price per Square Number of Sales Square Month Location Feet Properties Price Foot Gain ----- -------- ---- ---------- ----- ---- ---- August ....... Columbia, MD 38,000 1 $ 4.9 $ 128 $ 0.2 ====== = ======== ========== ========
6 In February 2003, Wellsford/Whitehall completed the sales of a portfolio of six properties to one purchaser for an aggregate of $136,800,000 and realized aggregate net gains of approximately $10,554,000 before income taxes. The Company's pre-tax income to be realized during the first quarter of 2003 from these transactions was approximately $2,700,000. The Company will not receive a distribution related to the sale of these properties as almost all of the proceeds were used to paydown $129,557,000 of Wellsford/Whitehall debt. In a separate transaction, Wellsford/Whitehall sold an unencumbered property in January 2003 for which the Company received a distribution of approximately $738,000 on January 31, 2003. The following table details the assets sold:
Gross Sales Price Leasable per Property Location Square Feet Sales Price Square Foot Gain (Loss) -------- -------- ----------- ----------- ----------- ----------- Portfolio sale: Mountain Heights Center #1 Berkeley Hts, NJ 183,000 Mountain Heights Center #2 Berkeley Hts, NJ 123,000 Greenbrook Corporate Center Fairfield, NJ 201,000 180/188 Mt. Airy Road ..... Basking Ridge, NJ 104,000 One Mall North ............ Columbia, MD 97,000 Gateway Tower ............. Rockville, MD 248,000 ------- Total portfolio sale ......... 956,000 $136,800,000 $ 143 $ 10,554,000 Decatur ...................... Decatur, GA 10,000 2,370,000 234 -- ------- ------------ ------------ 966,000 $139,170,000 144 $ 10,554,000 ======= ============ ============
In anticipation of the sales of the Decatur, GA and two other properties in Boston, MA, Wellsford/Whitehall recorded impairment provisions aggregating approximately $1,351,000 at December 31, 2002 as the expected sale prices net of selling expenses were less than the carrying amount of the properties. The Company's share of these impairments was approximately $440,000 before a write-off by the Company in 2002 of related unamortized warrant costs of $284,000. 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. 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 through June 30, 2003, which results are not expected to be achieved by that time. Accordingly, Wellsford/Whitehall is in the process of negotiating with GECC for an extension of the June 30, 2003 expiration. The facility bears interest at LIBOR + 2.90% per annum (4.28% at December 31, 2002) and matures in June 2004 with two 12-month extension options, subject to meeting certain operating and valuation covenants. Upon the initial funding, the facility was secured by interests in twenty-four commercial office properties in the Wellsford/Whitehall portfolio. The Wellsford/Whitehall GECC Facility replaced the previously existing facility which was due to mature in December 2001. The outstanding balance of the Wellsford/Whitehall GECC 7 Facility was $264,160,000 and $258,060,000 at December 31, 2002 and 2001, respectively. Details of the changes to the Wellsford/Whitehall GECC Facility balance are as follows: NUMBER OF SECURING BALANCE PROPERTIES ------- ---------- June 2001 proceeds .......................... $ 272,912,000 24 2001 asset sales ............................ (14,852,000) (2) ------------- -- Balance at December 31, 2001 ................ 258,060,000 22 2002 asset sales ............................ -- -- Additional asset encumbered by the facility . 6,100,000 1 ------------- -- Balance at December 31, 2002, including $131,811,000 reflected in liabilities held for sale ................................. $ 264,160,000 23 ============= == Balance at December 31, 2002, adjusted for completed sales from January 1, 2003 to February 28, 2003 ........................ $ 141,976,000 18 ============= == 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. The market value of the Cap was approximately $13,000 and $1,089,000 at December 31, 2002 and 2001, respectively. This Cap was purchased from Goldman Sachs based upon the results of a competitive bidding process. The following table summarizes the long-term debt at Wellsford/Whitehall:
BALANCE AT DECEMBER 31, INITIAL MATURITY STATED INTEREST ----------------------- DEBT/PROJECT DATE RATE 2002 2001 ------------ ---- ---- ---- ---- Wellsford/Whitehall GECC Facility.. June 2004 LIBOR + 2.90% $264,160,000 $258,060,000 Nomura Loan (A).................... February 2027 8.03% 65,458,000 66,189,000 Oakland Ridge Loan (B)............. March 2003 LIBOR + 2.00% 6,959,000 4,649,000 Retail properties (C).............. January 2024 7.28% 16,371,000 16,600,000 Other loans on office properties... (D) Various 15,410,000 24,511,000 ------------ ------------ $368,358,000 $370,009,000 ============ ============ - ---------- (A) In connection with a 1998 transaction, Wellsford/Whitehall assumed a mortgage loan held by Nomura Asset Capital Corporation with an initial principal balance of approximately $68,300,000. (B) The non-recourse loan is secured by the leasehold interest in the Oakland Ridge office park in Columbia, Maryland. The loan has a twelve-month extension at Wellsford/Whitehall's option. (C) Comprised of five mortgages secured by the leasehold interest in five retail properties. (D) Includes a property collateralizing the aggregate loan balances outstanding of $7,373,000 at December 31, 2002, which was sold in February 2003. The loans were repaid from sales proceeds.
The Company made temporary advances to Wellsford/Whitehall during 2000 which bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid in full by December 31, 2000. The Company earned approximately $703,000 of interest income during 2000 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. In June 2001, the Wellsford/Whitehall Fleet Facility was repaid in full, terminated and replaced with the Wellsford/Whitehall GECC Facility. 8 DEBT AND EQUITY ACTIVITIES - WELLSFORD CAPITAL - ---------------------------------------------- The Company, through the Wellsford Capital SBU, makes debt investments directly, or through joint ventures, predominantly in real estate related senior, junior or otherwise subordinated debt instruments and also in investment grade rated commercial mortgage backed securities and other asset-backed securities. The debt investments may be unsecured or secured by liens on real estate, liens on equity interests in real estate, pools of mortgage loans, 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 debt and other debt, especially in the low or below investment grade tranches, at significant returns as a result of inefficiencies in pricing in the marketplace, while utilizing both our and our joint venture partners' expertise to analyze the underlying assets and thereby effectively minimizing risk. At December 31, 2002, the Company had the following investments: (i) approximately $28,612,000 of direct debt investments which bore interest at a weighted average annual yield of approximately 11.69% during 2002 and had an average remaining term to maturity of approximately 4.2 years; (ii) approximately $31,797,000 of equity investments in companies which were organized to invest in debt instruments, including $28,166,000 in Second Holding Company, LLC, 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 $6,792,000 invested in Reis, a real estate information and database company. In addition, the Company owned and operated two commercial properties with a net book value of approximately $6,027,000, 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 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 first mortgage loan (amortized balance of $314,485,000 at December 31, 2002) (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, $3,042,000 and $3,050,000 per year of interest revenue from the 277 Park Loan during 2002, 2001 and 2000, respectively, or 9.6%, 7.3% and 11.9% of 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, of which the Company advanced $5,000,000 (its 50% share) (the "Patriot Loan"). The Patriot Loan was subordinate to a $75,000,000 first mortgage loan made by Fleet National Bank. During May 2002, the Patriot 9 Loan was paid in full and the Company received its loan balance of approximately $4,951,000. The loan bore interest at LIBOR + 4.75% per annum with payments of interest only from origination through August 2001 and, thereafter, principal and interest based on a 25-year amortization. The Patriot Loan was 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 $129,000, $449,000 and $564,000 of interest revenue from the Patriot Loan during 2002, 2001 and 2000, respectively, or 0.4%, 1.1% and 2.2% of 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 75% of the value of the borrowing base collateral which consisted of office, industrial and retail properties, all cross collateralized, totaling approximately 250,000 square feet. The Company's portion of the outstanding balance of approximately $4,300,000 was repaid in August 2000 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 of interest revenue from the Abbey Credit Facility during 2000, or 1.2% of total non-joint venture revenues during such period. SAFEGUARD CREDIT FACILITY In December 1998, the Company and JPMC originated a $90,000,000 credit facility cross-collateralized by nine self-storage 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 and $306,000 of interest revenue from the Safeguard Credit Facility during 2001 and 2000, respectively, or 0.1% and 1.2% of total non-joint venture revenues during such periods. 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 The Liberty Hampshire Company, L.L.C. ("Liberty Hampshire"), a venture which structures, establishes and provides management and services for special purpose finance companies 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 10 balance of the Guggenheim Loan was $3,612,000 at December 31, 2002 and 2001. The Company earned approximately $302,000 and $345,000 of interest revenue from the Guggenheim Loan during 2002 and 2001, respectively or 0.9% and 0.8% of total non-joint venture revenues during the period. On January 2, 2003, the Company received a payment of approximately $818,000, which included the 2002 interest payment and the 2002 principal paydown of $516,000. The following table summarizes interest revenue and its share of consolidated non-joint venture revenue during such periods for the Wellsford Capital SBU:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------- 2002 2001 2000 ----------------------- ----------------------- ----------------------- INTEREST INTEREST INTEREST REVENUE PERCENTAGE REVENUE PERCENTAGE REVENUE PERCENTAGE ------- ---------- ------- ---------- ------- ---------- 277 Park Loan .............. $ 3,042,000 9.6% $ 3,042,000 7.3% $ 3,050,000 11.9% Patriot Loan ............... 129,000 0.4% 449,000 1.1% 564,000 2.2% Abbey Credit Facility ...... -- 0.0% -- 0.0% 295,000 1.2% Safeguard Credit Facility .. -- 0.0% 25,000 0.1% 306,000 1.2% Guggenheim Loan ............ 302,000 0.9% 345,000 0.8% -- 0.0% Other ...................... 18,000 0.1% 233,000 0.6% 151,000 0.5% ----------- ---- ----------- ---- ----------- ---- Interest revenue from loans 3,491,000 11.0% 4,094,000 9.9% 4,366,000 17.0% Interest revenue from cash and cash equivalents .... 5,000 0.0% 72,000 0.2% 70,000 0.3% ----------- ---- ----------- ---- ----------- ---- Total interest revenue ..... $ 3,496,000 11.0% $ 4,166,000 10.1% $ 4,436,000 17.3% =========== ==== =========== ==== =========== ==== Consolidated non-joint venture revenue (base from which percentage is calculated) .......... $31,718,466 $41,492,999 $25,623,789 =========== =========== ===========
SECOND HOLDING Second Holding, a joint venture special purpose finance company, 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, bank deposits, leases on equipment, fuel/oil receivables, consumer receivables, pools of corporate bonds and loans and sovereign debt. It is Second Holding's intent to hold all securities to maturity. Many of these securities were obtained through private placements and current public market pricing is not available. The Company contributed approximately $24,200,000 and $4,900,000 in 1999 and 1998, respectively, to obtain an approximate 51.1% non-controlling interest in Second Holding, with Liberty Hampshire owning 10% and an affiliate of a significant shareholder of the Company (the Caroline Hunt Trust Estate, which owns 405,500 shares of the Company at December 31, 2002 ("Hunt Trust")) who, together with other entities, own the remaining approximate 39%. The Company's 1999 contribution was comprised of two of the Company's debt investments totaling $25,700,000, 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 an insurance policy for payment of the long-term debt issued by Second Holding. Effective January 1, 2002, the partners of Second Holding modified the terms of the agreement with the additional partner, which eliminated the additional partner's cumulative preference on earnings. The additional 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 51.1% of the remaining 65%. 11 The Company's investment in Second Holding, which is accounted for on the equity method, was approximately $28,166,000 and $27,803,000 at December 31, 2002 and 2001, respectively. The Company's share of income (loss) from Second Holding was approximately $723,000, $(163,000) and $1,432,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company also earns management fees for its role in analyzing real estate-related investments for Second Holding. The net fees earned by the Company, which are based upon total assets of Second Holding, amounted to approximately $646,000, $217,000 and $(182,000) for the years ended December 31, 2002, 2001 and 2000, respectively. At December 31, 2002 and 2001, Second Holding had real estate debt and other asset-backed securities investments of approximately $1,785,758,000 and $926,453,000, respectively. The investment-grade assets are variable rate based and have a weighted average annual interest rate of 2.21% and 2.58% at December 31, 2002 and 2001, respectively. Second Holding utilizes funds from the issuance of bonds, medium term notes and commercial paper to make investments. Second Holding had total debt of approximately $1,722,933,000 and $962,465,000 at December 31, 2002 and 2001 with a weighted average annual interest rate of 1.69% and 2.15%, respectively, after the effect of swaps on fixed rate debt to a floating rate. 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 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 interests in towers 1 and 2 and in the office components of 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; such insurance is from a consortium of 22 insurers. The policies of three of the insurance companies have been found by the United States District Court, Southern District of New York, to define the events of September 11, 2001 as a single occurrence. The owner of the leasehold interests is appealing this decision. The remaining insurance companies and the owner of the leasehold interests are in litigation to determine whether the events of September 11, 2001 constitute a single occurrence or a double occurrence. A single occurrence entitles the beneficiary of the policies to a payment equal to the face amount of the insurance policies, while a double occurrence entitles the beneficiary to a payment equal to twice the face amount. As of December 31, 2002, the rating agencies have not changed their ratings on the WTC Certificates and all payments of principal and interest were current. The Company and Second Holding management believe that the insurance coverage, whether the courts determine that the destruction of the towers was a single or double occurrence, will be 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. REIS, INC. 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, 2002 and 2001, the Company's aggregate investment in Reis, which is accounted for under the cost method, was approximately $6,792,000 and $6,583,000, respectively, or approximately 21.4% of Reis' equity on an as converted basis. The president and primary common shareholder of Reis is the brother of Mr. Lynford, the Chairman, President and Chief Executive Officer of the Company. Mr. Lowenthal, the Company's former President and Chief Executive Officer, who currently serves on the Company's Board of Directors, has served on the board of directors of Reis since the third quarter of 2000. Messrs. Lynford, Lowenthal and certain directors of the Company whom have invested directly in Reis, have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis. 12 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 the CVW 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, the venture was terminated and the investment balance was written off. In July 2001, the warrants issued to the CVW partners were repurchased for $80,000 and cancelled. 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"). 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 and fees have 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, $361,000 and $85,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Construction is nearing completion and delivery of certain units commenced in December 2002. As of December 31, 2002, approximately 93% of the units were under contract and 23 unit sales had closed for gross proceeds of approximately $11,300,000. 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 were under contract and subsequently sold to an affiliate of Whitehall 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 retained 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 for aggregate sales of approximately $34,217,000. Two unencumbered properties remain unsold at December 31, 2002. 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 13 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 after a remaining impairment reserve of $2,175,000 for the two unsold properties was approximately $6,027,000 and $5,560,000 at December 31, 2002 and 2001, respectively. The Company determined that no additional impairment provision was required at December 31, 2002 and 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 that could be achieved by acquiring stabilized 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 Presently, 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, 2002 and 2001, the Company had an 85.85% interest as the managing owner in this project and a subsidiary of EQR had the remaining 14.15% interest. In January 2003, the Company's board of directors approved a plan for the Company to seek institutional investors to purchase an interest in the residential rental phases at Palomino Park. There can be no assurance that the Company will be able to find suitable investors or that such a transaction will be completed. 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"). Initially, all five phases of Palomino Park were collateral for the Palomino Park Bonds. In June 2000, the Company obtained a five-year AA rated letter of credit from Commerzbank AG to provide additional collateral for the Palomino Park Bonds. This letter of credit, which expires in 2005, replaced an expiring letter of credit. A subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such guarantee also expires in 2005. 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 December 2007 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. 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 prepared certain units to be sold and continued to rent certain of the remaining unsold units during the sellout period until the inventory available for sale has been significantly reduced and additional units are required 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. 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 (3.38% at December 31, 2002), is 14 collateralized by the unsold Silver Mesa 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 $4,318,000 and $13,352,000 at December 31, 2002 and 2001, respectively. Sales of condominium units at the Silver Mesa phase of Palomino Park commenced in February 2001 and 153 units have been sold through December 31, 2002. The following table provides information regarding sales of Silver Mesa units: FOR THE YEARS ENDED DECEMBER 31, ------------------- PROJECT 2002 2001 TOTALS ---- ---- ------ Number of units sold ........... 48 105 153 Gross proceeds ................. $10,635,000 $21,932,000 $32,567,000 Principal paydown on Silver Mesa Conversion Loan ............. $ 9,034,000 $18,648,000 $27,682,000 The following table details operating information related to the Silver Mesa units being rented. As the Company continues to sell units, future rental revenues and corresponding operating expenses will diminish. FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 ---- ---- ---- Rental revenue ......... $1,462,000 $2,224,000 $ 592,000 Net operating income (A) $ 884,000 $1,488,000 $ 379,000 - ---------- (A) Net operating income is defined as rental revenue, less property operating and maintenance expenses, real estate taxes and property management fees. 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. The construction loan balance was $37,111,000 and $36,747,000 at December 31, 2002 and 2001, respectively and bore interest at LIBOR + 1.75% per annum (3.17% at December 31, 2002). On February 6, 2003, the Company obtained a $40,000,000 permanent loan secured by a first mortgage on Green River (the "Green River Mortgage"). The Green River mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per annum. Principal payments are based on a 30-year amortization schedule. Proceeds were used to repay the Green River Construction Loan and excess proceeds are generally available for working capital purposes. 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 $5,411,000 and $5,400,000 at December 31, 2002 and 2001, respectively. 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 through January 1998, 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 15 "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. 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 debt investments that Second Holding may invest in. 16 ITEM 2. PROPERTIES. The following property information is presented by SBU. WELLSFORD/WHITEHALL As of December 31, 2002, Wellsford/Whitehall owned and operated 34 properties, including ten properties held for sale (substantially all office properties), totaling approximately 3,874,000 square feet. By February 28, 2003, after the completion of certain sales, Wellsford/Whitehall owned 27 properties totaling approximately 2,908,000 square feet. The following table sets forth certain information related to all of these properties at December 31, 2002:
LEASABLE BUILDING YEAR NUMBER SQUARE CONSTRUCTED/ OF PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY -------- ---- -------- ---- ------------- ------- --------- OPERATING PROPERTIES - OFFICE 300 Atrium Drive.... Office Somerset, NJ 147,000 1983 5 100% 400 Atrium Drive**.. Office Somerset, NJ 355,000 1985 2 52% 500 Atrium Drive.... Office Somerset, NJ 169,000 1984 4 95% 700 Atrium Drive.... Office Somerset, NJ 181,000 1985 1 100% Garden State Exhibit Center........... Flex Somerset, NJ 82,000 1968/1989 N/A N/A 333 Elm Street...... Office Dedham, MA 48,000 1983 7 70% Dedham Place........ Office Dedham, MA 160,000 1987/2002 6 29% 201 University Avenue Office Westwood, MA 82,000 1982 1 100% 7/57 Wells Avenue.... Office Newton, MA 88,000 1982 14 100% 75/85/95 Wells Avenue Office Newton, MA 242,000 1976/1986 5 83% 105 Challenger Road.. Office Ridgefield 147,000 1992 3 100% Park, NJ Oakland Ridge........ Flex Columbia, MD 144,000 1972/2002 2 65% 117 Kendrick Street.. Office Needham, MA 211,000 1963/2000 2 38% Airport Park......... Office Hanover Twp, NJ 96,000 1979/2002 10 85% --------- -- --- SUBTOTAL--OPERATING PROPERTIES - OFFICE ........ 2,152,000 62 74% --------- -- --- 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 2001 1 100% Richmond............. Retail Richmond, VA 10,000 2001 1 100% --------- -- --- SUBTOTAL--OPERATING PROPERTIES - RETAIL ........ 54,000 5 100% --------- -- --- SUBTOTAL--OPERATING PROPERTIES ........ 2,206,000 67 74% --------- -- --- PRINCIPAL TENANTS BASE ESCALATED MARKET --------------------------------- RENT PER RENT PER RENT PER LEASE SQUARE SQUARE SQUARE PROPERTY NAME EXPIRATION FOOT FOOT FOOT* ENCUMBRANCE -------- ---- ---------- ---- ---- ----- ----------- OPERATING PROPERTIES - OFFICE 300 Atrium Drive.... AT&T March 2004 $ 20.69 $ 23.37 $ 21.00 (A) 400 Atrium Drive**.. Merrill Lynch December 2003 22.01 23.61 21.00 (A) 500 Atrium Drive.... AT&T December 2003 20.01 24.40 21.00 (A) 700 Atrium Drive.... Merck June 2005 17.39 20.83 21.00 (A) Garden State Exhibit Center........... N/A N/A 25.71 25.71 N/A (A) 333 Elm Street...... RNK, Inc. June 2006 17.13 18.43 24.00 (C) Dedham Place........ Washington Mutual January 2007 15.97 24.51 27.00 (C) 201 University Avenue RCN Corp. December 2009 18.00 20.33 21.50 (C) 7/57 Wells Avenue.... GEO Centers November 2004 26.79 28.30 27.00 (C) 75/85/95 Wells Avenue Wonderware Corp. April 2005 28.23 28.87 27.00 (C) 105 Challenger Road.. Samsung America, Inc. December 2003 26.74 31.38 26.00 (A) Oakland Ridge........ Wells Fargo May 2012 15.64 15.90 18.00 (E) 117 Kendrick Street.. MCK Communication March 2007 30.36 32.10 26.00 (A) Airport Park......... CapGemini January 2006 20.82 24.98 26.00 (E) ----- ----- ----- SUBTOTAL--OPERATING PROPERTIES - OFFICE ........ 22.23 24.99 23.40 ----- ----- ----- OPERATING PROPERTIES - RETAIL Essex................ CVS January 2024 37.00 37.00 37.00 (E) Pennsauken........... CVS January 2024 24.85 24.85 24.85 (E) Runnemeade........... CVS January 2024 26.06 26.06 26.06 (E) Wetumpa.............. CVS January 2024 20.46 20.46 20.46 (E) Richmond............. CVS January 2024 24.70 24.70 24.70 (E) ----- ----- ----- SUBTOTAL--OPERATING PROPERTIES - RETAIL ........ 26.53 26.53 26.53 ----- ----- ----- SUBTOTAL--OPERATING PROPERTIES ........ 22.34 25.03 23.48 ----- ----- ----- 17 WELLSFORD/WHITEHALL: PROPERTY TABLE - CONTINUED LEASABLE BUILDING YEAR NUMBER SQUARE CONSTRUCTED/ OF PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY -------- ---- -------- ---- ------------- ------- --------- PROPERTIES UNDER RENOVATION 600 Atrium Drive........ Land Somerset, NJ N/A N/A (H) -- Airport Park............ Land Hanover Twp, NJ N/A N/A (H) -- 150 Mt. Bethel Road..... Office/Flex Warren, NJ 129,000 1981 5 56% 377/379 Campus Drive**.. Office Franklin Twp, NJ 199,000 1984 1 10% 128 Technology Center**. Office Waltham, MA 218,000 1986 -- 0% --------- --- --- SUBTOTAL--PROPERTIES UNDER RENOVATION ........ 546,000 6 17% --------- --- --- PROPERTIES HELD FOR SALE - OFFICE Greenbrook Corporate Center (B)........... Office Fairfield, NJ 201,000 1987 14 78% Mountain Heights Center #1 (B)........ Office Berkeley Hts, NJ 183,000 1968/1986/1998 14 79% Mountain Heights Center #2 (B)........ Office Berkeley Hts, NJ 123,000 1968/1998/2000 1 100% 180/188 Mt. Airy Road (B).................. Office Basking Ridge, NJ 104,000 1980 11 83% One Mall North (B)...... Office Columbia, MD 97,000 1978/1998 27 61% 401 North Washington (B) Office Rockville, MD 248,000 1972/2002 11 82% 60 Turner Street (D).... Office/Land Waltham, MA 16,000 1970 1 100% 79 Milk Street (D)...... Office Boston, MA 65,000 1920/1998/2001 8 54% 24 Federal Street (D)... Office Boston, MA 75,000 1921/1997/2001 11 73% --------- --- --- SUBTOTAL--PROPERTIES HELD FOR SALE - OFFICE ........ 1,112,000 98 79% --------- --- --- PROPERTIES HELD FOR SALE - RETAIL Decatur (B)............. Retail Decatur, GA 10,000 2001 1 100% --------- --- --- SUBTOTAL--PROPERTIES HELD FOR SALE - RETAIL ........ 10,000 1 100% --------- --- --- SUBTOTAL--PROPERTIES HELD FOR SALE ........ 1,122,000 99 79% --------- --- --- TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2002 ........ 3,874,000 172 68% ========= === === PRINCIPAL TENANTS BASE ESCALATED MARKET --------------------------------- RENT PER RENT PER RENT PER LEASE SQUARE SQUARE SQUARE PROPERTY NAME EXPIRATION FOOT FOOT FOOT* ENCUMBRANCE -------- ---- ---------- ---- ---- ----- ----------- PROPERTIES UNDER RENOVATION 600 Atrium Drive..... -- -- -- -- -- (G) Airport Park......... -- -- -- -- -- (G) 150 Mt. Bethel Road.. GMAC March 2008 18.40 20.15 21.50 (A) 377/379 Campus Drive** Royal Consumer September 2009 9.85 10.41 19.50 (A) Products 128 Technology Center** -- N/A -- -- 29.00 (C) -------- ------- ------- SUBTOTAL--PROPERTIES UNDER RENOVATION ........ 7.94 8.55 23.77 -------- ------- ------- PROPERTIES HELD FOR SALE - Greenbrook Corporate Center (B)........... Information Resources December 2003 23.36 25.92 22.00 (A) & 2008 Mountain Heights Center #1 (B)........ The Santa Cruz Org. September 2006 29.79 32.30 27.00 (A) Mountain Heights Center #2 (B)........ Compaq August 2010 28.50 32.15 28.00 (A) 180/188 Mt. Airy Road (B).................. Avaya Inc. October 2004 25.49 27.92 26.50 (A) One Mall North (B)...... GSA November 2005 22.21 24.45 22.00 (E) 401 North Washington (B) Automatic Data February 2007 17.13 18.43 26.50 (A) Processing 60 Turner Street (D).... Brandeis University June 2002 (F) 8.00 8.00 8.00 (A) 79 Milk Street (D)...... International Data February 2009 43.92 46.20 36.50 (A) Group (IDG) 24 Federal Street (D)... IDG February 2009 46.65 49.55 36.50 (A) -------- ------- ------- SUBTOTAL--PROPERTIES HELD FOR SALE - OFFICE ........ 26.25 28.57 26.54 -------- ------- ------- PROPERTIES HELD FOR SALE - RETAIL Decatur (B)............. CVS April 2019 19.75 22.86 23.00 (G) -------- ------- ------- SUBTOTAL--PROPERTIES HELD FOR SALE - RETAIL ........ 19.75 22.86 23.00 -------- ------- ------- SUBTOTAL--PROPERTIES HELD FOR SALE ........ 26.19 28.52 26.50 -------- ------- ------- TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2002 ........ $ 21.40 $ 23.69 $ 24.41 ======== ======= ------- - ---------- (A) Encumbered by the Wellsford/Whitehall GECC Facility. (B) Property sold by February 28, 2003. Total square feet of sold properties was 966,000 square feet. (C) Encumbered by a $65,458,000 mortgage. (D) Property expected to be sold during second quarter of 2003. The total square feet of properties expected to be sold is 156,000 square feet. (E) Encumbered by other mortgages. (F) Hold over tenant on a month-to-month lease. (G) Unencumbered. (H) Land zoned for office development. * Represents the judgment of WP Commercial as managing member as to specific property market rent per square foot as of December 31, 2002. ** Wellsford/Whitehall is in the process of converting building from single to multi-tenant.
18 The following table sets forth historical Wellsford/Whitehall portfolio information by year:
SQUARE FEET OF OCCUPANCY TOTAL BUILDING TOTAL PORTFOLIO OPERATING OF OPERATING AT DECEMBER 31, SQUARE FEET OCCUPANCY PROPERTIES PROPERTIES --------------- ----------- --------- ---------- ---------- 2002 Pro forma (A).... 2,908,000 63% 2,362,000 74% 2002.................. 3,874,000 68% 3,328,000 76% 2001.................. 3,905,000 70% 3,307,000 69% 2000.................. 4,953,000 69% 3,431,000 87% - ---------- (A) December 31, 2002 adjusted to reflect all sales from January 1, 2003 to February 28, 2003.
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 generally 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, 2002 lease expirations for each of the next ten years, assuming tenants do not exercise any renewal options and excludes properties sold from January 1, 2003 to February 28, 2003:
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 ---- ------ ------ ----------- ----- ---- 2003......... 36 494,000 28% $10,424,000 $21.10 2004......... 10 147,000 8% 3,221,000 21.84 2005......... 17 357,000 20% 8,247,000 23.10 2006......... 20 233,000 13% 6,928,000 29.70 2007......... 14 145,000 8% 4,182,000 28.83 2008......... 8 87,000 5% 2,637,000 30.17 2009......... 5 145,000 8% 3,414,000 23.54 2010......... -- -- 0% -- -- 2011......... 4 12,000 1% 602,000 48.21 2012......... 3 96,000 5% 2,562,000 26.81
No tenant in the Wellsford/Whitehall portfolio accounted for more than 6% of rental revenues for assets classified as continuing operations by Wellsford/Whitehall for the year ended December 31, 2002. 19 WELLSFORD CAPITAL Wellsford Capital owned the following commercial properties at December 31, 2002; both properties are available for sale:
LEASABLE BUILDING YEAR SQUARE CONSTRUCTED/ PROPERTY TYPE LOCATION FEET REHABILITATED -------- ---- -------- ---- ------------- Chestnut Street .............. Office Philadelphia, PA 49,953 1857/1983/2002 Keewaydin Drive .............. Industrial Salem, NH 125,230 1973 ------- TOTAL/AVERAGE AT DECEMBER 31, 2002 .............................................. 175,183 ======= 2001 .............................................. 175,183 ======= 2000 .............................................. 482,270 ======= NUMBER OF PRINCIPAL LEASE PROPERTY TENANTS OCCUPANCY TENANTS EXPIRATION -------- ------- --------- ------- ---------- Chestnut Street .............. 3 69% A September 2007 Keewaydin Drive .............. 4 57% B January 2004 -- -- TOTAL/AVERAGE AT DECEMBER 31, 2002 ............. 7 60% == == 2001 ............. 9 62% == == 2000 ............. 53 74% == == - ---------- (A) Kittredge Donley (14,449 square feet). (B) Southern New Hampshire College (27,555 square feet).
WELLSFORD DEVELOPMENT The Company owned the following multifamily properties at December 31, 2002:
YEAR EFFECTIVE RENT PROPERTY LOCATION UNITS CONSTRUCTED OCCUPANCY PER UNIT ENCUMBRANCE -------- -------- ----- ----------- --------- -------- ----------- Operational phases: Blue Ridge ............... Denver, CO 456 1997 95% $ 976 $ 32,447,000 (A) Red Canyon ............... Denver, CO 304 1998 94% 1,161 25,677,000 (A) Green River .............. Denver, CO 424 2001 95% 1,035 37,111,000 (A) ----- ------------ Total operational phases .... 1,184 95% 1,045 95,235,000 ----- ------------ Future units to be sold: Silver Mesa (B) .......... Denver, CO 40 2000 N/A 1,689 4,318,000 ----- ------------ TOTAL/AVERAGE AT DECEMBER 31, 2002 ..... 1,224 95% $1,107 $ 99,553,000 ===== == ====== ============ 2001 ..... 1,320 77% (C) $1,267 $109,051,000 ===== == ====== ============ 2000 ..... 896 93% $1,224 $ 91,724,000 ===== == ====== ============ - ---------- (A) Encumbrance balances exclude the Palomino Park Bonds. The balance of the Palomino Park Bonds was $12,680,000 at December 31, 2002, 2001 and 2000. The Palomino Park Bond collateral includes the Blue Ridge, Red Canyon and Green River operational phases, as well as the undeveloped Gold Peak phase (improved land) (See Below). (B) The Silver Mesa phase information excludes units which are available for sale. The occupancy and average rent per unit for the 40 future units to be sold is excluded. At December 31, 2002, there were 71 units in available for sale inventory. The encumbrance is on all of the unsold units, including rentals in the phase (aggregating 111 units at December 31, 2002). As individual units are sold, they are released from the Silver Mesa Conversion Loan collateral. (C) Phases in lease-up (Green River during 2001) are not included in the 2001 Average Occupancy.
The average lease term of the tenants' leases range from six to fourteen months. Security deposits are generally required for all leases. 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 $5,411,000 and $5,400,000 at December 31, 2002 and 2001, respectively. The Company has not determined if it will construct this phase or sell the improved land. 20 ITEM 3. LEGAL PROCEEDINGS. The Company is not presently a defendant in any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not applicable. 21 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, 2002 and 2001 are as follows: COMMON SHARES ------------------------------ 2002 HIGH LOW DIVIDENDS ---- ---- --- --------- 1st Quarter..... $21.75 $19.00 None 2nd Quarter..... $22.55 $20.10 None 3rd Quarter..... $20.75 $17.20 None 4th Quarter..... $18.64 $15.30 None 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 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 3,400 and 1, respectively, as of December 31, 2002. DIVIDENDS - --------- The Company did not declare or distribute any dividends during 2002 or 2001. 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. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS - ------------------------------------------------------------------ The following table details information for each of the Company's compensation plans at December 31, 2002:
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY NUMBER OF SECURITIES WEIGHTED AVERAGE COMPENSATION PLANS TO BE ISSUED UPON EXERCISE PRICE OF (EXCLUDING SECURITIES EXERCISE OF OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A)) ------------------- ------------------- ------------------------ (a) (b) (c) Equity compensation plans approved by shareholders: Rollover Stock Option Plan ..................... 372,874 $ 20.46 277,654 1997 Management Incentive Plan ................. 208,687 $ 21.37 633,965 1998 Management Incentive Plan ................. 190,625 $ 17.96 471,074 ------- --------- 772,186 $ 20.90 1,382,693 Equity compensation plans not approved by shareholders ................................... -- $ -- -- ------- --------- Total ............................................. 772,186 $ 20.90 1,382,693 ======= =========
22 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.
SUMMARY CONSOLIDATED STATEMENT OF OPERATIONS DATA(A) FOR THE YEARS ENDED DECEMBER 31, - -------------------------------------- ----------------------------------------------------------- 2002 2001 2000 1999 1998 (AMOUNTS IN THOUSANDS, EXCEPT PER ---- ---- ---- ---- ---- SHARE DATA) Revenues ............................. $ 31,718 $ 41,493 $ 25,624 $ 30,770 $ 26,316 Costs and expenses (B) ............... (34,845) (46,420) (26,181) (29,526) (17,606) (Loss) income from joint ventures .... (208) 4,564 3,247 9,622 3,523 Gain on sales of assets, net of impairment provision of $4,725 in 2000 ........................... -- -- 6,135 -- 139 Minority interest benefit (expense) .. 43 (283) (66) (55) (78) --------- --------- --------- --------- --------- (Loss) income before taxes and Convertible Trust Preferred Securities ........................ (3,292) (646) 8,759 10,811 12,294 Income tax benefit (expense) ......... 1,300 (699) (1,430) (1,950) (2,850) Convertible Trust Preferred Securities distributions, net of tax benefit of $720, $720 and $510 ............ (1,380) (1,380) (861) -- -- --------- --------- --------- --------- --------- Net (loss) income .................... $ (3,372) $ (2,725) $ 6,468 $ 8,861 $ 9,444 ========= ========= ========= ========= ========= Net (loss) income per common share, basic ............................. $ (0.52) $ (0.38) $ 0.76 $ 0.86 $ 0.95 ========= ========= ========= ========= ========= Net (loss) income per common share, diluted ........................... $ (0.52) $ (0.38) $ 0.76 $ 0.86 $ 0.93 ========= ========= ========= ========= ========= Cash dividends declared per common share ............................. $ -- $ -- $ -- $ -- $ -- ========= ========= ========= ========= ========= Weighted average number of common shares outstanding, basic ......... 6,437 7,213 8,508 10,321 9,943 ========= ========= ========= ========= ========= Weighted average number of common shares outstanding, diluted ....... 6,437 7,213 8,516 10,329 10,190 ========= ========= ========= ========= ========= SUMMARY CONSOLIDATED BALANCE SHEET DATA FOR THE YEARS ENDED DECEMBER 31, - -------------------------------------- ----------------------------------------------------------- 2002 2001 2000 1999 1998 (AMOUNTS IN THOUSANDS) ---- ---- ---- ---- ---- Real estate, at cost ................. $ 163,400 $ 170,963 $ 167,279 $ 166,166 $ 153,030 Accumulated depreciation ............. (13,531) (9,873) (8,248) (6,584) (2,707) Notes receivable ..................... 28,612 34,785 37,824 37,260 124,706 Cash and cash equivalents ............ 38,644 36,149 36,369 34,740 10,122 Investment in joint ventures ......... 94,181 95,807 120,969 114,390 80,776 Total assets ......................... 332,775 345,838 375,770 366,331 384,971 Mortgage notes payable ............... 112,233 121,731 104,404 119,315 120,177 Credit facility ...................... -- -- 12,000 -- 17,000 Convertible Trust Preferred Securities 25,000 25,000 25,000 -- -- Shareholders' equity ................. 176,567 178,079 215,982 229,691 231,625 Other balance sheet information: Common shares outstanding ......... 6,451 6,405 8,350 9,611 10,375 ========= ========= ========= ========= ========= Equity per share .................. $ 27.37 $ 27.80 $ 25.86 $ 23.90 $ 22.32 ========= ========= ========= ========= ========= - ---------- (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 ("SFAS") 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. 23 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 the Company and its majority-owned and controlled subsidiaries. All significant inter-company accounts and transactions among the Company and its subsidiaries have been eliminated in consolidation. 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. Specifically, the Company's investment in Wellsford/Whitehall is accounted for under the equity method as it is a minority owner with a 32.59% interest and does not have unilateral control over its board. Additionally, the Company owns an approximate 51.1% interest in Second Holding (after a special class partner shares in 35% of net income as defined) which interest is represented by two of eight board seats with one-quarter of the vote on any major business decisions. Investments in entities where the Company does not have the ability to exercise significant influence are accounted for under the cost method. The Company accounts for its investment in Reis under the cost method as its ownership interest is in non-voting preferred shares and the Company's interests are represented by one member of Reis' seven member board. 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. REAL ESTATE, OTHER INVESTMENTS, DEPRECIATION, AMORTIZATION AND IMPAIRMENT. Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Costs incurred for significant repairs and maintenance that extend the usable life of the asset or have a determinable useful life are capitalized. Ordinary repairs and maintenance are expensed as incurred. The Company expenses all lease turnover costs for its residential units, such as painting, cleaning, carpet replacement and other turnover costs, as such costs are 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 investment. Additional amortization is charged as specified assets are sold in cases where the joint venture would cease to exist when all assets are sold or otherwise disposed of or where impairment provisions are recorded at the joint venture. 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 two to twelve years for furnishings and equipment. 24 The Company reviews its real estate assets, investments in joint ventures and other investments 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. Sales price concessions are recognized as a reduction in sales revenues as individual sales are completed. Advertising costs are expensed as incurred. 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. REVENUE RECOGNITION. Commercial properties are leased under operating leases. Rental revenue from office and industrial properties 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 fourteen months and such rental revenue is recognized monthly as tenants are billed. Interest revenue 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 No. 109 "ACCOUNTING FOR INCOME TAXES." Deferred income tax assets and liabilities are determined based upon differences between financial reporting and the tax basis 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 - --------------------- COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31, 2001 Rental revenue increased $2,544,000. This increase is due to the commencement of operations effective January 1, 2002 at the Green River phase at Palomino Park in the Wellsford Development SBU ($4,466,000), offset by (i) reduced rental revenue in 2002 from the sale of four of the VLP properties in the Wellsford Capital SBU during 2001, including two during January 2001, one in May 2001 and the fourth in December 2001 ($812,000), (ii) reduced rental revenue from the Silver Mesa phase at Palomino Park from unit sales ($765,000) and (iii) decreased economic occupancy at the Blue Ridge and Red Canyon phases at Palomino Park ($345,000). Revenues from the sale of Silver Mesa residential units and the associated cost of sales from such units were $10,635,000 and $9,544,000, respectively, from 48 sales during the year ended December 31, 2002 and were $21,932,000 and $19,364,000, respectively, from 105 sales during the corresponding 2001 period. The reduction of 2002 sales from 2001 sales is primarily due to the backlog of contracts which were closed after receipt of final approvals and releases in February 2001 to begin the condominium sales process and general and local economic conditions. The decline in gross profit per unit during the 2002 period results primarily from sales price concessions. Interest revenue decreased $1,079,000. This decrease is due to reduced interest income earned on loans of $686,000 from lower average outstanding loan balances in 2002 as compared to 2001, as well as reduced 25 interest earned on cash of $393,000 from lower interest rates during the current period versus the comparable 2001 period. Fee revenue increased $58,000. Such increase resulted from an increase in the Company's management fees for its role in the Second Holding investment of $429,000 from increased assets under management in that venture, offset by reduced transaction fees payable by Whitehall from sales of properties by Wellsford/Whitehall and certain asset purchases by a related entity as such fees amounted to $388,000 for the 2001 period, with only $29,000 earned in the corresponding 2002 period and $12,000 of loan modification fees earned in 2001 with no corresponding amount in 2002. Fee revenue will be impacted in the future by increases in assets under management by Second Holding and the ability to sell assets by Wellsford/Whitehall. Property operating and maintenance expense increased $1,662,000. This increase is the result of (i) the commencement of operations at Green River on January 1, 2002 ($1,127,000), (ii) increased property level payroll, insurance and significant retenanting costs at all operating phases at Palomino Park (for Silver Mesa, such increases were in excess of reductions from units sold) plus the cessation of capitalization of certain costs at Gold Peak commencing January 1, 2002 ($797,000), offset by (iii) reduced operating expenses resulting from the sale of the four VLP properties during 2001, net of current year non-capitalizable maintenance expenses ($262,000). The increase in real estate taxes of $435,000 is primarily due to the commencement of operations at Green River ($374,000) and the cessation of cost capitalization on the undeveloped Gold Peak land ($155,000) and increased Silver Mesa real estate taxes for a higher tax rate from more units being assessed at a condominium value, which is higher than the assessment for a rental unit ($14,000), offset by a decrease in real estate taxes from the sale of four VLP properties during 2001 ($110,000). Depreciation and amortization expense increased $167,000. This increase is attributable to the commencement of depreciation on the Green River rental phase ($1,573,000), depreciation on the two unsold VLP properties due to a change in accounting classification by definition, under the application of SFAS No. 144, effective January 1, 2002, from available for sale to held for use ($210,000) and fixed asset additions on Blue Ridge and Red Canyon ($83,000), offset by reduced amortization of joint venture cost as only one property was sold by Wellsford/Whitehall and one property was subject to an impairment adjustment during the 2002 period, causing a write-off of the related unamortized warrant balances by the Company ($758,000) whereas eleven properties were sold in the prior year's comparable period ($1,950,000), reduced basis from the transfer of 96 units at Silver Mesa during 2002 to replenish sales inventory (as 28 units became part of sales inventory in January 2002, 30 units in July 2002 and 38 units in October 2002) ($295,000) and reduced depreciation in 2002 of corporate furniture, fixtures and equipment ($212,000). Property management expenses decreased $88,000. Such decrease is due to the sale of the four VLP properties during 2001 and the assumption of certain asset management duties by the Company in April 2002 (which were previously performed by an affiliate of Whitehall for the VLP properties) ($147,000), as well as decreased rental revenues from lower economic occupancy at Blue Ridge and Red Canyon ($36,000) and Silver Mesa sales ($26,000), partially offset by the commencement of operations at Green River ($121,000). The Palomino Park property management expenses were also impacted by the reduction in contractual management fees during the fourth quarter of 2002 from a 3% annual fee of gross receipts to a 2% annual fee. Interest expense increased $1,495,000. This increase is attributable to the cessation of interest and debt cost capitalization in 2002 at Palomino Park ($1,841,000 was capitalized in the 2001 period for Green River and Gold Peak) and interest on the Green River Construction Loan ($1,295,000). Such amounts are offset by reduced expense from a lower outstanding balance and a reduced interest rate on the Silver Mesa Conversion Loan ($1,166,000), the expiration of the Wellsford Finance Facility in January 2002 (which had up to $12,000,000 of outstanding balances for portions of the 2001 period) ($294,000), reduced interest on the Palomino Park Bonds from a lower base interest rate in 2002 ($129,000) and lower interest on the Blue Ridge and Red Canyon fixed rate loans from lower average outstanding balances due to principal amortization ($52,000). 26 General and administrative expenses decreased $1,900,000. This decrease is primarily the result of an expense reduction program implemented by management in 2001 which resulted in reduced salaries and related benefits and lower net occupancy costs. An analysis of general and administrative expenses follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 2002 2001 (DECREASE) ---- ---- ---------- General and administrative expense per Statement of Operations ............................................. $ 6,567,166 $ 8,466,948 $ (1,899,782) Less: Non-cash component of general and administrative expenses for amortization of stock generally issued into deferred compensation plan ............................. 1,243,332 1,578,009 (334,677) ------------- ------------- ------------- Cash component of general and administrative expenses ..... $ 5,323,834 $ 6,888,939 $ (1,565,105) ============= ============= ============= Percentage (decrease) from prior year on cash component ... (22.7%) ============= Percentage of Total Assets at each year end on cash component .............................................. 1.60% 1.99% ============= ============= Total Assets at each year end ............................. $ 332,775,043 $ 345,838,157 ============= =============
The restructuring charge in 2001 of $3,527,000 is for costs incurred pursuant to the early retirement of the Company's former 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 paid approximately $2,800,000 in the first quarter of 2002 with the remaining accrued balance expected to be paid during the first quarter of 2003. Income from joint ventures decreased $4,773,000. An analysis of the decrease follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- INCREASE 2002 2001 (DECREASE) ---- ---- ---------- Wellsford/Whitehall: Operations (A) .................. $ (770,000) $ 302,000 $ (1,072,000) (Loss) gain on sale of assets (B) (82,000) 10,215,000 (10,297,000) Impairment provision (C) ........ (440,000) (6,150,000) 5,710,000 Second Holding (D) ................. 723,000 (163,000) 886,000 Clairborne Fordham Tower ........... 361,000 361,000 -- Other .............................. (1,000) (1,000) -- ------------ ------------ ------------ (Loss) income from joint ventures .. $ (209,000) $ 4,564,000 $ (4,773,000) ============ ============ ============ - ---------- (A) Includes a write-off of unamortized leasing costs and tenant improvements from a tenant in bankruptcy in December 2002, offset in part by lease termination income from this tenant. Additionally, 2002 was impacted, to a lesser extent, by the sale of properties in 2001, lower occupancy and lower rental rates in 2002. (B) One property was sold in 2002 where as eleven properties were sold in 2001. (C) Impairments in 2002 relate to properties available for sale at December 31, 2002. Impairments in 2001 primarily relate to the change in intended use of a development property, which was sold later in that year. (D) The increase in earnings is a result of a change in the allocation of income for the partners of the venture effective January 1, 2002, coupled with an increase in invested assets resulting in increased income for that venture.
Minority interest changed $326,000 from an expense of $283,000 in 2001 to a benefit of $43,000 in 2002, primarily attributable to fewer sales of residential units at Silver Mesa and lower economic and physical occupancy at Palomino Park, which resulted in a loss for the Wellsford Development SBU during the 2002 period. 27 Income taxes changed from an expense in 2001 of $699,000 to a benefit in 2002 of $1,300,000 primarily from the Company having a tax loss resulting in refundable income taxes in the 2002 fiscal period compared to a financial statement tax profit in the corresponding period in 2001 because of the Company reserving certain future tax timing benefits. The 2001 period provision was reduced by a $265,000 reversal of previously accrued state taxes as a result of net operating loss carryforwards being available in one state. Both periods include minimum state and local tax provisions. The increase in a net (loss) per share, basic and diluted aggregating $(0.14) per share is attributable to a current period loss of ($3,372,000) whereas in the 2001 period, the Company reported a loss of ($2,725,000). 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 2001 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 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 28 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 former 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. 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, (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 Liberty Hampshire 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 29 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. INCOME TAXES The Company has recorded a net deferred tax asset of $6,308,000 and $5,081,000 at December 31, 2002 and 2001, respectively, which is included in prepaid and other assets in the accompanying consolidated balance sheets. Management has determined that a $18,996,470 and $18,764,516 valuation allowance at December 31, 2002 and 2001, respectively, is necessary. The valuation allowance relates to the NOL carryforwards, certain deferred compensation and severance arrangements and alternative minimum tax credit carryforwards. At December 31, 2002, the Company has available net operating loss carryforwards of $61,856,000, which will expire between 2007 and 2012. The Company has recorded a deferred tax asset of approximately $7,723,000 or 72% of the total recorded deferred tax asset of $10,657,000 at December 31, 2002, 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. Approximately $15,700,000 could be utilized in 2003 to offset Federal taxable income. The deferred tax asset associated with the deferred compensation deductions, income earned by the assets in the deferred compensation plan and alternative minimum tax credit carryforwards have been fully reserved. The majority of the remaining $2,934,000 asset is expected to be realized upon the sale of the remaining two VLP assets, the scheduled payments of the balance of the severance accrual and the sale or other disposal of the Company's investment in Wellsford/Whitehall. During the year, the Company increased its valuation allowance by $232,000 principally as a result of additional deferred compensation costs and plan taxable income and alternative minimum tax credit carryforwards, the tax benefits of which were fully reserved, offset in part by the tax benefit from utilization in the fiscal 2001 Federal tax return of $2,852,000 of net operating loss carryforwards. In order to realize the recorded deferred tax asset, the Company would have to realize approximately $29,941,000 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, such as maturing construction debt and operating expenses generally through its available cash, sales of residential units in the Wellsford Development SBU, the permanent financing on the Green River phase at Palomino Park (which closed February 6, 2003) and cash provided by operations. The Company expects to meet its long-term liquidity requirements such as maturing mortgages, financing acquisitions and development, financing capital improvements and joint venture loan requirements through the use of available cash, repayments of notes receivable, sales of residential units in the Wellsford Development 30 SBU (proceeds from such sales will increase from the current amount of approximately 10% of net sales proceeds to 100% when the Silver Mesa Conversion Loan, with a balance of $4,318,000 at December 31, 2002, is fully repaid), sales of properties in the Wellsford/Whitehall SBU, refinancings and 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 short and long-term liquidity requirements, such as financing additional renovations and tenant improvements to its properties, repayments of debt maturities and operational expenses with available cash, operating cash flow from its properties, financing available under the Wellsford/Whitehall GECC Facility, as well as an extension to the period for funding of capital additions for tenant improvements and leasing commissions, proceeds from any asset sales, refinancing of existing loans 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, 2002, the Company and Whitehall each had completed funding their entire respective capital commitments. The additional financing/preferred equity commitment, of which the Company's share is $4,000,000, is fully available to Wellsford/Whitehall until December 31, 2003. At December 31, 2002, Wellsford/Whitehall's cash and cash equivalents balance was approximately $16,169,000 and restricted cash available for certain capital improvements was approximately $14,600,000. Second Holding expects to meet its liquidity requirements for purchases of investments with proceeds from the issuance of bonds, medium-term notes and commercial paper. Liquidity for the repayments of bonds, medium-term notes and commercial paper is expected to be provided from principal repayments, from amortization of investments and upon repayment of investments at maturity. Second Holding also has available a $400,000,000 line of credit. The nature of Second Holding's business results in the entity being highly leveraged. The Company's retained earnings included approximately $2,192,000 of undistributed earnings from Second Holding at December 31, 2002 as distributions are limited to 48.25% of earnings. 31 The following table summarizes the Company's material contractual obligations as of December 31, 2002: (amounts in thousands)
PAYMENTS DUE ------------------------------------------------------------------------------------ FOR THE YEAR FOR THE YEARS ENDED DECEMBER 31, ENDED -------------------------------- SUBSEQUENT TO CONTRACTUAL OBLIGATIONS DECEMBER 31, 2003 2004 AND 2005 2006 AND 2007 JANUARY 1, 2008 AGGREGATE ----------------------- ----------------- ------------- ------------- --------------- --------- Recorded on balance sheet: Principal payments for long- term debt: Blue Ridge Mortgage ....... $ 503 $ 1,115 $ 30,829 $ -- $ 32,447 Red Canyon Mortgage ....... 383 847 967 23,480 25,677 Green River Mortgage (A) . 374 1,092 1,226 37,308 40,000 Silver Mesa Conversion Loan (B) .................... 4,318 -- -- -- 4,318 Palomino Park Bonds (C) ... -- 12,680 -- -- 12,680 -------- -------- -------- -------- -------- Total long-term debt ... 5,578 15,734 33,022 60,788 115,122 Convertible Trust Preferred Securities ................ -- -- -- 25,000 25,000 Restructuring payments ....... 699 -- -- -- 699 -------- -------- -------- -------- -------- Contractual obligations recorded on balance sheet . 6,277 15,734 33,022 85,788 140,821 -------- -------- -------- -------- -------- Other contractual obligations: Interest expense on long-term debt ...................... 6,142 12,691 11,584 11,719 42,136 Distributions for Convertible Trust Preferred Securities (D) ...................... 2,063 4,125 4,125 29,585 39,898 Employment contractual obligations ............... 1,578 840 -- -- 2,418 Operating lease for office ... 753 1,630 1,630 679 4,692 Wellsford/Whitehall Preferred Equity/Loan ..... 4,000 -- -- -- 4,000 Reis (E) ..................... 420 -- -- -- 420 -------- -------- -------- -------- -------- Total other contractual obligations ............ 14,956 19,286 17,339 41,983 93,564 -------- -------- -------- -------- -------- Total contractual obligations $ 21,233 $ 35,020 $ 50,361 $127,771 $234,385 ======== ======== ======== ======== ======== - ---------- (A) On February 6, 2003, the Company obtained a $40,000 permanent loan, proceeds from which were used to repay the maturing $37,111 Green River Construction Loan. The above table reflects the obligation for the new financing as if it occurred on December 31, 2002. (B) The Silver Mesa Conversion Loan can be extended through June 2004. (C) Reflects the expiration of the letter of credit arrangements on the Palomino Park Bonds. In order to avoid the call of the Palomino Park Bonds in 2005, the Company would need to either replace the letter of credit arrangements or negotiate some other arrangement. (D) EQR can require redemption on or after May 30, 2012; however, the Company can extend the maturity for two five-year extension periods to May 2022. The table above assumes payments through that date. The Company can redeem in whole or in part on or after May 30, 2002 and can elect to make distributions for 12 quarters through the issuance of additional Convertible Trust Preferred Securities. The Convertible Trust Preferred Securities are convertible into 1,123,696 common shares at $22.248 per share. (E) The Company does not expect that such additional contribution will be required before the expiration of the commitment at December 31, 2003.
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 $219 per unit in apartment preparation costs from turnover of tenant leases during the year ending December 31, 2003, which will be charged to property operating and maintenance expense in the consolidated statements of operations. 32 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 $5,411,000 and $5,400,000 at December 31, 2002 and 2001, respectively. The Company has not determined if it will construct this phase or sell the improved land. WELLSFORD CAPITAL The Company expects to incur approximately $875,000 of total capital expenditures with respect to the two remaining VLP properties during 2003. Of this amount $560,000 is for required base building work at both properties. Tenant improvement costs and leasing commissions for 2003 are anticipated to be: PER AMOUNT SQUARE FOOT* ------ ------------ Tenant improvements ..... $185,000 $ 8.11 Leasing commissions ..... 130,000 5.67 -------- $315,000 ======== - ---------- * Per square foot amount represents applicable cost by category for expected square footage to be leased during the year. WELLSFORD/WHITEHALL Wellsford/Whitehall expects to incur approximately $23,863,000 of total capital expenditures during the year ending December 31, 2003. Of this amount, Wellsford/Whitehall expects to incur approximately $12,423,000 for asset repositioning through significant upgrades to the base building and amenities and the conversion of three single-tenant structures to multi-tenant use properties. Tenant improvement costs and leasing commissions for 2003 are anticipated to be: PER AMOUNT SQUARE FOOT* ------ ------------ Tenant improvements ..... $ 7,736,000 $ 19.88 Leasing commissions ..... 3,704,000 8.45 ----------- $11,440,000 =========== - ---------- * Per square foot amount represents applicable cost by category for expected square footage to be leased during 2003. 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. OTHER ITEMS IMPACTING THE COMPANY'S LIQUIDITY AND RESOURCES WELLSFORD/WHITEHALL BUY/SELL AGREEMENT The Amendments included a Buy/Sell Agreement of equity interests between the Company and Whitehall effective after December 31, 2003 with respect to the venture. The net book equity of Wellsford/Whitehall at December 31, 2002 was approximately $178,445,000. The Company has a 32.59% interest in Wellsford/Whitehall and the aggregate Whitehall interest is 59.96%. The terms of the Wellsford/Whitehall GECC Facility allow for a continuance of such debt as long as the Company or Whitehall has ultimate decision making authority over the management and operations of Wellsford/Whitehall. 33 SECOND HOLDING INVESTMENTS 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, bank deposits, leases on equipment, fuel/oil receivables, consumer receivables, pools of corporate bonds and loans and sovereign debt. It is Second Holding's intent to hold all securities to maturity. Many of these securities were obtained through private placements and current public market pricing is not available. There is a risk that these investments could be downgraded by a rating agency and that the underlying collateral could permanently decline in value and result in losses by Second Holding, which, in turn, would result in losses to the Company. The ability for Second Holding to continue to increase invested assets is dependent upon the availability of suitable investments which meet an investment criteria as established by the partners of Second Holding and the ability to obtain appropriate financing for such needs. The nature of Second Holding's business results in the entity being highly leveraged. The following table details the allocation of investments at December 31, 2002 and 2001 for Second Holding:
DECEMBER 31, -------------------------------------------------- 2002 2001 --------------------- ------------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- SECURITY FOR INVESTMENTS (A) - ---------------------------- Real estate ................. $ 587,358,000 33% $ 334,601,000 36% Corporate debt .............. 462,041,000 26% 135,686,000 15% Consumer/trade receivables .. 125,000,000 7% 33,500,000 3% Sovereign debt .............. 100,960,000 6% 73,000,000 8% Bank deposits ............... 105,000,000 6% 70,000,000 8% Aircraft loans and leases ... 80,000,000 4% 70,000,000 8% Fuel/oil receivables ........ 35,000,000 2% 35,000,000 3% Other asset-backed securities 290,399,000 16% 174,666,000 19% -------------- --- -------------- --- Total (B) ................... $1,785,758,000 100% $ 926,453,000 100% ============== === ============== === STANDARD & POOR'S RATINGS OF INVESTMENTS ---------------------- AAA ......................... $1,267,616,000 71% $ 759,241,000 82% AA+ ......................... 35,000,000 2% -- 0% AA .......................... 163,581,000 9% 42,750,000 5% AA- ......................... 164,223,000 9% 28,000,000 3% A+ .......................... 24,922,000 1% -- 0% A ........................... 97,092,000 6% 60,210,000 7% A- .......................... 33,324,000 2% 34,441,000 3% Other ....................... -- 0% 1,811,000 0% -------------- --- -------------- --- Total (B) ................... $1,785,758,000 100% $ 926,453,000 100% ============== === ============== === - ---------- (A) Investments may be secured by the assets or interests in such assets or their respective economic benefit. (B) Investments are variable rate based at a weighted average annual interest rate of 2.21% and 2.58% at December 31, 2002 and 2001, respectively.
Second Holding utilizes funds from the issuance of bonds, medium term notes and commercial paper to make investments. Second Holding had total debt, including $150,000,000 of junior subordinated bonds due in April 2010, of approximately $1,722,933,000 and $962,465,000 at December 31, 2002 and 2001 with a weighted average annual interest rate of 1.69% and 2.15%, respectively, after the effect of swaps on fixed rate debt to a floating rate. One of the partners of Second Holding has provided credit enhancement, through the issuance of an insurance policy by one of its affiliates, for the payment of principal and interest of the junior subordinated bonds through maturity in 2010. The parent company of this partner has announced that its subsidiary (the partner of Second Holding) will no longer write new credit enhancement business, while it will continue to 34 support its existing book of credit enhancement business. The Company does not believe that this decision will impact the business and operations of Second Holding. World Trade Center Debt Investment 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, 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 interests in towers 1 and 2 and in the office components of 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; such insurance is from a consortium of 22 insurers. The policies of three of the insurance companies have been found by the United States District Court, Southern District of New York, to define the events of September 11, 2001 as a single occurrence. The owner of the leasehold interests is appealing this decision. The remaining insurance companies and the owner of the leasehold interests are in litigation to determine whether the events of September 11, 2001 constitute a single occurrence or a double occurrence. A single occurrence entitles the beneficiary of the policies to a payment equal to the face amount of the insurance policies, while a double occurrence entitles the beneficiary to a payment equal to twice the face amount. As of December 31, 2002, the rating agencies have not changed their ratings on the WTC Certificates and all payments of principal and interest were current. The Company and Second Holding management believe that the insurance coverage, whether the courts determine that the destruction of the towers was a single or double occurrence, will be 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. SECOND HOLDING BUY/SELL AGREEMENT The terms of the operating agreement of Second Holding provide for a buy/sell agreement between the Company and one of the venture partners, which could be exercised after September 30, 2004 for a specified period of time. PALOMINO PARK In January 2003, the Company's board of directors approved a plan for the Company to seek institutional investors to purchase an interest in the residential rental phases at Palomino Park. There can be no assurance that the Company will be able to find suitable investors or that such a transaction will be completed. RESTRUCTURING CHARGE The Company recorded a non-recurring change of approximately $3,527,000 during the fourth quarter of 2001 related to the retirement of the Company's former President and Chief Executive Officer and other personnel changes. The Company made payments of approximately $2,767,000 during the year ended December 31, 2002, reducing the accrual balance from $3,466,000 at December 31, 2001 to approximately $699,000 at December 31, 2002; such remaining amount is payable during the first quarter of 2003. The Company utilized available cash for payments made in 2002 and will utilize available cash to make the 2003 payment. 35 CAPITAL COMMITMENTS At December 31, 2002, 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, 2002, capital commitments are as follows: COMMITMENT AMOUNT EXPIRATION ---------- ------ ---------- Wellsford/Whitehall (A)....... $ 4,000,000 December 31, 2003 Reis (B)...................... 420,000 December 31, 2003 - ---------- (A) Pursuant to the Agreement, the Company would provide for 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) In June 2002, the Company provided $210,000 to Reis, resulting in a remaining commitment of $420,000. This funding was the Company's share of an additional $667,000 capital subscription to Reis from the group of investors who also contributed capital in April 2000. The other investors have a remaining aggregate commitment of $913,000. TAX INDEMNITIES Wellsford/Whitehall has agreed to maintain certain tax indemnities, primarily through 2007, for a family group who are partners of the joint venture, relating to assets acquired from those partners in 1998. This indemnity was preserved during 2002 and 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. The Company will continue to make inquiries of Wellsford/Whitehall management as to their monitoring of asset sales and debt levels with respect to these tax indemnities. 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 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 including, but not limited to, a minimum shareholders' equity covenant as required by Commerzbank AG's letter of credit agreement for the Palomino Park Bonds. 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, 2002; none during the year ended December 31, 2002. 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. CREDIT FACILITY In the past, the Company had a $20,000,000 loan facility available for its corporate needs. In the future, the Company may seek to obtain a new facility based upon future liquidity requirements. RESOURCES PALOMINO PARK BONDS In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park. Initially, all five phases of Palomino Park were collateral for the Palomino Park Bonds. The Palomino Park Bonds have an outstanding balance of $12,680,000 at December 31, 2002 and 2001 and are 36 currently collateralized by four phases at Palomino Park, as Silver Mesa was released from the collateral in November 2000. In June 2000, the Company obtained a five-year AA rated letter of credit from Commerzbank AG to secure the Palomino Park Bonds. This letter of credit, which expires in 2005, replaced an expiring letter of credit. A subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such guarantee also expires in 2005. 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, 2002, the Company was in compliance with the covenants under the letter of credit agreement. SILVER MESA In December 2000, the Company obtained a $32,000,000 loan from KeyBank National Association which bears interest at LIBOR + 2.00% per annum (3.38% at December 31, 2002), is collateralized by the unsold Silver Mesa 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 $4,318,000 and $13,352,000 at December 31, 2002 and 2001, respectively. During the year ended December 31, 2002, the Company sold 48 Silver Mesa units and received net proceeds of approximately $761,000 after the repayment of principal on the Silver Mesa Conversion Loan of approximately $9,034,000 and selling costs. Net proceeds received by the Company from the above sales are available for working capital purposes. Proceeds will increase from the current amount of approximately 10% of net sales proceeds to 100% after the balance of the Silver Mesa Conversion Loan is repaid in full. The following table details operating information related to the Silver Mesa units being rented. As the Company continues to sell units, future rental revenues and corresponding operating expenses will diminish. FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 ---- ---- ---- Rental revenue........... $ 1,462,000 $ 2,224,000 $ 592,000 Net operating income (A). 884,000 1,488,000 379,000 - ---------- (A) Net operating income is defined as rental revenue, less property operating and maintenance expenses, real estate taxes and property management fees. GREEN RIVER 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. The construction loan balance was $37,111,000 and $36,747,000 at December 31, 2002 and 2001, respectively and bore interest at LIBOR + 1.75% per annum (3.17% at December 31, 2002). Principal payments of approximately $22,000 per month commenced October 1, 2002. On February 6, 2003, the Company obtained a $40,000,000 permanent loan secured by a first mortgage on Green River. The Green River mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per annum. Principal payments are based on a 30-year amortization schedule. Proceeds were used to repay the Green River Construction Loan and excess proceeds are generally available for working capital purposes. 37 CASH FLOWS - ---------- 2002 CASH FLOWS Cash flow provided by operating activities of $6,519,000 consists of (i) a net decrease in residential units available for sale of $7,763,000, (ii) depreciation and amortization of $5,512,000, (iii) amortization of deferred compensation of $1,243,000, (iv) distributions received in excess of joint venture income of $924,000; (v) shares issued for director compensation of $92,000, offset by (vi) a net loss of $3,372,000, (vii) a decrease in accrued expenses and other liabilities of $1,993,000, (viii) an increase in restricted cash and investments of $1,991,000, (ix) an increase in prepaid and other assets of $1,616,000, primarily a result of refundable income taxes and (x) minority interest benefit of $43,000. Cash flow provided by investing activities of $4,813,000 consists of repayments of notes receivable of $6,173,000, offset by additional investments in real estate assets of $1,150,000 and a capital contribution to Reis of $210,000. Cash flow used in financing activities of $8,837,000 consists of principal payments of mortgage notes payable of $9,929,000 (including $9,034,000 for the Silver Mesa Conversion Loan) and distributions of minority interests of $15,000, offset by proceeds received upon the exercise of options of $676,000 and interest funded by a construction loan of $431,000. 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. 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. 38 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. 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 consultant 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. In January 2002 the NHDES indicated concerns about surface water contamination, volatile organic chemical ("VOC") migration off of the property and air quality, and mandated further testing. Further test results and a "Scope of Work" plan for the required tests were submitted to the NHDES in February 2002. In June 2002, the NHDES renewed the Groundwater Monitoring Permit with certain stipulations and again expressed concerns related to indoor air quality, contaminant migration offsite and surface water contamination. It mandated further testing and the submission of a "Scope of Work" plan related thereto by August 1, 2002. The Company complied with the NHDES request and received approval in October 2002 to commence the additional testing which included testing on an adjacent property for VOC migration and air quality testing. These tests were conducted during the fourth quarter of 2002 and the results show no migration of the VOCs and, on a preliminary basis, no environmental problems with the indoor air quality. At this time, it is too early to conclude the form of remediation that will be required, if any, or the cost thereof, but in all likelihood, if remediation is required, it will be a more aggressive and costly one than natural attenuation. During 2002 and 2001, the Company incurred approximately $96,000 and $48,000, respectively, of costs principally for its environmental testing firm, with respect to this matter. TERRORISM INSURANCE - ------------------- In November 2002, Congress passed the Terrorism Risk Insurance Act of 2002, which was enacted to help companies obtain terrorism insurance at reasonable rates. As a result, the Company's primary and excess liability carriers have made such insurance available from November 26, 2002 until the current underlying policies expire at June 30, 2003. The Company was previously covered under its all risk property insurance policies for acts of terrorism on its consolidated real estate assets through June 30, 2002. Terrorism coverage was available to the Wellsford/Whitehall portfolio at December 31, 2002. The Company and Wellsford/Whitehall expect that similar coverage will be available in connection with an all risk policy and will need to make an assessment of the cost benefit of obtaining terrorism insurance in the future. The underwriting procedures utilized by the Company and Second Holding evaluate the impact of the lack of an appropriate amount of terrorism insurance, or inability to obtain terrorism insurance by property owners on single assets or small collateral pools for its debt investments. INFLATION/DECLINING PRICES - -------------------------- 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 39 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 during an inflationary period. Such short-term leases generally minimize the risk to the Company of the adverse effects of inflation. Conversely, in a period of declining economics, short-term leases pose an increasing risk to the Company of reduced rental revenue and decreased cash flow from lower rents in conjunction with concessions to new and renewal tenants. This is currently being experienced by the Company's Palomino Park operating properties. Assets in the Wellsford/Whitehall portfolio are currently subject to similar risks regarding declining economics which may result in reduced rental revenue and decreased cash flow from lower rents and greater concessions to new and renewal tenants. 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, rents and the amount of concessions at properties in the Wellsford Development and Wellsford Capital SBUs or negatively impact 2003 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. Rising insurance premium costs or availability of certain insurance coverages may negatively impact the operating results and cash flows of the Company's assets and SBUs. Energy costs may continue to increase as a result of the threat of war, also negatively impacting operating results and cash flows. The availability and cost of other natural resources, such as the lack of water supply caused by severe drought conditions in the Denver market, could negatively impact operating results and cash flows as well. 40 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; the risk of inflation in operating expenses, including, but not limited to energy, water and insurance; the availability of insurance coverages; adverse consequences of debt financing including, without limitation, the necessity of future financings to repay maturing debt obligations; inability to meet financial and valuation covenants contained in loan agreements; inability to repay financings; risks of investments in debt instruments, including possible payment defaults and reductions in the value of collateral; uncertainties pertaining to debt investments, including, but not limited 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 rating agencies; 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. 41 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 INCOM DECEMBER 31, RATE ON INCOME 2002 (EXPENSE) 2001 (EXPENSE) ---- --------- ---- --------- Consolidated assets and liabilities: Notes receivable: Variable rate .......................... $ -- $ -- $ 4,973 $ 50 Fixed rate ............................. 28,612 -- 29,812 -- --------- --------- --------- --------- $ 28,612 -- $ 34,785 50 ========= --------- ========= --------- Mortgage notes payable: Variable rate .......................... $ 54,109 (541) $ 62,780 (628) Fixed rate ............................. 58,124 -- 58,951 -- --------- --------- --------- --------- $ 112,233 (541) $ 121,731 (628) ========= --------- ========= --------- 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 ....................... $ 912,705 9,127 $ 486,174 4,862 Fixed rate .......................... -- -- -- -- --------- --------- --------- --------- $ 912,705 9,127 $ 486,174 4,862 ========= ========= Debt: Variable rate ....................... $ 871,100 (8,711) $ 487,335 (4,873) ========= --------- ========= --------- Net effect from Second Holding ............ 416 (11) --------- --------- Wellsford/Whitehall: Debt: Variable rate ....................... $ -- -- $ -- -- Variable rate, with LIBOR cap (A) ... 90,977 (910) 91,162 (912) Fixed rate .......................... 29,071 -- 29,424 -- --------- --------- --------- --------- $ 120,048 $ 120,586 ========= ========= Effect from Wellsford/Whitehall ........... (910) (912) --------- --------- Net decrease in annual income, before minority interest and income tax benefit ........... (1,035) (1,501) Minority interest ............................ 77 89 Income tax benefit ........................... 383 565 --------- --------- Net decrease in annual net income ............ $ (575) $ (847) ========= ========= Per share, basic and diluted ................. $ (0.09) $ (0.12) ========= ========= - ---------- (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 1.38% and 1.88% at December 31, 2002 and 2001, respectively.
42 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. 43 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...... 55 Chairman of the Board, Chief Executive Officer, President and Director*** James J. Burns.......... 63 Senior Vice President, Chief Financial Officer and Secretary Willliam H. Darrow II... 55 Vice President David M. Strong......... 44 Vice President for Development Mark P. Cantaluppi...... 32 Vice President, Chief Accounting Officer Martin Bernstein........ 65 Director* Douglas Crocker II...... 62 Director*** Rodney F. Du Bois....... 67 Director** Richard S. Frary........ 55 Director* Meyer S. Frucher........ 56 Director* Mark S. Germain......... 52 Director*** Edward Lowenthal........ 58 Director** - ---------- * Term expires 2003. ** Term expires 2004. *** Term expires 2005. 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 2003 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 2003 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 2003 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 2003 annual meeting of shareholders is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of its chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that the disclosure controls and procedures are 44 effective in timely alerting them to material information required to be included in the Company's periodic reports filed with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its last evaluation. ITEM 15. 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, 2002 and 2001. Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. 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 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. **** 45 EXHIBIT NO. DESCRIPTION!!! (CONTINUED) ----------- ----------- 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"). !!!!!! 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. *** 10.10 Common Stock and Preferred Stock Purchase Agreement by and between the Company and ERP Operating Limited Partnership dated as of May 30, 1997. **** 10.11 Registration Rights Agreement by and between the Company and ERP Operating Limited Partnership dated as of May 30, 1997. **** 46 EXHIBIT NO. DESCRIPTION!!! (CONTINUED) ----------- ----------- 10.12 Credit 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. ** 10.13 Assignment 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). ** 10.14 Assignment 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). ** 10.15 Stock 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). ** 10.16 Stock 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.). ** 10.17 Stock 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.). ** 10.18 Conditional Guaranty of Payment and Performance, dated as of April 25, 1997, by Stanley Stahl, relating to 277 Park Avenue. ** 10.19 Cash 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. ** 10.20 Recognition 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. ** 10.21 Intercreditor Agreement, dated as of April 25, 1997, between the Company and The First National Bank of Boston, as Agent, relating to 277 Park Avenue. ** 10.22 Assignment 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. **** 10.23 Revolving 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. **** 10.24 Agreement 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. **** 10.25 Assignment of Common Stock Agreements, dated as of May 30, 1997, between the Company and BankBoston, as agent. **** 10.26 Collateral 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. **** 47 EXHIBIT NO. DESCRIPTION!!! (CONTINUED) ----------- ----------- 10.27 Nomura 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. ++ 10.28 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. !!!! 10.29 Limited Liability Company Operating Agreement of Wellsford/Whitehall Group, L.L.C., dated as of May 28, 1999. +++ 10.30 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). !!!!!! 10.31 Program Agreement for Clairborne Investors Mortgage Program between Creamer Realty Consultants and The Prudential Investment Corporation, dated as of December 10, 1997. + 10.32 $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. + 10.33 Multifamily 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. + 10.34 1998 Management Incentive Plan of the Company. ++ 10.35 1997 Management Incentive Plan of the Company. ** 10.36 Rollover Stock Option Plan of the Company. ** 10.37 Amended and Restated Employment Agreement dated as of December 7, 2001 by and between Wellsford Real Properties, Inc. and Jeffrey H. Lynford. ^^^ 10.38 Employment Separation Agreement dated as of December 7, 2001 by and between Wellsford Real Properties, Inc. and Edward Lowenthal. ^^^ 10.39 Employment Agreement between the Company and David M. Strong. ^^^^^ 10.40 Employment Agreement between the Company and William H. Darrow II 10.41 Employment Agreement between the Company and James J. Burns. +++++ 10.42 Employment Agreement between the Company and Mark P. Cantaluppi. +++++ 10.43 Certificate of Trust of WRP Convertible Trust I, as filed with the Secretary of State of the State of Delaware on May 5, 2000. !!!!! 10.44 Declaration 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. !!!!! 10.45 Indenture 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. !!!!! 48 EXHIBIT NO. DESCRIPTION!!! (CONTINUED) ----------- ----------- 10.46 Preferred 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. !!!!! 10.47 Preferred Securities Guarantee, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and Wilmington Trust Company, as Trustee. !!!!!! 10.48 Common Securities Guarantee, dated as of May 5, 2000, by Wellsford Real Properties, Inc. !!!!! 10.49 Amendment to Registration Rights Agreement, dated as of May 5, 2000, by and between Wellsford Real Properties, Inc. and ERP Operating Limited Partnership. !!!!! 10.50 Articles Supplementary reclassifying and designating 350,000 shares of unissued Common Stock as Class A-1 Common Stock, dated as of May 5, 2000. !!!!! 10.51 Bond 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. # 10.52 Letter 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. # 10.53 Promissory Note, dated June 16, 2000, between Wellsford Real Properties, Inc. and Commerzbank AG. # 10.54 Letter 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. ## 10.55 Assignment 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. ## 10.56 Memorandum 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. ## 10.57 Operating Agreement of Silver Mesa at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of December 10, 1998. +++++ 10.58 First 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. +++++ 10.59 Loan Agreement dated as of December 20, 2000, between Silver Mesa at Palomino Park LLC and KeyBank National Association. ++++ 10.60 $32,000,000 Promissory Note dated as of December 20, 2000, payable to KeyBank National Association by Silver Mesa at Palomino Park LLC. ++++ 10.61 Guaranty dated December 20, 2000, by Wellsford Capital for the benefit of KeyBank National Association. ++++ 10.62 Sale-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. ++++ 49 EXHIBIT NO. DESCRIPTION!!! (CONTINUED) ----------- ----------- 10.63 Sale-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. ++++ 10.64 Sale-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. ### 10.65 Letter Agreement, dated as of June 7, 2001 between Wellsford Real Properties, Inc. and Mutual Beacon Fund, Mutual Qualified Fund and Mutual Beacon Fund (Canada). #### 10.66 Loan 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. ^ 10.661 First Amendment to Loan Agreement and Other Loan Documents, dated October 1, 2002, between Wellsford/Whitehall Holdings, L.L.C. and General Electric Capital Corporation. 10.67 Promissory Note, dated June 25, 2001, between General Electric Capital Corporation and Wellsford/Whitehall Holdings, L.L.C. ^ 10.68 Guaranty, dated as of June 25, 2001, made by WWG 401 North Washington LLC in favor of General Electric Capital Corporation. ^ 10.69 Hazardous 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. ^ 10.70 Indemnification 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. ^ 10.71 Indemnity Regarding Guaranty Obligations, dated as of June 25, 2001, between Wellsford/Whitehall Holdings, L.L.C. and WWG 401 North Washington LLC. ^ 10.72 October 2001 Amendment to the Letter of Credit Reimbursement Agreement, dated October 26, 2001 among PPPIC, Wellsford Real Properties, Inc. and Commerzbank AG. ^^ 10.73 Sale-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. +++++ 10.74 Indemnity 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. +++++ 10.75 Operating Agreement of Green River at Palomino Park LLC between Wellsford Park Highlands Corp. and Al Feld, dated as of January 5, 2000. +++++ 10.76 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. +++++ 10.77 $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. +++++ 50 EXHIBIT NO. DESCRIPTION!!! (CONTINUED) ----------- ----------- 10.78 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. +++++ 10.79 Operating Agreement of Park at Highlands L.L.C. between Wellsford Park Highlands Corp. and Al Feld, dated as of April 27, 1995. ^^^^ 10.80 First Amendment to Operating Agreement of Park at Highlands L.L.C. between Wellsford Park Highlands Corp. and Al Feld, dated as of December 29, 1995. ^^^^ 10.81 Second Amendment to Operating Agreement of Park at Highlands L.L.C. between Wellsford Park Highlands Corp. and Al Feld, dated as of December 31, 1997. ^^^^ 10.82 Wellsford Real Properties, Inc. Code of Business Conduct and Ethics for Directors, Senior Financial Officers, Other Officers and All Other Employees. 10.83 Deed of Trust, Security Agreement and Fixture Filing for Green River at Palomino Park LLC, as grantor to The Public Trustee of Douglas Count, as trustee for the benefit of AUSA Life Insurance Company, Inc. dated February 6, 2003. 10.84 $40,000,000 Secured Promissory Note, dated February 6, 2003, payable to the order of AUSA Life Insurance Company, Inc. by Green River at Palomino Park LLC. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of KPMG LLP. 99.1 Chief Executive Officer and Chief Financial Officer Certificates pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------- * 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-K filed on March 22, 2002. # 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. ^^^^ Previously filed as an exhibit to the Form 10-Q filed on May 10, 2002. ^^^^^ Previously filed as an exhibit to the Form 10-Q filed on August 12, 2002. 51 (b) During the last quarter of the period covered by this report, the Company filed the following reports on Form 8-K: None. (c) The following exhibits are filed as exhibits to this Form 10-K: See Item 15 (a) (3) above. (d) The following documents are filed as a part of this report: None. 52 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 and Secretary By: /s/ Mark P. Cantaluppi ------------------------------------------------- Mark P. Cantaluppi Vice President, Chief Accounting Officer Dated: March 17, 2003 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, Chief Executive Officer, March 17, 2003 - ---------------------- President and Director Jeffrey H. Lynford /s/ Martin Bernstein Director March 17, 2003 - ---------------------- Martin Bernstein /s/ Douglas Crocker II Director March 17, 2003 - ---------------------- Douglas Crocker II Director March 17, 2003 - ---------------------- Rodney F. Du Bois /s/ Richard S. Frary Director March 17, 2003 - ---------------------- Richard S. Frary /s/ Meyer S. Frucher Director March 17, 2003 - ---------------------- Meyer S. Frucher /s/ Mark S. Germain Director March 17, 2003 - ---------------------- Mark S. Germain /s/ Edward Lowenthal Director March 17, 2003 - ---------------------- Edward Lowenthal
53 CERTIFICATION I, Jeffrey H. Lynford, certify that: 1. I have reviewed this annual report on Form 10-K of Wellsford Real Properties, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 17, 2003 /s/ Jeffrey H. Lynford ---------------------- Jeffrey H. Lynford Chief Executive Officer 54 CERTIFICATION I, James J. Burns, certify that: 1. I have reviewed this annual report on Form 10-K of Wellsford Real Properties, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 17, 2003 /s/ James J. Burns ---------------------- James J. Burns Chief Financial Officer 55 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, 2002: SUBSIDIARY STATE - ----------------------------------------------- -------- Wellsford Real Properties, Inc................. Maryland Wellsford Capital.............................. Maryland Wellsford Capital Properties, L.L.C............ Delaware 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 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 Association................ Colorado Palomino Park Public Improvements Corp.......... Colorado Silver Mesa Homeowners Association.............. Colorado Wellsford Commercial Properties Trust........... Maryland Wellsford/Whitehall Group, L.L.C............... Delaware Wellsford Ventures, Inc........................ Maryland WRP Convertible Trust I........................ Delaware 56 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 17, 2003, with respect to the consolidated financial statements and schedule of Wellsford Real Properties, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ ERNST & YOUNG LLP New York, New York March 25, 2003 57 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, 2003, with respect to the consolidated balance sheets of Second Holding Company, LLC and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, members' equity and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of Wellsford Real Properties, Inc. /s/ KPMG LLP Chicago, Illinois March 20, 2003 58 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Wellsford Real Properties, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Jeffrey H. Lynford, Chief Executive Officer of the Company and James J. Burns, Chief Financial Officer of the Company, certify, to the best of our knowledge, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jeffrey H. Lynford ------------------------------- Jeffrey H. Lynford Chief Executive Officer Wellsford Real Properties, Inc. /s/ James J. Burns ------------------------------- James J. Burns Chief Financial Officer Wellsford Real Properties, Inc. March 26, 2003 A signed original of this written statement required by Section 906 has been provided to Wellsford Real Properties, Inc. and will be retained by Wellsford Real Properties, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 59 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, 2002 and 2001..........F-4 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000.........F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000.........F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.........F-7 Notes to Consolidated Financial Statements............................F-9 Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes. ...............F-51 FINANCIAL STATEMENT SCHEDULES III - Real Estate and Accumulated Depreciation........................S-1 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, 2002 and 2001, 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, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 $28,228,810 and $27,862,508 as of December 31, 2002 and 2001, respectively, and equity in earnings (loss) of $723,430, $(162,933) and $1,431,835, respectively, for the three years in the period ended December 31, 2002. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP New York, New York March 17, 2003 F-2 INDEPENDENT AUDITORS' REPORT The Board of Managers Second Holding Company, LLC: We have audited the consolidated balance sheets of Second Holding Company, LLC and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, members' equity and cash flows for each of the years in the three-year period ended December 31, 2002 (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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois February 21, 2003 F-3 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 2002 2001 ---- ---- ASSETS Real estate assets, at cost: Land ............................................................. $ 20,437,840 $ 23,113,670 Buildings and improvements ....................................... 125,184,726 139,223,965 ------------- ------------- 145,622,566 162,337,635 Less: Accumulated depreciation ...................................... (13,530,908) (9,873,232) Impairment reserve ............................................ (2,174,853) (2,174,853) ------------- ------------- 129,916,805 150,289,550 Residential units available for sale ............................. 14,541,634 5,400,951 Construction in progress ......................................... 5,410,831 5,399,631 ------------- ------------- 149,869,270 161,090,132 Notes receivable .................................................... 28,612,000 34,784,727 Investment in joint ventures ........................................ 94,180,991 95,806,509 ------------- ------------- Total real estate and investments ................................... 272,662,261 291,681,368 Cash and cash equivalents ........................................... 38,644,315 36,148,529 Restricted cash and investments ..................................... 9,543,934 7,553,159 Prepaid and other assets ............................................ 11,924,533 10,455,101 ------------- ------------- Total assets ........................................................ $ 332,775,043 $ 345,838,157 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable ........................................... $ 112,232,830 $ 121,730,604 Accrued expenses and other liabilities, including the liability for deferred compensation of $8,933,607 and $6,604,106 ........ 15,536,789 17,532,211 ------------- ------------- Total liabilities ................................................... 127,769,619 139,262,815 ------------- ------------- 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 ................................................... 3,438,127 3,496,640 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 - 6,280,683 and 6,235,338 shares issued and outstanding .... 125,614 124,707 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 ........................... 162,801,498 162,083,959 Retained earnings ................................................ 20,617,085 23,989,504 Accumulated other comprehensive income (loss); share of unrealized loss on interest rate protection contract purchased by joint venture investment, net of income tax benefit ................. (253,500) (102,736) Deferred compensation ............................................ (277,664) (1,520,996) Treasury stock, 311,624 and 317,997 shares ....................... (6,449,134) (6,499,134) ------------- ------------- Total shareholders' equity .......................................... 176,567,297 178,078,702 ------------- ------------- Total liabilities and shareholders' equity .......................... $ 332,775,043 $ 345,838,157 ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-4 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 2002 2001 2000 ---- ---- ---- REVENUES Rental revenue .......................................... $ 16,311,929 $ 13,768,411 $ 18,681,250 Revenue from sales of residential units ................. 10,635,188 21,932,050 -- Interest revenue ........................................ 4,096,374 5,175,162 6,256,739 Fee revenue ............................................. 674,975 617,376 685,800 ------------ ------------ ------------ Total revenues ....................................... 31,718,466 41,492,999 25,623,789 ------------ ------------ ------------ COSTS AND EXPENSES Cost of sales of residential units ...................... 9,543,905 19,363,647 -- Property operating and maintenance ...................... 5,453,647 3,791,740 4,351,150 Real estate taxes ....................................... 1,486,365 1,051,060 1,609,649 Depreciation and amortization ........................... 5,474,665 5,307,394 4,967,821 Property management ..................................... 469,133 557,255 798,761 Interest ................................................ 5,850,719 4,355,864 7,076,122 General and administrative .............................. 6,567,166 8,466,948 7,377,168 Restructuring charge .................................... -- 3,526,772 -- ------------ ------------ ------------ Total costs and expenses ............................. 34,845,600 46,420,680 26,180,671 Gain on sale of assets, net of impairment provision of $4,725,000 in 2000 ...................................... -- -- 6,134,851 (Loss) income from joint ventures .......................... (208,751) 4,564,406 3,246,758 ------------ ------------ ------------ (Loss) income before minority interest, income taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities .................. (3,335,885) (363,275) 8,824,727 Minority interest benefit (expense) ........................ 43,281 (282,526) (66,221) ------------ ------------ ------------ (Loss) income before income taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities .................................... (3,292,604) (645,801) 8,758,506 Income tax (benefit) expense ............................... (1,300,000) 699,000 1,430,000 ------------ ------------ ------------ (Loss) income before accrued distributions and amortization of costs on Convertible Trust Preferred Securities .................................... (1,992,604) (1,344,801) 7,328,506 Accrued distributions and amortization of costs on Convertible Trust Preferred Securities, net of income tax benefit of $720,000, $720,000 and $510,000 ... 1,379,815 1,379,815 860,461 ------------ ------------ ------------ Net (loss) income .......................................... $ (3,372,419) $ (2,724,616) $ 6,468,045 ============ ============ ============ Net (loss) income per common share, basic .................. $ (0.52) $ (0.38) $ 0.76 ============ ============ ============ Net (loss) income per common share, diluted ................ $ (0.52) $ (0.38) $ 0.76 ============ ============ ============ Weighted average number of common shares outstanding, basic ................................................... 6,436,755 7,213,029 8,507,631 ============ ============ ============ Weighted average number of common shares outstanding, diluted ................................................. 6,436,755 7,213,029 8,516,321 ============ ============ ============
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, 2002, 2001 AND 2000
COMMON SHARES* ------------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL** EARNINGS ------ ------ --------- -------- BALANCE, JANUARY 1, 2000 ............ 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 . -- -- -- -- Net (loss) .......................... -- -- -- (2,724,616) --------- ------------- ------------- ------------- BALANCE, DECEMBER 31, 2001 .......... 6,405,241 128,105 155,584,825 23,989,504 Director and employee share grants .. 4,760 95 91,905 -- Stock option exercises .............. 40,585 812 675,634 -- Amortization of deferred compensation ..................... -- -- -- -- Share of unrealized loss on interest rate protection contract purchased by joint venture investment, net of income tax benefit of $100,509 -- -- -- -- Net (loss) .......................... -- -- -- (3,372,419) --------- ------------- ------------- ------------- BALANCE, DECEMBER 31, 2002 .......... 6,450,586 $ 129,012 $ 156,352,364 $ 20,617,085 ========= ============= ============= ============= ACCUMULATED OTHER TOTAL COMPREHENSIVE DEFERRED SHAREHOLDERS' COMPREHENSIVE INCOME (LOSS) COMPENSATION EQUITY INCOME (LOSS) ------------- ------------ ------ ------------- BALANCE, JANUARY 1, 2000 ............ $ -- $ (1,861,677) $ 229,691,213 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) (102,736) Net (loss) .......................... -- -- (2,724,616) (2,724,616) ------------- -------- ------------- ------------- BALANCE, DECEMBER 31, 2001 .......... (102,736) (1,520,996) 178,078,702 $ (2,827,352) ============= Director and employee share grants .. -- -- 92,000 $ -- Stock option exercises .............. -- -- 676,446 -- Amortization of deferred compensation ..................... -- 1,243,332 1,243,332 -- Share of unrealized loss on interest rate protection contract purchased by joint venture investment, net of income tax benefit of $100,509 (150,764) -- (150,764) (150,764) Net (loss) .......................... -- -- (3,372,419) (3,372,419) ------------- --------- ------------- ------------- BALANCE, DECEMBER 31, 2002 .......... $ (253,500) $ (277,664) $ 176,567,297 $ (3,523,183) ============= ========== ============= ============= - ---------- * 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, ------------------------------------------ 2002 2001 2000 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ......................................... $ (3,372,419) $ (2,724,616) $ 6,468,045 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................... 5,511,980 5,126,018 4,979,927 Amortization of deferred compensation ............... 1,243,332 1,578,009 906,672 Non-cash charges in restructuring charge ............ -- 61,081 -- Distributions received in excess of joint venture income ........................................... 923,875 163,695 1,493,056 Minority interest (in excess of) less than amounts distributed ...................................... (43,281) 282,526 66,221 Shares issued for director compensation ............. 92,000 80,000 80,000 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 .................. (1,990,775) 2,368,347 506,338 Residential units available for sale ............. 7,763,125 16,448,630 -- Prepaid and other assets ......................... (1,616,072) 855,258 (1,003,471) Accrued expenses and other liabilities ........... (1,992,351) 2,362,890 2,661,548 ------------ ------------ ------------ Net cash provided by operating activities ........... 6,519,414 26,601,838 10,023,485 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investments in real estate assets ......................... (1,149,995) (40,046,696) (39,026,039) Investments in joint ventures: Capital contributions ................................ (209,800) (8,565,877) (12,895,201) Returns of capital ................................... -- 31,616,900 2,886,017 Investments in notes receivable ........................... -- (500,000) (28,833,000) Repayments of notes receivable ............................ 6,172,727 3,589,255 32,408,296 Proceeds from sale of joint venture investment ............ -- -- 1,032,000 Proceeds from sale of real estate assets .................. -- 18,553,458 21,650,257 ------------ ------------ ------------ Net cash provided by (used in) investing activities .. 4,812,932 4,647,040 (22,777,670) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Convertible Trust Preferred Securities ........ -- -- 25,000,000 Deferred financing costs .................................. -- -- (544,360) Borrowings from credit facility ........................... -- 12,000,000 12,000,000 Repayment of credit facility .............................. -- (24,000,000) -- Borrowings from mortgage notes payable .................... -- 36,747,451 32,000,000 Interest funded by construction loan ...................... 431,120 -- -- Interest reserve from mortgage note proceeds .............. -- -- (1,960,752) Repayment of mortgage notes payable ....................... (9,928,894) (19,420,817) (30,939,713) Proceeds from option exercises ............................ 676,446 -- -- Distributions to minority interest ........................ (15,232) (16,385) (8,569) Costs incurred for reverse stock split .................... -- -- (44,364) Costs to repurchase warrants .............................. -- (80,000) -- Registration costs ........................................ -- (123,112) -- Repurchase of common shares ............................... -- (36,576,192) (21,119,217) ------------ ------------ ------------ Net cash (used in) provided by financing activities ....................................... (8,836,560) (31,469,055) 14,383,025 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ......... 2,495,786 (220,177) 1,628,840 Cash and cash equivalents, beginning of year ................. 36,148,529 36,368,706 34,739,866 ------------ ------------ ------------ Cash and cash equivalents, end of year ....................... $ 38,644,315 $ 36,148,529 $ 36,368,706 ============ ============ ============ F-7 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 2002 2001 2000 ---- ---- ---- SUPPLEMENTAL INFORMATION: Cash paid during the year for interest, including amounts capitalized of $1,610,359 and $2,347,000 in 2001 and 2000, respectively ........... $ 5,763,774 $ 5,849,094 $ 9,044,373 ============ ============ ============ Cash paid during the year for income taxes, net of (tax refunds) .................................... $ 107 $ 1,154,461 $ (107,095) ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: 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 ........ $ 150,764 $ 102,736 ============ ============ Release of shares held in deferred compensation plan ...... $ 50,000 ============ Net reclassification of 96 Silver Mesa units from land, building and improvements and accumulated depreciation to residential units available for sale $ 16,903,808 ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION. The accompanying consolidated financial statements include the accounts of the Company 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 the Company 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. F-9 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, OTHER INVESTMENTS, DEPRECIATION, AMORTIZATION AND IMPAIRMENT. Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Costs incurred for significant repairs and maintenance that extend the usable life of the asset or have a determinable useful life are capitalized. Ordinary repairs and maintenance are expensed as incurred. The Company expenses all lease turnover costs for its residential units, such as painting, cleaning, carpet replacement and other turnover costs, as such costs are 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 investment. Additional amortization is charged as specified assets are sold in cases where the joint venture would cease to exist when all assets are sold or otherwise disposed of or where impairment provisions are recorded at the joint venture. 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 two to twelve years for furnishings and equipment. Depreciation and amortization expense was approximately $5,475,000, $5,307,000 and $4,968,000 in 2002, 2001 and 2000, respectively, and included approximately $758,000, $1,950,000 and $664,000 of amortization in 2002, 2001 and 2000, respectively, of certain costs capitalized to the Company's Investment in Joint Ventures. The Company reviews its real estate assets, investments in joint ventures and other investments 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 in the Wellsford Capital SBU 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 for aggregate sales of approximately $34,217,000. 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. The net book value after a remaining impairment reserve of $2,175,000 for the two unsold properties was approximately $6,027,000 and $5,560,000 at December 31, 2002 and 2001, respectively. The Company determined that no additional impairment provision is required at December 31, 2002 and 2001. F-10 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. In August 2001, Statement of Financial Accounting Standard ("SFAS") No. 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF 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 adoption of SFAS No. 144 by the Company on January 1, 2002, did not have a material effect on its results of operations or financial position. Adoption of the standard requires a change in display of operating results as the operations of properties which are classified as held for sale or are sold subsequent to January 1, 2002 will be included as discontinued operations. Even though the Company is pursuing a sale of the remaining two operating properties in the Wellsford Capital SBU (five of the seven properties have been sold during 2000 and 2001), the Company could not definitively determine that the assets would likely be sold within the one year time frame as required by SFAS No. 144. The operations of these two properties have not been classified as discontinued operations but treated as held for use and accordingly the Company recorded depreciation expense for the years ended December 31, 2002 and 2000. No depreciation was recorded in 2001 for these two properties. 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. Sales price concessions are recognized as a reduction in sales revenues as individual sales are completed. Advertising costs are expensed as incurred. 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, 2002, 2001 and 2000. REVENUE RECOGNITION. Commercial properties are leased under operating leases. Rental revenue from office and industrial properties 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 fourteen months and such rental revenue is recognized monthly as tenants are billed. Interest revenue 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-11 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHARE BASED COMPENSATION. SFAS No. 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") No. 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 No. 25, there has been no impact on the Company's consolidated financial statements resulting from SFAS No. 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 No. 109 "ACCOUNTING FOR INCOME TAXES." Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax basis 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. 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). 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. F-12 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table details the computation of earnings per share, basic and diluted:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 2002 2001 2000 ---- ---- ---- Numerator for net (loss) income per common share, basic and diluted ................................................ $(3,372,419) $(2,724,616) $ 6,468,045 =========== =========== =========== Denominator: Denominator for net income per common share, basic-- Weighted average common shares .................... 6,436,755 7,213,029 8,507,631 Effect of dilutive securities: Employee stock options ............................ -- -- 8,690 Convertible Trust Preferred Securities ............ -- -- -- Warrants .......................................... -- -- -- ----------- ----------- ----------- Denominator for net income per common share, diluted-- Weighted average common shares .................... 6,436,755 7,213,029 8,516,321 =========== =========== =========== Net (loss) income per common share, basic ................. $ (0.52) $ (0.38) $ 0.76 =========== =========== =========== Net (loss) income per common share, diluted ............... $ (0.52) $ (0.38) $ 0.76 =========== =========== ===========
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 materially from those estimates. RECENTLY ISSUED PRONOUNCEMENTS NOT YET ADOPTED. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" ("FIN 46"). The provisions of FIN 46 are effective immediately for variable interest entities formed or acquired after January 31, 2002 and in the fiscal year beginning after June 15, 2003 for variable interest entities in which the Company holds such an interest before February 1, 2003. The Company does not anticipate that the adoption of FIN 46 will result in a change in its accounting for its interests in currently existing variable interest entities. In December 2002, SFAS No. 148 "ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE," was issued as an amendment to SFAS No. 123. The provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has not yet determined which alternative method of transition will be used to account for stock-based compensation on a fair value basis in the future. 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 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-13 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, 2002 and 2001, deferred compensation arrangement deposits amounted to approximately $8,934,000 and $6,604,000, respectively, and reserve balances amounted to approximately $610,000 and $949,000, 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, 2002 and 2001, 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 2002 2001 - -------------------- ------------- ---------- ------------- ----- ---- ---- 277 Park Loan ...... 12.00% 12.00% May 2007 Interest only $25,000,000 $25,000,000 Patriot Loan ....... LIBOR + 4.75% --% (C) (C) -- 4,972,727 Guggenheim ......... 8.25% 8.25% December 2005 (D) 3,612,000 3,612,000 Other .............. Various --% Various Various (E) -- 1,200,000 ----------- ----------- $28,612,000 $34,784,727 =========== =========== - ---------- (A) For additional information regarding notes receivable, see Footnote 12, "Segment Information, Debt and Equity Investments." (B) At December 31, 2002 based upon then in effect fixed rates and LIBOR contracts. (C) The Patriot Loan was repaid in full in May 2002. 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"). On January 2, 2003, the Company received a principal payment of $516,000 relating to 2002. (E) In January 2002, the $1,200,000 balance was repaid in full.
5. DEBT At December 31, 2002 and 2001, the Company's debt consisted of the following:
BALANCE AT DECEMBER 31, INITIAL STATED INTEREST ----------------------- DEBT/PROJECT MATURITY DATE RATE 2002 2001 ------------ ------------- ---- ---- ---- Mortgage notes payable: Palomino Park Bonds (A) .......... May 2005 Variable (B) $ 12,680,000 $ 12,680,000 Blue Ridge Mortgage .............. December 2007 6.92% (C) 32,447,478 32,916,492 Red Canyon Mortgage .............. December 2008 6.68% (C) 25,676,576 26,034,695 Silver Mesa Conversion Loan ...... December 2003 LIBOR + 2.00% (D) 4,317,501 13,351,966 Green River Construction Loan .... January 2003 LIBOR + 1.75% (E) 37,111,275 36,747,451 ------------ ------------ Total mortgage notes payable ........ $112,232,830 $121,730,604 ============ ============ Carrying amount of real estate assets collateralizing mortgage notes payable .......................... $143,842,011 $155,530,004 ============ ============ - ---------- (A) Tax-exempt bonds are secured by liens on four of the five phases of Palomino Park. (B) Rate approximates the Standard & Poor's / J.J. Kenney index for short-term high grade tax-exempt bonds (average annual rates were approximately 1.68% and 2.72% for 2002 and 2001, respectively). (C) Principal payments are made based on a 30-year amortization schedule. (D) Effective interest rates were approximately 3.38% and 4.14% at December 31, 2002 and 2001, respectively. Principal payments are based on approximately 90% of net sales proceeds from condominium sales. The Silver Mesa Converstion Loan is extendable for six months for a 0.25% extension fee. (E) Effective interest rates were approximately 3.17% and 3.76% at December 31, 2002 and 2001, respectively. The Green River Construction Loan was repaid on February 6, 2003.
F-14 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEBT (CONTINUED) On February 6, 2003, the Company obtained a $40,000,000 permanent loan secured by a first mortgage on Green River (the "Green River Mortgage"). The Green River Mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per annum. Principal payments are based on a 30-year amortization schedule. Proceeds were used to repay the Green River Construction Loan and excess proceeds are generally available for working capital purposes. 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"). Initially, all five phases of Palomino Park were collateral for the Palomino Park Bonds. In June 2000, the Company obtained a five-year AA 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, which expires in 2005, provides for the Company to meet certain financial operating and balance sheet covenants, which were met at December 31, 2002. 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. A subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such guarantee also expires in 2005. The Company incurred aggregate fees of $231,000, $230,000 and $395,000 for the years ended December 31, 2002, 2001 and 2000, 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 and this phase was released from the collateral. The Company had a $20,000,000 loan facility from a predecessor of Fleet National Bank which was secured by a $25,000,000 note receivable, bore interest at LIBOR + 2.75% per annum and expired in January 2002 (the "Wellsford Finance Facility"). Interest expense, including unused facility fees was approximately $7,000, $300,000 and $93,000 for the years ended December 31, 2002, 2001 and 2000, respectively. There was no outstanding balance on the Wellsford Finance Facility at December 31, 2001. In the future, the Company may seek to obtain a new facility based upon future liquidity requirements. F-15 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEBT (CONTINUED) The Company's long-term mandatory maturities of debt for the next five years and thereafter are as follows:
SILVER MESA PALOMINO FOR THE YEARS ENDED CONVERSION PARK DECEMBER 31, MORTGAGES (A) LOAN (B) BONDS TOTAL ------------ ------------- -------- ----- ----- 2003................... $ 1,260,000 $4,318,000 $ -- $ 5,578,000 2004................... 1,476,000 -- -- 1,476,000 2005................... 1,578,000 -- 12,680,000 14,258,000 2006................... 1,681,000 -- -- 1,681,000 2007................... 31,341,000 -- -- 31,341,000 Thereafter............. 60,788,000 -- -- 60,788,000 - ---------- (A) On February 6, 2003, the Company repaid the Green River Construction Loan with proceeds from the Green River Mortgage. Amortization requirements of the Green River Mortgage is included for each period presented in the amounts shown in the table. (B) Approximately 90% of net sales proceeds per unit goes toward principal repayments. The Silver Mesa Conversion Loan is extendable for six months though June 2004.
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 and 2000 was approximately $1,610,000 and $2,347,000, respectively. No interest was capitalized during the year ended December 31, 2002. 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, 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. 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. F-16 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES The components of the income tax (benefit) provision are as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2002 2001 2000 ---- ---- ---- Current federal tax (A) .... $ (375,000) $ (633,000) $ 3,005,000 Current state and local tax 300,000 (171,000) 905,000 Deferred federal tax ....... (850,000) 1,353,000 (1,820,000) Deferred state and local tax (375,000) 150,000 (660,000) ----------- ----------- ----------- $(1,300,000) $ 699,000 $ 1,430,000 =========== =========== ===========
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, ------------------------------------------------------------------------------------- 2002 2001 2000 ---------------------- ---------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Tax (benefit) at U.S. statutory rate (A) .......................... $(1,152,000) (35.00%) $ (226,000) (35.00%) $ 3,065,000 35.00% State taxes, net of federal benefit .. 195,000 5.93% 150,000 23.23% 335,000 3.82% State and local tax operating loss carryforwards, net of federal taxes ............................. -- -- (171,000) (26.47%) (175,000) (1.99%) Change in valuation allowance, net ... (313,000) (9.51%) 806,000 124.81% (1,742,000) (19.89%) Non-deductible/non-taxable items, net ............................... (63,000) (1.90%) 131,000 20.28% 35,000 0.39% Effect of difference in tax rate ..... 33,000 1.00% 9,000 1.39% (88,000) (1.00%) ----------- ------ ----------- ------ ----------- ----- $(1,300,000) (39.48%) $ 699,000 108.24% $ 1,430,000 16.33% =========== ====== =========== ====== =========== ===== - ---------- (A) The aforementioned income tax expense (benefit) for 2002, 2001 and 2000 is prior to the tax benefit aggregating $720,000, $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 $61,856,000 at December 31, 2002, 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 may be carried forward to subsequent years. Approximately $15,700,000 could be utilized in 2003 to offset Federal taxable income. F-17 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, ----------------------- 2002 2001 ---- ---- DEFERRED TAX ASSETS ------------------- Net operating loss ............................... $ 21,031,195 $ 22,000,950 Deferred compensation and severance arrangements . 5,329,393 5,176,437 Wellsford/Whitehall asset basis differences ...... 1,044,469 -- Value Property Trust asset basis differences ..... 1,279,590 1,235,355 AMT credit carryforwards ......................... 547,564 -- Other ............................................ 421,374 437,121 ------------ ------------ 29,653,585 28,849,863 Valuation allowance .............................. (18,996,470) (18,764,516) ------------ ------------ Total deferred tax assets ........................ 10,657,115 10,085,347 ------------ ------------ DEFERRED TAX LIABILITIES ------------------------ Palomino Park asset basis differences ............ (3,019,961) (2,402,269) Wellsford/Whitehall asset basis differences ...... -- (1,525,303) Deferred gain on sale of Liberty Hampshire ....... (1,303,194) (1,040,342) Other ............................................ (25,543) (36,211) ------------ ------------ Total deferred tax liabilities ................... (4,348,698) (5,004,125) ------------ ------------ Net deferred tax asset ........................... $ 6,308,417 $ 5,081,222 ============ ============
SFAS No. 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 $18,996,470 and $18,764,516 valuation allowance at December 31, 2002 and 2001, respectively, is necessary. The valuation allowance relates to the NOL carryforwards, certain deferred compensation and severance arrangements and alternative minimum tax credit carryforwards. The Company's net deferred tax asset is included in prepaid and other assets in the accompanying consolidated balance sheets. F-18 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, 2002, 2001 and 2000:
(amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 ---- ---- ---- Revenues Wellsford/Whitehall: Interest revenue ........................ $ -- $ -- $ 703 Management fee revenue .................. -- -- 600 WP Commercial: Asset acquisition fee revenue ........... 22 23 86 Asset disposition fee revenue ........... 7 365 -- Second Holding fees, net of fees paid to Reis of $120, $180 and $180, respectively 646 217 (182) ------- ------- ------- $ 675 $ 605 $ 1,207 ======= ======= ======= Costs (A) Whitehall affiliates: Management fees for VLP properties (B) .. $ 20 $ 142 $ 242 EQR: Credit enhancement ...................... 81 81 92 ------- ------- ------- $ 101 $ 223 $ 334 ======= ======= ======= - ---------- (A) 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. (B) This arrangement was terminated during the second quarter of 2002.
The Company has an approximate 51.1% non-controlling interest in a joint venture special purpose finance company, Second Holding Company, LLC, 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"). An affiliate of a significant shareholder of the Company (the Caroline Hunt Trust Estate, which owns 405,500 shares of common stock of the Company at December 31, 2002 ("Hunt Trust")) who, together with other entities, own an approximate 39% interest in Second Holding. 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, 2002 and 2001, the Company's aggregate investment in Reis, which is accounted for under the cost method, was approximately $6,792,000 and $6,583,000, respectively, or approximately 21.4% of Reis' equity on an as converted basis. The president and primary common shareholder of Reis is the brother of Mr. Lynford, the Chairman, President and Chief Executive Officer of the Company. Mr. Lowenthal, the Company's former President and Chief Executive Officer, who currently serves on the Company's Board of Directors, has served on the board of directors of Reis since the third quarter of 2000. Messrs. Lynford, Lowenthal and certain directors of the Company whom have invested directly in Reis, have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis. A portion of the Reis 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 Hunt Trust who, together with other entities, own an approximate 39% interest in Reis Capital. F-19 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TRANSACTIONS WITH AFFILIATES (CONTINUED) Messrs. Lynford and Lowenthal have been members of the EQR board of directors from the date of the Merger through their expected retirements from the EQR board in May 2003. In addition, the former president and current vice-chairman of EQR is a member of the Company's Board of Directors. EQR has a 14.15% interest in the Company's residential project in Denver, Colorado at December 31, 2002 and 2001, respectively and provides credit enhancement for the Palomino Park Bonds. A subsidiary of EQR is the holder of the Convertible Trust Preferred Securities and the class A-1 common stock of the Company. See Note 12 for additional related party information. 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 including, but not limited to, a minimum shareholder's equity covenant as required by Commerzbank AG's letter of credit agreement. No minimum number or value of shares to be repurchased has been fixed. F-20 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAREHOLDERS' EQUITY (CONTINUED) The following table summarizes the stock repurchase activity by the Company and approvals thereof by the Company's Board of Directors during the years ended December 31, 2001, 2000 and 1999; there was no activity during 2002:
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.
The Company has issued shares to executive officers and other employees through periodic 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, 2002, an aggregate of 311,624 shares (which had an aggregate market value of approximately $4,911,000 based on the Company's December 31, 2002 closing stock price of $15.76 per share), 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, 2002 follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 2002 2001 2000 --------------------- ----------------------- ---------------------- 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 ................. 317,997 257,935 208,380 Shares issued as deferred compensation awards ....... -- 71,087 $19.08 53,305 $ 15.69 Shares released under terms of agreements ................ (6,373) $ 15.69 (11,025) $20.00/$15.69 (3,750) $ 20.00 ------- ------- ------- Balance at December 31 ........ 311,624 317,997 257,935 ======= ======= ======= Shares vested at December 31 .. 270,226 231,297 155,084 ======= ======= =======
F-21 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAREHOLDERS' EQUITY (CONTINUED) All remaining shares will vest during the year ended December 31, 2003. During the years ended December 31, 2002, 2001 and 2000, the Company recorded costs approximating $1,243,000, $1,578,000 and $907,000, 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 4,760 and 4,560 common shares during 2002 and 2001, 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 $92,000 and $80,000 during 2002 and 2001, respectively. 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 $2,192,000 of undistributed retained earnings at December 31, 2002 from Second Holding as distributions are limited to 48.25% of earnings. The Company did not declare or distribute any dividends during 2002, 2001 or 2000. 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 immediate vesting to up to five years, and generally contain the right to receive reload options under certain conditions. F-22 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHARE OPTION PLANS (CONTINUED) The following table presents the changes in options outstanding by year, as well as other plan data:
2002 2001 2000 ------------------------- ------------------------- --------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- ----- ------- ----- ------- ----- Outstanding at January 1 ............. 1,140,624 $ 21.52 1,761,655 $ 24.20 1,794,680 $ 24.16 Granted .............................. 15,000 15.80 12,500 19.25 19,250 16.15 Exercised ............................ (40,585) (16.67) -- -- -- -- Forfeited/cancelled (A) .............. (342,853) (25.06) (633,531) (28.92) (52,275) (21.00) Expired .............................. -- -- -- -- -- -- ---------- ---------- ---------- Outstanding at December 31 ........... 772,186 20.09 1,140,624 21.52 1,761,655 24.20 ========== ========== ========== Options exercisable at December 31 .. 739,236 $ 20.21 922,261 $ 21.48 1,234,096 $ 23.51 ========== ========= ========== ========= ========== ========= Weighted average fair value of options granted (per option) ............ $ 7.92 $ 10.72 $ 9.57 ========== ========== ========== Weighted average remaining contractual life at December 31 .. 4.3 years 6.0 years 6.9 years - ---------- (A) Amounts primarily include 284,551 options during 2002 and 284,551 options during 2001 which were repurchased and cancelled in connection with Mr. Lowenthal's separation arrangements from the Company and 290,000 options cancelled during 2001 pursuant to Mr. Lynford's amended employment agreement.
The following table presents additional option details at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ------------------- WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE ------ ----------- ------------ ----- ------- ----- $13.34 to $16.13 40,733 7.4 $ 15.53 38,733 $ 15.49 $16.30 44,625 5.6 16.30 31,075 16.30 $17.82 28,000 5.3 17.82 23,000 17.82 $18.38 to $19.25 38,000 7.5 18.67 27,800 18.78 $19.75 to $20.25 55,500 4.2 20.13 53,300 20.13 $20.60 547,828 3.7 20.60 547,828 20.60 $29.75 to $31.50 17,500 4.2 31.00 17,500 31.00 ------- ------- 772,186 4.3 20.09 739,236 20.21 ======= =======
F-23 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHARE OPTION PLANS (CONTINUED) Pursuant to SFAS No. 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, ---------------------------------------------- 2002 2001 2000 ---- ---- ---- Net (loss) income - as reported ...................... $(3,372) $(2,725) $ 6,468 Expense .............................................. 717 1,677 2,045 ------- ------- ------- Net (loss) income - pro forma ........................ $(4,089) $(4,402) $ 4,423 ======= ======= ======= Net (loss) income per common share, basic and diluted: As reported ...................................... $ (0.52) $ (0.38) $ 0.76 ======= ======= ======= Pro forma ........................................ $ (0.64) $ (0.61) $ 0.52 ======= ======= ======= Assumptions: Expected volatility ranges ....................... 32% 34% 37% to 38% Expected life .................................... 10 years 10 years 10 years Risk-free interest rate ranges ................... 3.83% 5.17% 5.45% to 6.24% Expected dividend yield .......................... -- -- --
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 during 2003 and 2004 and provide for aggregate minimum annual fixed payments of approximately $1,578,000 and $840,000 in 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 repurchase amount per option. 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 and a continuation of health and other benefits. F-24 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMITMENTS AND CONTINGENCIES (CONTINUED) In connection with these arrangements and other personnel changes, the Company recorded a non-recurring charge of approximately $3,527,000 during the fourth quarter of 2001. The Company made payments of approximately $2,767,000 during the year ended December 31, 2002, reducing the accrual balance from $3,466,000 at December 31, 2001 to approximately $699,000 at December 31, 2002; such remaining amount is payable during the first quarter of 2003. The Company utilized available cash for payments made during 2002 and will utilize available cash to make the 2003 payment. Mr. Lynford's employment arrangement has been modified pursuant to an Amended and Restated Employment Agreement (the "Restated Agreement") and provides, among other items, 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. Mr. Lynford also agreed to the cancellation of 290,000 of the 569,102 options to acquire the Company's common stock then held by him. The 290,000 options had a Black-Scholes valuation of approximately $1,400,000 at the date of cancellation. The Restated Agreement provided for the Company to issue $1,356,000 of restricted shares of common stock (which equates to 71,087 shares at $19.075 per share), one third of which vested on each of December 31, 2001, June 30, 2002 and January 1, 2003. In December 2001, the Company submitted a report to the New Hampshire Department of Environmental Services ("NHDES") that summarized the findings of an environmental consultant 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. In January 2002 the NHDES indicated concerns about surface water contamination, volatile organic chemical ("VOC") migration off of the property and air quality, and mandated further testing. Further test results and a "Scope of Work" plan for the required tests were submitted to the NHDES in February 2002. In June 2002, the NHDES renewed the Groundwater Monitoring Permit with certain stipulations and again expressed concerns related to indoor air quality, contaminant migration offsite and surface water contamination. It mandated further testing and the submission of a "Scope of Work" plan related thereto by August 1, 2002. The Company complied with the NHDES request and received approval in October 2002 to commence the additional testing which included testing on an adjacent property for VOC migration and air quality testing. The tests were conducted during the fourth quarter of 2002 and the results show no migration of the VOCs and, on a preliminary basis, no environmental problems with the indoor air quality. At this time, it is too early to conclude the form of remediation that will be required, if any, or the cost thereof, but in all likelihood, if remediation is required, it will be a more aggressive and costly one than natural attenuation. During 2002 and 2001, the Company incurred approximately $96,000 and $48,000, respectively, of costs principally for its environmental testing firm, with respect to this matter. From time-to-time, legal actions may be brought against the Company in the ordinary course of business. There can be no assurance that such matters will not have a material effect on the Company's financial condition, results of operations or cash flows. F-25 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMITMENTS AND CONTINGENCIES (CONTINUED) 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, if any, are made based on a discretionary amount determined by the Company's management. During the years ended December 31, 2002, 2001 and 2000, the Company made contributions of approximately $38,000, $43,000 and $35,000, respectively. The Company is a tenant under an operating lease for its New York office through October 2008. Rent expense was approximately $851,000, $866,000 and $853,000 for the years ended December 31, 2002, 2001 and 2000, respectively, which includes base rent plus other charges including, but not limited to, real estate taxes and maintenance costs in excess of base year amounts. Future minimum lease payments under the operating lease at December 31, 2002 are as follows: FOR THE YEARS ENDED DECEMBER 31, AMOUNT -------------------------------- ------ 2003............................ $ 753,000 2004............................ 815,000 2005............................ 815,000 2006............................ 815,000 2007............................ 815,000 2008............................ 679,000 At December 31, 2002, 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, 2002, capital commitments are as follows: COMMITMENT AMOUNT EXPIRATION ---------- ------ ---------- Wellsford/Whitehall (A).. $ 4,000,000 December 31, 2003 Reis (B)................. 420,000 December 31, 2003 ---------- (A) Pursuant to the Agreement, the Company would provide for 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) In June 2002, the Company provided $210,000 to Reis, resulting in a remaining commitment of $420,000. This funding was the Company's share of an additional $667,000 capital subscription to Reis from the group of investors who also contributed capital in April 2000. The other investors have a remaining aggregate commitment of $913,000. Wellsford/Whitehall has agreed to maintain certain tax indemnities, primarily through 2007, for a family group who are partners of the joint venture, relating to assets acquired from those partners in 1998. This indemnity was preserved during 2002 and 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. The Company will continue to make inquiries of Wellsford/Whitehall management as to their monitoring of asset sales and debt levels with respect to these tax indemnities. See Note 12 for additional commitments and contingencies. F-26 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 2002, 2001 and 2000: (amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT PROPERTY EQUITY AND LAND INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED ----------- ----------- ----------- ------ ------------ DECEMBER 31, 2002 ----------------- Investment properties: Real estate held for investment, net ............................... $ -- $ -- $ 129,300 $ -- $ 129,300 Real estate held for sale** .......... -- 6,027 -- -- 6,027 Residential units available for sale .............................. -- -- 14,542 -- 14,542 --------- --------- --------- --------- --------- Real estate, net ........................ -- 6,027 143,842 -- 149,869 Notes receivable ........................ -- 28,612 -- -- 28,612 Investment in joint ventures ............ 55,592 38,589 -- -- 94,181 Cash and cash equivalents ............... -- 6,220 166 32,258 38,644 Restricted cash and investments ......... -- -- 610 8,934 9,544 Other assets ............................ -- 9,125 1,669 1,131 11,925 --------- --------- --------- --------- --------- Total assets ............................ $ 55,592 $ 88,573 $ 146,287 $ 42,323 $ 332,775 ========= ========= ========= ========= ========= Mortgage notes payable .................. $ -- $ -- $ 112,233 $ -- $ 112,233 Accrued expenses and other liabilities .. -- 3,602 2,637 9,298 15,537 Convertible Trust Preferred Securities .. -- -- -- 25,000 25,000 Minority interest ....................... 6 -- 3,432 -- 3,438 Equity .................................. 55,586 84,971 27,985 8,025 176,567 --------- --------- --------- --------- --------- Total liabilities and equity ............ $ 55,592 $ 88,573 $ 146,287 $ 42,323 $ 332,775 ========= ========= ========= ========= ========= FOR THE YEAR ENDED DECEMBER 31, 2002 ----------------------- Rental revenue .......................... $ -- $ 1,206 $ 15,106 $ -- $ 16,312 Revenue from sales of residential units ................................ -- -- 10,635 -- 10,635 Interest revenue ........................ -- 3,496 -- 600 4,096 Fee revenue ............................. -- 700 (54) 29 675 --------- --------- --------- --------- --------- Total revenues .......................... -- 5,402 25,687 629 31,718 --------- --------- --------- --------- --------- Cost of sales of residential units ...... -- -- 9,544 -- 9,544 Operating expenses ...................... -- 884 6,525 -- 7,409 Depreciation and amortization ........... 755 217 4,427 75 5,474 Interest ................................ -- 7 5,677 167 5,851 General and administrative .............. -- 41 -- 6,526 6,567 --------- --------- --------- --------- --------- Total costs and expenses ................ 755 1,149 26,173 6,768 34,845 --------- --------- --------- --------- --------- (Loss) income from joint ventures ....... (1,292) 1,083 -- -- (209) Minority interest benefit ............... -- -- 43 -- 43 --------- --------- --------- --------- --------- Income (loss) before taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities ........................... $ (2,047) $ 5,336 $ (443) $ (6,139) $ (3,293) ========= ========= ========= ========= ========= - ---------- * 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-27 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, 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 expense ............... 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 expense ............... -- -- (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-28 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 ventures............. 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 expense................ -- -- (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-29 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL ---------------------------------------------------- The Company's commercial property operations currently consist solely of its interest in Wellsford/Whitehall, a joint venture by and 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 32.59% interest in Wellsford/Whitehall as of December 31, 2002. The manager of the joint venture is a Whitehall affiliate. At December 31, 2002, Wellsford/Whitehall owned and operated 34 properties, including ten properties held for sale (substantially all office properties) totaling approximately 3,874,000 square feet (including approximately 546,000 square feet under renovation), primarily located in New Jersey, Massachusetts and Maryland. Subsequent to February 28, 2003, after the completion of certain sales, Wellsford/Whitehall owned 27 properties totaling approximately 2,908,000 square feet. 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 in the future. The Company's investment in Wellsford/Whitehall, which is accounted for on the equity method, was approximately $55,592,000 and $57,790,000 at December 31, 2002 and 2001, respectively. The following table details the changes in the Company's investment in Wellsford/Whitehall during the three years ended December 31, 2002:
(amounts in thousands) 2002 2001 2000 ---- ---- ---- Investment balance at January 1, ............. $ 57,790 $ 82,820 $ 79,688 Contributions ............................. -- 8,468 3,763 Distributions ............................. -- (35,984) (1,897) Share of: (Loss) income from operations .......... (770) 302 1,583 (Loss) gains from asset sales .......... (82) 10,321 92 Impairment provisions .................. (440) (6,256) -- Accumulated other comprehensive income . (151) (103) -- Amortization .............................. (755) (1,778) (409) -------- -------- -------- Investment balance at December 31, ........... $ 55,592 $ 57,790 $ 82,820 ======== ======== ========
Wellsford/Whitehall was formed in August 1997 as a private real estate operating company. The Company contributed six properties and Whitehall contributed four 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 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. F-30 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) In December 2000, the Company and Whitehall executed definitive agreements modifying the terms of the joint venture, effective January 1, 2001. 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 provides management, construction, development and leasing services to Wellsford/Whitehall based upon an agreed fee schedule. WP Commercial also provides similar services to a new venture formed by Whitehall (the "New Venture") as well as other affiliates of Whitehall and to third parties, including tenants of Wellsford/Whitehall and new owners of properties sold by Wellsford/Whitehall. WP Commercial receives an administrative management fee of 93 basis points on a predetermined value for each asset owned at the time of the Amendments. As Wellsford/Whitehall sells assets, the basis used to determine the fee is reduced by the respective asset's predetermined value six months after the completion of such sales. During the years ended December 31, 2002 and 2001, respectively, Wellsford/Whitehall paid the following fees to WP Commercial, including amounts reflected in discontinued operations of Wellsford/Whitehall: FOR THE YEARS ENDED DECEMBER 31, -------------------- 2002 2001 ---- ---- Administrative management ............ $5,826,000 $6,422,000 ========== ========== Construction, construction management, development and leasing ........... $ 905,000 $1,787,000 ========== ========== WP Commercial leases space at three buildings owned by Wellsford/Whitehall in each of its geographic regions for management and administration, including one building sold in November 2001. Aggregate rent received during the years ended December 31, 2002 and 2001 by Wellsford/Whitehall amounted to $197,000 and $542,000, respectively. 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 disposed of 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 acquisition of real estate made by certain other affiliates of Whitehall, until such acquisitions aggregate $400,000,000. The following table presents fees earned by the Company related to this provision: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 ---- ---- Asset disposition fees ......... $ 7,000 $365,000 Asset acquisition fees ......... 22,000 23,000 -------- -------- Total fees ..................... $ 29,000 $388,000 ======== ======== F-31 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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 of equity interests between the Company and Whitehall effective after December 31, 2003 with respect to the venture. 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-32 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 the Wellsford/Whitehall segment:
(amounts in thousands) DECEMBER 31, ------------------------ CONDENSED BALANCE SHEET DATA 2002 2001 (A) ---------------------------- ---- -------- Real estate, net ............................ $ 351,997 $ 347,187 Cash and cash equivalents ................... 16,169 32,148 Assets held for sale ........................ 164,696 170,875 Other assets (B) ............................ 24,457 21,901 Total assets ................................ 557,319 572,111 Mortgages payable ........................... 96,826 104,452 Credit facility ............................. 132,349 126,855 Liabilities attributable to properties held for sale ................................. 140,825 142,590 Preferred equity (C) ........................ -- -- Common equity ............................... 179,742 183,815 Other comprehensive loss .................... (1,297) (526) FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- CONDENSED OPERATING DATA 2002 2001 (D) 2000 (D) ------------------------ ---- -------- -------- Rental revenue (E) .......................... $ 46,636 $ 56,916 $ 59,010 Interest and other income (F) ............... 2,366 4,987 5,290 --------- --------- --------- Total revenues .............................. 49,002 61,903 64,300 --------- --------- --------- Operating expenses .......................... 23,705 27,489 22,240 Depreciation and amortization ............... 15,026 12,448 9,386 Interest .................................... 13,068 17,724 18,351 General and administrative .................. 727 922 6,869 --------- --------- --------- Total expenses .............................. 52,526 58,583 56,846 (Loss) gain on sale of assets ............... (259) 10,791 239 --------- --------- --------- (Loss) income before preferred equity distributions and discontinued operations (3,783) 14,111 7,693 (Loss) from discontinued operations (G) ..... (196) (1,365) (2,585) --------- --------- --------- Net (loss) income before preferred equity distributions ............................ $ (3,979) $ 12,746 $ 5,108 ========= ========= ========= - ---------- (A) Reclassified for assets and liabilities held for sale at December 31, 2002. (B) Includes the marked to market value of an interest rate protection contract of $13 and $1,089 at December 31, 2002 and 2001, respectively. (C) Preferred equity converted to common equity in September 2001. (D) Operations reclassified for assets held for sale at December 31, 2002. (E) Reflects (including amounts in discontinued operations) an increase in income of $1,042, a reduction in income of $262 and an increase in income of $1,271 from the straight-lining of tenant rents for the years ended December 31, 2002, 2001 and 2000, respectively. (F) Reflects (including amounts in discontinued operations) lease cancellation income of $3,624, $4,012 and $4,037 for the years ended December 31, 2002, 2001 and 2000, respectively. Capitalized costs written off in connection with lease cancellation income are included in depreciation and amortization expense in the corresponding periods. (G) Includes an aggregate impairment provision of $1,351 attributable to three properties held for sale at December 31, 2002.
F-33 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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, 2002 New Jersey .................. 17 2 13 2 2,140,000 $277,502,000 Boston, MA .................. 10 -- 10 -- 1,205,000 225,560,000 Maryland/Washington, D.C .... 4 -- 3 1 499,000 66,250,000 Other ....................... 3 -- -- 3 30,000 8,236,000 -- -- -- -- --------- ------------ 34 2 26 6 3,874,000 $577,548,000 == == == == ========= ============ Pro forma for completed sales from January 1, 2003 to February 28, 2003 ........ 27 2 20 5 2,908,000 $435,533,000 == == == == ========= ============ AS OF DECEMBER 31, 2001 New Jersey .................. 17 2 13 2 2,140,000 $272,851,000 Boston, MA .................. 10 -- 10 -- 1,204,000 209,551,000 Maryland/Washington, D.C .... 5 -- 4 1 531,000 65,578,000 Other ....................... 3 -- -- 3 30,000 8,219,000 -- -- -- -- --------- ------------ 35 2 27 6 3,905,000 $556,199,000 == == == == ========= ============
No tenant in the Wellsford/Whitehall portfolio accounted for more than 6% of rental revenues for assets classified as continuing operations by Wellsford/Whitehall for the year ended December 31, 2002. F-34 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) During the years ended December 31, 2002, 2001 and 2000, Wellsford/Whitehall participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts) 2002 ACTIVITY Sales: Gross Leasable Sales Price per Square Number of Sales Square Gain Month Location Feet Properties Price Foot (Loss) ----- -------- ---- ---------- ----- ---- ------ June ......... Owings Mills, MD 31,732 1 $ 2.9 $ 91.39 $ (0.3) ====== = ======== ========== ======== 2001 ACTIVITY Purchases (1): Gross Leasable Purchase Price per Square Number of Purchase Square Month Location Feet Properties Price 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 Sales Price per Square Number of Sales Square Gain Month Location Feet Properties Price Foot (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 Sales Price per Square Number of Sales Square Gain Month Location Feet Properties Price Foot (Loss) ----- -------- ---- ---------- ----- ---- ------ August ....... Columbia, MD 38,000 1 $ 4.9 $ 128 $ 0.2 ====== = ======== ========== ========
F-35 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) In February 2003, Wellsford/Whitehall completed the sales of a portfolio of six properties to one purchaser for an aggregate of $136,800,000 and realized aggregate net gains of approximately $10,554,000 before income taxes. The Company's pre-tax income to be realized during the first quarter of 2003 from these transactions was approximately $2,700,000. The Company will not receive a distribution related to the sale of these properties as almost all of the proceeds were used to paydown $129,557,000 of Wellsford/Whitehall debt. In a separate transaction, Wellsford/Whitehall sold an unencumbered property in January 2003 for which the Company received a distribution of approximately $738,000 on January 31, 2003. The following table details the assets sold:
GROSS SALES PRICE LEASABLE PER PROPERTY LOCATION SQUARE FEET SALES PRICE SQUARE FOOT GAIN (LOSS) -------- -------- ----------- ----------- ----------- ----------- Portfolio sale: Mountain Heights Center #1 .. Berkeley Hts, NJ 183,000 Mountain Heights Center #2 .. Berkeley Hts, NJ 123,000 Greenbrook Corporate Center . Fairfield, NJ 201,000 180/188 Mt. Airy Road ....... Basking Ridge, NJ 104,000 One Mall North .............. Columbia, MD 97,000 Gateway Tower ............... Rockville, MD 248,000 ------- Total portfolio sale ........... 956,000 $136,800,000 $ 143 $ 10,554,000 Decatur ........................ Decatur, GA 10,000 2,370,000 234 -- ------- ------------ ------------ 966,000 $139,170,000 144 $ 10,554,000 ======= ============ ============
In anticipation of the sales of the Decatur, GA and two other properties in Boston, MA, Wellsford/Whitehall recorded impairment provisions aggregating approximately $1,351,000 at December 31, 2002 as the expected sale prices net of selling expenses were less than the carrying amount of the properties. The Company's share of these impairments was approximately $440,000 before a write-off by the Company in 2002 of related unamortized warrant costs of $284,000. 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. F-36 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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 through June 2003, which results are not expected to be achieved by that time. Accordingly, Wellsford/Whitehall is in the process of negotiating with GECC for an extension of the June 30, 2003 expiration. The facility bears interest at LIBOR + 2.90% per annum (4.28% at December 31, 2002) and matures in June 2004 with two 12-month extension options, subject to meeting certain operating and valuation covenants. Upon the initial funding, the facility was secured by interests in twenty-four commercial office properties in the Wellsford/Whitehall portfolio. The Wellsford/Whitehall GECC Facility replaced the previously existing facility which was due to mature in December 2001. The outstanding balance of the Wellsford/Whitehall GECC Facility was $264,160,000 and $258,060,000 at December 31, 2002 and 2001, respectively. Details of the changes to the Wellsford/Whitehall GECC Facility balance are as follows: NUMBER OF SECURING BALANCE PROPERTIES ------- ---------- June 2001 ................................... $ 272,912,000 24 2001 asset sales ............................ (14,852,000) (2) ------------- -- Balance at December 31, 2001 ................ 258,060,000 22 2002 asset sales ............................ -- -- Additional asset encumbered by the facility . 6,100,000 1 ------------- -- Balance at December 31, 2002, including $131,811,000 reflected in liabilities held for sale ................................. $ 264,160,000 23 ============= == Balance at December 31, 2002, adjusted for completed sales from January 1, 2003 to February 28, 2003 ........................ $ 141,976,000 18 ============= == 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. The market value of the Cap was approximately $13,000 and $1,089,000 at December 31, 2002 and 2001, respectively. This Cap was purchased from Goldman Sachs based upon the results of a competitive bidding process. F-37 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The following table summarizes the long-term debt at Wellsford/Whitehall:
BALANCE AT DECEMBER 31, INITIAL MATURITY STATED INTEREST ----------------------- DEBT/PROJECT DATE RATE 2002 2001 ------------ ---- ---- ---- ---- Wellsford/Whitehall GECC Facility....... June 2004 LIBOR + 2.90% $264,160,000 $258,060,000 Nomura Loan (A)......................... February 2027 8.03% 65,458,000 66,189,000 Oakland Ridge Loan (B).................. March 2003 LIBOR + 2.00% 6,959,000 4,649,000 Retail properties (C)................... January 2024 7.28% 16,371,000 16,600,000 Other loans on office properties........ (D) Various 15,410,000 24,511,000 ------------ ------------ $368,358,000 $370,009,000 ============ ============ - ---------- (A) In connection with a 1998 transaction, Wellsford/Whitehall assumed a mortgage loan held by Nomura Asset Capital Corporation with an initial principal balance of approximately $68,300,000. (B) The non-recourse loan is secured by the leasehold interest in the Oakland Ridge office park in Columbia, Maryland. The loan has a twelve-month extension at Wellsford/Whitehall's option. (C) Comprised of five mortgages secured by the leasehold interest in five retail properties. (D) Includes a property collateralizing the aggregate loan balances outstanding of $7,373,000 at December 31, 2002, which was sold in February 2003. The loans were repaid from sales proceeds.
The Company made temporary advances to Wellsford/Whitehall during 2000 which bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid in full by December 31, 2000. The Company earned approximately $703,000 of interest income during 2000 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. In June 2001, the Wellsford/Whitehall Fleet Facility was repaid in full, terminated and replaced with the Wellsford/Whitehall GECC Facility. DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL --------------------------------------------- At December 31, 2002, the Company had the following investments: (i) approximately $28,612,000 of direct debt investments which bore interest at a weighted average annual yield of approximately 11.69% during 2002 and had an average remaining term to maturity of approximately 4.2 years; (ii) approximately $31,797,000 of equity investments in companies which were organized to invest in debt instruments, including $28,166,000 in Second Holding, 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; and (iii) approximately $6,792,000 invested in Reis, a real estate information and database company. In addition, the Company owned and operated two commercial properties with a net book value of approximately $6,027,000, totaling approximately 175,000 square feet located in Salem, New Hampshire and Philadelphia, Pennsylvania at December 31, 2002. F-38 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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 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 first mortgage loan (amortized balance of $314,485,000 at December 31, 2002) (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, $3,042,000 and $3,050,000 per year of interest revenue from the 277 Park Loan during 2002, 2001 and 2000, respectively, or 9.6%, 7.3% and 11.9% of 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, of which the Company advanced $5,000,000 (its 50% share) (the "Patriot Loan"). The Patriot Loan was subordinate to a $75,000,000 first mortgage loan made by Fleet National Bank. During May 2002, the Patriot Loan was paid in full and the Company received its loan balance of approximately $4,951,000. The loan bore interest at LIBOR + 4.75% per annum with payments of interest only from origination through August 2001 and, thereafter, principal and interest based on a 25-year amortization. The Patriot Loan was 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 $129,000, $449,000 and $564,000 of interest revenue from the Patriot Loan during 2002, 2001 and 2000, respectively, or 0.4%, 1.1% and 2.2% of 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 75% of the value of the borrowing base collateral which consisted of office, industrial and retail properties, all cross collateralized, totaling approximately 250,000 square feet. The Company's portion of the outstanding balance of approximately $4,300,000 was repaid in August 2000 and the Abbey Credit Facility was terminated. F-39 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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 of interest revenue from the Abbey Credit Facility during 2000, or 1.2% of total non-joint venture revenues during such period. SAFEGUARD CREDIT FACILITY In December 1998, the Company and JPMC originated a $90,000,000 credit facility cross-collateralized by nine self storage 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 and $306,000 of interest revenue from the Safeguard Credit Facility during 2001 and 2000, respectively, or 0.1% and 1.2% of total non-joint venture revenues during such periods. 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 special purpose finance companies 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, 2002 and 2001. The Company earned approximately $302,000 and $345,000 of interest revenue from the Guggenheim Loan during 2002 and 2001, respectively, or 0.9% and 0.8% of total non-joint venture revenues during the period. On January 2, 2003, the Company received a payment of approximately $818,000, which included the 2002 interest payment and the 2002 principal paydown of $516,000. F-40 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The following table summarizes interest revenue and its share of consolidated non-joint venture revenue during such periods for the Wellsford Capital SBU:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2002 2001 2000 --------------------- ---------------------- --------------------- INTEREST INTEREST INTEREST REVENUE PERCENTAGE REVENUE PERCENTAGE REVENUE PERCENTAGE ------- ---------- ------- ---------- ------- ---------- 277 Park Loan ............. $ 3,042,000 9.6% $ 3,042,000 7.3% $ 3,050,000 11.9% Patriot Loan .............. 129,000 0.4% 449,000 1.1% 564,000 2.2% Abbey Credit Facility ..... -- 0.0% -- 0.0% 295,000 1.2% Safeguard Credit Facility . -- 0.0% 25,000 0.1% 306,000 1.2% Guggenheim Loan ........... 302,000 0.9% 345,000 0.8% -- 0.0% Other ..................... 18,000 0.1% 233,000 0.6% 151,000 0.5% ----------- ---- ----------- ---- ----------- ---- Interest revenue from loans 3,491,000 11.0% 4,094,000 9.9% 4,366,000 17.0% Interest revenue from cash and cash equivalents ... 5,000 0.0% 72,000 0.2% 70,000 0.3% ----------- ---- ----------- ---- ----------- ---- Total interest revenue .... $ 3,496,000 11.0% $ 4,166,000 10.1% $ 4,436,000 17.3% =========== ==== =========== ==== =========== ==== Consolidated non-joint venture revenue (base from which percentage is calculated) ......... $31,718,466 $41,492,999 $25,623,789 =========== =========== ===========
SECOND HOLDING Second Holding, a joint venture special purpose finance company, 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, bank deposits, leases on equipment, fuel/oil receivables, consumer receivables, pools of corporate bonds and loans and sovereign debt. It is Second Holding's intent to hold all securities to maturity. Many of these securities were obtained through private placements and current public market pricing is not available. The Company contributed approximately $24,200,000 and $4,900,000 in 1999 and 1998, respectively, to obtain an approximate 51.1% non-controlling interest in Second Holding, with Liberty Hampshire owning 10% and an affiliate of a significant shareholder of the Company (the Hunt Trust, which owns 405,500 shares of the Company at December 31, 2002) who, together with other entities, own the remaining approximate 39%. The Company's 1999 contribution was comprised of two of the Company's debt investments totaling $25,700,000, 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 an insurance policy for payment of the long-term debt issued by Second Holding. Effective January 1, 2002, the partners of Second Holding modified the terms of the agreement with the additional partner, which eliminated the additional partner's cumulative preference on earnings. The additional 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 51.1% of the remaining 65%. F-41 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The Company accounts for its investment in Second Holding on the equity method of accounting as its interests are represented by two of eight board seats with one-quarter of the vote on any major business decisions. The Company's investment was approximately $28,166,000 and $27,803,000 at December 31, 2002 and 2001, respectively. The Company's share of income (loss) from Second Holding was approximately $723,000, $(163,000) and $1,432,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company also earns management fees for its role in analyzing real estate-related investments for Second Holding. The net fees earned by the Company, which are based upon the total assets of Second Holding, amounted to approximately $646,000, $217,000 and $(182,000) for the years ended December 31, 2002, 2001 and 2000, respectively. The following table presents a condensed balance sheet and operating data for Second Holding:
(amounts in thousands) DECEMBER 31, ------------ CONDENSED BALANCE SHEET DATA 2002 2001 ---------------------------- ---- ---- Cash and cash equivalents ............ $ 16,876 $ 76,487 Investments .......................... 1,785,758 926,453 Other assets (A) ..................... 37,462 19,943 Total assets ......................... 1,840,096 1,022,883 Commercial paper ..................... -- 58,770 Medium-term notes (B) ................ 1,552,945 742,475 Long-term debt (C) (D) ............... 169,988 161,220 Total equity ......................... 55,910 54,581 FOR THE YEARS ENDED DECEMBER 31, -------------------------------- CONDENSED OPERATING DATA 2002 2001 2000 ------------------------ ---- ---- ---- Interest ............................. $ 41,802 $ 30,528 $ 7,383 Interest from Reis ................... -- -- 169 ---------- ---------- ---------- Total revenue ........................ 41,802 30,528 7,552 ---------- ---------- ---------- Interest expense ..................... 35,594 28,017 3,665 Fees and other ....................... 3,894 2,422 1,084 ---------- ---------- ---------- Total expenses ....................... 39,488 30,439 4,749 ---------- ---------- ---------- Net income attributable to members (D) $ 2,314 $ 89 $ 2,803 ========== ========== ========== - ---------- (A) Other assets includes an interest rate swap asset with a fair value of $22,638 and $13,531 at December 31, 2002 and 2001, respectively. (B) The face amount of medium-term notes were $1,555,000 at December 31, 2002, and includes a fair value adjustment for swapped debt of $513, offset by unamortized discounts and debt issuance costs of $2,568. (C) Long-term debt outstanding is a privately placed ten-year $150,000 junior subordinated bond-issue maturing April 2010, issued at a fixed rate of 7.96% per annum. The effect of fair value adjustments for the long-term debt was $22,125 and $13,531 at December 31, 2002 and 2001, respectively, net of unamortized debt issuance costs. (D) The partner which was admitted in the latter part of 2000 (who is committed to provide an insurance policy, through one of its affiliates, for the payment of principal and interest through April 2010 for the $150,000 junior subordinated bond-issue) was entitled to a cumulative preference on earnings; accordingly all fiscal 2001 income is allocable to this partner.
F-42 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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. The Company accounts for its investment in Reis under the cost method as its ownership interest is in non-voting preferred shares and the Company's interests are represented by one member of Reis' seven member board. At December 31, 2002 and 2001 the Company's aggregate investment in Reis was $6,792,000 and $6,583,000, respectively. A portion of the investment is held directly by the Hunt Trust who, together with other entities, own an approximate 39% interest in Reis Capital. A summary of the Company's direct and indirect investments in Reis follows:
AMOUNTS COMPANY INVESTED BY TOTAL OWNERSHIP OTHER PARTNERS INVESTMENT --------- -------------- ---------- INDIRECT OWNERSHIP BY THE COMPANY 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 through Reis Capital in April 2000 (D) ...................................... 766,000 734,000 1,500,000 ---------- ---------- ---------- Total indirect ownership .................................. 4,553,000 $4,360,000 $8,913,000 ---------- ========== ========== DIRECT OWNERSHIP BY THE COMPANY Series C Preferred shares purchased directly in April 2000 (E) ............................................... 2,022,000 Series D Preferred shares purchased directly in June 2002 (F) .......................................... 210,000 Other ..................................................... 7,000 ---------- Total direct ownership .................................... 2,239,000 ---------- Total investment .......................................... $6,792,000 ========== - ---------- Note: 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 $3.968 per share. (D) Issued 15,000 shares at $100 per share; convertible into common shares at $3.968 per share. (E) Issued 20,220 shares at $100 per share; convertible into common shares at $3.968 per share. (F) Issued 2,098 shares at $100 per share; convertible into common shares at $3.22 per share, liquidation preference at $200 per share.
F-43 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The Company's Chairman, President and Chief Executive Officer (Mr. Lynford) is the brother of the president of Reis. The Company's former President and Chief Executive Officer, who currently serves on the Company's Board of Directors (Mr. Lowenthal), has served on the board of directors of Reis since 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. During the year ending December 31, 2002, the Company committed to invest an aggregate of $629,000 in Reis Series D Preferred shares of which $209,800 was invested in June 2002, and the balance of $419,600 is subject to call by Reis in two separate equal tranches through December 31, 2003. These tranches have a liquidation preference of 250% and 300%, respectively. Other Preferred shareholders invested $456,800 directly at the time of the Company's fiscal 2002 investment and committed to invest an additional $913,600. Two of these Preferred shareholders, including the Hunt Trust who, together with other entities, own the remaining interests in Reis Capital and certain other Series D Preferred share investors are Company officers and directors. The aggregate committed capital is $2,000,000, including amounts already funded. At December 31, 2002, the Company's investment in Reis, through direct ownership and its pro rata share of its investment in Reis Capital, amounted to approximately 21.4% of Reis' equity on an as converted basis. The pro rata converted interests in Reis owned by the other partners of Reis Capital, either directly or indirectly through Reis Capital aggregate 18.36%. The investments of the Company's officers and directors together with shares of common stock previously held by Mr. Lynford represent approximately 3.2% of Reis' equity, on an as converted basis. Additionally, a company controlled by the Chairman of EQR owns Series C and Series D Preferred shares with an aggregate 4.5% converted interest. The vice-chairman of EQR is a director of the Company. Messrs. Lynford, Lowenthal and certain directors of the Company whom have invested directly in Reis, have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis. 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, to increase marketing of its products to expand its customer base, to accelerate the introduction of its new product line, develop a new product related to its existing business and for general corporate purposes as well as future working capital. Information provided by Reis is used by Second Holding for due diligence procedures on certain real estate-related investment opportunities. Second Holding incurred fees of $240,000, $360,000 and $360,000 in connection with such services for each of the years ended December 31, 2002, 2001 and 2000, respectively. The Company's share of such fees was $120,000, $180,000 and $180,000 for the years ended December 31, 2002, 2001 and 2000, respectively. 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. F-44 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) The Company's original investment in the CVW 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, the venture was terminated and the investment balance was written off. In July 2001, warrants issued to the CVW partners were repurchased for $80,000 and cancelled. 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"). 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 and fees have 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, $361,000 and $85,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Construction is nearing completion and delivery of certain units commenced in December 2002. As of December 31, 2002, approximately 93% of the units were under contract and 23 unit sales had closed for gross proceeds of approximately $11,300,000. OTHER INVESTMENTS VALUE PROPERTY TRUST In February 1998, the Company completed the merger with VLP for total consideration of approximately $169,000,000, which was accounted for as a purchase. Thirteen of the twenty VLP properties were under contract and subsequently sold to an affiliate of Whitehall 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 retained VLP properties, bore interest at LIBOR + 2.75% per annum and was scheduled to mature in October 2001. F-45 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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 for aggregate sales of approximately $34,217,000. Two unencumbered properties remain unsold at December 31, 2002. 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 after a remaining impairment reserve of $2,175,000 for the two unsold properties was approximately $6,027,000 and $5,560,000 at December 31, 2002 and 2001, respectively. The Company determined that no additional impairment provision was required at December 31, 2002 and 2001. PROPERTY DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT --------------------------------------------------------------- PALOMINO PARK Presently, 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, 2002 and 2001, the Company had an 85.85% interest as the managing owner in this project and a subsidiary of EQR had the remaining 14.15% interest. In January 2003, the Company's board of directors approved a plan for the Company to seek institutional investors to purchase an interest in the residential rental phases at Palomino Park. There can be no assurance that the Company will be able to find suitable investors or that such a transaction will be completed. In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park. Initially, all five phases of Palomino Park were collateral for the Palomino Park Bonds. In June 2000, the Company obtained a five-year AA rated letter of credit from Commerzbank AG to provide additional collateral for the Palomino Park Bonds. This letter of credit, which expires in 2005, replaced an expiring letter of credit. A subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such guarantee also expires in 2005. 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 December 2007 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. F-46 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) 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 prepared certain units to be sold and continued to rent certain of the remaining unsold units during the sellout period until the inventory available for sale has been significantly reduced and additional units are required 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. 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 (3.38% at December 31, 2002), is collateralized by the unsold Silver Mesa 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 $4,318,000 and $13,352,000 at December 31, 2002 and 2001, respectively. Sales of condominium units at the Silver Mesa phase of Palomino Park commenced in February 2001 and 153 units have been sold through December 31, 2002. The following table provides information regarding sales of Silver Mesa units:
FOR THE YEARS ENDED DECEMBER 31, --------------------- PROJECT 2002 2001 TOTALS ---- ---- ------ Number of units sold ........... 48 105 153 Gross proceeds ................. $10,635,000 $21,932,000 $32,567,000 Principal paydown on Silver Mesa Conversion Loan ............. $ 9,034,000 $18,648,000 $27,682,000
The following table details operating information related to the Silver Mesa units being rented. As the Company continues to sell units, future rental revenues and corresponding operating expenses will diminish. FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2002 2001 2000 ---- ---- ---- Rental revenue ......... $1,462,000 $2,224,000 $ 592,000 Net operating income (A) $ 884,000 $1,488,000 $ 379,000 - ---------- (A) Net operating income is defined as rental revenue, less property operating and maintenance expenses, real estate taxes and property management fees. 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. The construction loan balance was $37,111,000 and $36,747,000 at December 31, 2002 and 2001, respectively and bore interest at LIBOR + 1.75% per annum (3.17% at December 31, 2002). F-47 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEGMENT INFORMATION (CONTINUED) On February 6, 2003, the Company obtained a $40,000,000 permanent loan secured by a first mortgage on Green River. The Green River Mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per annum. Principal payments are based on a 30-year amortization schedule. Proceeds were used to repay the Green River Construction Loan and excess proceeds generally are available for working capital purposes. 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 $5,411,000 and $5,400,000 at December 31, 2002 and 2001, respectively. 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 through January 1998, 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-48 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 consolidated financial instruments at December 31, 2002 and 2001:
(AMOUNTS IN THOUSANDS) HISTORICAL COST AT DECEMBER 31, FAIR VALUE AT DECEMBER 31, ------------------------------- -------------------------- NOTES RECEIVABLE (A) 2002 2001 2002 2001 -------------------- ---- ---- ---- ---- Fixed rate: 277 Park Loan .................. $ 25,000 $ 25,000 $ 27,771 (C) $ 25,900 (C) Guggenheim ..................... 3,612 3,612 3,782 (C) 3,692 (C) Other .......................... -- 1,200 -- 1,200 (D) -------- -------- -------- -------- Total fixed rate notes ............ 28,612 29,812 31,553 30,792 -------- -------- -------- -------- Floating rate: Patriot Loan ................... -- 4,973 -- 4,973 (E) -------- -------- -------- -------- Total floating rate notes ......... -- 4,973 -- 4,973 -------- -------- -------- -------- Total notes receivable ............ $ 28,612 $ 34,785 $ 31,553 $ 35,765 ======== ======== ======== ======== DEBT (B) -------- Floating rate: Palomino Park Bonds ............ $ 12,680 $ 12,680 $ 12,680 (F) $ 12,680 (F) Silver Mesa Conversion Loan .... 4,318 13,352 4,318 (F) 13,352 (F) Green River Construction Loan .. 37,111 36,748 37,111 (F) 36,748 (F) -------- -------- -------- -------- Total floating rate debt .......... 54,109 62,780 54,109 62,780 -------- -------- -------- -------- Fixed rate: Blue Ridge Mortgage ............ 32,447 32,916 35,472 (G) 33,648 (G) Red Canyon Mortgage ............ 25,677 26,035 27,845 (G) 26,143 (G) -------- -------- -------- -------- Total fixed rate debt ............. 58,124 58,951 63,317 59,791 -------- -------- -------- -------- Total debt ........................ $112,233 $121,731 $117,426 $122,571 ======== ======== ======== ======== - ---------- (A) For more information regarding the Company's note receivables, see Footnote 4. (B) For more information regarding the Company's debt, see Footnote 5. (C) The fair value of the Company's fixed rate investments was determined by reference to various market data. (D) This $1,200 loan was paid in full on January 18, 2002. The Company considered the fair value of this repaid loan at its face value. (E) The fair value of the Company's floating rate investments is considered to be their carrying amounts. (F) The fair value of the Company's floating rate debt is considered to be their carrying amounts. (G) The fair value of the Company's fixed rate debt was determined by reference to various market data.
F-49 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, 2002 and 2001 is as follows:
FOR THE THREE MONTHS ENDED ------------------------------------------------------------------- 2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ------------------------------------------------ -------- ------- ------------ ----------- Revenues ....................................... $ 6,990,948 $ 7,442,491 $ 8,342,920 $ 8,942,107 Costs and expenses.............................. 8,140,081 8,255,483 9,179,849 9,270,187 Income (loss) from joint ventures .............. 420,203 329,582 505,283 (1,463,819) Minority interest benefit (expense) ............ 45,470 25,977 13,206 (41,372) ------------ ------------ ------------ ------------ (Loss) before taxes and accrued distributions and amortization of costs on Convertible Trust Preferred Securities ......................... (683,460) (457,433) (318,440) (1,833,271) Income tax (benefit) expense (A) ............... (27,000) 16,000 60,000 (1,349,000) Accrued distributions and amortization of costs on Convertible Trust Preferred Securities, net of income tax benefit (A) .................... 419,954 419,953 419,954 119,954 ------------ ------------ ------------ ------------ Net (loss) ..................................... $ (1,076,414) $ (893,386) $ (798,394) $ (604,225) ============ ============ ============ ============ Net (loss) per common share, basic** ........... $ (0.17) $ (0.14) $ (0.12) $ (0.09) ============ ============ ============ ============ Net (loss) per common share, diluted** ......... $ (0.17) $ (0.14) $ (0.12) $ (0.09) ============ ============ ============ ============ Weighted average number of common shares outstanding, basic .......................... 6,409,248 6,437,390 6,449,206 6,450,586 ============ ============ ============ ============ Weighted average number of common shares outstanding, diluted ........................ 6,409,248 6,437,390 6,449,206 6,450,586 ============ ============ ============ ============ 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 income 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 ============ ============ ============ ============ - ---------- * 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 former President for his early retirement and other personnel changes. ** Aggregate quarterly earnings per share amounts may not equal annual amounts presented elsewhere in these consolidated financial statements due to rounding differences. (A) The fourth quarter income tax benefit and tax benefit of accrued distributions and amortization of costs of Convertible Trust Preferred Securities results primarily from the Company's year end assessment of the total available tax loss carrybacks to 1997 and 1998. The tax benefit attributable to the Convertible Trust Preferred Securities amounted to $105,000 in each of the first three quarters and $405,000 in the fourth quarter of fiscal 2002.
F-50 Wellsford/Whitehall Group, L.L.C. and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 WITH REPORT OF INDEPENDENT AUDITORS F-51 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 PAGE NO. -------- Report of Independent Auditors.............................................F-53 Consolidated Balance Sheets................................................F-54 Consolidated Statements of Operations......................................F-55 Consolidated Statements of Changes in Members' Equity......................F-56 Consolidated Statements of Cash Flows......................................F-57 Notes to Consolidated Financial Statements.................................F-59 F-52 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. and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in members' equity and cash flows for the years ended December 31, 2002, 2001 and 2000. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years ended December 31, 2002, 2001 and 2000, in conformity with accounting principles generally accepted in the United States. As discussed in Note 8 to the consolidated financial statements, in 2002, the Company adopted the provisions of Statement of Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets". /s/ Ernst & Young LLP New York, New York February 14, 2003 F-53 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------ 2002 2001 ---- ---- ASSETS Real estate assets, at cost: Land .......................................... $ 41,727,134 $ 47,440,830 Buildings and improvements .................... 300,642,477 325,972,924 ------------- ------------- 342,369,611 373,413,754 Less accumulated depreciation .............. (46,036,554) (31,949,782) ------------- ------------- 296,333,057 341,463,972 Construction in progress ...................... 55,664,016 5,723,067 ------------- ------------- 351,997,073 347,187,039 Assets held for sale ............................. 164,695,820 170,874,955 Cash and cash equivalents ........................ 16,169,437 32,147,561 Restricted cash .................................. 17,587,502 9,845,420 Deferred costs, less accumulated amortization .... 2,561,149 5,094,552 Receivables, prepaids and other assets, net ...... 4,307,741 6,961,009 ------------- ------------- Total assets ..................................... $ 557,318,722 $ 572,110,536 ============= ============= LIABILITIES AND MEMBERS' EQUITY Liabilities: Liabilities attributable to properties held for sale ........................................ $ 140,825,065 $ 142,590,319 Mortgages payable ............................. 96,825,748 104,451,545 Portfolio loan ................................ 132,349,245 126,854,606 Accrued expenses and other liabilities ........ 7,762,485 9,578,212 Distributions payable ......................... -- 4,221,364 Ground lease obligation ....................... 1,111,239 1,124,981 ------------- ------------- Total liabilities ................................ 378,873,782 388,821,027 ------------- ------------- Commitments and contingencies Members' equity: Membership units, $.01 par value per unit ..... 192,583 192,662 Paid in capital ............................... 275,657,412 275,752,333 Other comprehensive loss ...................... (1,296,573) (525,560) Series A convertible preferred membership units -- -- Excess of distribution over earnings .......... (96,108,482) (92,129,926) ------------- ------------- Total members' equity ............................ 178,444,940 183,289,509 ------------- ------------- Total liabilities and members' equity ............ $ 557,318,722 $ 572,110,536 ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-54 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------ 2002 2001 2000 ---- ---- ---- Revenues: Rental income ........................................ $ 46,636,386 $ 56,915,572 $ 59,010,207 Interest and other income ............................ 2,365,516 4,987,034 5,290,142 ------------ ------------ ------------ Total revenues .................................... 49,001,902 61,902,606 64,300,349 ------------ ------------ ------------ Expenses: Property operations and maintenance .................. 12,842,551 15,273,712 14,915,152 Real estate taxes .................................... 5,768,902 6,348,414 6,162,127 Depreciation and amortization ........................ 15,025,575 12,448,133 9,386,113 Property and asset management ........................ 5,093,689 5,866,084 1,162,271 Interest ............................................. 13,067,548 17,724,169 18,350,715 General and administrative ........................... 727,580 922,159 6,869,410 ------------ ------------ ------------ Total expenses .................................... 52,525,845 58,582,671 56,845,788 ------------ ------------ ------------ (Loss)/income available before gains on dispositions, loss from discontinued operations and preferred distributions ........................................ (3,523,943) 3,319,935 7,454,561 (Loss)/gains on dispositions, net of losses on impairment (258,711) 10,790,576 238,829 ------------ ------------ ------------ (Loss)/gain available before discontinued operations and preferred distributions .............................. (3,782,654) 14,110,511 7,693,390 ------------ ------------ ------------ Discontinued Operations: Operating income/(loss) from discontinued operations .... 1,154,736 (1,364,627) (2,585,362) Loss on impairment ...................................... (1,350,638) -- -- ------------ ------------ ------------ Loss from discontinued operations ....................... (195,902) (1,364,627) (2,585,362) ------------ ------------ ------------ Net (loss)/income available for members before preferred distributions .............................. (3,978,556) 12,745,884 5,108,028 Preferred distributions ................................. -- (757,541) (1,099,353) ------------ ------------ ------------ Net (loss)/income available for members ................. $ (3,978,556) $ 11,988,343 $ 4,008,675 ============ ============ ============ Net (loss)/income per membership unit, basic ............ $ (0.21) $ 0.77 $ 0.30 ============ ============ ============ Net (loss)/income per membership unit, diluted .......... $ (0.21) $ 0.77 $ 0.30 ============ ============ ============ Net loss from discontinued operations per membership unit, basic .......................................... $ (0.01) $ (0.09) $ (0.19) ============ ============ ============ Weighted average number of membership units outstanding, basic ................................................ 19,262,875 15,527,652 13,457,410 ============ ============ ============ Weighted average number of membership units outstanding, diluted .............................................. 19,262,875 16,200,451 14,439,499 ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-55 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
SERIES A CONVERTIBLE MEMBERSHIP UNITS PREFERRED ---------------- PAID-IN MEMBERSHIP UNITS AMOUNT CAPITAL UNITS ----- ------ ------- ----- 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 -- Redemption of units ............ (7,865) (79) (94,921) -- Net loss ....................... -- -- -- -- Other comprehensive loss ....... -- -- -- -- ---------- -------- ------------ ------------ December 31, 2002 .............. 19,258,328 $192,583 $275,657,412 $ -- ========== ======== ============ ============ EXCESS OF DISTRIBUTIONS OTHER TOTAL OVER COMPREHENSIVE MEMBERS' EARNINGS LOSS EQUITY -------- ---- ------ 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 Redemption of units ............ -- -- (95,000) Net loss ....................... (3,978,556) -- (3,978,556) Other comprehensive loss ....... -- (771,013) (771,013) ------------- ----------- ------------- December 31, 2002 .............. $ (96,108,482) $(1,296,573) $ 178,444,940 ============= =========== =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-56 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------------------- 2002 2001 2000 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: (Loss)/income from continuing operations ............... $ (3,782,654) $ 14,110,511 $ 7,693,390 Adjustments to (loss)/income from continuing operations to net cash provided by operating activities: Loss/(gains) on disposition of real estate assets . 258,711 (27,335,636) (238,829) Depreciation and amortization ..................... 15,025,575 12,448,133 9,386,113 Loss on impairment of real estate assets .......... -- 16,545,060 -- Amortization of deferred financing costs .......... 2,090,024 1,845,868 1,414,338 Deferred rental revenue ........................... (714,108) 27,869 (487,918) Decrease/(increase) in assets: Receivables, prepaids and other assets ......... 517,374 (2,748,236) (1,114,179) Increase/(decrease) in liabilities: Accrued expenses and other liabilities ......... 890,398 (4,355,710) 1,893,991 Security deposits .............................. (82,020) (150,789) 37,054 ------------- ------------- ------------- Net cash provided by operating activities ......... 14,203,300 10,387,070 18,583,960 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of real estate assets ..................... -- (18,209,956) -- 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 paid ......................... (209,621) -- (608,832) Disposal of real estate assets, net of selling expenses 4,230,617 139,305,312 4,562,255 Improvements to real estate assets ..................... (23,937,160) (30,774,591) (38,801,637) ------------- ------------- ------------- Net cash (used in)/provided by investing activities (19,916,164) 95,290,976 (38,743,536) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgage loans ........................... 2,309,968 16,877,798 4,371,095 Proceeds from secured senior credit facility ........... -- -- 3,210,826 Proceeds from secured mezzanine credit facility ........ -- -- 1,000,441 Proceeds from Portfolio loan ........................... 5,494,639 141,706,172 -- Repayment of mortgage loans ............................ (9,935,765) (805,157) (606,541) Repayment of secured senior credit facility ............ -- (137,165,693) (1,424,173) Repayment of secured mezzanine credit facility ......... -- (48,193,351) (500,385) Repayment of Portfolio loan ............................ -- (14,851,566) -- Increase in restricted cash ............................ (7,742,082) (4,095,286) (1,463,303) Deferred financing costs ............................... (293,635) (6,058,167) (1,315,996) Preferred distributions ................................ -- (757,541) (1,113,093) Member distributions ................................... (4,221,364) (101,646,062) (7,610,848) Equity contributions, net .............................. -- 55,811,879 19,909,557 Redemption of equity ................................... (95,000) -- (750,000) ------------- ------------- ------------- Net cash (used in)/provided by financing activities .... (14,483,239) (99,176,974) 13,707,580 ------------- ------------- ------------- Net cash provided by discontinued operations ........... 4,711,382 21,752,974 5,455,448 ------------- ------------- ------------- (Decrease)/increase in cash and cash equivalents ....... (15,484,721) 28,254,046 (996,548) Cash and cash equivalents, beginning of year ........... 32,147,561 4,469,216 7,157,318 ------------- ------------- ------------- 16,662,840 32,723,262 6,160,770 Less: cash of discontinued operations .................. (493,403) (575,701) (1,691,554) ------------- ------------- ------------- Cash and cash equivalents, end of year ................. $ 16,169,437 $ 32,147,561 $ 4,469,216 ============= ============= ============= F-57 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, -------------------------------------------- 2002 2001 2000 ---- ---- ---- SUPPLEMENTAL DISCLOSURE: Cash paid for interest ................................. $ 20,471,820 $ 28,276,227 $ 34,362,662 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: 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-58 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 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 paid 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 $4.0 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-59 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, 2002, the Company owned 17 office properties, excluding properties held for sale, totaling approximately 2,697,000 square feet (unaudited), five drugstores totaling approximately 54,675 square feet (unaudited), and approximately 34 acres of land (unaudited) under development. The office properties are located in Northern New Jersey (9), Downtown and Suburban Boston (7) and Suburban Baltimore and Washington, DC (1). The drugstores are located in the Middle Atlantic (3) and Southern (2) 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 five to 12 years for furnishings and equipment. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets", which supercedes 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 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 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-60 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 Operations. 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 believes 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. DISCONTINUED OPERATIONS. SFAS No. 144 superceded the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The statement is effective for fiscal years beginning after December 15, 2001. Consistent with SFAS No. 144, the results of operations of properties held for sale are reported separately as discontinued operations for the years ended December 31, 2002, 2001 and 2000. Assets and liabilities attributable to properties held for sale have been classified separately in the Company's consolidated balance sheets at December 31, 2002 and December 31, 2001 and the consolidated financial statements issued for 2001 and 2000 have been reclassified to reflect this presentation. 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. There were no Series A convertible preferred membership units outstanding during 2002. The assumed conversion of the Series A convertible preferred membership units is 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 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 F-61 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 members' equity as other comprehensive loss. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 is not expected to have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS. Certain reclassifications have been made to the prior years' presentations to conform to the current year. 3. COMMERCIAL PROPERTIES The Company owns the following properties from continuing operations at December 31, 2002 and 2001:
(amounts in thousands, except square foot amounts) Properties Collateralizing Portfolio Loan at December 31, 2002* --------------------------------------------------------------- YEAR SQUARE FEET (UNAUDITED) CONSTRUCTED/ GROSS INVESTMENT ---------------------- REHABILITATED -------------------- PROPERTY LOCATION 2002 2001 (UNAUDITED) 2002 2001 -------- -------- ---- ---- ----------- ---- ---- 300 Atrium Drive .............. Somerset, NJ 147,000 147,000 1983 $ 19,551 $ 19,551 400 Atrium Drive .............. Somerset, NJ 355,000 355,000 1985 37,191 36,136 500 Atrium Drive .............. Somerset, NJ 169,000 169,000 1984 21,108 21,108 700 Atrium Drive .............. Somerset, NJ 181,000 181,000 1985 18,839 18,735 Garden State Exhibit Center ... Somerset, NJ 82,000 82,000 1968/1989 6,190 6,134 Cutler Lake Corporate Center .. Needham, MA 210,000 210,000 1963/2000 36,030 35,789 377/379 Campus Drive .......... Franklin Twp, NJ 199,000 199,000 1984 23,792 23,309 Samsung/105 Challenger Road ... Ridgefield Park, NJ 147,000 147,000 1992 21,286 21,269 150 Mount Bethel .............. Warren, NJ 129,000 129,000 1981 9,787 9,059 --------- --------- --------- --------- 1,619,000 1,619,000 193,774 191,090 --------- --------- --------- --------- Properties Collateralizing the Nomura Loan at December 31, 2002* ---------------------------------------------------------------- YEAR SQUARE FEET (UNAUDITED) CONSTRUCTED/ GROSS INVESTMENT ---------------------- REHABILITATED -------------------- PROPERTY LOCATION 2002 2001 (UNAUDITED) 2002 2001 -------- -------- ---- ---- ----------- ---- ---- 333 Elm Street ................ Dedham, MA 48,000 48,000 1983 6,193 5,974 Dedham Place .................. Dedham, MA 160,000 160,000 1987/2002 31,064 28,302 Stony Brook Corporate Park .... Waltham, MA 218,000 218,000 1986 48,810 37,302 201 University Avenue ......... Westwood, MA 82,000 82,000 1982 10,363 10,363 7/57 Wells Avenue ............. Newton, MA 88,000 88,000 1982 12,744 12,651 75/85/95 Wells Avenue ......... Newton, MA 242,000 242,000 1976/1986 41,856 41,663 --------- --------- --------- --------- 838,000 838,000 151,030 136,255 --------- --------- --------- --------- F-62 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, 2002 ------------------------------------------------------------------------------- YEAR SQUARE FEET (UNAUDITED) CONSTRUCTED/ GROSS INVESTMENT ---------------------- REHABILITATED -------------------- PROPERTY LOCATION 2002 2001 (UNAUDITED) 2002 2001 -------- -------- ---- ---- ----------- ---- ---- 600 Atrium Drive (land)** ..... Somerset, NJ N/A N/A N/A 2,885 2,695 74 Turner Street (land)** ..... Waltham, MA N/A N/A N/A 1,001 1,001 McDonough Crossroads .......... Owings Mills, MD -- 32,000 1988 -- 3,842 Airport Executive Park ........ Hanover Twp, NJ 96,000 96,000 1979/2002 14,034 13,637 Airport Executive Park-Land** . Hanover Twp, NJ N/A N/A N/A 3,969 3,028 Columbia Technology Center .... Columbia, MD 144,000 144,000 1972/2002 12,631 8,879 CVS ........................... Essex, MD 10,125 10,125 2000 4,776 4,776 CVS ........................... Pennsauken, NJ 12,150 12,150 2001 3,925 3,925 CVS ........................... Runnemede, NJ 12,150 12,150 2001 4,134 4,134 CVS ........................... Wetumpka, AL 10,125 10,125 2000 2,681 2,681 CVS ........................... Richmond, VA 10,125 10,125 2001 3,194 3,194 --------- --------- --------- --------- 294,675 326,675 53,230 51,792 --------- --------- --------- --------- Total Commercial Properties ... 2,751,675 2,783,675 $ 398,034 $ 379,137 - --------------------------- ========= ========= ========= ========= * - 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.
Revenues from one single tenant, a large financial services provider, aggregated approximately 6% and 11% of rental revenue from continuing operations in 2002 and 2001, respectively. In 2000, one telecommunications company aggregated 13% of revenue from continuing operations. This tenant's lease was terminated in 2001 and the Company received approximately $3.7 million in lease termination fees. This amount is included in interest and other income on the accompanying consolidated statements of operations. The Company capitalizes interest related to buildings under renovation to the extent such assets qualify for capitalization. Total interest incurred and capitalized was $13,464,472 and $2,486,948, $18,462,098 and $2,583,797 and $24,242,401 and $7,306,024, respectively for the years ended December 31, 2002, 2001 and 2000. The Company sold the following buildings and properties:
YEARS ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ---- ---- ---- Number of buildings ............ 1 11 1 ============ ============ ============ Net sales proceeds (approximate) $ 4,231,000 $139,305,000 $ 4,562,000 ============ ============ ============ (Loss)/gains on sales .......... $ (258,711) $ 27,335,636 $ 238,829 ============ ============ ============
The Company recorded a $1,350,638 and $16,545,060 impairment provision during the years ended December 31, 2002 and 2001. The 2002 impairment provision relates to two assets; 24 Federal St. and CVS Decatur. Both of these assets are classified as assets held for sale as of December 31, 2002. CVS Decatur was sold in January 2003 (see Note 11). The 2001 impairment provision relates to three assets: the Pointview Corporate Center, 2331 Congress St. and McDonough Crossroads. These properties were sold in September 2001, May 2001 and June 2002, respectively. F-63 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 from continuing operations to be received under leases existing as of December 31, 2002, are as follows:
(amounts in thousands) PROPERTIES COLLATERALIZING ----------------------------------- PORTFOLIO NOMURA FOR THE YEARS ENDED DECEMBER 31, TOTAL LOAN LOAN OTHER - -------------------------------- ----- ---- ---- ----- 2003............................ $ 36,756 $ 19,500 $ 11,501 $ 5,755 2004............................ 26,729 10,040 11,125 5,564 2005............................ 21,014 7,117 8,401 5,496 2006............................ 13,808 3,437 5,803 4,568 2007............................ 8,992 1,348 3,089 4,555 Thereafter...................... 37,729 983 4,937 31,809 -------- -------- -------- -------- Total........................... $145,028 $ 42,425 $ 44,856 $ 57,747 ======== ======== ======== ========
The above future minimum lease payments do not include specified payments for tenant reimbursements of operating expenses which amounted to approximately $4,418,051, $5,565,160, and $6,345,495 for the years ended December 31, 2002, 2001 and 2000. These amounts have been included in rental income in the accompanying consolidated statements of operations. 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, 2002, aggregate future minimum rental payments under the leases which expire in October 2066, April 2077 and January 2084, are as follows: (amounts in thousands) YEARS ENDED DECEMBER 31, AMOUNT ------------------------ ------ 2003.................... $ 218 2004.................... 231 2005.................... 233 2006.................... 234 2007.................... 235 Thereafter.............. 27,624 ------- Total................... $28,775 ======= F-64 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. LONG TERM DEBT The Company's long-term debt from continuing operations (see Note 8) consisted of the following:
(amounts in thousands) DECEMBER 31, ----------------- DEBT MATURITY DATE 2002 2001 - --------------------------- ------------- ---- ---- Portfolio Loan............ June 2004 $132,349 $126,855 Nomura Loan............... February 2027 65,458 66,189 Other Mortgage Loans...... December 2003 - January 2024 31,368 38,262 -------- -------- $229,175 $231,306 ======== ========
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 a previous bank facility and two mortgages; the remainder was distributed to the Members. Interest expense on the Portfolio Loan was $6,084,768 and $4,222,189 in 2002 and 2001, respectively. The 30-day LIBOR rate was 1.38%, 1.88% and 6.57% respectively, on December 31, 2002, 2001 and 2000. The average 30-day LIBOR rate was 1.76%, 3.72% and 6.43% respectively, for the years ended December 31, 2002, 2001 and 2000. 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 four mortgages to acquire and improve four 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 + 2.00% to 2.95% and the original maturity dates range from March 2003 to January 2024. One of the Other Mortgage Loans matured in 2002 and was refinanced into the Portfolio Loan described above. In connection with a sale of one of the properties, the Company also repaid one of the Other Mortgage Loans in 2002. The Company has exercised its extension option on one of the two mortgage loans maturing in 2003 and expects to refinance the other. As of December 31, 2002 and 2001, 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 $261,474,000 and $256,939,000 at December 31, 2002 and 2001, respectively. F-65 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LONG TERM DEBT (CONTINUED) The aggregate maturities for the Company's long-term debt obligations for each of the next five years and thereafter are as follows:
(amounts in thousands) PORTFOLIO NOMURA OTHER MORTGAGE YEARS ENDED DECEMBER 31, TOTAL LOAN LOAN LOANS - ------------------------ ----- ---- ---- ----- 2003 ................... $ 16,056 $ -- $ 793 $ 15,263 2004 ................... 133,481 132,349 844 288 2005 ................... 1,240 -- 931 309 2006 ................... 1,343 -- 1,010 333 2007 ................... 1,452 -- 1,095 357 Thereafter.............. 75,603 -- 60,785 14,818 -------- -------- -------- -------- Total .................. $229,175 $132,349 $ 65,458 $ 31,368 ======== ======== ======== ========
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, 2002 and 2001, the fair market value of the Cap was approximately $13,000 and $1,089,000, respectively. The ineffective portion of the Cap's change in fair market value was recorded as an adjustment to interest expense of $79,724 in 2002 and $17,347 in 2001, respectively. The effective portion of the Cap's change in fair market value, which was recorded as an adjustment to other comprehensive loss during 2002 and 2001, is $771,013 and $525,560. An affiliate of the Whitehall Members is the counterparty under the Cap. Prior to December 31, 2000, the Company entered into another interest rate protection agreement (the "Prior Cap"), which 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 cost of the Prior Cap was amortized over its life. 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 $4,144,301 in 2002 and $4,761,282 in 2001, respectively, 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 $816,966 in 2002 and $897,730 in 2001, respectively, 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 two buildings owned by the Company and at one building previously owned by the Company, which was sold in November 2001. The buildings owned by the Company are shown on the accompanying consolidated balance sheets as assets held for sale. Rental income under those leases was approximately $0 and $219,684 for the years ended December 31, 2002 and 2001, respectively. 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. F-66 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TRANSACTIONS WITH AFFILIATES (CONTINUED) Affiliates of the Whitehall Members provide debt placement, environmental and insurance services for the Company. The Company incurred $849,583 in 2002, $3,182,139 in 2001 and $464,411 in 2000, respectively for these services. In addition, an affiliate of the Whitehall Members is the counter-party of the Cap discussed in Note 6. Affiliates of the Saracen Members perform property management services for the Company, which amounted to approximately $267,000, $337,000 and $528,000, respectively for the years ended December 31, 2002, 2001 and 2000. Pursuant to an asset management agreement that was terminated in January 1999, the Company agreed to pay $1 million in 2004, plus quarterly interest at 10% per annum paid currently. At December 31, 2002 and 2001 the Company has approximately $735,000 and $742,000, respectively payable to its Members or their affiliates. These amounts are in included accrued expenses and other liabilities 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, 2002, 2001 and 2000, amounted to $46,895, $47,258 and $44,826, respectively. See Notes 1, 6, 9 and 10 for additional related party interest information. 8. DISCONTINUED OPERATIONS ("ASSETS AND LIABILITIES ATTRIBUTABLE TO PROPERTIES HELD FOR SALE") As of December 31, 2002 the Company has ten properties totaling 1,121,125 square foot (unaudited) which are being held for sale (collectively, the "Properties Held for Sale"). Consistent with SFAS No. 144, the results of operations of the Properties Held for Sale are reported separately as discontinued operations for the years ended December 31, 2002, 2001, and 2000. Assets and liabilities attributable to the Properties Held for Sale have been classified separately in the Company's consolidated balance sheets at December 31, 2002 and December 31, 2001 and are summarized in the following table: DECEMBER 31, ------------ 2002 2001 ---- ---- ASSETS Net real estate ............................. $159,265,358 $164,460,647 Cash and cash equivalents ................... 493,403 575,701 Restricted cash ............................. -- -- Deferred costs, less accumulated amortization 4,309 5,264 Receivables, prepaids and other assets ...... 4,932,750 5,833,343 ------------ ------------ Total assets ................................ $164,695,820 $170,874,955 ============ ============ LIABILITES AND MEMBERS' EQUITY Mortgages payable ........................... $ 7,372,678 $ 7,497,117 Senior Secured facility ..................... -- -- Secured Mezzanine facility .................. -- -- Portfolio loan .............................. 131,811,189 131,205,828 Accrued expenses and other liabilities ...... 1,641,198 3,887,374 ------------ ------------ Total liabilities ........................... 140,825,065 142,590,319 ------------ ------------ Net assets of discontinued operations ....... $ 23,870,755 $ 28,284,636 ============ ============ Revenues attributable to Properties Held for Sale for the years ended December 31, 2002, 2001 and 2000 were $27,063,377, $21,607,439 and $18,150,355, respectively. Loss from discontinued operations as reflected in the accompanying consolidated statements of operations for the year ended December 31, 2002 is after an impairment provision aggregating $1,350,638 attributable to two properties held for sale. F-67 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. 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 were 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 December 31, 2002 none of the Revolving Equity has been drawn. 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 9,052,422 units were issued to WCPT and Whitehall, respectively, in connection with net additional capital contributions used to fund acquisitions and renovations. 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 unit holders, 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, ---------------------------------------- 2002 2001 2000 ---- ---- ---- WCPT .......... 6,276,780 6,276,780 5,673,012 Whitehall ..... 11,547,422 11,555,287 8,178,620 Saracen Members 1,434,126 1,434,126 451,840 ---------- ---------- ---------- Total ......... 19,258,328 19,266,193 14,303,472 ========== ========== ========== During 2002, 2001 and 2000, distributions of $0, $103,352,145 and $4,540,835, respectively, were declared, of which $0, $4,221,364 and $2,253,520 remained unpaid at December 31, 2002, 2001 and 2000 respectively. F-68 WELLSFORD/WHITEHALL GROUP, L.L.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. 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 significant restrictions. Subsequent to December 31, 2003, either Whitehall or WCPT may trigger a buy/sell of the other party's membership units in the Company or of the remaining assets to the other member, subject to certain conditions. As of December 31, 2002, 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 $518,000 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, 2002, 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. There can be no assurances that such matters will not have a material effect on the Company's consolidated financial condition, consolidated results of operations or consolidated cash flows in the future. 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% per annum of gross rentals collected and are generally terminable on 30 days notice. See Notes 1, 6, 7, 8 and 9 for additional commitments and contingencies. 11. SUBSEQUENT EVENTS In January 2003, the Company sold one of its drugstores for $2.4 million. In February 2003, the Company sold four office properties located in Northern New Jersey and two office properties located in Suburban Baltimore totaling 956,000 square feet for $136.8 million. These sales resulted in an aggregate net gain of approximately $10.5 million. In March 2003, the company sold one 16,000 square foot office property located in Waltham, MA for $1.3 million. As discussed in Note 8, the assets and liabilities of all eight properties are included in assets held for sale and liabilities attributable to properties held for sale in the accompanying consolidated balance sheets. The Company is currently negotiating two contracts to sell two office properties, located in Downtown Boston, MA, for an aggregate of approximately $33.5 million (unaudited). Such transactions are expected to close during the second quarter 2003 and should result in a net gain of approximately $75,000 (unaudited). The assets and liabilities of these two properties are included in assets held for sale and liabilities attributable to properties held for sale in the accompanying consolidated balance sheets. There can be no assurances that such sales will be completed at all, or if completed will be at the terms being contemplated. F-69 WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (amounts in thousands, except square footage and units)
INITIAL COST COST ------------------------------------ CAPITALIZED UNITS/ SUBSEQUENT DATE YEAR SQUARE DEPRECIABLE BUILDING AND TO DESCRIPTION ACQUIRED BUILT FEET LIFE LAND IMPROVEMENTS TOTAL ACQUISITION ----------- -------- ----- ---- ---- ---- ------------ ----- ----------- RESIDENTIAL Blue Ridge - Dec- Denver, CO .... 1997 1997 456 27.5 yrs $ 5,225 $ 36,339 $ 41,564 $ 419 Red Canyon - Nov- Denver, CO .... 1998 1998 304 27.5 yrs 5,060 28,844 33,904 39 Silver Mesa - Dec- Denver, CO (B). 2000 2000 40 27.5 yrs 3,343 18,959 22,302 (17,852) Green River - Dec- Denver, CO .... 2001 2001 424 27.5 yrs 8,451 47,889 56,340 7 ------- --------- --------- --------- --------- TOTAL RESIDENTIAL ... 1,224 22,079 132,031 154,110 (17,387) ======= --------- --------- --------- --------- OFFICE AND INDUSTRIAL Two properties- Office/Industrial Feb-1998 Var. 175,183 40 yrs 1,035 5,865 6,900 2,000 ======= --------- --------- --------- --------- TOTAL ........... $ 23,114 $ 137,896 $ 161,010 $ (15,387) ========= ========= ========= ========= TOTAL COST ----------------------------------- PROVISION BUILDING AND FOR ACCUMULATED DESCRIPTION LAND IMPROVEMENTS TOTAL IMPAIRMENT NET DEPRECIATION ENCUMBRANCE ----------- ---- ------------ ----- ---------- --- ------------ ----------- RESIDENTIAL Blue Ridge - Denver, CO .... $ 5,225 $ 36,758 $ 41,983 $ -- $ 41,983 $ 6,694 $32,447 (A) Red Canyon - Denver, CO .... 5,060 28,883 33,943 -- 33,943 4,268 25,677 (A) Silver Mesa - Denver, CO (B). 667 3,783 4,450 -- 4,450 310 4,318 (C) Green River - Denver, CO .... 8,451 47,896 56,347 -- 56,347 1,562 37,111 (A) --------- --------- --------- --------- --------- --------- ------- TOTAL RESIDENTIAL ... 19,403 117,320 136,723 -- 136,723 12,834 99,553 --------- --------- --------- --------- --------- --------- ------- OFFICE AND INDUSTRIAL Two properties- Office/Industrial 1,035 7,865 8,900 (2,175) (D) 6,725 697 -- (E) --------- --------- --------- --------- --------- --------- ------- TOTAL ........... $ 20,438 $ 125,185 $ 145,623 $ (2,175) $ 143,448 $ 13,531 $99,553 ========= ========= ========= ========= ========= ========= ======= - ---------- (A) Encumbrance balances exclude the Palomino Park Bonds. The balance of the Palomino Park Bonds was $12,680 at December 31, 2002. The Palomino Park Bond collateral includes Blue Ridge, Red Canyon and Green River operational phases, as well as the undeveloped Gold Peak phase (improved land). (B) During the year ended December 31, 2002, the Company reclassified costs of $17,854 and accumulated depreciation of $950 on 96 units to inventory available for sale. (C) Debt is also collateralized by the condominium portion of the project with a carrying amount of approximately $14,542; individual units are currently held for sale. (D) Provision for impairment relates to excess of carrying amounts over estimated individual net sale prices of assets held for sale. (E) These properties are unencumbered at December 31, 2002.
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, --------------------------------------- 2002 2001 2000 ---- ---- ---- REAL ESTATE Balance at beginning of period .... $ 160,163 $ 123,201 $ 135,418 Additions: Acquisitions and transfers from construction in progress .... -- 56,340 22,302 Recovery of impairment reserve . -- 2,550 -- Capital improvements ........... 1,139 537 1,993 --------- --------- --------- 161,302 182,628 159,713 Less: Reclassified costs to available for sale inventory .......... (17,854) -- -- Provision for impairment ....... -- -- (4,725) Cost of real estate sold ....... -- (22,465) (31,787) --------- --------- --------- Balance at end of period .......... $ 143,448 (A) $ 160,163 $ 123,201 ========= ========= ========= ACCUMULATED DEPRECIATION Balance at beginning of period .... $ 9,873 $ 8,248 $ 6,584 Additions: Charged to operating expense ... 4,608 3,066 4,198 --------- --------- --------- 14,481 11,314 10,782 Less: Accumulated depreciation on real estate costs reclassified to available for sale inventory. (950) -- -- Accumulated depreciation on real estate sold ................. -- (1,441) (2,534) --------- --------- --------- Balance at end of period ......... $ 13,531 (A) $ 9,873 $ 8,248 ========= ========= ========= - ---------- (A) The aggregate depreciated cost for federal income tax purposes was approximately $5,000 less at December 31, 2002.
S-2 EX-10.40 3 ex10-40.txt EMPLOYMENT AGREEMENT FOR W. H. DARROW 07/01/01 WELLSFORD REAL PROPERTIES, INC. 535 Madison Avenue, 26th Floor New York, New York 10022 As of July 1, 2001 Mr. William H. Darrow II 7 Hunt Road Darien, CT 06820 Dear Mr. Darrow: 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 Managing Director to perform such services for the Company and its affiliated entities commensurate with your position as Managing Director 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 $200,000 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 eligible for bonuses in the sole discretion of the Company. 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. (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 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 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 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 agreements. 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/ William H. Darrow II - ------------------------------ William H. Darrow II EX-10.661 4 ex10-661.txt 1ST AMEND TO LOAN AGRMT DATED 10/1/02 FIRST AMENDMENT TO LOAN AGREEMENT AND OTHER LOAN DOCUMENTS This First Amendment to Loan Agreement and Other Loan Documents (this "AGREEMENT") is entered into as of October .l, 2002, by and between WELLSFORD/ WHITEHALL HOLDINGS, L.L.C., a Delaware limited liability company ("BORROWER"), and GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation ("Lender"). This Agreement is made with reference to the following facts: RECITALS A. Lender has made a loan to Borrower in the aggregate principal amount of up to $352,600,000.00 (the "LOAN"), pursuant to terms of that certain Loan Agreement dated June 25, 2001 by and between Borrower and Lender (the "LOAN AGREEMENT"). Capitalized terms used in this Agreement and not defined shall have the meanings assigned to such terms in the Loan Agreement. The Loan is evidenced by that certain Promissory Note dated June 25, 2001, executed by Borrower to the order of Lender in the face principal amount of $352,600,000.00 (the "NOTE"). B. Borrower has requested that Lender agree to make an additional advance to Borrower in the aggregate amount of up to $6,500,000.00. The funds from such additional advance shall be used to refinance that certain real property located in Warren, New Jersey, more particularly described in Exhibit "A" attached hereto and incorporated herein (the "SOMERSET' TECH CENTER"), and to pay certain closing costs relating to such additional advance. Borrower has also requested that Lender reallocate a portion of the Working Capital Advance Allocation to pay for or reimburse Borrower for certain costs in respect of necessary and customary replacements or substitutions to improvements to the Somerset Tech Center. Subject to the terms and conditions contained in this Agreement, Lender has agreed to modify the Loan Agreement and other Loan Documents to increase the amount of the Loan, and to reallocate a portion of the Working Capital Advance Allocation, as requested by Borrower. C. As of the date of this Agreement (and exclusive of the Additional Advance described below), the outstanding principal balance of the Loan is $258,060,434. The unfunded balance of the Loan is $72,230,000, consisting of the Nomura Holdback of $28,000,000, the Mt. Airy Holdback of $200,000, the Gateway Tower Holdback of $1,800,000 and the Working Capital Advance Allocation of $42,230,000. Pursuant to the terms of the Loan Agreement, the Shattuck Office Center Holdback, in the amount of $7,088,000, and the portion of the Working Capital Advance Allocation which was originally allocated to the Shattuck Office Center Property, in the amount of $370,000, were canceled. D. As used in this Agreement, the term "LOAN DOCUMENTS" means the Loan Agreement, the Note, the Deeds of Trust, the Assignments of Leases, and the other "Loan Documents" described in the Loan Agreement. This Agreement, the Amendments described below and the Amended and Restated Note described below also shall constitute Loan Documents. AGREEMENT NOW, THEREFORE, with reference to the foregoing Recitals and information, and in consideration of the mutual covenants and agreements contained in this Agreement, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender agree as follows: 1. Recitals; Representations and Warranties. The above statement of facts set forth in the Recitals is true and correct, and the Recitals hereby are incorporated herein as an agreement of Borrower and Lender. Borrower hereby represents and warrants to Lender that (a) no Default or Event of Default has occurred or exists, and (b) all representations and warranties of Borrower contained in the Loan Agreement or in any of the other Loan Documents (as the Loan Agreement and such other Loan Documents are amended hereby) are true and correct as of the date hereof, excluding the representation in Section 6.28 regarding the Shattuck Office Center Property. 2. Additional Advance. Subject to the terms and conditions of this Agreement, Lender agrees to provide Borrower, and Borrower accepts, an additional advance (the "ADDITIONAL ADVANCE") in the principal sum of up to $6,500,000.00. The Additional Advance, together with the outstanding principal balance and remaining unfunded proceeds of the original Loan, shall be evidenced by the- Amended and Restated Note described below and shall be secured by the Deeds of Trust and the other Collateral Documents. 2.1. Initial Advance. Upon fulfillment of the conditions set forth in Section 8 Lender shall disburse (a) a portion of the Additional Advance, equal to the commitment fee payable to Lender (described in Section 8.1 (a) below) and all other sums owing to Lender described in Section 8 below, to itself, in payment of the commitment fee and such other sums (to the extent not paid through escrow in accordance with clause (b) of this Section 2.1 (b) a portion of the Additional Advance by wire transfer to Commonwealth Land Title Company for the escrow established to consummate the closing of the transactions contemplated by this Agreement, to be disbursed by Commonwealth Land Title Company (upon satisfaction of the conditions set forth in Lender's escrow and recording instructions) to pay certain closing costs, and (iii) the balance of the Additional Advance less the amount of the GMAC Holdback) by wire transfer to Borrower to finance or refinance the Somerset Tech Center. 2.2. GMAC Holdback. Lender shall disburse a portion of the Additional Advance in the amount of $400,000 (the "GMAC HOLDBACK") in one or more Advances, subject to satisfaction of the following conditions as to each such Advance: (a) Borrower shall have satisfied the terms and conditions set forth in Part B of Schedule 2.1 to the Loan Agreement; (b) Advances shall not be made more frequently than once per calendar month; (c) After giving effect to the requested Advance, the undisbursed portion of the GMAC Holdback (if any) shall not be less than the then remaining amount (if any) of the "Allowance" defined and described in Section 5(a) of Exhibit C to the Lease dated February 28, 2001 between Borrower, as landlord, and GMAC Home Services, as Tenant, covering space at the Somerset Tech Center. Borrower shall deliver to Lender evidence reasonably satisfactory to Lender, evidencing the then remaining amount of the Allowance. 3. Consolidation of Indebtedness. The original Loan is consolidated with the Additional Advance to form a single indebtedness (the "MQREGATE LOAN") in the principal amount of $336,790,434.00, which is the sum of the amounts described in Recital C plus the Additional Advance. The Aggregate Loan shall be evidenced by that certain Amended and Restated Promissory Note of even date herewith executed by Borrower in favor of Lender in the face amount of $336,790,434.00 (the "AMENDED AND RESTATED NOTE"). The Amended and Restated Note shall amend, restate and replace the Note in its entirety. Amendments to Loan Agreement. Borrower and Lender hereby amend the Loan Agreement as follows: 4.1. Definition of GECC. The definition of "GECC" set forth in Section 1.1(61) is amended and restated in its entirety to read as follows: "'GECC" means General Electric Capital Corporation, a Delaware corporation." 4.2. Definition of Maximum Loan Amount. The definition of "Maximum Loan Amount" set forth in Section 1.1(93) is amended and restated in its entirety to read as FOLLOWS: "'MAXIMUM LOAN AMOUNT" means $336,790,434.00." 4.3. Definition of Note. The definition of "Note" set forth in Section 1.1(107) of the Loan Agreement is amended and restated in its entirety to read as follows: "'NOTE" shall mean the Amended and Restated Promissory Note dated October 1, 2002, in the stated principal amount of Three Hundred Thirty-Six Million Seven Hundred Ninety Thousand Four Hundred Thirty Four and No/100 Dollars ($336,790,434.00) executed by Borrower and payable to the order of Lender, in evidence of the Loan." 4.4. New Definitions. Section 1.1 of the Loan Agreement is hereby amended to add the following new definitions to the end thereof: "(156) "FIRST AMENDMENT" shall mean that certain First Amendment to Loan Agreement and Other Loan Documents dated as of October 1, 2002 entered into between Borrower and Lender." "(157) "FIRST AMENDMENT DATE" shall mean October_, 2002." 4.5. Definition of Borrower Properties. The definition of "Borrower Properties" set forth in Section 1.1 of the Loan Agreement is hereby amended to include, in addition to all other real property currently included within such definition, (a) the Somerset Tech Center, and (b) all other "Property" described in the Deed of Trust encumbering the Somerset Tech Center. 4.6. Working Capital Budgets. Effective as of the First Amendment Date, the remaining undisbursed Working Capital Advance Allocation shall be reallocated among the Properties (including Somerset Tech Center) in accordance with the Working Capital Budgets set forth in revised Schedule 2.1(5) attached hereto. 4.7. Amendment to Section 2.1(5)(d)(ii). Section 2.1(5)(d)(ii) of the Loan Agreement is amended and restated in its entirety to read as follows: "(ii) subject to paragraph (e) below, an amount which, when added to the Loan balance and all undisbursed Loan funds allocated to the Mount Airy Holdback and the Gateway Tower Holdback and the GMAC Holdback (as defined r- Z. Holdback the First Amendment), is equal to the lesser of (A) the Cash On Cash Limit CU I.,~% Amount and (B) the Debt Service Coverage Ratio Limit Amount; and" Mc;!:: 1.3}G 4.8. Amendment to Section 2.3(4). Section 2.3(4) of the Loan Agreement is amended and restated in its entirety to read as follows: "(4) PREPAYMENT. Except as provided below, at any time during the Term, upon not less than ten (10) days' prior written notice to Lender, Borrower may prepay the Loan in whole or in part without premium or penalty, provided that each such prepayment shall be accompanied by the payment of accrued and unpaid interest on the principal amount being prepaid, through the date of prepayment, and any other costs or expenses which are payable to Lender in accordance with the terms hereof or any other Loan Document. The foregoing notwithstanding, from the Closing Date through December 31, 2002 prepayment (in whole or in part) shall only be permitted in connection with a sale or other transfer of a Property to a Person which is not an Affiliate of Borrower or of any Borrower Party. From and after January 1, 2003, Loan shall be closed to partial prepayment from a Refinance (including a Refinance of any or all of the Nomura Properties). A prepayment premium equal to two percent (2.0%) of the outstanding principal balance of the Loan shall be payable if an Event of Default occurs and the Loan is accelerated prior to January 1, 2003. Borrower acknowledges that the prepayment premium required by this Section 2.3(4) constitutes partial compensation to Lender for the costs of reinvesting the Loan proceeds and for loss of the contracted rate of return on the Loan. Furthermore, Borrower acknowledges that the loss that may be sustained by Lender as a result of such prepayment by Borrower is not susceptible of precise calculation and the prepayment premium represents the good faith effort of Borrower and Lender to compensate Lender for such loss. Borrower confirms that Lender's agreement to make the Loan at the interest rate and on the other terms set forth herein constitutes adequate and valuable consideration, given individual weight by Borrower, for the prepayment provision set forth in this Section." 4.9. Amendment to Section 3.1(1). The following is hereby added to the end of Section 3.1(1) of the Loan Agreement: "In addition to the foregoing insurance requirements, Borrower shall keep in full force and effect through July 1, 2003 the existing insurance policies, issued by Lexington Insurance Company and National Fire and Marine Insurance Company, which insure the buildings and improvements located at each Borrower Property against loss or damage by acts of terrorism (and while such policies are in effect, Lender shall be listed as a "mortgagee" and "loss payee" thereunder); provided that Borrower shall not be in breach of this covenant if either of such policies terminates due to dissolution of the insurer or a unilateral cancellation of such policy by the insurer (other than a cancellation caused by any action or inaction by Borrower which entitled the insurer to cancel the policy)." 4.10. Schedules. Schedules 1.1(A), 1.1(B), 2.1(5), 4.2, 5.1 (A)-5.1(F), 6.4, 6.5, 6.6, 6.7, 6.10, 6.26, 6.27 and 8.19 to the Loan Agreement are hereby replaced in their entirety with Schedules 1.1(A), 1.1(B), 2.1(5), 4.2, 5.1(A)-5.1(F), 6.4, 6.5, 6.6, 6.7, 6.10, 6.26, 6.27 and 8.19 respectively, attached to this Agreement. All defined terms making specific reference to any information contained within any of these Schedules are hereby amended to refer to such Schedule(s) as attached hereto. 5. Amendments to Loan Documents. Borrower and Lender hereby amend the Loan Documents as follows: 5.1. References to Loan and Note. All references to the Loan in the Loan Documents hereafter shall be deemed to be references to the Aggregate Loan, and all references to the Note hereafter shall be deemed to be references to the Amended and Restated Note. 5.2. Amendment to Hazardous Substances Indemnity Agreement. The definition of "Premises" in the recitals of the Hazardous Substances Indemnity Agreement is hereby amended to include, in addition to all other Property currently included within such definition, the Somerset Tech Center. Borrower hereby reaffirms and restates all representations, warranties, covenants and agreements contained in the Hazardous Substances Indemnity Agreement, as such representations, warranties, covenants and agreements apply to the Somerset Tech Center. WWPH and WWG shall execute the Consent of Borrower Parties attached hereto, and Gateway Tower Owner shall execute the Consent of Guarantor attached hereto, to evidence their consent to the foregoing amendment to the Hazardous Substances Indemnity Agreement. 5.3. Amendment to Agreement Regarding Asset Management. The Agreement Regarding Asset Management is hereby amended to include the Somerset Tech Center within the definition of "Property" used therein. 5.4. Collateral Documents. The Deeds of Trust and all other Collateral Documents shall secure, in addition to all other indebtedness and obligations secured thereby, the payment and performance of all present and future indebtedness and obligations of Borrower under (a) this Agreement, (b) the Amended and Restated Note, and (c) any and all amendments, modifications, renewals and/or extensions of this Agreement or the Amended and Restated Note, regardless of whether any such amendment, modification, renewal or extension is evidenced by a new or additional instrument, document or agreement. The Deed of Trust which Borrower is executing concurrently herewith and which shall encumber the Somerset Tech Center shall also constitute one of the Collateral Documents. 6. Replacement of Front Building at Somerset Tech Center. The Somerset Tech Center is currently improved with two buildings, one of which is a currently vacant single-story building located closest to the southern boundary of the Somerset Tech Center (the "FRONT BUILDING"). Subject to the following terms and conditions, Borrower shall be entitled to demolish the Front Building and replace it with a new office building (together with any related improvements to be constructed in connection therewith, the "NEW BUILDING") containing approximately 60,000 net rentable square feet: 6.1. Prior to seeking a loan commitment from another lender to finance the construction of the New Building (the "NEW BUILDING FINANCING"), Borrower covenants to notify Lender in writing of its intention to seek such New Building Financing and shall provide to Lender fifteen (15) Business Days to submit a proposal to provide the New Building Financing. If Borrower elects to accept the terms of such proposal, Lender shall provide the New Building Financing on such terms as may be contained in the definitive documentation relating to the New Building Financing executed by Lender, Borrower and the other parties thereto (it being understood and agreed, however, that Lender shall not be required to provide, and Borrower shall not be required to accept, any such. New Building Financing except pursuant to definitive documentation that is executed and delivered by Lender, Borrower and the other parties thereto). If Lender does not make a proposal to provide the New Building Financing within fifteen (15) Business Days after being given the opportunity to make such proposal, or Borrower does not elect to accept Lender's proposal for the New Building Financing, or Lender and Borrower do not execute and deliver definitive documentation with respect to the New Building Financing within a reasonable period of time after Borrower accepts Lender's proposal with respect to the New Building Financing, Borrower may, subject to compliance with the provisions of Sections 6.2 and 6.3 below, obtain the New Building Financing from such other lender and on such terms as it shall, in its sole discretion, deem appropriate ("PERMITTED FINANCING"). 6.2. Notwithstanding anything to the contrary contained herein, Borrower shall not obtain any Permitted Financing unless, prior to or concurrently with the closing of such Permitted Financing, Borrower shall have (a) satisfied all conditions set forth in Section 2.4 of the Loan Agreement to the release of the Somerset Tech Center from the Lien of the Loan Documents, other than the requirement that the release be in connection with a sale or other transfer of such Property to a Person that is not an Affiliate of Borrower or of any Borrower Party; provided, however, that if such release occurs within six (6) months of the First Amendment Date, the Release Payment shall be the greater of (i) the Adjusted Loan Basis of the Somerset Tech Center and (ii) the minimum amount which, when applied to the outstanding principal balance of the Loan, would result in a Cash On Cash Return of at least eleven percent (11%) and a Debt Service Coverage Ratio of at least 1.25 to 1.0; and (b) transferred the Somerset Tech Center to an entity which may be related to Borrower, so long as Borrower is not directly or indirectly liable on a recourse basis for any of such entity's indebtedness or obligations to any Person. 6.3. If the New Building will be constructed with funds from a Permitted Financing, then (a) Borrower shall not undertake any demolition or new construction work at the Somerset Tech Center unless and until the Somerset Tech Center has been released from the Lien of the Loan Documents in accordance with Section 6.2 above, and (b) Section 6.4, Section 6.5, Section 6.6 and Section 6.7 below shall not apply. 6.4. If the New Building will be constructed with funds from Lender or with funds from capital contributions to Borrower, then prior to undertaking any demolition or new construction work, Borrower shall have delivered to Lender, and Lender shall have reasonably approved: (a) a detailed line item budget of all costs to be incurred in connection with the demolition of the Front Building and the construction and lease-up of the New Building (the "NEW BUILDING BUDGET"); (b) the final plans and specifications for the New Building, bearing the signed approval thereof by the project architect, accompanied by the architect's signed estimate, bearing the architect's seal, of the entire cost of completing the New Building; (c) evidence that all necessary approvals and consents regarding the New Building have been obtained, and that the Somerset Tech Center, upon completion of the New Building, will be in compliance with all applicable Laws (including all zoning, parking, setback and other land use restrictions); (d) copies of all building permits and other permits, licenses, consents and approvals of all applicable Governmental Authorities relating to the New Building, as well as copies of all construction contracts and other contracts relating to the New Building; and (e) if Borrower is funding the work from capital contributions, Borrower shall have provided Lender with (i) evidence reasonably satisfactory to Lender that Borrower has access to all capital funds necessary to complete the New Building in accordance with the plans and New Building Budget approved by Lender, and (ii) a guaranty of completion of the New Building in accordance with the plans approved 6.5. Lender, which guaranty shall be in form and substance, and from WWG or another guarantor reasonably satisfactory to Lender. 6.6. The New Building shall be constructed in accordance with all applicable Laws. At such time as the foundations for the New Building have been completed, Borrower shall cause the Title Company to issue to Lender an CLTA 102.5 (or local equivalent) foundation Endorsement to Lender's Title Policy for the Somerset Tech Center. 6.7. Upon completion of the New Building, Borrower shall deliver to Lender a certificate of occupancy covering the New Building, together with a written certification from the architect retained in connection with the New Building that the New Building has been completed in accordance with the plans approved by Lender and that the New Building is fully operational and ready for occupancy and use. 7. Anti-Terroism and Anti-Money Laundering Compliance. 7.1. Compliance with Anti-Terrorism Laws. Borrower represents, warrants and covenants to Lender that Borrower, the Gateway Tower Owner and Borrower's other direct and indirect wholly-owned subsidiaries (collectively with the Gateway Tower Owner, the "BORROWER SUBSIDIARIES"), WWPII and WWG are not and shall not be, and, after making due inquiry, that no Person who directly or indirectly owns a controlling interest in or otherwise controls Borrower, WWPII or WWG (each, a "CONTROLLING PERSON") is or shall be, (a) listed on the Specially Designated Nationals and Blocked Persons List (the "SDN LIST") maintained by the Office of Foreign Assets Control ("OFAC" Department of the Treasury, and/or on any other similar list ("OTHER LISTS" and, collectively with the SDN List, the "Lists") maintained by the OFAC pursuant to any authorizing statute, Executive Order or regulation (collectively, "OFAC LAWS AND REGULATIONS"); or (b) a Person (a "DESIGNATED PERSON") either (i) included within the term "designated national" as defined in the Cuban Assets Control Regulations, 31 C.F.R Part 515, or (ii) designated under Sections 1(a), 1(b), 1(c) or 1(d) of Executive Order No. 13224, 66 Fed. Reg. 49079 (published September 25, 2001) or a Person similarly designated under any related enabling legislation or any other similar Executive Orders (collectively, the "EXECUTIVE ORDERS"). The OFAC Laws and Regulations and the Executive Orders are collectively referred to in this Agreement as the "ANTI-TERRORISM LAWS". Borrower also shall require, and shall take reasonable measures to ensure compliance with the requirement, that no Person who owns any otherdirect interest in Borrower, WWPII or WWG is or SHALL be listed on any of the Lists or is or shall be a Designated Person. This Section 7.1 shall not apply to any Person to the extent that such Person's interest in the Borrower is through a U.S. Publicly-Traded or Pension Entity. As used in this Agreement, "U.S. PUBLICLY-TRADED OR PENSION ENTITY" means either (A) a Person (other than an individual) whose securities are listed on a national securities exchange, or quoted on an automated quotation system, in the United States, or a wholly-owned subsidiary of such a Person, or (B) an "employee pension benefit plan" or "pension plan" as defined in Section 3(2) of ERISA. 7.2. Compliance by Interest Holders. Borrower shall require each Person that proposes to become a Controlling Person after the First Amendment Date and that is not a U.S. Publicly-Traded or Pension Entity to sign, and to deliver to Borrower (and Borrower shall deliver to Lender), an Interest Holder Certification and Agreement, substantially in the form attached as Exhibit "B" ("INTEREST HOLDER AGREEMENT"). No transfer of an interest which would otherwise cause such a Person to become a Controlling Person shall be effective unless and until the transferee has executed and delivered to Borrower an Interest Holder Agreement as required above, and Borrower has delivered a copy thereof to Lender. From time to time upon the written request of Lender, Borrower shall deliver to Lender a schedule of the name, legal domicile address and (for entities) place of organization of each holder of a direct interest in Borrower, WWPII or WWG. 7.3. Anti-Terrorism Policies. Borrower agrees to adopt and maintain adequate policies, procedures and controls to ensure that it and each of the Borrower Subsidiaries is in compliance with all Anti-Terrorism Laws and related government guidance (such policies, procedures and controls are collectively referred to in this Agreement as "BORROWER ANTI-TERRORISM POLICIES"). Borrower further agrees to make the Borrower Anti-Terrorism Policies, and the respective policies, procedures and controls for Persons who are or are to become Controlling Persons or direct members in Borrower (such policies, procedures and controls are collectively referred to as "INVESTOR ANTI-TERRORISM POLICIES"), together with the information collected thereby concerning Borrower, the Borrower Subsidiaries, WWPII, WWG and such Controlling Persons and direct members (but not indirect members that are not Controlling Persons, WWPII or WWG), available to Lender for review and inspection by Lender from time to time during normal business hours and upon reasonable prior notice, and Borrower agrees to deliver copies of the same to Lender from time to time upon request. Lender will keep the Borrower Anti-Terrorism Policies and the Investor Anti-Terrorism Policies, and the information collected thereby, confidential subject to customary exceptions for legal process, auditors, regulators, or as otherwise reasonably required by Lender to comply with requirements of law. Borrower consents to the disclosure to U.S. regulators and law, enforcement authorities by Lender or any of its Affiliates or agents of such information about Borrower, the Borrower Subsidiaries and the owners of direct interests in Borrower, WWPII and WWG that Lender reasonably deems necessary or appropriate to comply with applicable Anti-Terrorism Laws and Anti-Money Laundering Laws. 7.4. Funds Invested in Borrower. Borrower represents and warrants that it has taken, and that it shall continue to take, reasonable measures appropriate to the circumstances (and in any event as required by law), with respect to each holder of a direct interest in Borrower, WWPII and WWG to assure that funds invested by such holders in Borrower are derived from legal sources ("ANTI-MONEY LAUNDERING MEASURES"). The Anti-Money Laundering Measures have been and shall be undertaken in accordance with the Bank Secrecy Act, 31 U.S.C.ss.ss.5311 et seq. ("BSA" and all applicable laws, regulations and government guidance on BSA compliance and on the prevention and detection of money laundering violations under 18 U.S.C.ss.ss.1956 and 1957 (collectively with the BSA, "ANTI-MONEY LAUNDERING LAWS"). 7.5. No Violation of Anti-Money Laundering Laws. Borrower represents and warrants to Lender, to its actual knowledge after making reasonable inquiry (in accordance with the Anti-Money Laundering Measures), that neither Borrower, nor any Borrower Subsidiary, nor any holder of a direct interest in Borrower, WWPII or WWG (a) is under investigation by any Governmental Authority for, or has been charged with, or convicted of, money laundering under 18 U.S.C.ss.ss.1956 and 1957, or drug trafficking, terrorist-related activities or other money laundering predicate crimes, or a violation of the BSA, (b) has been assessed civil penalties under any Anti-Money Laundering Laws, or (c) has had any of its funds seized or forfeited in an action under any Anti-Money Laundering Laws. 7.6. Borrower Compliance with Anti-Money Laundering Laws. Borrower represents, warrants and covenants to Lender that it has taken, and agrees that it shall continue to take, reasonable measures appropriate to the circumstances (in any event as required by law), to ensure that Borrower and all Borrower Subsidiaries are and shall be in compliance with all current and future Anti-Money. Laundering Laws and laws, regulations and government guidance for the prevention of terrorism, terrorist financing and drug trafficking. 7.7. Notification of Lender: Quarantine Steps. Borrower shall immediately notify Lender if Borrower obtains actual knowledge that any holder of a direct interest in Borrower, WWPII or WWG, or any director, manager or officer of any of such holder, (a) has been listed on any of the Lists, (b) has become a Designated Person, (c) is under investigation by any Governmental Authority for, or has been charged with or convicted of, money laundering or drug trafficking, terrorist-related activities or other money laundering predicate crimes, or any violation of the BSA, (d) has been assessed civil penalties under any Anti-Money Laundering Laws, or (e) has had funds seized or forfeited in an action under any Anti-Money Laundering Laws. In addition, if Borrower obtains actual knowledge that any holder of an indirect interest in Borrower, WWPII or WWG (i) has been listed on any of the Lists, (ii) has become a Designated Person, (iii) has been indicted for, or has been charged with or convicted of, money laundering or drug trafficking, terrorist-related activities or other money laundering predicate crimes, or any violation of the BSA, (iv) has been assessed civil penalties under any Anti-Money Laundering Laws, or (v) has had funds seized or forfeited in an action under any Anti-Money Laundering Laws, Borrower shall take reasonable steps ("QUARANTINE STEPS") to assure that funds received from such indirect interest holder thereafter are not used by Borrower to make payments to Lender under the Loan Documents; provided, however, that if the facts or circumstances which caused such indirect interest holder to be classified within one of the categories described in the foregoing clauses (i) through (v) cease to exist or to apply to such indirect interest holder, then Borrower may cease taking Quarantine Steps with respect to such indirect interest holder. As a matter of clarification and not limitation, any payments by Borrower to Lender which are made from Gross Receipts of the Properties shall be deemed to be payments that are not derived from funds received from such indirect interest holder. 7.8. Additional Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) Borrower shall fail to comply with any of the provisions of this Section 7 or any Person executing an Interest Holder Agreement shall fail to comply with the provisions of such agreement, and in either case the same shall remain unremedied for a period of thirty (30) days after Borrower receives written notice of such failure from Lender; provided, however, if such failure is of the type WHICH IS curable but cannot be cured within such 30-day period, then Borrower shall have an additional sixty (60) days to cure such failure if Borrower, within the initial 30 days, shall have commenced and shall be diligently pursuing such cure. (b) Any representation or warranty of Borrower under this Section 7, or any representation or warranty made to Lender under an Interest Holder Agreement, shall be false, misleading or incorrect as of the date when made and such representation or warranty, if the condition that gave raise to the breach thereof is capable of being cured, shall remain false, misleading or incorrect for a period ending on the first to occur of thirty (30) days after Borrower shall receive written notice from Lender regarding such false, misleading or inaccurate representation or warranty, or thirty (30) days after Borrower shall become aware that such representation or warranty is false, misleading or incorrect; provided, however, that if the breach of the representation or warranty that is capable of being cured is of the type that cannot be cured within such 30-day period, then Borrower shall have an additional sixty (60) days to effect such cure so long as Borrower shall have commenced to cure the condition that gave raise to the breach of representation or warranty within the initial 30-day period, and Borrower thereafter diligently pursues such cure. (c) Notwithstanding the foregoing, it shall be an immediate Event of Default (for which no cure periods shall apply) if Borrower or any Controlling Person is at any time listed on the SDN List. 7.9. Representations and Warranties True and Correct. Borrower represents and warrants to Lender that, as of the First Amendment Date, all of the representations and warranties contained in the Interest Holder Agreements delivered to Lender prior to the First Amendment Date are true and 'correct. Borrower further represents and warrants that all evidence of Borrower's, Gateway Tower Owner's, and each Borrower Party's identity provided to Lender is genuine, that all related information is accurate and that Borrower has acquired and shall hold its interest in the Assets for its own account, risk and beneficial interest, without the obligation or intention to sell, distribute, assign or transfer all or any portion of such interest to any other Person. 7.10. Blocking the Loan. Borrower acknowledges and agrees that if Borrower breaches any of its representations, warranties or agreements set forth in this Section 7, Lender has the right or may be obligated to block the Loan by, among other things, prohibiting additional Loan advances, segregating the assets constituting the Loan or any funds deposited with or otherwise controlled by Lender pursuant to the Loan Documents in accordance with applicable Anti-Terrorism Laws, declining any payment or any prepayment or consent request, and/or declaring an Event of Default and immediately accelerating the Loan (subject, in the case of declaring an Event of Default and accelerating the Loan, to the notice and cure provisions set forth in Section 7,.8, above). 7.11. No Expansion of Transfer Rights. Nothing contained in this Section 7 is intended, nor shall be construed, to permit any assignment, transfer, sale, conveyance, encumbrance, pledge or hypothecation of a direct or indirect interest in Borrower, the Gateway Tower Owner, WWG, WWPII, Wells Avenue Holdings, WASH Manager or Nomura Borrower which is prohibited by Section 9.4(2) of the Loan Agreement. 8. Conditions Precedent. Lender's obligation to make the initial advance of the Additional Advance, and to otherwise modify the terms of the Loan as set forth herein, is subject to the satisfaction of all of the following conditions precedent: 8.1. Lender shall have received each of the following in form and substance satisfactory to Lender (unless otherwise specified, all documents to be delivered shall be originals): (a) The payment to Lender in cash of (i) the commitment fee for the Additional Advance in an amount equal to $65,000.00 (less any portion of Borrower's good faith deposit applied thereto), and (ii) $13,500, which is the unpaid portion of the commitment fee for the Loan funds reallocated from the Working Capital Budgets for the Nomura Properties to the Working Capital Budget for the Somerset Tech Center (i.e., 0.5% of $2,700,000). (b) The Amended and Restated Note duly executed by Borrower. (c) This Agreement duly executed by Borrower; the Consent of Borrower Parties attached hereto duly executed by the Whitehall Parties, Wellsford, WWPII and WWG; the Consent of Guarantor attached hereto executed by Gateway Tower Owner; the Consent of Indemnitors attached hereto executed by all "Indemnitors" under the Indemnification Agreement; and the Acknowledgment and Reaffirmation Regarding Asset Management attached hereto duly executed by WWG and the Asset Manager. (d) A duly executed and acknowledged Amendment to Deed of Trust and Assignment of Leases and Rents executed by Borrower for each of the Deeds of Trust (collectively, the "AMENDMENTS"). (e) A duly executed and acknowledged Deed of Trust encumbering the Somerset Tech Center. (f) A duly executed and acknowledged Assignment of Leases with respect to the Somerset Tech Center. (g) A Collateral Assignment of Contracts for the Somerset Tech Center, duly executed and delivered by Borrower. (h) UCC-I financing statements for the Somerset Tech Center for filing in each jurisdiction deemed necessary by Lender. (i) Opinions of Sullivan & Cromwell, counsel to Borrower, and opinions of Lender's local counsel in Massachusetts, Maryland and New Jersey; in each case addressing such matters regarding the Aggregate Loan, the Borrower, each Borrower. Party, the Gateway Tower Owner, this Agreement, the Amended and Restated Note, the Amendments and/or the Loan Documents as Lender may reasonably specify. (j) A current rent roll for the Somerset Tech Center and each other Property, together with copies of all Tenant leases relating to the Somerset Tech Center and each other Property which have not been previously delivered to Lender. (k) Estoppel certificates and, where required by Lender, subordination, nondisturbance and attornment agreements from Tenants under Leases at the Somerset Tech Center, as shall be satisfactory to Lender. (l) Governmental certificates, dated the most recent practicable date prior to the First Amendment Date, with telecopy updates where available, showing that Borrower and the Gateway Tower Owner are each organized and in good standing in the jurisdiction of its organization and showing that Borrower is qualified as a foreign limited liability company in good standing in all states in which the Borrower Properties are located, and that the Gateway Tower Owner is qualified as a foreign limited liability company in good standing in the state of Maryland. (m) Resolutions of the management committee of the sole member of the sole member of Borrower, certified by an authorized signatory of such sole member (or the manager thereof) of such member within a recent date prior to the First Amendment Date, to be duly adopted and in full force and effect on such date, authorizing (i) the consummation of the transactions contemplated by this Agreement and the Amendments, and (ii) specific officers to execute and deliver this Agreement, the Amendments, the Amended and Restated Note and the other Ancillary Agreements which Borrower and/or Gateway Tower Owner is executing in connection herewith. (n) Certificates of an authorized signatory of the sole member (or the manager thereof) of the sole member of Borrower, dated within a recent date prior to the First Amendment Date, as to the incumbency of the authorized signatories authorized by the resolutions delivered to Lender (as required herein) to execute and deliver this Agreement, the Amended and Restated Note, the Amendments and the other Ancillary Agreements and other certificates or documents to be delivered pursuant hereto or thereto, together with a certification of the incumbency of such authorized signatory. (o) Resolutions of the management committee of WWG, certified by an authorized signatory of WWG (or the manager thereof) within a recent date prior to the First Amendment Date, to be duly adopted and in full force and effect on such date, authorizing (i) the consummation of the transactions contemplated by this Agreement, and (ii) specific authorized signatories to execute and deliver the Consent of Borrower Parties, the Consent of Indemnitors and the Acknowledgment and Reaffirmation Regarding Asset Management attached to this Agreement, the other Loan Documents and Ancillary Agreements to which WWG is a party, and any other certificate or other document to be delivered by WWG pursuant hereto or thereto. (p) Resolutions of the management committee of the sole member of WWPII, certified by an authorized signatory of such member (or the manager thereof) within a recent date prior to the First Amendment Date, to be duly adopted and in full force and effect on such date, authorizing (i) the consummation of each of the transactions contemplated by this Agreement, and (ii) specific authorized signatories to execute and deliver the Consent of Borrower Parties and the Consent of Indemnitors attached to this Agreement, the other Loan Documents and Ancillary Agreements to which WWPII is a party, and any other certificate or other document to be delivered by WWPII pursuant hereto or thereto. (q) Certificates of an authorized signatory of the sole or managing member (as applicable) of WWG and WWPII (or the manager thereof), in each case dated within a recent date prior to the First Amendment Date, as to the incumbency of the authorized signatories of such member (or the manager thereof) authorized by the company resolutions or consent delivered to Lender (as required herein for each such party) to execute and deliver the Consent of Borrower Parties, the Consent of Indemnitors and (as to WWG) the Acknowledgment and Reaffirmation Regarding Asset Management attached to this Agreement, the other Loan Documents and Ancillary Agreements to which such entity is a party, and any other certificate or other document to be delivered by such party pursuant hereto or thereto, together with a certification of the incumbency of such authorized signatory. (r) A board resolution of Wellsford certified by the Secretary or an Assistant Secretary of Wellsford, in each case within a recent date prior to the First Amendment Date, to be duly adopted and in force and effect on such date, authorizing (i) the consummation of the transactions contemplated by this Agreement, and (ii) specific officers to execute and deliver the Consent of Borrower Parties and the Consent of Indemnitors attached to this Agreement, the other Loan Documents and Ancillary Agreements to which Wellsford is a party, and any other certificate or other document to be delivered by Wellsford pursuant hereto or thereto. (s) Certificates of the Secretary, an Assistant Secretary or a Vice President of Wellsford, dated within a recent date prior to the First Amendment Date, as to the incumbency of the officers or representatives of Wellsford authorized by the company consent delivered to Lender (as required herein) to execute and deliver the Consent of Borrower Parties and the Consent of Indemnitors attached to this Agreement, the other Loan Documents and Ancillary Agreements to which Wellsford is a party, and any other certificate or other document to be delivered by Wellsford pursuant hereto or thereto, together with a certification of the incumbency of such Secretary or Assistant Secretary, as the case may be. (t) A partnership. certificate of each Whitehall Party and a consent of manager of each Whitehall Party's general partner, certified by the Secretary, an Assistant Secretary or a Vice President of such general partner, and in each case within a recent date prior to the First Amendment Date, to be duly adopted and in force and effect on such date, authorizing (i) the consummation of the transactions contemplated by this Agreement, and (ii) specific officers to execute and deliver the Consent of Borrower Parties and the Consent of Indemnitors attached to this Agreement, the other Loan Documents and Ancillary Agreements to which such Whitehall Party is a party, and any other'certificate or other document to be delivered by such Whitehall Party pursuant hereto or thereto. (u) Certificates of the Secretary, an Assistant Secretary or Vice President of the general partner of each Whitehall Party, dated within a recent date prior to the First Amendment Date, hereof, as to the incumbency of the officers or representatives of such general partner authorized by the resolutions delivered to Lender (as required herein) to execute and deliver the Consent or Borrower Parties and the Consent of Indemnitors attached to this Agreement, any other Loan Documents and Ancillary Agreements to which such Whitehall Party is =a party, and any other certificate or other document to be delivered by such Whitehall Party pursuant hereto or thereto, together with a certification of the incumbency of such Secretary, Assistant Secretary or Vice President, as the case may be. (v) A copy of any amendments (excluding those delivered to Lender at or before the original Loan closing) to the organizational charter of Borrower, Gateway Tower Owner, WWG, WWPII, WP Commercial, each Whitehall Party and the general partner of each Whitehall Party, in each case certified as of a recent date prior to the First Amendment Date by the Secretary of State of the jurisdiction of its organization, and a copy of any amendments (excluding those delivered to Lender at or before the original Loan closing) to the operating agreement or partnership agreement, as the case may be, of Borrower, Gateway Tower Owner, WWG, WWPII, WP Commercial, each Whitehall Party, and the general partner of each Whitehall Party, certified by an authorized officer or manager of such entity as true and correct as of a recent date. (w) An environmental engineering report for the Somerset Tech Center, the content of which is acceptable to Lender in its sole discretion, conducted by an engineer and in a manner both of which are satisfactory to Lender in its sole discretion. Such report shall be of an investigation which makes appropriate inquiry concerning the existence of Hazardous Materials on the Somerset Tech Center, and the past or present use or release of any Hazardous Materials. (x) An engineering report for the Somerset Tech Center, acceptable to Lender covering, among other matters, inspection of heating and cooling systems, roof and structural details, and showing no failure of compliance with building plans and specifications (which must be approved by Lender), or with any applicable local, state or federal laws. (y) An ALTA-form title insurance policy (or its equivalent) naming Lender as insured first mortgagee in respect of the Somerset Tech Center, and insuring the validity and first position lien priority of the Deed of Trust encumbering the Somerset Tech Center, issued by Commonwealth Land Title Insurance Company, with coverage brought forward to the date on which the Deed of Trust is recorded, with such endorsements as may be required by Lender, with no exceptions or exclusions other than Permitted Encumbrances or as may be approved by Lender, and in an insured amount not to exceed 120% of the sum of (i) the initial Loan Basis for the Somerset Tech Center plus (ii) the amount of Loan funds allocated to the Working Capital Budget for the Somerset Tech Center. (z) A current "as-built" survey of the Somerset Tech Center, dated or updated to a date not earlier than thirty (30) days prior to the First Amendment Date, certified to Lender and Commonwealth Land Title Insurance Company, prepared by a licensed surveyor reasonably acceptable to Lender and such title insurer, and conforming to Lender's current standard survey requirements. (aa) Evidence that the Somerset Tech Center and the operation thereof comply with all legal requirements, including that all requisite certificates of occupancy, building permits, and other licenses, certificates, approvals or consents required of any Governmental Authority have been issued without variance or condition and that there is no litigation, action, citation, injunctive proceedings, or like matter pending or threatened with respect to the validity of such matters. Borrower shall have provided Lender with copies of such documentation as Lender may require from applicable zoning, building and municipal agencies evidencing the foregoing. (bb) All other Ancillary Agreements reasonably required by Lender. (cc) Evidence that all actions necessary or, in the reasonable opinion of Lender, desirable to perfect and protect the security interests created by the existing Deeds of Trust and other Collateral Documents, as amended by this Agreement and the Amendments, have been or will be taken. 8.2. No change shall have occurred in the financial condition of Borrower, the Gateway Tower Owner or any Borrower Party or in the Operating Cash Flow of any of the Borrower Properties, or in the financial condition of any major or anchor tenant, which would have, in Lender's reasonable judgment, a Material Adverse Effect. 8.3. No condemnation or adverse zoning or usage change proceeding shall have occurred or shall have been threatened against any of the Borrower Properties (including the Somerset Tech Center); none of the Borrower Properties shall have suffered any significant damage by fire or other casualty which has not been repaired; no Law, moratorium, injunctive proceeding, restriction, litigation, action, citation or similar proceeding or matter shall have been enacted, adopted or threatened by any Governmental Authority, which would have, in Lender's judgment, a Material Adverse Effect. 8.4. Lender shall have verified that the amount of the Additional Advance does not exceed eighty percent (80%) of the Property Basis for the Somerset Tech Center. 8.5. Lender shall have verified that the amount of the Additional Advance does not exceed seventy-one percent (71 %) of the acquisition and historical renovation costs for the Somerset Tech Center. 8.6. Lender shall have verified that the Cash On Cash Return is not less than 10.7%, and Lender shall have verified that the Cash On Cash Return based solely on the Somerset Tech Center and the amount of the Additional Advance is not less than 10.5%. 8.7. Lender shall have verified that (a) Borrower's cash equity invested in the Somerset Tech Center is not less than $2,700,000, and (b) Borrower's cash equity invested in all Borrower Properties is not less than $38,400,000. 8.8. Borrower shall have delivered to Lender, and Lender shall have approved, a detailed two-year capital budget for the Somerset Tech Center. 8.9. Borrower shall have (a) established all deposit accounts relating to the Somerset Tech Center as required by the terms of the Loan Agreement and delivered to Lender satisfactory evidence thereof, and (b) delivered to Lender a deposit account agreement for each such account, substantially in the form of Exhibit "B" to the Loan Agreement, executed by Borrower and the depository at which such account is held. 8.10. All brokerage fees and commissions payable in connection with the Additional Advance (if any) have been paid. 8.11. The representations and warranties contained in the Loan Agreement and in all other Loan Documents are true and correct as of the date hereof. 8.12. No Default or Event of Default has occurred and is continuing. 8.13. The Title Company shall have issued and delivered to Lender, or shall have irrevocably and unconditionally committed to issue for the. benefit of Lender, such endorsements to the Title Policies as Lender shall request to insure the validity and continuing first position lien priority of the Deeds of Trust, as amended hereby and by the Amendments, including CTLA 110.10 endorsements. 8.14. Borrower shall have reimbursed Lender (either directly tly or through the application of all or part of the Borrower's good faith deposit) for all third party costs and expenses incurred by Lender in connection with the transaction contemplated by this Agreement, including title insurance costs, recording fees, attorneys' fees and costs, costs of environmental appraisals and structural reports and travel expenses. 9. Consent to Merger of WXI/Mt. Bethel Road. L.L.C. into Borrower. Lender acknowledges that, as of the First Amendment Date, Borrower will have acquired title to Somerset Tech Center as the successor by merger to WXI/Mt. Bethel Road, L.L.C., a Delaware limited liability company ("WXI/MT. BETHEL"), which is a wholly-owned subsidiary of WWG, and Lender consents to such merger. Borrower represents and warrants to Lender that, since its inception, WXI/Mt. Bethel has not engaged in any business other than the business of owning and operating Somerset Tech Center, and has not incurred any Indebtedness other than trade debt incurred in the ordinary course of its ownership and operation of Somerset Tech Center. 10. Return of Original Note. Lender agrees that, concurrently with the closing of the transaction contemplated by this Agreement, or reasonably promptly thereafter, Lender shall return the original Note to Borrower. 11. Non-Impairment. Except as expressly provided herein, nothing in this Agreement shall alter or affect any provision, condition or covenant contained in the Loan Agreement or other Loan Documents or affect or impair any rights, powers or remedies thereunder, and the parties hereto intend that the provisions of the Loan Agreement and other Loan Documents shall continue in FULL force and effect except as expressly modified hereby. In the event of any conflict between this Agreement and the terms of the respective Loan Documents to which it relates or any documents relating thereto, the terms of this Agreement shall govern and control. Unless otherwise specified herein, whenever possible, the provisions of this Agreement shall be deemed supplemental to and not in derogation of the terms of the respective Loan Documents to which it relates. 12. Miscellaneous. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. The headings used in this Agreement are for convenience only and shall be disregarded in interpreting the substantive provisions of this Agreement., If any provision of this Agreement shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed herefrom and the remaining parts shall remain IN FULL force as though the invalid, illegal or unenforceable provision had never been a part hereof As used in this Agreement, the term "INCLUDES)" shall mean "include(s), without limitation," and the term "INCLUDING" shall mean "including, but not limited to." 13. Integration; Interpretation. The Loan Documents, including this. Agreement, contain or expressly incorporate by reference the entire agreement of the parties with respect to the matters contemplated therein, and supersede all prior negotiations. No reference to this Agreement is necessary in any instrument or document at any time referring to a Loan Document. Any reference to a Loan Document (including in any other Loan Document) shall be deemed a reference to such document as modified hereby. 14. Counterparts. This Agreement may by executed in any number of counterparts, all of which shall be considered one in the same instrument. The original, executed signature pages of exact copies of this Agreement may be attached to one of such copies to form one document. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement as of the day and year first set forth above. "Borrower" WELLSFORD/WHITEHALL HOLDINGS, L.L.C., a Delaware limited liability company By. Wellsford/Whitehall Properties II, L L C , a Delaware limited liability company, its managing member By: Wellsford/Whitehall Group, L L C , a Delaware limited liability company, its sole member By. WP Commercial, L L C , a Delaware limited liability company, its manager . By: /s/ Alan S. Kava ----------------------------------- Name: Alan S. Kava Title: Authorized Signatory Lender: GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation By: /s/ Paul St Arnauld ------------------------------------ Paul St Arnauld, Authorzed Signatory CONSENT OF BORROWER PARTIES --------------------------- The undersigned, having read and understood the foregoing First Amendment to Loan Agreement and Other Loan Documents ("AGREEMENT"), hereby (a) consent to the Additional Advance and to all of the terms and provisions of the Agreement, (b) agree that the Agreement does not terminate any of the obligations of the undersigned to Lender under the Joinder, and (c) reaffirm their obligations under the Joinder in light of the Agreement. The undersigned have reviewed the provisions of the Joinder and, with the advice of their own counsel, hereby reaffirm and restate the waivers, authorizations, agreements and understandings set forth in the Joinder as though set forth in full herein. By executing this Consent of Borrower Parties, WWG and WWPII further specifically consent and agree to the amendment of the Hazardous Substances Indemnity Agreement set forth in Section 5.2 of the Agreement, pursuant to which the Somerset Tech Center is included within the term "Premises" as used in the Hazardous Substances Indemnity Agreement. WWG and WWPII hereby reaffirm and restate all representations, warranties, covenants and agreements contained in the Hazardous Substances Indemnity Agreement, as such representations, warranties, covenants and agreements apply to the Somerset Tech Center. WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP XI, a Delaware limited partnership By: WH Advisors, L.L.C. XI, a Delaware limited liability company, its General Partner By: ----------------------------------- Name: Title: WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP VIII, a Delaware limited partnership By: WH Advisors, L.L.C. XI, a Delaware limited liability company, its General Partner By: ----------------------------------- Name: Title: WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP V, a Delaware limited partnership By: WH Advisors, L.L.C. XI, a Delaware limited liability company, its General Partner By: ----------------------------------- Name: Title: WELLSFORD/WHITEHALL GROUP, L.L.C., a Delaware limited partnership By: WP Commercial, L.L.C., a Delaware limited liability company, its manager By: ----------------------------------- Name: Title: WELLSFORD REAL PROPERTIES, a Maryland corporation By: ----------------------------------- Name: Title: WELLSFORD/WHITEHALL PROPERTIES II, L.L.C. a Delaware limited company By: Wellsford/Whitehall Group, L.L.C., a Delaware limited liability company, its sole member By: WP Commerccial, L.L.C, a Delaware limited liability company, its manager By: ----------------------------------- Name: Title: CONSENT OF GUARANTOR The undersigned, having read and understood the foregoing First Amendment to Loan Agreement and Other Loan Documents ("AGREEMENT"), hereby (a) consents to the Additional Advance and to all of the terms and provisions of the Agreement, (b) agrees that the Agreement does not terminate any of the obligations of the undersigned to Lender under the Guaranty dated as of June 25, 2001, executed by the undersigned in favor of Lender (the "GUARANTY"), (c) reaffirms its obligations under the Guaranty in light of the Agreement, and (d) agrees that, subject to the limitations on the undersigned's aggregate total liability under the Guaranty for the Guaranteed Obligations, the Guaranteed Obligations shall include the payment of the Aggregate Loan and the payment and performance of all other present and future indebtedness and obligations of Borrower to Lender under the Agreement and under the Loan Documents, as amended by the Agreement. The undersigned agrees that all references in the Guaranty to (i) the Loan hereafter shall be deemed to be references to the Aggregate Loan, and (ii) the Note hereafter shall be deemed to be references to the Amended and Restated Note. The undersigned has reviewed the provisions of the Guaranty and, with the advice of its own counsel, hereby reaffirms and restates the waivers, authorizations, agreements and understandings set forth in the Guaranty as though set forth in full herein. By executing this Consent of Guarantor, the undersigned further consents and agrees to the amendment of the Hazardous Substances Indemnity Agreement set forth in Section 5.2 of the Agreement, pursuant to which the Somerset Tech Center is included within the term "Premises" as used in the Hazardous Substances Indemnity Agreement. The undersigned agrees that such amendment does not terminate any of the obligations of the undersigned to Lender under the Hazardous Substances Indemnity Agreement, and the undersigned hereby reaffirms and restates all representations, warranties, indemnities and other agreements made by the undersigned in the Hazardous Substances Indemnity Agreement, which shall continue to apply only to the Gateway Tower Premises. WWG 401 NORTH WASHINGTON LLC, a Delaware limited liability company By: WellsfordlWhitehall Holdings, L.L.C., a Delaware limited liability company, its sole member By: Wellsford/Whitehall Properties 1I, L.L.C., a Delaware limited liability company, its managing member By: Wellsford/Whitehall Group, L.L.C., a Delaware limited liability company, its sole member By: WP Commercial, L.L.C., a Delaware limited liability company, its manager By: ----------------------------------- Name: Title: CONSENT OF INDEMNITORS The undersigned, having read and understood the foregoing First Amendment to Loan Agreement and Other Loan Documents ("AGREEMENT"), hereby (a) consent to the Additional Advance and to all of the terms and provisions of the Agreement, (b) agree that the Agreement does not terminate any of the obligations of the undersigned to Lender under the Indemnification Agreement dated as of June 25, 2001, executed by the undersigned in favor of Lender (the "INDEMNITY"), (c) reaffirm their obligations under the Indemnity in light of the Agreement, and (d) agree that all references in the Indemnity to the Loan hereafter shall be deemed to be references to the Aggregate Loan. The undersigned have reviewed the provisions of the Indemnity and, with the advice of their own counsel, hereby reaffirm and restate the indemnities, waivers, authorizations, agreements and understandings set forth in the Indemnity as though set forth in full herein. WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP V, a Delaware limited partnership By: WH Advisors, L.L.C. V, a Delaware limited libaility company, its general partner By: ----------------------------------- Name: Title: WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP VII, a Delaware limited partnership By: WH Advisors, L.L.C. VII, a Delaware limited libaility company, its general partner By: ----------------------------------- Name: Title: WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP VI, a Delaware limited partnership By: WH Advisors, L.L.C. VI, a Delaware limited libaility company, its general partner By: ----------------------------------- Name: Title: WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP VIII, a Delaware limited partnership By: WH Advisors, L.L.C. VIII, a Delaware limited libaility company, its general partner By: ----------------------------------- Name: Title: WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP XI, a Delaware limited partnership By: WH Advisors, L.L.C.XI, a Delaware limited libaility company, its general partner By: ----------------------------------- Name: Title: WHITEHALL STREET REAL ESTATE LIMITED PARTNERSHIP XII, a Delaware limited partnership By: WH Advisors, L.L.C. XII, a Delaware limited libaility company, its general partner By: ----------------------------------- Name: Title: WELLSFORD REAL PROPERTIES, INC., a Maryland corporation By: ----------------------------------- Name: Title: ACKNOWLEDGMENT AND REAFFIRMATION -------------------------------- REGARDING ASSET MANAGEMENT -------------------------- The undersigned, having read and understood the foregoing First Amendment to Loan Agreement and Other Loan Documents ("AGREEMENT"), hereby (i) reaffirms its obligations under the Agreement Regarding Asset Management, as amended by the Agreement, and (ii) acknowledges that the Somerset Tech Center constitutes a "Property" under the Agreement Regarding Asset Management, and that the Somerset Tech Center constitutes a "Property" under the Asset Management Provisions. WELLSFORD/WHITEHALL GROUP, L.L.C., a Delaware limited liability company By: WP Commercial, L.L.C., a Delaware limited liability company, its manager By: ----------------------------------- Name: Title: WP COMMERCIAL, L.L.C., a Delaware limited liability company By: ----------------------------------- Name: Title: EXHIBIT "A" LEGAL DESCRIPTION That certain real property situated in the Township of Warren, County of Somerset, State of New Jersey, described as follows: BEGINNING at a point on the northerly sideline of Mt. Bethel Road (a.k.a. Somerset County Route 651, variable width right of way), said point being on the dividing line between Lot 11 and Lot 12.01, Block 80, said point also being 378.48 feet westerly as measured along various courses along said northerly sideline of Mt. Bethel Road from its intersection with the westerly terminus of a curve connecting Mt. Bethel Road with the westerly sideline of Technology Drive North (variable width right of way), and from said beginning point running thence; The following three (3) courses along the northerly sideline of Mt. Bethel Road: 1. North 56 degrees 24 minutes 00 seconds West, a distance of 100.41 feet to a point; thence 2. North 51 degrees 46 minutes 00 seconds West, a distance of 224.86 feet to point; thence 3. North 65 degrees 13 minutes 30 seconds 00 seconds West, a distance of 138.95 feet to a point; thence 4. Along the dividing line between Lot 11 and Lot 10, Block 80, North 04 degrees 51 minutes 16 seconds East, a distance of 278.00 feet to a point; thence 5. Continuing along the dividing line between Lot 11 and Lot 10, Block 80, North 86 degrees 09 minutes 44 seconds West, a distance of 100.02 feet to a point; thence 6. Along the dividing line between Lot 11 and Lot 9, Block 80, North 04 degrees 51 minutes 16 seconds East, a distance of 300.05 feet to a point; thence the following two (2) courses along the dividing line between Lot 11 and Lot 2, Block 80: 7. South 86 degrees 09 minutes 44 seconds East, a distance of 100.02 feet to a point; thence 8. North 02 degrees 56 minutes 30 seconds East, a distance of 613.93 feet to an iron pipe found; thence 9. Along the common dividing line between Lot 11 & Lot 2, Block 80, and Lot 49, Block 82, North 01 degrees 06 minutes 30 seconds West, a distance of 303.25 feet to a point; thence 10. Along the common dividing line between Lot 22, Block 80 and Lots 49, 48, 47 & 46, Block 82, South 88 degrees 10 minutes 31 seconds East, a distance of 441.75 feet to a point; thence 11. Along the common dividing line between Lot 11, Lot 12.01 and Lot 12.02, Block 80 and Lot 46, Block 82, South 04 degrees 17 minutes 00 seconds West, a distance of 1736.02 feet to the northerly side of Mt. Bethel Rood and the point and place of Beginning. FOR INFORMATIONAL PURPOSES ONLY: "In compliance with Chapter 157, Laws of 1977, premises herein is Lot 11 & 11.01 in Block 80 on the Tax Map of the Township of Warren, County of Somerset, State of New Jersey." EXHIBIT "B" FORM OF INTEREST HOLDER AGREEMENT --------------------------------- SCHEDULE 1.1(A) --------------- PROPERTY INFORMATION --------------------
PROPERTY ADDRESS CITY STATE UNITS/NRSF/ PROPERTY TYPE -------- ------- ---- ----- ----------- ------------- ASSETS ------ Cutler Lake Corp Center 117 Kendrick Street Needham MA 211,556 office 60 Turner Street 60 Turner Street Waltham MA 15,876 office 24 Federal/3 P.O. Square 24 Federal St. and 79 Milk Street Boston MS 74,353 office 65,007 Gateway Tower 401 N. Washington Street Rockville MD 248,463 office Somerset Tech Center 150 Mt. Bethel Warren NJ 129,227 office 300 Atrium 300 Atrium Drive Franklin NJ 147,474 office 400 Atrium 400 Atrium Drive Franklin NJ 354,669 office 500 Atrium 500 Atrium Drive Franklin NJ 169,752 office 700 Atrium 700 Atrium Drive Franklin NJ 181,069 office Mountain Heights I & II 420-430 Mountain Avenue Berkley NJ 182,588 office Heights 123,082 105 Challenger Road 105 Challenger Road Ridgefield NJ 153,550 office Park Greenbrook Corporate Center 100 Passaic Avenue Fairfield NJ 201,350 office Campus Drive 379-399 Campus Drive Franklin NJ 199,110 office 180/188 Mount Airy Road 180/188 Mount Airy Road Basking Ridge NJ 103,668 office Garden State Convention 50 Atrium Drive Franklin NJ 82,300 office Center Wells Reasearch Center* 75, 85, 95 Wells Avenue Newton MA 241,761 office 7/57 Wells Avenue* 7/57 Wells Avenue* Newton MA 89,215 office Dedham Place* 9-11 Allied Drive Dedham MA 47,662 office 128 Tech Center* 128 Technology Drive Waltham MA 217,501 office 201 University Avenue* 201 University Avenue Westwood MA 82,000 office * Nomura Property
SCHEDULE 1.1(B) BASIS ALLOCATIONS ----------------- PROPERTY PROPERTY BASIS LOAN BASIS -------- -------------- ---------- Cutler Lake Corp. Center $30,072,421 $22,051,307 60 Turner Street $ 840,113 $ 605,361 24 Federal/3 P.O. Square $33,877,463 $29,385,454 Gateway Tower $33,577,228 $28,312,359 Somerset Tech Center $ 9,402,976 $ 6,100,000 300 Atrium $14,754,318 $13,489,484 400 Atrium $27,759 988 $25,065,149 500 Atrium $15,943,480 $14,902,659 700 Atrium $18,587,001 $15,926,886 Mountain Heights I & II $49,568,274 $41,223,409 105 Challenger Road $16,385,111 $17,554,480 Greenbrook Corporate Center $23,236,806 $20,375,843 Campus Drive $15,118,598 $13,143,421 180/188 Mount Airy Road $13,061,316 $11,908,763 Garden State Convention Center $ 4,849,471 $ 4,115,858 Wells Research Center $41,875,000 $ - 0 - 7/57 Wells Avenue $13,917,000 $ - 0 - Dedham Place $14,504,000 $ - 0 - 333 Elm Street $ 6,001,000 $ - 0 - 128 Tech Center $33,249,000 $ - 0 - 201 University Avenue $ 9,339,000 $ - 0 - TOTAL: $425,919,663 $264,160,434 ============ ============ SCHEDULE 4.2 ENVIRONMENTAL REPORTS
PROPERTY REPORT TITLE CONSULTANT DATE -------- ------------ ---------- ---- Cutler Lake Corp Center Release Notification and Downgradient Property ENSR 05/04/01 Status Submittal 60 Turner Street Phase I Environmental Site Assessment & ENSR 02/98 Subsurface Investigation Gateway Tower Phase I Environmental Site Assessment I'VE Environmental 11/23/94 Phase I & II Environmental Site Assessment ENSR 10/99 Comprehensive Asbestos Survey ENSR 10/99 . Asbestos Abatement Final Compliance Report ENSR 01/00 Somerset Tech Center Phase I Environmental Site Assessment Vertex Engineering Services, 05/02/01 Inc. 300 Atrium Drive Review of Environmental Assessments Report PMK Group 08/01/97 400 Atrium Drive Review of Environmental Assessments Report PMK Group 08/01/97 Final UST Investigation ATC Associates, Inc. 05/15/01 500 Atrium Drive Review of Environmental Assessments Report PMK Group 08/01/97 700 Atrium Drive Review of Environmental Assessments Report PMK Group 08/01/97 Greenbrook Corp Center Environmental Site Assessment First Environmental 04/97 Site Assessment PMK Group 02/18/98 180/188 Mount Airy Rd. Environmental Assessment Report PMK Group. 06/02/98 Mountain Heights I & H Phase I Environmental Report Kaselaan & IYAngelo Associates 03%30/94 Report of Preliminary Asbestos Survey PMK Group 11/03/97 Environmental Site Assessment PMK Group 10/15/99 Letter Environmental Health 10/19/99 Investigations, Inc. Wells Research Center Phase I Environmental Report ENSR 03/98 Due Diligence Report Environmental Waste 03/98 Management Dedham Place Phase I Environmental Report ENSR 03/98 Underground Storage Tank Report ENSR 09/08/99 333 Elm Street Phase I Environmental Site Assessment ENSR 02/98 128 Technology Center Phase I Environmental Report EMG 11/25/96 Limited Subsurface Investigation Rizw Associates 01/30/97 201 University Avenue Phase I Environmental Report ENSR 02/98 Method 3 Risk Assessment Report ENSR 03/99
SCHEDULE 5.1(A1 TENANT DELINQUENCIES -------------------- ASSET NAME COMMENT [SEE ATTACHED TENANT DELINQUENCY REPORTS] SCHEDULE 5.1(B) NOTICES OF TERMINATION OR DEFAULT --------------------------------- ASSET NAME COMMENT ---------- ------- 24 Federal/3 P.O. Square 1. Andover Brokerage, aka JP Capital - termination (24 Federal) 2. Walter S. Burrage - default (3 Post Office Square) 3. Destineer/Skytel -- default (3 Post Office Square) Wells Research Center 1. HQ Business Center (default and termination) 7/57 Wells Avenue 1. Custom Communications (default) SCHEDULE 5.1(C) PURCHASE OPTIONS ---------------- Property Name - ------------- MOUNTAIN HEIGHTS I & II Comment - ------- COMPAQ COMPUTER CORP. (TENANT) HAS RIGHT OF FIRST OFFER TO PURCHASE BUILDING (420 MOUNTAIN AVENUE) IF OFFERED FOR SALE OTHER THAN AS PART OF A MULTI-ASSET SALE (2 OR MORE BUILDINGS). SCHEDULE 5.1(D) LEASE TERMINATION RIGHTS
PROPERTY NAME TENANT COMMENT ------------- ------ ------- Somerset Tech Center GMAC Home Services One-time right to terminate at the end of the fifth lease year, with at least 12 months prior notice and a fee equal to 6 months "fully escalated" rent 300 Atrium Drive EMS America Termination option effective 4/04; penalty 3 months rent + umommortized TI Mountain Heights 1& II Santa Cruz Termination option effective 9/04; penalty $529,000 (430 Mountain Ave) Compaq One-time right at the end of the seventh lease year (420 Mountain Axe) (8/07), with 12 months prior notice and termination fee of $3,630,919 ($29.50 x 123,082 sf) One-time right to terminate upon 6 months prior notice, Campus Drive Royal Consumer given within 180 days after Rent Information Products Commencement Date; exercisable if Tenant or all of Tenant's assets have been sold to a third party in an arms-length transaction 180/188 Mount Airy Research International. Termination option effective 12/01 - 12/03 with 6 months penalty only if Tenant wants 15,000 sf in market and Landlord cannot deliver Dedham Place Kramer & Flgman Termination right after the 5th year (3/04), with 6 months prior notice and 2 months rent and operating expense penalty Paging Network Right to terminate anytime CellcoFartnership d/b/a Tennination option at sole discretion if unable to use Verizon Wireless property for its intended purpose by written notice via certified mail Washington Mutual One-time right to terminate as to all or a portion of premises at the end of the third lease year, with at least 7 months prior notice and a fee equal to 40% of abated base rent and 40% of landlord's unamortized leasing costs 7/57 Wells Avenue EMC Either party may terminate at the end of any monthly extension with no less than 15 days prior notice GEO Centers May terminate after 12/1/95 with 6 months notice. Jungbunziauer May terminate with 120 days prior written notice and rent penalty Charles Murray Right to terminate upon death or disability Wells Research Center Provident Mutual Right to terminate after 5th lease year (6/04), with no less than 9 months notice Sodexho Marriott May terminate with/without cause with 60 days written notice 60 Turner Street Brandeis University May terminate in entirety or partially (2,500 sf minimum) with 6 months written notice after 7/1997 24 Federal/3 P.O. Square WP Commercial Floating termination option upon 9 months written notice (3 P.O. Square) with a partial termination right not to exceed 50% of Premises as long as the space is "feasible". Tenant to pay all separation costs. Gateway Tower WP Commercial Floating termination option upon 9 months written notice with a partial termination right not to exceed 50% of Premises as long as the space is "feasible". Tenant to pay all separation costs.
SCHLDULE 5.1(E) LEASING COMMISSIONS OWING
ASSET NAME COMMENT ---------- ------- Greenbrook Tenant: Information Resources; $136,375 commission owed Campus Drive Tenant: Royal Consumer Information Products; $231,908 commission owed Gateway Tower Tenant: GSA; $70,000 commission owed Tenant: various retail tenants; $33,776 commission owed Tenant: Emmes; $76,697 commission owed Tenant: Montgomery County; $106,972 commission owed
SCHEDULE 5.L(F) PREPAID RENTS ASSET NAME COMMENT [SEE ATTACHMENTS TO SCHEDULE 5.1(A)] SCHEDULE 6.4 CONDEMNATION PROCEEDINGS ------------------------ None. SCHEDULE 6.5 CASULATIES AND FLOOD ZONE PROPERTIES ------------------------------------ None. SCHEDULE 6.6 MATERIAL AGREEMENTS ------------------- 1. Environmental Services Procurement and Coordination Agreement dated as of January 1, 2001 between WWG and BTS Solutions LLC. SCHEDULE 6.7 PROPERTY COMPLIANCE ------------------- None. SCHEDULE 6.10 PERMITS ------- None. SCHEDULE 6.17 LITIGATION ---------- None. SCHEDULE 6.26 AFFILIATE INDEBTEDNESS Wellsford/Whitehall Properties II, L.L.C. ("WWPII") is liable under (i) that certain Guaranty and Indemnity Agreement, dated as of July 16, 1999, by and between WWPII and IDS Life Insurance Company ("IDS"), (ii) that certain Hazardous Materials Indemnity Agreement, dated as of July_, 1999, by and between WWPII and IDS and (iii) that certain Guaranty, dated as of July 16, 1999, by and between WWPII and Leonard Grebow, Steven J. Grebow, Marc G. Grebow, Ronald S. Deutsch and Governor Warfield LLC, and (iii) that certain Contribution Agreement, dated as of June 27, 2001, by and among WWPH, WWG, WP Commercial, Wellsford, the Whitehall Parties, Whitehall Street Real Estate Limited Partnership VI, a Delaware limited partnership, Whitehall Street Real Estate Limited Partnership VIII, a Delaware limited partnership and Whitehall Street Real Estate Limited Partnership XII, a Delaware limited partnership. SCHEDULE 6.27 ------------- CASH EQUITY INVESTMENT ---------------------- Cost Basis: - ----------- Gateway Tower $ 35,740,537 24 Federal/3 P.O. Square 35,915,583 400 Atrium 36,204,695 Mountain Heights I&ls 48,168,466 Cutler Lake Corp. Center 35,800,640 Greenbrook Corp. Center 25,741,614 105 Challenger Rd. 21,275,542 700 Atrium 18,746,791 500 Atrium 21,107,770 300 Atrium 19,550,744 Campus Drive 23,466,899 180/188 Mt. Airy Road 16,364,462 Garden St. Convention Center 6,134,396 60 Turner St. 1,153,246 Somerset Technology Center 9,257,262 ------------ Subtotal $354,628,647 Less: GECC Loan ($264,160,434) Net Cash Equity $ 90,468,213 SUPPLEMENTAL SCHEDULE 8.19 -------------------------- PROPERTY-SPECIFIC COVENANTS --------------------------- 1. POST CLOSING STRUCTURAL REPAIRS. Within six (6) months after the date of the initial Advance for the Somerset Tech Center, Borrower shall have completed, Lien-free and in accordance with applicable Laws, the repairs described in the tableset forth below for the Somerset Tech Center (as such work is more particularly described in the engineering report for such Property prepared by Lender's consultant(s) in connection with theinitial Advance for such Property): COMPONENT OR SYSTEM ITEM DESCRIPTION QTY. UNIT UNIT TOTAL COST COST Wall Surfaces Repair water-damaged drywall 200 SF $5 $1,000 in building 2 TOTAL $1,000 2. POST CLOSING REMEDIAL ACTION. Borrower shall complete the Remedial Action described in the table set forth below for the designated Properties, which Remedial Action shall be completed Lien-free, in accordance with all applicable Environmental Laws, and within the applicable time period (if any) set forth below.
PROPERTY REMEDIAL ACTION COMPLETION DATE -------- --------------- --------------- Somerset Tech Center Borrower acknowledges that asbestos-containing materials and leas based paint may be present at the Somerset Tech Center. Within 45 days after the First Amendment Date, Borrower shall establish its standard operations and maintenance program at Somerset Tech Center for the removal, encapsulation of, or other action for handling asbestos-containing materials and leas-based paint at Somerset Tech Center, and thereafter Borrower shall 60 Turner Street Install air venting system to ensure that radon concentration in 12/31/02 lowest building level (i.e., classrooms and theater) remains consistently below 4 pCi/l (picocuries per liter). Borrower to provide Lender with reasonably 12/31/02 satisfactory evidence that the out-of-service generator and associated above-ground propane storage tank have been removed from the Property and disposed of. Cutler Lake Corp. Center Borrower to provide Lender with 12/31/02 reasonably satisfactory evidence that it has made commercially reasonable efforts to obtain an indemnity from Coca Cola Corporation with respect to contamination originating from an groundwater contamination originating from an upgradient property owned and/or occupied by Coca Cola Corporation. 400 Atrium Borrower shall cause its Lender-approved consultant to complete 12/31/02 a Phase II environmental study of the portion of the Property in the vicinity of the active 3,500-gallon underground storage tank currently located at the Property, which Phase II study shall be sufficient in scope to identify the extent of any subsurface contamination associated with such underground storage tank. Borrower shall cause such consultant to remediate such contamination to applicable legal standards, and Borrower shall obtain a "closure" or "no further action" letter from the lead Governmental Authority having jurisdiction over the Remedial Action and the Property. 180/188 Mount Airy Rd. Borrower shall cause its Lender-approved consultant to conduct 12/31/02 additional investigation of the area of the Property in the vicinity of the former location of three underground storage tanks. The scope of such investigation shall be reasonably satisfactory to Lender. Borrower shall cause such consultant to remediate any contamination identified to applicable legal standards, and Borrower shall obtain a "closure" or "no further action" letter from the lead Governmental Authority having jurisdiction over the Remedial Action and the Property.
EX-10.82 5 ex10-82.txt CODE OF BUSINESS ETHICS FOR ALL EMPLOYEES, ETC. WELLSFORD REAL PROPERTIES, INC. CODE OF BUSINESS CONDUCT AND ETHICS FOR DIRECTORS, SENIOR FINANCIAL OFFICERS, OTHER OFFICERS AND ALL OTHER EMPLOYEES INTRODUCTION It is the general policy of Wellsford Real Properties, Inc. (the "Company") to conduct its business activities and transactions with the highest level of integrity and ethical standards and in accordance with all applicable local, state and federal laws. Obeying the law both in letter and in spirit is the foundation on which this Company's ethical standards are built. In carrying out this policy, the Company has adopted the following Code of Business Conduct (the "Code"). This Code covers a wide range of business practices and procedures. It does not cover every issue that may arise, but it sets out basic principles to guide all employees of the Company. All of our employees must comply with this Code and seek to avoid even the appearance of improper behavior. The Code should also be provided to and followed by the Company's agents and representatives, including consultants. If a law conflicts with a policy in this Code, you must comply with the law; however, if a local custom or policy conflicts with this Code, you must comply with the Code. If you have any questions about these conflicts, you should ask your supervisor how to handle the situation. Those who violate the standards in this Code will be subject to disciplinary action. In addition, some of the violations can subject either the employee or the Company to civil and criminal penalties. If you are in a situation which you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 15 of this Code. 1. COMPLIANCE WITH LAWS, RULES AND REGULATIONS The Company complies with all applicable laws and regulations in the conduct of its activities and expects the employees to do the same. All employees must respect and obey the laws of the cities, states and countries in which we operate. Although not all employees are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel. 2. CONFLICTS OF INTEREST It is the policy of the Company to avoid situations that create an actual or potential conflict between an employee's personal interests and the interests of the Company. A conflict of interest exists when a person's loyalties or actions are divided between the interests of the Company and those of another, such as a competitor, supplier, customer or personal business. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Company. Moreover, the appearance of a conflict of interest alone can adversely affect the Company and its relations with its customers, suppliers and employees. The appearance of a conflict should also be avoided. Employees are expected to use good judgment, to adhere to high ethical standards and to avoid situations that create an actual or potential conflict of interest. It is almost always a conflict of interest for a Company employee to work simultaneously for a competitor, customer or supplier. You are not allowed to work for a competitor as a consultant or board member without prior disclosure to and approval from the Chief Executive Officer. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf. Conflicts of interest can also arise with respect to employment of relatives and persons with close personal relationships. Further, if an employee or someone with whom an employee has a close relationship (a family member or close companion) has a financial or employment relationship with a competitor, supplier, or potential supplier, the employee must disclose this fact in writing to the Chief Financial Officer. Federal law now prohibits most loans or extensions of credit from a company whose stock is publicly traded to its directors or executive officers. The Company will not directly or indirectly extend any loan or credit to any director or executive officer except as permitted by law and approved by a vote of the disinterested members of the Board of Directors. 3. CORPORATE OPPORTUNITIES Employees, officers and directors are prohibited from taking for themselves opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No employee, without prior approval from the Company's Chief Executive Officer, may use corporate property, information, or position for personal gain, and no employee may compete with the Company directly or indirectly. Employees, officers and directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises. 4. COMPETITION AND FAIR DEALING We seek to outperform our competition fairly and honestly. Stealing proprietary information, possessing secret trade information that was obtained without the owner's consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each employee should endeavor to respect the rights of and deal fairly with the Company's customers, suppliers, competitors and employees. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice. Company personnel should not engage a competitor in discussions, agreements or understandings concerning proprietary or specific information with regards to tenant lease terms, investees, interest rates, transaction structures, similar business related arrangements or any other business of the Company. In addition, Company personnel should avoid discussing with a competitor of any other agreements inhibiting free and open competition or involving tie-in sales or reciprocal transactions without prior authorization from the Chief Financial Officer. The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain an unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any Company employee, family member of an employee or agent unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff and (5) does not violate any laws or regulations. Any proposed gift to an employee, family member of an employee or agent which is other than of nominal value (greater than $50) should be discussed first with the Chief Financial Officer for appropriate resolution, in advance of the receipt of such proposed gift. 5. EQUAL EMPLOYMENT AND WORKING CONDITIONS Each of us has a fundamental responsibility to show respect and consideration to our teammates. The diversity of the Company's employees is a tremendous asset. We are firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment or any kind. All employment practices and decisions, including those involving recruiting, hiring, transfers, promotions, compensation, benefits, discipline and termination, will be conducted without regard to race, creed, color, religion, national origin, sexual orientation, sex or age and will comply with all applicable laws. 6. RELATIONSHIPS WITH CO-WORKERS The Company expects everyone to provide co-workers with information that is accurate, complete, objective, relevant, timely and understandable and to share knowledge and maintain skills important and relevant to each co-workers' needs. The Company expects all supervisory personnel to promote ethical behavior in the work environment. 7. HEALTH AND SAFETY The Company strives to provide each employee with a safe and healthy work environment. Each employee has an individual responsibility for maintaining a safe and healthy workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions. Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of illegal drugs in the workplace will not be tolerated. 8. DISCLOSURES IN PERIODIC REPORTS As a public company, the Company is required to file various periodic reports with the Securities and Exchange Commission. It is Company policy to make full, fair, accurate, timely and understandable disclosure in compliance with all applicable laws and regulations in all required periodic reports. 9. RECORD KEEPING The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions. All of the Company's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls. All company business data, records and reports must be prepared truthfully and accurately. Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports. Records should always be retained or destroyed according to the Company's record retention policies. 10. CONFIDENTIALITY OF COMPANY INFORMATION AND TRADE SECRETS OF OTHERS Persons who come into possession of Company information must safeguard the information from the public and not intentionally or inadvertently communicate it to any person (including family members and friends) unless the person has a need to know the information for legitimate, Company-related reasons. This duty of confidentiality is important both as to the Company's competitive position and with respect to the securities laws applicable to the Company as a public Company. Consistent with the foregoing, all Company personnel should be discrete with respect to inside information and not discuss it in public places. Such information should be divulged only to persons having a need to know it in order to carry out their job responsibilities. To avoid even the appearance of impropriety, Company personnel should refrain from providing advice or making recommendations regarding the purchase or sale of the Company's securities. Confidential information related to the Company can include a variety of materials and information regarding the ongoing operations and plans of the Company. For example, confidential information can include information regarding the financial health of the Company, salary and personnel information, and marketing and sales plans. Confidential information will be held in the strictest confidence, and such confidential information will not be disclosed by any employee to any third party unless the third party has signed a nondisclosure agreement approved by the Company's Chief Financial Officer and the specific disclosure also has been approved by the Chief Financial Officer. The confidential information can only be disclosed by an employee for limited purposes where the confidential information is needed. Company personnel must maintain the confidentiality of confidential or proprietary information entrusted to them by the Company or others, except when disclosure is authorized in writing by the Chief Financial Officer or required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers or suppliers, if disclosed. The obligation to preserve confidential information continues even after employment ends, in accordance with the proprietary data agreement signed at the start of employment. Company personnel must not intentionally or inadvertently breach any agreement to keep knowledge or data in confidence or in trust prior to employment with the Company. During employment by the Company no confidential or proprietary information or material belonging to any previous employer or other parties shall be improperly used or disclosed to the Company. Employees must not bring onto the premises of the Company or use in the performance of his or her responsibilities any unpublished documents or any property belonging to any previous employer or any other person to whom the employee has an obligation of confidentiality unless consented to in writing by that previous employer or person. 11. PROTECTION AND PROPER USE OF COMPANY ASSETS No secret or unrecorded fund of Company assets or cash shall be established or maintained for any purpose. Anyone spending or obligating Company funds should be sure that the transaction is properly and appropriately documented, and that the Company receives the appropriate value in return. All employees should endeavor to protect the Company's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Company equipment should not be used for non-Company business, though incidental personal use may be permitted. The Company licenses the use of much of its computer software from a variety of outside companies. The Company does not own this software or its related documentation and, unless authorized by the software developer, does not have the right to reproduce it. With regard to the use of software on local area networks or on multiple machines, employees shall only use the software in accordance with the license agreement. 12. POLITICAL CONTRIBUTIONS AND PAYMENTS TO GOVERNMENT PERSONNEL The U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country. In addition, the U.S. government has a number of laws and regulations regarding business gratuities which may be accepted by U.S. government personnel. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. 13. WAIVERS OF THE CODE OF BUSINESS CONDUCT AND ETHICS Any waiver of this Code for executive officers or directors may be made only by the Board or the Board committee responsible for corporate governance matters and will be promptly disclosed as required by law or regulation. 14. REPORTING ANY ILLEGAL OR UNETHICAL BEHAVIOR OR OTHER VIOLATIONS OF THIS CODE Employees are responsible for being aware of the corporate policies applicable to their activities and to comply with them fully. Employees also have a duty to report any apparent misconduct through appropriate management channels, or any special and confidential reporting mechanisms which may be established within the Company for such purposes, and to assist the Company in the prevention and correction of such problems. Employees are encouraged to talk to supervisors, managers or other appropriate personnel about observed illegal or unethical behavior and when in doubt about the best course of action in a particular situation. Employees who know or have good reason to believe that other employees are engaged in conduct violating this policy should report this to the Chief Financial Officer. No supervisor shall retaliate against an employee, either directly or indirectly, who in good faith and in accordance with Company procedure, reports an act of apparent misconduct. Employees are also expected to cooperate fully with the Company or governmental authorities in any investigation of an alleged violation. Failure of any employee to comply with such policies will result in disciplinary action up to and including termination. In the event an employee is not satisfied with the response they receive from their supervisor, the employee should speak to an appropriate senior officer within the Company. 15. COMPLIANCE PROCEDURES We must all work to ensure prompt and consistent action against, violations of this Code. However, in some situations it is difficult to know right from wrong. Since we cannot anticipate every situation that will arise, it is important that we have a way to approach a new question or problem. These are the steps to keep in mind: o Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible. o Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is. o Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem. o Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor's responsibility to help solve problems. If you are not satisfied with the response you receive from your supervisor, you should bring your grievance to an appropriate senior officer within the Company. o Seek help from Company resources. In the case where it may not be appropriate to discuss an issue with your supervisor or where you do not feel comfortable approaching your supervisor with your question, discuss it with a responsible officer of the Company. o You may report ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, your anonymity will be protected. The Company does not permit retaliation of any kind against employees for good faith reports of ethical violations. Further, the Company has adopted a policy for the protection of whistleblowers that prohibits any form of retaliation against an individual who reports violations. o Always ask first, act later. If you are unsure of what to do in any situation, seek guidance before you act. CERTIFICATION OF RECEIPT AND ACKNOWLEDGMENT OF COMPLIANCE WITH CODE OF CONDUCT AND ETHICS POLICY FOR DIRECTORS, SENIOR FINANCIAL OFFICERS, OTHER OFFICERS AND ALL OTHER EMPLOYEES I hereby certify and acknowledge to Wellsford Real Properties, Inc. ("WRP") the following: I HAVE RECEIVED A COPY OF WRP'S CODE OF CONDUCT AND ETHICS POLICY FOR DIRECTORS, SENIOR FINANCIAL OFFICERS, OTHER OFFICERS AND ALL OTHER EMPLOYEES ("POLICY"). I HAVE READ, UNDERSTOOD AND AGREE TO COMPLY WITH ALL TERMS, CONDITIONS AND PROVISIONS OF THE POLICY. I HAVE NOT VIOLATED THE TERMS, CONDITIONS AND PROVISIONS OF THE POLICY AT ANY TIME IN THE PAST WHILE SERVING AS AN EMPLOYEE, OFFICER OR DIRECTOR OF WRP. The undersigned declares that he or she has examined this Certification of Receipt and Acknowledgment of Compliance, and, to the best of his or her knowledge and belief, it is true, correct and complete. Signature: ------------------------------------------------- Printed Name: ---------------------------------------------- Date: ------------------------------------------------------ EX-10.83 6 ex10-83.txt DEED OF TRUST FOR GREEN RIVER 02/06/03 Prepared by, and after recording return to: Gary Whittington, Esq. Assistant General Counsel AEGON USA Realty Advisors, Inc. 4333 Edgewood Road N.E. Cedar Rapids, Iowa 52499 - -------------------------------------------------------------------------------- ATTENTION: CLERK AND RECORDER--THIS INSTRUMENT COVERS GOODS THAT ARE OR WILL BECOME FIXTURES ON THE DESCRIBED REAL PROPERTY AND SHOULD BE FILED FOR RECORD IN THE REAL PROPERTY RECORDS WHERE DEEDS OF TRUST ON REAL ESTATE ARE RECORDED. THIS INSTRUMENT SHOULD ALSO BE INDEXED AS A UNIFORM COMMERCIAL CODE FINANCING STATEMENT COVERING GOODS THAT ARE OR WILL BECOME FIXTURES ON THE DESCRIBED REAL PROPERTY. THE MAILING ADDRESSES, TELEPHONE NUMBERS, AND FAX NUMBERS OF THE SECURED PARTY AND THE DEBTOR ARE WITHIN. DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING GREEN RIVER AT PALOMINO PARK LLC, Grantor, having an office at c/o Wellsford Park Highlands Corp., 6700 Palomino Pkwy, Highlands Ranch, Colorado 80130 Attn: David M. Strong to THE PUBLIC TRUSTEE OF DOUGLAS COUNTY, Trustee for the benefit of AUSA LIFE INSURANCE COMPANY, INC., a New York life insurance company, Beneficiary, having an office c/o AEGON USA Realty Advisors, Inc. 4333 Edgewood Road, N.E. Cedar Rapids, Iowa 52499-5443 Loan Amount: $40,000,000.00 Premises: Green River at Palomino Park, Douglas County, Highlands Ranch, Colorado DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING THIS DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING (this "Deed of Trust") is made and given as of February 6th 2003 by GREEN RIVER AT PALOMINO PARK LLC, a Colorado limited liability company, whose address is c/o Wellsford Park Highlands Corp., 6700 Palomino Pkwy, Highlands Ranch, Colorado 80130, Attn: David M. Strong (the "Grantor"), to the Public Trustee of Douglas County, as Trustee, (the "Trustee"), for the benefit of AUSA LIFE INSURANCE COMPANY, INC., a New York life insurance company having an office c/o AEGON USA Realty Advisors, Inc., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-5443 (the "Beneficiary"). The definitions of capitalized terms used in this Deed of Trust may be found either in Section 3 below, or through the cross-references provided in that Section. 1. RECITALS A. Under the terms of that certain Third Revised Loan Application/Commitment dated November 8, 2002 (the "Commitment"), AEGON USA Realty Advisors, Inc. ("AEGON"), as agent for the Beneficiary, agreed to fund a loan in the principal amount of $40,000,000 (the "Loan"). B. The Beneficiary has funded the Loan in the principal amount of $40,000,000 in accordance with the Commitment, and to evidence the Loan, the Grantor has executed and delivered to the Beneficiary a certain secured promissory note, of even date, in the amount of $40,000,000. C. The Commitment requires that the Loan be secured by all of the Grantor's existing and after-acquired interest in certain real property and by certain tangible and intangible personal property. 2. GRANTING CLAUSE To secure the repayment of the Indebtedness, any increases, modifications, renewals or extensions of the Indebtedness, and any substitutions for the Indebtedness, as well as the performance of the Grantor's other Obligations, and in consideration of the sum of ten dollars ($10.00) and other valuable consideration, the receipt and sufficiency of which are acknowledged, the Grantor grants, bargains, warrants, conveys, alienates, releases, assigns, sets over and confirms to the Trustee, in trust with the power of sale for the benefit of the Beneficiary and to his or her successors and assigns forever, all of the Grantor's existing and after acquired interests in the Real Property. 3. DEFINED TERMS The following defined terms are used in this Deed of Trust. For ease of reference, terms relating primarily to the Security Agreement are defined in Section 22.1. "Absolute Assignment of Leases and Rents" means the Loan Document bearing this heading. "Appurtenances" means all rights, estates, titles, interests, privileges, easements, tenements, hereditaments, titles, royalties, reversions, remainders and other interests, whether presently held by the Grantor or acquired in the future, that may be conveyed as interests in the Land under the law of Colorado. Appurtenances include the Easements and the Assigned Rights. "Assigned Rights" means all of the Grantor's rights, easements, privileges, tenements, hereditaments, contracts, claims, licenses or other interests, whether presently existing or arising in the future. The Assigned Rights include all of the Grantor's rights in and to: (a) any greater estate in the Real Property; (b) insurance policies required to be carried hereunder, including the right to negotiate claims and to receive Insurance Proceeds and unearned insurance premiums (except as expressly provided in Section 8.1); (c) Condemnation Proceeds; (d) licenses and agreements permitting the use of sources of groundwater or water utilities, septic leach fields, railroad sidings, sewer lines, means of ingress and egress; (e) drainage over other property; (f) air space above the Land; (g) mineral rights; (h) party walls; (i) vaults and their usage; (j) franchises; (k) commercial tort claims that arise during the Loan term in respect of damages to the Real Property or to its operations, in respect of any impairment to the value of the Real Property, or in respect of the collection of any Rents; (l) construction contracts; (m) roof and equipment guarantees and warranties; (n) building and development licenses and permits; (o) tax credits or other governmental entitlements, credits or rights, whether or not vested; (p) licenses and applications (whether or not yet approved or issued); (q) rights under management and service contracts; (r) leases of Fixtures; (s) trade names; trademarks, trade styles, service marks, copyrights, , and agreements with architects, environmental consultants, property tax consultants, engineers, and any other third party contractors whose services benefit the Real Property. "Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. Sections 101 et seq., and the regulations promulgated pursuant to those statutes. "Business Day" means any day when state and federal banks are open for business in Cedar Rapids, Iowa. "Carveout Obligations" means those obligations described in Section 21. "Carveouts" means those matters from which Carveout Obligations may arise, which are described in Section 21. "Condemnation Proceeds" means all money or other property that has been, or is in the future, awarded or agreed to be paid or given in connection with any taking by eminent domain of all or any part of the Real Property (including a taking through the vacation of any street dedication or through a change of grade of such a street), either permanent or temporary, or in connection with any purchase in lieu of such a taking, or as a part of any related settlement, except for the right to condemnation proceeds granted to the tenant in a separate proceeding including in respect of the lost value of the tenant's leasehold interest. "Default" means any of the acts, omissions, or circumstances specified in Section 10 below. "Default Rate" means the rate of interest specified as the "Default Rate" in the Note. "Development Agreements" means all development, utility or similar agreements included in the Permitted Encumbrances. "Distribution System" means all cable, wiring, conduit, fiber optics and other similar medium whether installed above or underground or in the buildings on the Real Property, but not including the Telecommunications Equipment. "Easements" means the Grantor's existing and future interests in and to the declarations, easements, covenants, and restrictions appurtenant to the Land. "Environmental Indemnity Agreement" means the Loan Document bearing that heading. "Environmental Laws" means all present and future laws, statutes, ordinances, rules, regulations, orders, guidelines, rulings, decrees, notices and determinations of any Governmental Authority to the extent that they pertain to: (A) the protection of health against environmental hazards; (B) the protection of the environment, including air, soils, wetlands, and surface and underground water, from contamination by any substance that may have any adverse health effect on humans, livestock, fish, wildlife, or plant life, or which may disturb an ecosystem; (C) underground storage tank regulation or removal; (D) wildlife conservation; (E) protection or regulation of natural resources; (F) the protection of wetlands; (G) management, regulation and disposal of solid and hazardous wastes; (H) radioactive materials; (I) biologically hazardous materials; (J) indoor air quality; (K) the manufacture, possession, presence, use, generation, storage, transportation, treatment, release, emission, discharge, disposal, abatement, cleanup, removal, remediation or handling of any Hazardous Substances. "Environmental Laws" include the Comprehensive Environmental Response, Compensation, and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.ss.9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.ss.6901 et seq., the -- --- - -- --- Federal Water Pollution Control Act, as amended by the Clean Water Act, 33 U.S.C.ss.1251 et seq., the -- --- Clean Air Act, 42 U.S.C.ss.7401 et seq., the Toxic Substances Control Act, 15 U.S.C.ss.2601 et seq., all -- --- -- --- similar state statutes and local ordinances, and all regulations promulgated under any of those statutes, and all administrative and judicial actions respecting such legislation, all as amended from time to time. "ESA" means the written environmental site assessment of the Real Property obtained under the terms of the Commitment. "Escrow Expenses" means those expenses in respect of Insurance Premiums and such other lienable Impositions as the Beneficiary pays from time to time directly from the Escrow Fund using monies accumulated through the collection of Monthly Escrow Payments. "Escrow Fund" means the funds deposited by Grantor with the Beneficiary pursuant to Section 9 hereof, as reflected in the accounting entry maintained on the books of the Beneficiary as funds available for the payment of Escrow Expenses under the terms of this Deed of Trust. "Fixtures" means all materials, supplies, equipment, apparatus and other items now or hereafter attached to or installed on the Land and Improvements in a manner that causes them to become fixtures under the law of Colorado, including all built-in or attached furniture or appliances, elevators, escalators, heating, ventilating and air conditioning system components, emergency electrical generators and related fuel storage or delivery systems, septic system components, storm windows, doors, electrical equipment, plumbing, water conditioning, lighting, cleaning, snow removal, lawn, landscaping, irrigation, security, incinerating, fire-fighting, sprinkler or other fire safety equipment, bridge cranes or other installed materials handling equipment, satellite dishes or other telecommunication equipment, built-in video conferencing equipment, sound systems or other audiovisual equipment, and cable television distribution systems. Fixtures do not include the Telecommunications Equipment and Distribution System, trade fixtures, furniture and equipment owned by tenants and vendors who are unrelated to the Grantor, provided such items may be detached and removed by the tenants without damage to the Real Property, other than incidental damage that the tenants are obligated to repair under the terms of their Leases. Fixtures expressly include HVAC, mechanical, security and similar systems of general utility for the operation of the Improvements as leasable commercial real property. "Governmental Authority" means any political entity with the legal authority to impose any requirement on the Property, including the governments of the United States, the State of Colorado, Douglas County, and any other entity with jurisdiction to decide, regulate, or affect the ownership, construction, use, occupancy, possession, operation, maintenance, alteration, repair, demolition or reconstruction of any portion or element of the Real Property. "Hazardous Substance" means any substance the release of or the exposure to which is prohibited, limited or regulated by any Environmental Law, or which poses a hazard to human health, including: (A) any "oil," as defined by the Federal Water Pollution Control Act and regulations promulgated thereunder (including crude oil or any fraction of crude oil), (B) any radioactive substance and (C) STACCHYBOTRIS CHARTARUM or other molds. However, the term "Hazardous Substance" includes neither (A) a substance used in the cleaning and maintenance of the Real Property, if the quantity, storage and manner of its use are customary, prudent, and do not violate applicable law, or (B) automotive motor oil in immaterial quantities, if leaked from vehicles in the ordinary course of the operation of the Real Property and cleaned up in accordance with reasonable property management procedures and in a manner that violates no applicable law. "Impositions" means all real and personal property taxes levied against the Property; general or special assessments; ground rent; water, gas, sewer, vault, electric or other utility charges; common area charges; owners' association dues or fees; fees for any easement, license or agreement maintained for the benefit of the Property; and any and all other taxes, levies, user fees, claims, charges and assessments whatsoever that at any time may be assessed, levied or imposed on the Property or upon its ownership, use, occupancy or enjoyment, and any related costs, interest or penalties. In addition, "Impositions" include all documentary, stamp or intangible personal property taxes that may become due in connection with the Indebtedness, including Indebtedness in respect of any future advance made by the Beneficiary to the Grantor, or that are imposed on any of the Loan Documents. "Improvements" means, to the extent of the Grantor's existing and future interest, all buildings and improvements of any kind erected or placed on the Land now or in the future, including the Fixtures, together with Grantor's existing and future interest in all appurtenant rights, privileges, easements, tenements, hereditaments, titles, reversions, remainders and other interests. "Indebtedness" means all sums that are owed or become due pursuant to the terms of the Note, this Deed of Trust, or any of the other Loan Documents or any other writing executed by the Grantor relating to the Loan, including scheduled principal payments, scheduled interest payments, default interest, late charges, prepayment premiums, accelerated or matured principal balances, advances, collection costs (including reasonable attorneys' fees), reasonable attorneys' fees and costs in enforcing or protecting the Note, the Deed of Trust, or any of the other Loan Documents in any probate, bankruptcy or other proceeding, receivership costs, fees and costs of the Trustee and all other financial obligations of the Grantor incurred in connection with the Loan transaction, provided, however, that this Deed of Trust shall not secure any Loan Document or any particular person's liabilities or obligations under any Loan Document to the extent that such Loan Document expressly states that it or such particular person's liabilities or obligations are unsecured by this Deed of Trust. Indebtedness shall also include any obligations under agreements which specifically provide that such obligations are secured by this Deed of Trust. "Insurance Premiums" means all premiums or other charges required to maintain in force any and all insurance policies that this Deed of Trust requires that the Grantor maintain. "Insurance Proceeds" means (A) all proceeds of all insurance now or hereafter carried by or payable to the Grantor with respect to the Real Property, including with respect to the interruption of rents or income derived from the Property, all unearned insurance premiums and all related claims or demands, and (B) all Proceeds. "Land" means that certain tract of land located in Douglas County, Colorado, which is described on the attached Exhibit A, together with the Appurtenances. "Leases" means all leases, subleases, licenses, concessions, extensions, renewals and other agreements (whether written or oral, and whether presently effective or made in the future) through which the Grantor grants any possessory interest in and to, or any right to occupy or use, all or any part of the Real Property, and any related guaranties. "Legal Control" means the power, either directly or indirectly, to exercise the authority of the owner of the Real Property, either as the majority shareholder of the common stock of a corporation, as the sole general partner of a limited partnership, as the managing general partner of a general partnership, or as the sole manager of a limited liability company, provided the entity exercising such authority cannot be divested of such authority without its consent, either directly or indirectly, except for cause. "Legal Requirements" means all laws, statutes, rules, regulations, ordinances, judicial decisions, administrative decisions, building permits, development permits, certificates of occupancy, or other requirements of any Governmental Authority. "Loan Documents" means all documents evidencing the Loan or delivered in connection with the Loan, whether entered into at the closing of the Loan or in the future. "Maximum Lawful Rate" means the maximum lawful rate of interest that may be paid or collected under the laws of Colorado. "Monthly Escrow Payment" means the sum of the Monthly Imposition Requirement, the Monthly Insurance Premium Requirement, and the Monthly Reserve Requirement. "Monthly Imposition Requirement" means one-twelfth of the annual amount that the Beneficiary estimates will be required to permit the timely payment by the Beneficiary of those Impositions that the Beneficiary elects, from time to time, to include in the calculation of the Monthly Imposition Requirement. Such Impositions shall include real and personal property taxes and may include, at the Beneficiary's sole and absolute discretion any Impositions that the Grantor has failed to pay on a timely basis during the term of the Loan. The Beneficiary shall base its estimate on the most recent information supplied by the Grantor concerning future Impositions. If the Grantor fails to supply such information or if it is unavailable at the time of estimation, the Beneficiary shall estimate future Impositions using historical information and an annual inflation factor equal to the lesser of 5% and the maximum inflation factor permitted by law. "Monthly Insurance Premium Requirement" means one-twelfth of the annual amount that the Beneficiary estimates (based on available historical data and using, if future Insurance Premiums are as yet undeterminable, a 5% inflation factor) will be required to permit the timely payment of the Insurance Premiums by the Beneficiary. "Monthly Reserve Requirement" means the monthly payment amount which the Beneficiary estimates will, over the subsequent twelve months, result in the accumulation of a surplus in the Escrow Fund equal to the sum of the Monthly Imposition Requirement and the Monthly Insurance Premium Requirement. "Note" means the promissory note dated of even date herewith to evidence the Indebtedness in the original principal amount of $40,000,000, together with all extensions, renewals and modifications. "Notice" means a notice given in accordance with the provisions of Subsection 26.12. "Obligations" means all of the obligations required to be performed under the terms and conditions of any of the Loan Documents by any Obligor, except for obligations that are expressly stated to be unsecured under the terms of another Loan Document. "Obligor" means the Grantor, or any other Person that is liable under the Loan Documents for the payment of any portion of the Indebtedness, or the performance of any other obligation required to be performed under the terms and conditions of any of the Loan Documents, under any circumstances. "Participations" means participation interests in the Loan Documents granted by the Beneficiary. "Permitted Control Group Member" shall mean any member of a group comprised of Wellsford Real Property, Inc. and EOP Limited Partnership. "Permitted Encumbrances" means (A) the lien of taxes and assessments not yet due and payable and (B) those matters listed as special exceptions in the Beneficiary's title insurance policy insuring the priority of this Deed of Trust. "Permitted Transfer" means a transfer specifically described in Section 14 as permitted. "Person" means any individual, corporation, limited liability company, partnership, trust, unincorporated association, government, governmental authority or other entity. "Prohibited Structural Change" means (A) a change in the ownership structure of Grantor, if, following the change, Legal Control of the Real Property is no longer exercised by one or more Permitted Control Group Member, or (B) a change in the identity or capacity of any intermediate entity through which any Permitted Control Group Member exercises such Legal Control. "Property" means the Real Property, the Personal Property, the Leases and the Rents. "Rating Agencies" means one or more credit rating agencies approved by Lender. "Real Property" means the Land, the Improvements, the Leases and the Rents. "Rents" means all rents, income, receipts, issues and profits and other benefits paid or payable for using, leasing, licensing, possessing, operating from or in, residing in, selling, mining, extracting minerals from, or otherwise enjoying the Real Property, whether presently existing or arising in the future, to which the Grantor may now or hereafter become entitled or may demand or claim from the commencement of the Loan term through the time of the satisfaction of all of the Obligations, including security deposits, amounts drawn under letters of credit securing tenant obligations, minimum rents, additional rents, common area maintenance charges, parking revenues, deficiency rents, termination payments, space contraction payments, damages following default under a Lease, premiums payable by tenants upon their exercise of cancellation privileges, proceeds from lease guarantees, proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by destruction or damage to the Real Property, all rights and claims of any kind which the Grantor has or may in the future have against the tenants under the Leases, lease guarantors, or any subtenants or other occupants of the Real Property, all proceeds of any sale of the Real Property in violation of the Loan Documents, any future award granted the Grantor in any court proceeding involving any such tenant in any bankruptcy, insolvency, or reorganization proceedings in any state or federal court, and any and all payments made by any such tenant in lieu of rent. "Restoration" means (A) in the case of a casualty resulting in damage to or the destruction of the Improvements, the repair or rebuilding of the Improvements to their original condition, or (B) in the case of the condemnation of a portion of the Real Property, the completion of such work as may be necessary in order to remedy the effects of the condemnation so that the value and income-generating characteristics of the Real Property are restored. "Securities" means mortgage pass-through certificates or other securities evidencing a beneficial interest in the Loan, issued in a rated or unrated public offering or private placement. "Securitization" means the issuance of Securities. "Telecommunications" means (i) local telephone exchange services and point-to-point telephone communications (including dedicated long-distance service), call waiting, call forwarding, speed dialing and other similar services; paging, voice mail and message center service; video communications service; 800 or other toll-free-number service; telephone credit or debit card service; audio conferencing; (ii) multichannel video or audio programming, including, without limitation, cable television services, satellite master antenna television, wireless or microwave technology, direct feed from a local franchise cable provider or video delivery provider, multichannel multipoint distribution service, direct broadcast satellite, or other similar video or audio transmission services; and (iii) high speed Internet access and other Internet-related communication services, which may include all other services such as voice, video, data, facsimile or other communication services (or any combination of the foregoing), data transmission service; access to computer "Internet" or other networked computer-based communications and related content, including access via Internet "portal" service; provision of telephone, video communication or other similar communications equipment or infrastructure. "Telecommunications Equipment" means the facilities and equipment owned by Palomino Park Telecom, LLC or its licensees for the transmission and reception of Telecommunications services, including without limitation: servers, racks, cabinets, cable, risers, junction boxes, hangers, pull boxes, innerducts, connecting equipment, termination blocks, intermediate distribution facilities, a/k/a customer service boxes, electrical wiring and related equipment, electronic devises, and hardware and software or any components thereof, but not including the Distribution System. 4. TITLE The Grantor represents to and covenants with the Beneficiary and with its successors and assigns that, at the point in time of the grant of the lien created by this Deed of Trust, the Grantor is well seized of good and indefeasible title to the Real Property, in fee simple absolute, subject to no lien or encumbrance except the Permitted Encumbrances. The Grantor warrants this estate and title to the Beneficiary and to its successors and assigns forever, against all lawful claims and demands of all persons subject to the Permitted Encumbrances. The Grantor shall maintain mortgagee title insurance issued by a solvent carrier, covering the Real Property in an amount at least equal to the amount of the Loan's original principal balance. This Deed of Trust is and shall remain a valid and enforceable first lien on the Real Property, subject only to the Permitted Encumbrances, and if the validity or enforceability of this first lien is attacked by appropriate proceedings, the Grantor shall diligently and continuously defend it through appropriate proceedings. Should the Grantor fail to do so, the Beneficiary may at the Grantor's expense take all necessary action, including the engagement and compensation of legal counsel, the prosecution or defense of litigation, and the compromise or discharge of claims. The Grantor shall defend, indemnify and hold the Beneficiary harmless in any suit or proceeding brought to challenge or attack the validity, enforceability or priority of the lien granted by this Deed of Trust. If a prior construction, mechanics' or materialmen's lien on the Real Property arises by operation of statute during any construction or repair of the Improvements, the Grantor shall either cause the lien to be discharged by paying when due any amounts owed to such persons, or shall comply with Section 12 of this Deed of Trust. 5. REPRESENTATIONS OF THE GRANTOR The Grantor hereby represents to the Beneficiary as follows: 5.1 FORMATION, EXISTENCE, GOOD STANDING The Grantor is a limited liability company duly organized, validly existing and in good standing under the laws of Colorado and has obtained all licenses and permits and filed all statements of fictitious name and registrations necessary for the lawful operation of its business in Colorado. 5.2 POWER AND AUTHORITY The Grantor has full power and authority to carry on its business as presently conducted, to own the Property, to execute and deliver the Loan Documents, and to perform its Obligations. 5.3 ANTI-TERRORISM REGULATIONS Neither the Grantor, any affiliate of the Grantor, nor any person owning an interest in either of the foregoing (unless in either case, as a shareholder of Wellsford Real Properties, Inc. or of any other publicly traded entity), is a "Specially Designated National" or a "Blocked Person" as those terms are defined in the Office of Foreign Asset Control Regulations (31 CFR Section 500 ET SEQ.). 5.4 DUE AUTHORIZATION The Loan transaction and the performance of all of the Grantor's Obligations have been duly authorized by all requisite limited liability company action, and each individual executing any Loan Document on behalf of the Grantor has been duly authorized to do so. 5.5 NO DEFAULT OR VIOLATIONS The execution and performance of the Grantor's Obligations will not result in any breach of, or constitute a default under, any contract, agreement, document or other instrument to which the Grantor is a party or by which the Grantor may be bound or affected, and do not and will not violate or contravene any law to which the Grantor is subject; nor do any such other instruments impose or contemplate any obligations which are or will be inconsistent with the Loan Documents. 5.6 NO FURTHER APPROVALS OR ACTIONS REQUIRED No approval by, authorization of, or filing with any federal, state or municipal or other governmental commission, board or agency or other governmental authority is necessary in connection with the authorization, execution and delivery of the Loan Documents by the Grantor. 5.7 DUE EXECUTION AND DELIVERY Each of the Loan Documents to which the Grantor is a party has been duly executed and delivered on behalf of the Grantor. 5.8 LEGAL, VALID, BINDING AND ENFORCEABLE Each of the Loan Documents to which the Grantor is a party constitutes the legal, valid and binding obligation of the Grantor, enforceable against the Grantor in accordance with its terms, except to the extent that its enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the enforceability of creditors' rights generally, or by equitable principles of general application (whether considered in an action at law or in equity). 5.9 ACCURATE FINANCIAL INFORMATION All financial information furnished by the Grantor to the Beneficiary in connection with the application for the Loan is true, correct and complete in all material respects and does not omit to state any fact or circumstance necessary to make the statements in them not misleading, and there has been no material adverse change in the financial condition of the Grantor since the date of such financial information. 5.10 COMPLIANCE WITH LEGAL REQUIREMENTS All governmental approvals and licenses required for the conduct of the Grantor's business and for the maintenance and operation of the Real Property in compliance with applicable law are in full force and effect, and the Real Property is currently being operated in compliance with the Legal Requirements in all material respects. 5.11 CONTRACTS AND FRANCHISES All contracts and franchises necessary for the conduct of the Grantor's business and for the operation of the Real Property in accordance with good commercial practice are in force. 5.12 NO CONDEMNATION PROCEEDING As of the date of this Deed of Trust and except as disclosed to Beneficiary in writing, the Grantor has no knowledge of any present, pending or threatened condemnation proceeding or award affecting the Real Property. 5.13 NO CASUALTY As of the date of this Deed of Trust, no damage to the Real Property by any fire or other casualty has occurred, other than damage that has been completely repaired in accordance with good commercial practice and in compliance with applicable law. 5.14 INDEPENDENCE OF THE REAL PROPERTY The Real Property may be operated independently from other land and improvements not included within or located on the Land, and it is not necessary to own or control any property other than the Real Property in order to meet the obligations of the landlord under any Lease, or in order to comply with the Legal Requirements. 5.15 COMPLETE LOTS AND TAX PARCELS The Land is comprised exclusively of tax parcels that are entirely included within the Land, and, if the Land is subdivided, of subdivision lots that are entirely included within the Land. 5.16 OWNERSHIP OF FIXTURES The Grantor owns the Fixtures free of any encumbrances (except the Permitted Encumbrances to the extent the Fixtures are deemed part of the Real Property), including purchase money security interests, rights of lessors, and rights of sellers under conditional sales contracts or other financing arrangements. 5.17 COMMERCIAL PROPERTY The Grantor is not using the Real Property for its personal residential purposes, and the Loan has not been made for personal, family or household purposes. 5.18 REAL PROPERTY IS NOT HOMESTEAD PROPERTY The Real Property is NOT HOMESTEAD PROPERTY of the Grantor or of the spouse of any person named as the Grantor. 5.19 PERFORMANCE UNDER DEVELOPMENT AGREEMENTS All of the obligations of the owner of the Real Property due under the Development Agreements have been fully, timely and completely performed and such performance has been accepted by the related governmental agency or utility company, and no Governmental Authority has alleged that any default exists under any of the Development Agreements. 5.20 STATUS OF CERTAIN TITLE MATTERS Each of the Appurtenances (a) is valid and in full force and effect and may not be amended or terminated, except for cause, without the consent of the owner of the Real Property, (b) has not been amended or supplemented, (c) requires no approval of the Improvements that has not been obtained, (d) is free of defaults or alleged defaults, (e) does not provide for any assessment against the Real Property that has not been paid in full or, if paid in installments, which have not been paid current through the date of this Deed of Trust, and (f) has not been violated by the owner of the Real Property or, to the best of the Grantor's knowledge, by any tenant of the Real Property. 5.21 NO PROHIBITED TRANSACTIONS The Grantor represents to the Beneficiary that either (a) the Grantor is not an "employee benefit plan" within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is subject to Title I of ERISA, a "plan" within the meaning of Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or an entity that is deemed to hold "plan assets" within the meaning of 29 C.F.R. ss.2510.3-101 of any such employee benefit plan or (b) the enter into of the Loan Documents, the acceptance of the Loan by the Grantor and the existence of the Loan will not result in a non-exempt prohibited transaction under ss.406 of ERISA or Section 4975 of the Code. The Grantor further warrants and covenants that the foregoing representation will remain true during the term of the Loan. 6. COVENANTS 6.1 GOOD STANDING The Grantor shall remain in good standing as a limited liability company under the laws of Colorado and shall maintain in force all statements of fictitious name and registrations necessary for the lawful operation of its business in Colorado during the term of the Loan. 6.2 NO DEFAULT OR VIOLATIONS The Grantor shall not enter into any contract, agreement, document or other instrument, if the performance of the Grantor's Obligations would result in any breach of, or constitute a default under, any such contract, agreement, document or other instrument, or if the contract, agreement, document or other instrument would impose or contemplate any obligations the performance of which would result in a Default under the Loan Documents or would be inconsistent with the performance of the Grantor's Obligations. 6.3 PAYMENT AND PERFORMANCE The Grantor shall pay the Indebtedness and perform all of its other Obligations, as and when the Loan Documents require such payment and performance. 6.4 PAYMENT OF IMPOSITIONS The Grantor shall pay the Impositions on or before the last day on which they may be paid without penalty or interest, and shall, within thirty days, furnish the Beneficiary with a paid receipt or a cancelled check as evidence of payment. If the Beneficiary does not receive such evidence, the Beneficiary may obtain it directly. If it does so, the Beneficiary will charge the Grantor an administrative fee of $250 for securing the evidence of payment. The payment of this fee shall be a demand obligation of the Grantor. The Grantor may meet the Imposition payment requirements of this Subsection 6.4 by remitting the Monthly Escrow Payments when due, by immediately providing Notice to the Beneficiary of any new Imposition or increased Imposition unknown to the Beneficiary, and by paying to the Beneficiary on demand any amount required to increase the Escrow Fund to an amount sufficient to permit the Beneficiary to pay all Impositions from the Escrow Fund on time. If the Grantor wishes to contest the validity or amount of an Imposition, it may do so by complying with Section 12. If any new Legal Requirement (other than a general tax on income or on interest payments) taxes the Deed of Trust so that the yield on the Indebtedness would be reduced, and the Grantor may lawfully pay the tax or reimburse the Beneficiary for its payment, the Grantor shall do so. 6.5 MAINTENANCE OF THE REAL PROPERTY The Grantor shall not commit or permit any waste of the Real Property as a physical or economic asset, and agrees to maintain in good repair the Improvements, including structures, roofs, mechanical systems, parking lots or garages, and other components of the Real Property that are necessary or desirable for the use of the Real Property, or which the Grantor as landlord under any Lease is required to maintain for the benefit of any tenant. In its performance of this Obligation, the Grantor shall promptly and in a good and workmanlike manner repair or restore, as required under Subsection 6.17, any elements of the Improvements that are damaged or destroyed. The Grantor shall also replace roofs, parking lots, mechanical systems, and other elements of the Improvements requiring periodic replacement. The Grantor shall carry out such replacements no less frequently than would a commercially reasonable owner intending to maintain the maximum income-generating potential of the Real Property over its reasonable economic life. The Grantor shall not, without the prior written consent of the Beneficiary, demolish, reconfigure, or materially alter the structural elements of the Improvements, unless such an action is the obligation of the Grantor under a Lease approved by Beneficiary or for which the Beneficiary's approval is not required under the Absolute Assignment of Leases and Rents. The Beneficiary agrees that any request for its consent to such an action shall be deemed given if the Beneficiary does not respond within fifteen (15) Business Days to any written request for such a consent, if the request is accompanied by all materials required to permit the Beneficiary to analyze the proposed action. 6.6 MANAGEMENT OF THE REAL PROPERTY The Real Property shall be professionally leased and managed in a manner that is consistent with good commercial practice for institutional owners of first-class multifamily apartment projects. 6.7 USE OF THE REAL PROPERTY The Grantor agrees that the Real Property may only be used as a residential apartment complex and for no other purpose. 6.8 LEGAL REQUIREMENTS The Grantor shall maintain in full force and effect all governmental approvals and licenses required for the conduct of the Grantor's business and for the maintenance and operation of the Real Property in compliance with applicable law, and shall comply with all Legal Requirements relating to the Real Property at all times. 6.9 CONTRACTS AND FRANCHISES The Grantor shall maintain in force all contracts and franchises necessary for the conduct of the Grantor's business and for the operation of the Real Property in accordance with good commercial practice. 6.10 COVENANTS REGARDING CERTAIN TITLE MATTERS The Grantor shall promptly pay, perform and observe all of its obligations under the Appurtenant Easements or under reciprocal easement agreements, operating agreements, declarations, and restrictive covenants included in the Permitted Encumbrances, shall not modify or consent to the termination of any of them without the prior written consent of the Beneficiary, shall promptly furnish the Beneficiary with copies of all notices of default under them, and shall cause all covenants and conditions under them and benefiting the Real Property to be fully performed and observed. 6.11 INDEPENDENCE OF THE REAL PROPERTY The Grantor shall maintain the independence of the Real Property from other land and improvements not included within or located on the Land. In fulfilling this covenant, the Grantor shall neither take any action which would make it necessary to own or control any property other than the Real Property in order to meet the obligations of the landlord under any Lease, or in order to comply with the Legal Requirements, nor take any action which would cause any land or improvements other than the Land and the Improvements to rely upon the Land or the Improvements for those purposes. 6.12 COMPLETE LOTS AND TAX PARCELS The Grantor shall take no action that would result in the inclusion of any portion of the Land in a tax parcel or subdivision lot that is not entirely included within the Land. 6.13 COMMERCIAL PROPERTY The Grantor shall not use the Real Property for its personal residential purposes, and the Loan shall not be used for personal, family or household purposes. 6.14 REAL PROPERTY IS NOT HOMESTEAD PROPERTY The Real Property shall NOT BECOME HOMESTEAD PROPERTY of the Grantor or of the spouse of any person named as the Grantor. 6.15 PERFORMANCE UNDER DEVELOPMENT AGREEMENTS The Grantor shall fully, timely and completely perform all of the obligations of the owner of the Real Property due under the Development Agreements and shall cause no default under any of the Development Agreements. 6.16 STATUS OF CERTAIN TITLE MATTERS The Grantor shall not take or fail to take any action with respect to the Easements included within the Appurtenances or the reciprocal easement agreements, operating agreements, declarations, and restrictive covenants included in the Permitted Encumbrances, if as the result of such an action or failure, the Subject Easement or other title matter would (a) be rendered invalid or without force, (b) be amended or supplemented without the consent of the Grantor, (c) be placed in default or alleged default, (d) result in any lien against the Real Property, or (e) give rise to any assessment against the Real Property, unless immediately paid in full or, if payable in installments, paid prior to any delinquency. 6.17 RESTORATION UPON CASUALTY OR CONDEMNATION If a casualty or condemnation occurs, the Grantor shall promptly commence the Restoration of the Real Property, to the extent that the Beneficiary has made Insurance Proceeds or Condemnation Proceeds available to the Grantor for such Restoration. 6.18 PERFORMANCE OF LANDLORD OBLIGATIONS The Grantor shall perform its obligations as landlord under the Leases, and shall neither take any action, nor fail to take any action, if the action or failure would be inconsistent with the commercially reasonable management of the Real Property for the purpose of enhancing its long-term performance and value. Except as expressly permitted under the Absolute Assignment of Leases and Rents, the Grantor shall not, without the Beneficiary's written consent, extend, modify, declare a default under, terminate, or enter into any Lease of the Real Property. 6.19 FINANCIAL REPORTS AND OPERATING STATEMENTS (A) MAINTENANCE OF BOOKS AND RECORDS During the term of the Loan, the Grantor shall maintain complete and accurate accounting and operational records, including copies of all Leases and other material written contracts relating to the Real Property, copies of all tax statements, and evidence to support the payment of all material property-related expenses. (B) DELIVERY OF FINANCIAL AND PROPERTY-RELATED INFORMATION Within one hundred twenty (120) days of the end of each of its fiscal years, or, if a Default exists, on demand by the Beneficiary, the Grantor shall deliver to the Beneficiary (A) copies of the financial statements of the Grantor, including balance sheets and earnings statements, (B) a complete and accurate operating statement for the Real Property, and (C) a complete rent roll, all in form satisfactory to the Beneficiary. The rent roll must be certified by the Grantor to be true and correct and must include each tenant's name, premises, square footage, rent (including any percentage rent and supporting sales reports from the related tenants), lease expiration date, renewal options and related rental rates, delinquencies and vacancies, and the existence of any unsatisfied landlord obligations in respect of tenant improvements or other leasing costs. If the Grantor fails to deliver the items required in this Subsection, the Beneficiary may engage an accounting firm to prepare the required items. The Grantor shall cooperate fully with any investigative audit required to permit the accounting firm to produce these items, and the fees and expenses incurred in connection with their preparation shall be paid on demand by the Grantor. If a decision is made to include the Loan in a Securitization and the amount of the Loan would exceed 20% of the amount estimated in good faith to be raised in the offering, the Grantor agrees to provide, to the extent required by SEC Rule 3-14, and to the extent not previously supplied to Beneficiary, financial statements for the Real Property in respect of the three years prior to the Securitization. If the amount of the Loan would exceed 10% (but not 20%) of the amount estimated in good faith to be raised by the offering, the Grantor agrees to provide such additional property-related financial information as the Beneficiary may request in order to meet then-applicable SEC rules in connection with the contemplated manner of the offering. The Grantor shall not be required to provide audited financial statements or audited property and related financial information unless and to the extent required elsewhere in this Deed of Trust; provided, however the financial statements and the Property-related financial information shall be certified as true and correct by Wellsford Park Highlands Corp. (C) EFFECT OF FAILURE TO DELIVER FINANCIAL AND PROPERTY REPORTS If no Default exists and the Grantor fails to provide the financial and property reports required under this Section within one hundred twenty (120) days of the close of any fiscal year, the Beneficiary will provide a Notice of this failure and a thirty (30)-day opportunity to cure before a Default shall exist. All monthly payments of principal and interest under the Note that become due after this cure period has elapsed but before the reports are received by the Beneficiary must be accompanied by a fee of .000834 times the principal balance of the Loan at the beginning of the previous month, regardless of whether the Notice has asserted that the failure constitutes a Default under this Deed of Trust. This fee is to compensate the Beneficiary for (A) the increased risk resulting from the Beneficiary's inability to monitor and service the Loan using up-to-date information and (B) the reduced value and liquidity of the Loan as a financial asset. (D) CERTIFICATION OF INFORMATION The financial and operating statements provided under this Subsection need not, as an initial matter, be certified by an independent certified public accountant as having been prepared in accordance with generally accepted accounting principles, consistently applied, or, in the case of financial statements prepared on a cash or income tax basis, or of operating statements, as not materially misleading based on an audit conducted in accordance with generally accepted auditing standards. The Grantor shall, however certify that such statements are true and correct, and the Beneficiary expressly reserves the right to require such a certification by an independent certified public accountant if a Default exists or if the Beneficiary has reason to believe that any previously provided financial or operating statement is misleading in any material respect. 6.20 ESTOPPEL STATEMENTS Upon request by the Beneficiary, the Grantor shall, within ten Business Days of Notice of the request, furnish to the Beneficiary or to whom it may direct, a written statement acknowledging the amount of the Indebtedness and disclosing whether any offsets or defenses exist against the Indebtedness. Thereafter, the Grantor shall be estopped from asserting any other offsets or defenses alleged to have arisen as of the date of the statement. 6.21 PROHIBITION ON CERTAIN DISTRIBUTIONS If Default exists under Subsection 10.2 or under any of Subparagraphs (b), (c), (d), (e) or (f) of Subsection 10.4, the Grantor shall not pay any dividend or make any partnership, trust or other distribution, and shall not make any payment or transfer any property in order to purchase, redeem or retire any interest in its beneficial interests or ownership. 6.22 USE OF LOAN PROCEEDS The Loan proceeds shall be used solely for commercial purposes. 6.23 PROHIBITION ON CUTOFF NOTICES The Grantor shall not issue any Notice to the Beneficiary to the effect that liens on the Real Property after the date of the Notice will enjoy priority over the lien of the Deed of Trust. 7. INSURANCE REQUIREMENTS At all times until the Indebtedness is paid in full, the Grantor shall maintain insurance coverage and administer insurance claims in compliance with this Section. 7.1 REQUIRED COVERAGES (A) OPEN PERILS/SPECIAL FORM/SPECIAL PERILS PROPERTY The Grantor shall maintain "Open Perils," "Special Form," or "Special Perils" property insurance coverage in an amount not less than one hundred percent (100%) of the replacement cost of all insurable elements of the Real Property and of all tangible Personal Property, with coinsurance waived, or if a coinsurance clause is in effect, with an agreed amount endorsement acceptable to the Beneficiary. Coverage shall extend to the Real Property and to all tangible Personal Property. (B) BROAD FORM BOILER AND MACHINERY If any boiler or other machinery is located on or about the Real Property, the Grantor shall maintain broad form boiler and machinery coverage, including a form of business income coverage. (C) FLOOD If the Real Property is located in a special flood hazard area (that is, an area within the 100-year floodplain) according to the most current flood insurance rate map issued by the Federal Emergency Management Agency and if flood insurance is available, the Grantor shall maintain flood insurance coverage on all insurable elements of Real Property and of all tangible Personal Property. (D) BUSINESS INTERRUPTION The Grantor shall maintain a form of business income coverage in the amount of eighty percent (80%) of one year's business income from the Property. (E) COMPREHENSIVE/GENERAL LIABILITY The Grantor shall maintain commercial general liability coverage (which may be in the form of umbrella/excess liability insurance) with a $1,000,000 combined single limit per occurrence and a minimum aggregate limit of $2,000,000. (F) LIQUOR LIABILITY The Grantor shall maintain liquor liability coverage, if applicable law may impose liability on those selling, serving, or giving alcoholic beverages to others and if such beverages will be sold, served or given on the Real Property by the Grantor. (G) ELECTIVE COVERAGES The Beneficiary may require additional coverages appropriate to the property type and site location. Additional coverages may include earthquake, windstorm, mine subsidence, sinkhole, personal property, supplemental liability, or coverages of other property-specific risks. 7.2 PRIMARY COVERAGE Each coverage required under this Section shall be primary rather than contributing or secondary to the coverage Grantor may carry for other properties or risks, provided, however, that blanket coverage shall be acceptable if (a) the policy includes limits by property location and (b) the Beneficiary determines, in the exercise of its sole and absolute discretion, that the amount of such coverage is sufficient in light of the other risks and properties insured under the blanket policy. 7.3 HOW THE BENEFICIARY SHOULD BE NAMED On all property insurance policies and coverages required under this Section (including coverage against loss of business income), the Beneficiary must be named as "first mortgagee" under a standard mortgage clause. On all liability policies and coverages, the Beneficiary must be named as an "additional insured." The Beneficiary should be referred to verbatim as follows: "AUSA Life Insurance Company, Inc., and its successors, assigns, and affiliates; as their interest may appear; c/o AEGON USA Realty Advisors, Inc.; Mortgage Loan Dept.; 4333 Edgewood Rd., NE; Cedar Rapids, Iowa 52499-5443." 7.4 RATING Each insurance carrier providing insurance required under this Section must have, independently of its parent's or any reinsurer's rating, a General Policyholder Rating of A, and a Financial Rating of X or better, as reported in the most current issue of Best's Insurance Guide, or as reported by Best on its internet web site. 7.5 DEDUCTIBLE The maximum deductible on each required coverage or policy is $25,000. 7.6 NOTICES, CHANGES AND RENEWALS All policies must require the insurance carrier to give the Beneficiary a minimum of ten (10) days' notice in the event of modification, cancellation or termination for non-payment of premium and a minimum of sixty (60) days' notice of non-renewal. The Grantor shall report to the Beneficiary immediately any of the following to the extent they affect any insurance contract: any vacancy; change of title; tenant occupancy or use; physical damage; additional improvements; or other factors affecting any insurance contract. Prior to expiration of any policy required under this Section, the Grantor shall provide either (a) an original or certified copy of the renewed policy, or (b) a "binder," an Acord 27 (property) or Acord 25 (liability) certificate, or another document satisfactory to the Beneficiary conferring on the Beneficiary the rights and privileges of mortgagee. If the Grantor meets the foregoing requirement under clause (b), the Grantor shall supply an original or certified copy of the original policy within ninety (90) days. All binders, certificates, documents, and original or certified copies of policies must name the Grantor as a named insured or as an additional insured, must include the complete and accurate property address and must bear the original signature of the issuing insurance agent. 7.7 UNEARNED PREMIUMS If this Deed of Trust is foreclosed, the Beneficiary may at its discretion cancel any of the insurance policies required under this Section and apply any unearned premiums to the Indebtedness. 7.8 FORCED PLACEMENT OF INSURANCE If the Grantor fails to comply with the requirements of this Section, the Beneficiary may, at its discretion, procure any required insurance. Any premiums paid for such insurance, or the allocable portion of any premium paid by the Beneficiary under a blanket policy for such insurance, shall be a demand obligation under this Deed of Trust, and any unearned premiums under such insurance shall comprise Insurance Proceeds and therefore a portion of the Property. 8. INSURANCE AND CONDEMNATION PROCEEDS 8.1 ADJUSTMENT AND COMPROMISE OF CLAIMS AND AWARDS The Grantor may settle any insurance claim or condemnation proceeding if the effect of the casualty or the condemnation may be remedied for $100,000 or less. If a greater sum is required, the Grantor may not settle any such claim or proceeding without the advance written consent of the Beneficiary. If a Default exists, the Grantor may not settle any insurance claim or condemnation proceeding without the advance written consent of the Beneficiary. 8.2 DIRECT PAYMENT TO THE BENEFICIARY OF PROCEEDS If the Insurance Proceeds received in connection with a casualty or the Condemnation Proceeds received in respect of a condemnation exceed $100,000, or if there is a Default, then such proceeds shall be paid directly to the Beneficiary. The Beneficiary shall have the right to endorse instruments which evidence proceeds that it is entitled to receive directly. 8.3 AVAILABILITY TO THE GRANTOR OF PROCEEDS The Grantor shall have the right to use the Insurance Proceeds or the Condemnation Proceeds to carry out the Restoration of the Real Property, if the amount received is less than $1,200,000. If the amount received in respect of a casualty or condemnation equals or exceeds $1,200,000, and if the Loan-to-Value ratio of the Property on completion will be seventy-five percent (75%) or less, as determined by the Beneficiary in its discretion based on its estimate of the market value of the Real Property, the Beneficiary shall receive such Insurance Proceeds or Condemnation Proceeds directly and hold them in a fund for Restoration. If the Beneficiary's estimate of the market value of the Real Property implies a Loan-to-value ratio of over 75%, and the Grantor disagrees with the Beneficiary's estimate, the Grantor may require that the Beneficiary engage an independent appraiser (the "Fee Appraiser") to prepare and submit to AEGON a full narrative appraisal report estimating the market value of the Real Property. The Fee Appraiser shall be certified in Colorado and shall be a member of a national appraisal organization that has adopted the Uniform Standards of Professional Appraisal Practice (USPAP) established by the Appraisal Standards Board of the Appraisal Foundation. The Fee Appraiser will be required to use assumptions and limiting conditions established by the Beneficiary and to prepare the appraisal in conformity with the Beneficiary's Appraisal Guidelines. For purposes of this Section, the independent appraiser's value conclusion shall be binding on both the Beneficiary and the Grantor. The Grantor shall have the right to make a prepayment of the Loan, without premium, sufficient to achieve this Loan-to-value ratio. The independent fee appraisal shall be at the Grantor's expense, and the Grantor shall pay to the Beneficiary an administrative fee of $2,500 in connection with its review. The Beneficiary may require that the Grantor deposit $10,000 with the Beneficiary as security for these expenses or may pay the fee appraiser's and administrative fees from the proceeds at its sole discretion. Unless the Grantor has the right to use the Insurance Proceeds or the Condemnation Proceeds under the foregoing paragraph, the Beneficiary may, in its sole and absolute discretion, either apply them to the Loan balance or disburse them for the purposes of repair and reconstruction, or to remedy the effects of the condemnation. No prepayment premium will be charged on amounts applied to reduce the principal balance of the Loan. 8.4 CONDITIONS TO AVAILABILITY OF PROCEEDS The Beneficiary shall have no obligation to release Insurance Proceeds or Condemnation Proceeds to the Grantor, and may hold such amounts as additional security for the Loan, if (i) the Beneficiary has delivered to the Grantor Notice of any act, omission or circumstance that will, if uncured, become a Default, (ii) a Default has occurred under Section 10.2(a) in the twelve months prior to the casualty or condemnation event that precipitates the payment of Insurance Proceeds or Condemnation Proceeds or (iii) if the Insurance Proceeds or Condemnation Proceeds received by the Beneficiary and any other funds deposited by the Grantor with the Beneficiary are insufficient, as determined by the Beneficiary in its reasonable discretion, to complete the Restoration. If a Default exists, the Beneficiary may at its sole and absolute discretion apply such Insurance Proceeds and Condemnation Proceeds to the full or partial cure of the Default. 8.5 PERMITTED MEZZANINE FINANCING FOR REBUILDING OR REMEDIATION OF THE EFFECT OF TAKING BY EMINENT DOMAIN If the Beneficiary reasonably determines that the Insurance Proceeds or Condemnation Proceeds received in respect of a casualty or condemnation, as the case may be, would be insufficient to permit the Grantor to restore the Improvements to their condition before the casualty, or to remedy the effect on the Real Property of the condemnation, then the Grantor shall use its best efforts to secure such additional funds as are necessary to effect the restoration or remediation. The Grantor's obligation to use its best efforts shall be limited to securing such funds on a non-recourse basis, pledging, if necessary, its equity interest in the Real Property as security to the extent of any such financing. 8.6 DRAW REQUIREMENTS The Grantor's right to receive Insurance Proceeds and Condemnation Proceeds held by the Beneficiary under this Section shall be conditioned on the Beneficiary's approval of plans and specifications for the Restoration. Each draw shall be in the minimum amount of $50,000. Draw requests shall be accompanied by customary evidence of construction completion, and by endorsements to the Beneficiary's mortgagee title insurance coverage insuring the absence of construction, mechanics' or materialmen's liens. Draws based on partial completion of the Restoration shall be subject to a ten percent (10%) holdback. All transactional expenses shall be paid by the Grantor. 9. ESCROW FUND The Grantor shall pay the Monthly Escrow Payment on the first (1st) day of every month, commencing with the month in which the first regular payment of principal and interest is due. The Beneficiary shall hold Monthly Escrow Payments in a non-interest-bearing fund from which the Beneficiary will pay on a timely basis those Escrow Expenses that the Beneficiary has anticipated will become payable on a regular basis during the Loan's term, and on which the Beneficiary has based its determination of the Monthly Imposition Requirement, the Monthly Insurance Premium Requirement and the Monthly Reserve Requirement. The Escrow Fund will be maintained as an accounting entry in the Beneficiary's general account, where it may be commingled with the Beneficiary's other funds. The Beneficiary may reanalyze the projected Escrow Expenses from time to time and shall advise the Grantor of any change in the amount of the Monthly Escrow Payment. Upon the foreclosure of this Deed of Trust, the delivery of a deed in lieu of foreclosure, or the payoff of the Loan, the Beneficiary shall apply amounts in the Escrow Fund, net of accrued Escrow Expenses, to the Indebtedness. The Beneficiary shall remit any amounts in excess of the Indebtedness to the Grantor. 10. DEFAULT 10.1 EXISTENCE OF DEFAULT A Default shall exist immediately upon the occurrence of any of the acts, omissions or circumstances specified in Subsection 10.2 or in Subsection 10.4. Upon the occurrence of any of the acts, omissions or circumstances specified in Subsection 10.3, the Beneficiary may deliver written Notice to the Grantor of the existence of such an act, omission or circumstance, and that such an act, omission or circumstance shall constitute a Default under the Loan Documents unless the Grantor promptly initiates an effort to cure the potential Default, pursues the cure diligently and continuously, and succeeds in effecting the cure within one hundred twenty (120) days of its receipt of Notice. The Beneficiary shall afford the Grantor an additional period of one hundred twenty (120) days in cases where construction or repair is needed to cure the potential Default, and the cure cannot be completed within the first one hundred twenty (120)-day cure period. During the cure period, the Grantor has the obligation to provide on demand satisfactory documentation of its effort to cure, and, upon completion, evidence that the cure has been achieved. All notice and cure periods provided in this Deed of Trust shall run concurrently with any notice or cure periods provided by law. 10.2 MONETARY DEFAULTS A Default shall exist upon any of the following: (A) MONTHLY PRINCIPAL AND INTEREST PAYMENTS The Grantor's failure to pay, or to cause to be paid, any regular monthly payment of principal and interest under the Note or any required Monthly Escrow Payment on or before the tenth day of the month in which it is due. (B) MATURED INDEBTEDNESS The Grantor's failure to pay, or to cause to be paid, the Indebtedness when the Loan matures by acceleration under Section 16, because of a transfer or encumbrance under Section 13, or by lapse of time. (C) DEMAND OBLIGATIONS The Grantor's failure to pay, or to cause to be paid, within five (5) Business Days of the Beneficiary's demand, any other amount due under this Deed of Trust or any of the other Loan Documents. 10.3 CURABLE NONMONETARY DEFAULT Following the giving of Notice and the expiration of the cure period specified in Section 10.1, a Default shall exist if: (A) ENTRY OF A MATERIAL JUDGMENT Any judgment is entered against the Grantor or any other Obligor, and the judgment may materially and adversely affect the value, use or operation of the Real Property. (B) OTHER DEFAULTS The Grantor fails to observe any promise or covenant made in this Deed of Trust, unless the failure results in a Default under Subsection 10.2, subparagraph (a) of this Section 10.3, or Subsection 10.4. 10.4 INCURABLE NONMONETARY DEFAULT A Default shall exist upon any of the following: (A) MATERIAL UNTRUTH OR MISREPRESENTATION The Beneficiary's discovery that any representation made by the Grantor in any Loan Document in connection with the Loan was untrue or misleading in any material respect at the time it was made. (B) DUE ON SALE OR ENCUMBRANCE The occurrence of any sale, conveyance, transfer or vesting that would result in the Loan becoming immediately due and payable at the Beneficiary's option under Section 13. (C) VOLUNTARY BANKRUPTCY FILING The filing by the Grantor of a petition in bankruptcy or for relief from creditors under any present or future law that affords general protection from creditors. (D) INVOLUNTARY BANKRUPTCY OR SIMILAR FILING The Grantor becomes the subject of any petition or action seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief, or that may result in a composition of its debts, provide for the marshaling of the Grantor's assets for the satisfaction of its debts, or result in the judicially ordered sale of the Grantor's assets for the purpose of satisfying its obligations to creditors, unless a motion for the dismissal of the petition or other action is filed within ten (10) days and results in its dismissal within sixty (60) days of the filing of the petition or other action. (E) INSOLVENCY The failure of the Grantor generally to pay its debts as they become due, its admission in writing to an inability so to pay its debts, the making by the Grantor of a general assignment for the benefit of creditors, or a judicial determination that the Grantor is insolvent. (F) RECEIVERSHIP The appointment of a receiver or trustee to take possession of any of the assets of the Grantor. (G) LEVY OR ATTACHMENT The taking or seizure of any material portion of the Property under levy of execution or attachment. (H) LIEN The filing against the Real Property of any lien or claim of lien for the performance of work or the supply of materials, or the filing of any federal, state or local tax lien against the Grantor, or against the Real Property, unless the Grantor promptly complies with Section 12 of this Deed of Trust. (I) DEFAULTS UNDER OTHER LOAN DOCUMENTS The existence of any default under any other Loan Document, provided any required Notice of such default has been given and any applicable cure period has expired. (J) DISSOLUTION OR LIQUIDATION The Grantor shall initiate or suffer the commencement of a proceeding for its dissolution or liquidation, and such proceeding shall not be dismissed within thirty (30) days, or the Grantor shall cease to exist as a legal entity (unless resulting in or allowed pursuant to a Permitted Transfer). 11. RIGHT TO CURE Upon Default or upon the failure of the Grantor, following a Notice given under Subsection 10.1, to diligently pursue the cure of any act, omission or circumstance that may cause Default, the Beneficiary shall have the right to cure the Default or the act, omission or circumstance. The expenses of doing so shall be part of the Indebtedness, and the Grantor shall pay them to the Beneficiary on demand. 12. CONTEST RIGHTS The Grantor may secure the right to contest Impositions and construction, mechanics' or materialmen's liens, through appropriate proceedings conducted in good faith, by either (A) depositing with the Beneficiary an amount equal to one hundred twenty five percent (125%) of the amount of the Imposition or the lien, or (B) obtaining and maintaining in effect a bond issued by a surety acceptable to the Beneficiary, in an amount equal to the greater of (i) the amount of a required deposit under clause (A) above and (ii) the amount required by the surety or by the court in order to obtain a court order staying the foreclosure of the lien pending resolution of the dispute, and releasing the lien of record. The proceeds of such a bond must be payable directly to the Beneficiary or to the applicable court if required by Colorado law. The surety issuing such a bond must be acceptable to the Beneficiary in its sole discretion. After such a deposit is made or bond issued, the Grantor shall promptly commence the contest of the lien and continuously pursue that contest in good faith and with reasonable diligence. If the contest of the related Imposition or lien is unsuccessful, any deposits or bond proceeds shall be used to pay the Imposition or to satisfy the obligation from which the lien has arisen. Any surplus shall be refunded to the Grantor. Grantor shall not be required to secure the right to contest Impositions, construction, mechanics' or materialmen's liens if the amount of the Imposition or lien contested is less than $25,000.00. 13. DUE ON TRANSFER OR ENCUMBRANCE Upon the sale of any portion of the Real Property or any other conveyance, transfer or vesting of any direct or indirect interest in the Grantor or the Property, including (i) the direct or indirect transfer of, or the granting of a security interest in, the ownership of the Grantor, (ii) any encumbrance (other than a Permitted Encumbrance) of the Real Property (unless the Grantor contests the encumbrance in compliance with Section 12) and (iii) the lease, license, or granting of any security interest in the Personal Property, the Indebtedness shall, at the Beneficiary's option, become immediately due and payable upon Notice to the Grantor, unless the sale, conveyance, transfer or vesting is a Permitted Transfer. 14. DUE ON SALE EXCEPTIONS 14.1 TRANSFER TO AN APPROVED PURCHASER The Grantor shall have the right, on five occasions during the term of the Loan, to sell or transfer the Property in a transaction approved by the Beneficiary. The Beneficiary agrees to approve a transfer if the following conditions are satisfied: (A) NO DEFAULT No Default shall exist, and no act, omission or circumstance shall exist which, if uncured following Notice and the passage of time, would become a Default. (B) REQUEST AND SUPPORTING MATERIALS The Beneficiary shall receive a written request for its approval at least sixty (60) days before the proposed transfer. The request shall specify the identity of the proposed transferee and the purchase price and other terms of the transaction, shall include a copy of the proposed contract of sale, and shall be accompanied by the financial statements, tax returns, and organizational documents of the proposed transferee and its principals. (C) CRITERIA TO BE CONSIDERED The ownership structure, financial strength, credit history and demonstrated property management expertise of the proposed transferee and its principals shall be satisfactory to the Beneficiary in its sole discretion. The Beneficiary expressly reserves the right to withhold its approval of the proposed transfer if the proposed transferee or any of its principals is or has been the subject of any bankruptcy, insolvency, or similar proceeding. (D) ASSUMPTION AGREEMENT Under the terms of the proposed transfer, the proposed transferee shall assume the Loan, without modification, under the terms of an assumption agreement and additional documentation satisfactory to the Beneficiary in form and substance. Under the assumption agreement, the transferee shall provide a representation as to the purchase price paid for the Real Property. (E) TITLE INSURANCE ENDORSEMENT The Grantor shall agree to provide an endorsement to the Beneficiary's mortgagee title insurance policy, insuring the continued validity and priority of this Deed of Trust following the assumption. (F) ASSUMPTION FEE The Beneficiary shall receive an assumption fee of one percent (1%) of the outstanding balance of the Loan, and the Grantor shall agree to reimburse the Beneficiary's out-of-pocket expenses incurred in connection with the proposed transfer, including title updates and endorsement charges, recording fees, any applicable taxes and attorneys' fees, regardless of whether the transfer is consummated. (G) RELEASE OF GRANTOR Upon a transfer pursuant to this Section 14.1, Grantor shall be released from all liabilities with respect to the Loan, to the extent that the party assuming the Loan expressly assumes all such obligations, including any accrued Carveout Obligations. 14.2 PERMITTED TRANSFERS OF CERTAIN PASSIVE INTERESTS The Beneficiary agrees that it shall not withhold its consent to certain transfers of direct or indirect interests in the Grantor (each a "Qualified Passive Interest Transfer"). A "Qualified Passive Interest Transfer" is any transfer of a direct or indirect interest in the Grantor, if, following the transfer (i) the Real Property remains under the Legal Control of one or more Permitted Control Group Members; (ii) the transfer does not result in a Prohibited Structural Change and (iii) the transfer does not result in a change in assets that would be at risk with respect to the Carveout Obligations. Borrower shall not be required to pay an assumption fee to Beneficiary upon the occurrence of a Qualified Passive Interest Transfer, but shall be required to pay the costs described in Section 14.4. 14.3 TRANSFERS RESULTING IN PERMITTED CONTROL GROUP MEMBER OWNERSHIP Beneficiary shall not unreasonably withhold its consent to any transfer of direct or indirect interests in the Borrower if, after such transfer, one or more Permitted Control Group Members directly or indirectly owns at least a 20% economic interest in Borrower. Beneficiary shall have the right of review, approval and consent of such transfer. Upon the occurrence of such transfer, Borrower shall pay to Beneficiary a $20,000 assumption fee, together with the costs described in Section 14.4. 14.4 TRANSACTION COSTS The Grantor shall pay all out-of-pocket expenses incurred by the Beneficiary in the review and processing of a Permitted Transfer. 15. NOTICE OF ABSOLUTE ASSIGNMENT OF LEASES AND RENTS Under the Absolute Assignment of Leases and Rents, the Grantor has assigned to the Beneficiary, and to its successors and assigns, all of the Grantor's right and title to, and interest in, the Leases, including all rights under the Leases and all benefits to be derived from them. The rights assigned include all authority of the Grantor to modify or terminate Leases, or to exercise any remedies, and the benefits assigned include all Rents. This assignment is present and absolute, but under the terms of the Absolute Assignment of Leases and Rents, the Beneficiary has granted the Grantor a conditional license to collect and use the Rents, and to exercise the rights assigned, in a manner consistent with the Obligations, all as more particularly set forth in the Absolute Assignment of Leases and Rents. The Beneficiary may, however, terminate the license by written Notice to the Grantor on certain conditions set forth in the Absolute Assignment of Leases and Rents. 16. ACCELERATION Under the terms of the Note, if a Default exists, the Beneficiary may, at its option, by Notice to the Grantor, declare the Indebtedness to be immediately due and payable, provided, however, that if the Default arises solely as the result of the failure of the Grantor to make a regular monthly payment of principal and interest, the Beneficiary shall not accelerate the Indebtedness unless the Beneficiary has given the Notice of the Default, and a cure period of three (3) Business Days, prior to declaring the Indebtedness to be immediately due and payable. 17. RIGHTS OF ENTRY AND TO OPERATE 17.1 ENTRY ON REAL PROPERTY If a Default exists, the Beneficiary may, to the extent permitted by law, enter upon the Real Property and take exclusive possession of the Real Property and of all books, records and accounts, all without Notice and without being guilty of trespass, but subject to the rights of tenants in possession under the Leases. If the Grantor remains in possession of all or any part of the Property after Default and without the Beneficiary's prior written consent, the Beneficiary may, without Notice to the Grantor, invoke any and all legal remedies to dispossess the Grantor. 17.2 OPERATION OF REAL PROPERTY Following Default, the Beneficiary may hold, lease, manage, operate or otherwise use or permit the use of the Real Property, either itself or by other persons, firms or entities, in such manner, for such time and upon such other terms as the Beneficiary may deem to be prudent under the circumstances (making such repairs, alterations, additions and improvements thereto and taking any and all other action with reference thereto, from time to time, as the Beneficiary deems prudent), and apply all Rents and other amounts collected by the Beneficiary in accordance with the provisions of the Absolute Assignment of Leases and Rents. 18. RECEIVERSHIP Following Default, the Beneficiary may apply to a court of competent jurisdiction for the appointment of a receiver of the Property, ex parte without Notice to the Grantor, whether or not the value of the Property exceeds the Indebtedness, whether or not waste or deterioration of the Real Property has occurred, and whether or not other arguments based on equity would justify the appointment. The Grantor irrevocably, with knowledge and for valuable consideration, consents to such an appointment. Any such receiver shall have all the rights and powers customarily given to receivers in Colorado, including the rights and powers granted to the Beneficiary by this Deed of Trust, the power to maintain, lease and operate the Real Property on terms approved by the court, and the power to collect the Rents and apply them to the Indebtedness or otherwise as the court may direct. Once appointed, a receiver may at the Beneficiary's option remain in place until the Indebtedness has been paid in full. 19. FORECLOSURE; POWER OF SALE Upon Default, the Beneficiary may immediately proceed to foreclose the lien of this Deed of Trust, against all or part of the Property, or to sell the Property by judicial or nonjudicial foreclosure in accordance with the laws of Colorado and may pursue any other remedy available to commercial mortgage lenders under the laws of Colorado. 20. WAIVERS To the maximum extent permitted by law, the Grantor irrevocably and unconditionally WAIVES and RELEASES any present or future rights (a) of reinstatement or redemption (b) that may exempt the Property from any civil process, (c) to appraisal or valuation of the Property, (d) to extension of time for payment, (e) that may subject the Beneficiary's exercise of its remedies to the administration of any decedent's estate or to any partition or liquidation action, (f) to any homestead and exemption rights provided by the Constitution and laws of the United States and of Colorado, (g) to notice of acceleration or notice of intent to accelerate (other than as expressly stated herein), and (h) that in any way would delay or defeat the right of the Beneficiary to cause the sale of the Real Property for the purpose of satisfying the Indebtedness. The Grantor agrees that the price paid at a lawful foreclosure sale, whether by the Beneficiary or by a third party, and whether paid through cancellation of all or a portion of the Indebtedness or in cash, shall conclusively establish the value of the Real Property. The foregoing waivers shall apply to and bind any party assuming the Obligations of the Grantor under this Deed of Trust. 21. EXCULPATION CLAUSE AND CARVEOUT OBLIGATIONS The Beneficiary agrees that it shall not seek to enforce any monetary judgment with respect to the Indebtedness evidenced by the Note against the Grantor except through recourse to the Property, unless the Obligation from which the judgment arises is a Carveout Obligation. The Carveout Obligations include (a) the obligation to repay any portion of the Indebtedness that arises from a Carveout, (b) the obligation to repay the entire Indebtedness, if the Beneficiary's exculpation of the Grantor from personal liability under this Section has become void as set forth below, (c) the obligation to indemnify the Beneficiary in respect of its actual damages suffered in connection with a Carveout, and (d) the obligation to defend and hold the Beneficiary harmless from and against any claims, judgments, causes of action or proceedings arising from a Carveout. The Carveouts are: (i) fraud or material written misrepresentation; (ii) waste of the Property (which shall include damage, destruction or disrepair of the Real Property caused by a willful act or grossly negligent omission of the Grantor, but shall exclude ordinary wear and tear in the absence of gross negligence); (iii) misappropriation of tenant security deposits (including proceeds of tenant letters of credit), Insurance Proceeds or Condemnation Proceeds; (iv) failure to pay property taxes, assessments or other lienable Impositions; (v) failure to pay to the Beneficiary all Rents, income and profits, net of reasonable and customary operating expenses, received in respect of a period when the Loan is in Default (including the last month's rent, if collected in advance, under any lease in force at the time of Default); (vi) removal from the Real Property of fixtures or Personal Property, unless replaced in a commercially reasonable manner; (vii) the out-of-pocket expenses of enforcing the Loan Documents following Default, not including expenses incurred after the Grantor has agreed in writing to transfer the Real Property to the Beneficiary by the Beneficiary's choice of either an uncontested foreclosure or delivery of a deed in lieu of foreclosure; (viii) terminating or amending a Lease in violation of the Loan Documents; and (ix) any liability of the Grantor under the Environmental Indemnity Agreement. The Beneficiary's exculpation of the Grantor from personal liability for the repayment of the Indebtedness shall be void without Notice if the Grantor (A) voluntarily transfers or creates any material voluntary lien on the Property in violation of this Deed of Trust, or (B) files a voluntary petition for reorganization under Title 11 of the United States Code (or under any other present or future law, domestic or foreign, relating to bankruptcy, insolvency, reorganization proceedings or otherwise similarly affecting the rights of creditors), and has not offered, prior to the filing, to enter into the Beneficiary's choice of either an agreement to permit an uncontested foreclosure, or an agreement to deliver a deed in lieu of foreclosure within sixty (60) days of the Beneficiary's acceptance of the offer. After the Beneficiary accepts such an offer, default by the Grantor in fulfilling the terms of the accepted offer shall trigger personal liability for the entire Indebtedness. No such offer shall be conditioned on any payment by the Beneficiary, on the release of any Obligor from any Obligation, or on any other concession. 22. SECURITY AGREEMENT AND FIXTURE FILING 22.1 DEFINITIONS "Account" shall have the definition assigned to it in the UCC. "Account Collateral" means all Accounts that arise from the operations, use or enjoyment of the Property, from the commencement of the Loan term through the satisfaction of all of the Obligations. "Bank" shall have the meaning assigned to that term in the UCC. "Chattel Paper" shall have the definition assigned to it in the UCC. "Chattel Paper Collateral" means all Chattel Paper arising from the sale or other disposition of all or part of the Property. "Commercial Tort Claim" shall have the definition assigned to it in the UCC. "Commercial Tort Claim Collateral" means all Commercial Tort Claims in respect of damages to the Property or to its operations, in respect of any impairment of the value of the Property, or in respect of the collection of any Accounts. "Deposit Account" shall have the definition assigned to it in the UCC. "Deposit Account Collateral" means all the Deposit Accounts into which Rents or Proceeds are deposited at any time from the commencement of the Loan term through the satisfaction of all of the Obligations. "Document" shall have the definition assigned to it in the UCC. "Document Collateral" means all Documents that evidence title to all or any part of the Goods Collateral. "Equipment" shall have the definition assigned to it in the UCC. "Equipment Collateral" means all Equipment that relates to the Real Property and is used in the operation of the Real Property as commercial real estate. "Financing Statements" shall have the definition assigned to it in the UCC. "General Intangibles" shall have the definition assigned to it in the UCC. "General Intangible Collateral" means all General Intangibles that have arisen or that arise in the future in connection with the Grantor's ownership, operation or leasing of the Real Property, at any time from the commencement of the Loan term through the satisfaction of all of the Obligations. "Goods" shall have the definition assigned to it in the UCC. "Goods" include all detached Fixtures, items of Personal Property that may become Fixtures, property management files, accounting books and records, reports of consultants relating to the Real Property, site plans, test borings, environmental or geotechnical surveys samples and test results, blueprints, construction and shop drawings, and plans and specifications. "Goods Collateral" means all Goods that relate to the Real Property and are used in the operation of the Real Property as commercial real estate. "Instrument" shall have the definition assigned to that term in the UCC. "Instrument Collateral" means all Instruments received as Rents or Proceeds or purchased by the Grantor with Rents or Proceeds. "Investment Property" shall have the definition assigned to that term in the UCC. "Investment Property Collateral" means all the Investment Property purchased using Rents or Proceeds, or received in respect of Account Collateral. "Letter of Credit" shall have the definition assigned to it in the UCC. "Letter of Credit Collateral" means all Letters of Credit that relate to the use, operation or enjoyment of the Property, including those that secure the payment of any Accounts comprising Account Collateral or arising from the sale or other disposition of all or part of the Property. "Letter of Credit Rights" shall have the definition assigned to it in the UCC. "Letter of Credit Rights Collateral" means all Letter of Credit Rights that relate to the use, operation or enjoyment of the Property, including rights to Letters of Credit that secure the payment of any Accounts comprising Account Collateral or arising from the sale or other disposition of all or part of the Property. "Money Collateral" means all money received in respect of Rents. "Personal Property" means Account Collateral, Chattel Paper Collateral, Commercial Tort Claim Collateral, Deposit Account Collateral, Document Collateral, Goods Collateral, Instrument Collateral, General Intangibles Collateral, Investment Property Collateral, Letter-of-Credit Rights Collateral, Letters of Credit Collateral, and Money Collateral. "Proceeds" shall have the meaning assigned to that term in the UCC. "UCC" means the Uniform Commercial Code as adopted in Colorado. 22.1 CREATION OF SECURITY INTEREST This Deed of Trust shall be self-operative and shall constitute a Security Agreement pursuant to the provisions of the UCC with respect to the Personal Property. The Grantor, as debtor, hereby grants the Beneficiary, as secured party, for the purpose of securing the Indebtedness, a security interest in the Account Collateral, Chattel Paper Collateral, Commercial Tort Claim Collateral, Deposit Account Collateral, Document Collateral, Goods Collateral, Instrument Collateral, General Intangible Collateral, Investment Property Collateral, Letter-of-Credit Rights Collateral, Letter of Credit Collateral, and Money Collateral, in the accessions, additions, replacements, substitutions and Proceeds of any of the foregoing items of collateral. Upon Default, the Beneficiary shall have the rights and remedies of a secured party under the UCC as well as all other rights and remedies available at law or in equity, and, at the Beneficiary's option, the Beneficiary may also invoke the remedies provided elsewhere in this Deed of Trust as to such Property. The Grantor and the Beneficiary agree that the rights granted to the Beneficiary as secured party under this Section 22 are in addition to rather than a limitation on any of the Beneficiary's other rights under this Deed of Trust with respect to the Property. The Grantor and the Beneficiary agree that the Telecommunications Equipment and the Distribution System are specifically excluded from the foregoing grant of security interest. 22.2 FILING AUTHORIZATION The Grantor irrevocably authorizes the Beneficiary to file, in the appropriate locations for filings of UCC financing statements in any jurisdictions as the Beneficiary in good faith deems appropriate, such financing statements and amendments as the Beneficiary may require in order to perfect or continue this security interest, or in order to prevent any filed financing statement from becoming misleading or from losing its perfected status. 22.3 ADDITIONAL SEARCHES AND DOCUMENTATION Grantor shall provide to Beneficiary upon request, certified copies of any searches of UCC records deemed necessary or appropriate by Beneficiary to confirm the first priority status of its security interest in the Personal Property, together with copies of all documents or records evidencing security interests disclosed by such searches. 22.4 COSTS The Grantor shall pay all filing fees and costs and all reasonable costs and expenses of any record searches (or their continuations) as the Beneficiary may require. 22.5 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE GRANTOR (A) OWNERSHIP OF THE PERSONAL PROPERTY All of the Personal Property is, and shall during the term of the Loan continue to be, owned by the Grantor, and is not the subject matter of any lease, control agreement or other instrument, agreement or transaction whereby any ownership, security or beneficial interest in the Personal Property is held by any person or entity other than the Grantor, subject only to (1) the Beneficiary's security interest, (2) the rights of Tenants occupying the Property pursuant to Leases approved by the Beneficiary, and (3) the Permitted Exceptions. (B) NO OTHER IDENTITY The Grantor represents and warrants that the Grantor has not used or operated under any other name or identity for at least five (5) years. The Grantor covenants and agrees that Grantor will furnish Beneficiary with notice of any change in its name, form of organization, or state of organization within thirty (30) days prior to the effective date of any such change. (C) LOCATION OF EQUIPMENT All Equipment Collateral is located upon the Land. (D) REMOVAL OF GOODS The Grantor will not remove or permit to be removed any item included in the Goods Collateral from the Land, unless the same is replaced immediately with unencumbered Goods Collateral (1) of a quality and value equal or superior to that which it replaces and (2) which is located on the Land. All such replacements, renewals, and additions shall become and be immediately subject to the security interest of this Deed of Trust. (E) PROCEEDS The Grantor may, without the Beneficiary's prior written consent, dispose of Goods Collateral in the ordinary course of business, provided that, following the disposition, the perfection of the Beneficiary's security interest in the Proceeds of the disposition will continue under ss. 9-315 (d) of the UCC. The Grantor shall not, without the Beneficiary's prior written consent, dispose of any Personal Property in any other manner, except in compliance with Paragraph (d)of this Section 22.5. 22.6 FIXTURE FILING This Deed of Trust constitutes a financing statement filed as a fixture filing in the Official Records of the Clerk and Recorder of Douglas County, Colorado with respect to any and all fixtures comprising Property. The "debtor" is Green River at Palomino Park LLC, a limited liability company organized under Colorado law, the "secured party" is AUSA Life Insurance Company, Inc., a New York life insurance company, the collateral is as described in Section 22.1 above and the granting clause of this Deed of Trust, and the addresses of the debtor and secured party are the addresses stated in Subsection 26.12 of this Deed of Trust for Notices to such parties. The federal identification number of the debtor is 84-1498143. The Organizational Identification Number of the debtor is 19991212581. The owner of record of the Real Property is Green River at Palomino Park LLC. 23. ENVIRONMENTAL MATTERS 23.1 REPRESENTATIONS The Grantor represents as follows: (A) NO HAZARDOUS SUBSTANCES To the best of the Grantor's knowledge as a duly diligent property owner, and except as disclosed in the ESA or otherwise disclosed to Beneficiary in writing prior to the date of this Deed of Trust, no release of any Hazardous Substance has occurred on or about the Real Property in a quantity or at a concentration level that (i) violates any Environmental Law, or (ii) requires reporting to any regulatory authority or may result in any obligation to remediate under any Environmental Law. (B) COMPLIANCE WITH ENVIRONMENTAL LAWS The Real Property and its current use and presently anticipated uses comply with all Environmental Laws, including those requiring permits, licenses, authorizations, and other consents and approvals. (C) NO ACTIONS OR PROCEEDINGS No governmental authority or agency has commenced any action, proceeding or investigation based on any suspected or actual violation of any Environmental Law on or about the Real Property. To the best of the Grantor's knowledge as a duly diligent property owner, no such authority or agency has threatened to commence any such action, proceeding, or investigation. 23.2 ENVIRONMENTAL COVENANTS The Grantor covenants as follows: (A) COMPLIANCE WITH ENVIRONMENTAL LAWS The Grantor shall, and the Grantor shall cause all employees, agents, contractors, and tenants of the Grantor and any other persons present on or occupying the Real Property to, keep and maintain the Real Property in compliance with all Environmental Laws. (B) NOTICES, ACTIONS AND CLAIMS The Grantor shall immediately advise the Beneficiary in writing of (i) any notices from any governmental or quasi-governmental agency or authority of violation or potential violation of any Environmental Law received by the Grantor, (ii) any and all enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened pursuant to any Environmental Law, (iii) all claims made or threatened by any third party against the Grantor or the Real Property relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Substances, and (iv) discovery by the Grantor of any occurrence or condition on any real property adjoining or in the vicinity of the Real Property that creates a foreseeable risk of contamination of the Real Property by or with Hazardous Substances. 23.3 THE BENEFICIARY'S RIGHT TO CONTROL CLAIMS The Beneficiary shall have the right (but not the obligation) to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Substances and to have its related and reasonable attorneys' and consultants' fees paid by the Grantor upon demand. 23.4 INDEMNIFICATION The Grantor shall be solely responsible for, and shall indemnify, defend, and hold harmless the Beneficiary, its directors, officers, employees, agents, successors and assigns, from and against, any claim, judgment, loss, damage, demand, cost, expense or liability of whatever kind or nature, known or unknown, contingent or otherwise, directly or indirectly arising out of or attributable to the use, generation, storage, release, threatened release, discharge, disposal, or presence (whether prior to or after the date of this Deed of Trust) of Hazardous Substances on, in, under or about the Real Property (whether by the Grantor, a predecessor in title, any tenant, or any employees, agents, contractor or subcontractors of any of the foregoing or any third persons at any time occupying or present on the Real Property), including: (i) personal injury; (ii) death; (iii) damage to property; (iv) all consequential damages; (v) the cost of any required or necessary repair, cleanup or detoxification of the Real Property, including the soil and ground water thereof, and the preparation and implementation of any closure, remedial or other required plans; (vi) damage to any natural resources; and (vii) all reasonable costs and expenses incurred by the Beneficiary or the Trustee in connection with clauses (i) through (vi), including reasonable attorneys' and consultants' fees; provided, however, that nothing contained in this Section shall be deemed to preclude the Grantor from seeking indemnification from, or otherwise proceeding against, any third party including any tenant or predecessor in title to the Real Property, and further provided that this indemnification will not extend to matters caused by the Beneficiary's gross negligence or willful misconduct, or arising from a release of Hazardous Substances which occurs after the Beneficiary has taken possession of the Real Property, so long as the Grantor has not caused the release through any act or omission. The covenants, agreements, and indemnities set forth in this Section shall be binding upon the Grantor and its heirs, personal representatives, successors and assigns, and shall survive repayment of the Indebtedness, foreclosure of the Real Property, and the Grantor's granting of a deed to the Real Property in lieu of foreclosure. Payment shall not be a condition precedent to this indemnity. Any costs or expenses incurred by the Beneficiary for which the Grantor is responsible or for which the Grantor has indemnified the Beneficiary shall be paid to the Beneficiary on demand, with interest at the Default Rate from the date incurred by the Beneficiary until paid in full, and shall be secured by this Deed of Trust. Without the prior written consent of the Beneficiary, the Grantor shall not enter into any settlement agreement, consent decree, or other compromise in respect to any claims relating to Hazardous Substances. The Beneficiary agrees that it shall not unreasonably delay its consideration of any written request for its consent to any such settlement agreement, consent decree, or other compromise once all information, reports, studies, audits, and other documentation have been submitted to the Beneficiary. 23.5 ENVIRONMENTAL AUDITS If a Default exists, or at any time the Beneficiary has reason to believe that a release of Hazardous Substances may have occurred or may be likely to occur, the Beneficiary may require that the Grantor retain, or the Beneficiary may retain directly, at the sole cost and expense of the Grantor, a licensed geologist, industrial hygienist or an environmental consultant acceptable to the Beneficiary to conduct an environmental assessment or audit of the Real Property. In the event that the Beneficiary makes a reasonable determination of the need for an environmental assessment or audit, the Beneficiary shall inform the Grantor in writing that such a determination has been made and, if requested to do so by the Grantor, give the Grantor a written explanation of that determination before the assessment or audit is conducted. The Grantor shall afford any person conducting an environmental assessment or audit access to the Real Property and all materials reasonably requested. The Grantor shall pay on demand the cost and expenses of any environmental consultant engaged by the Beneficiary under this Subsection. The Grantor shall, at the Beneficiary's request and at the Grantor's sole cost and expense, take such investigative and remedial measures determined by the geologist, hygienist or consultant to be necessary to address any condition discovered by the assessment or audit so that (i) the Real Property shall be in compliance with all Environmental Laws, (ii) the condition of the Real Property shall not constitute any identifiable risk to human health or to the environment, and (iii) the value of the Real Property shall not be affected by the presence of Hazardous Substances. 24. AGREEMENT CONCERNING INTEREST The provisions of the Note and of this Deed of Trust now or hereafter existing are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of the maturity of the Note or otherwise, shall the amount paid or agreed to be paid to the Beneficiary for the use, forbearance or detention of the sums evidenced by the Note exceed the Maximum Lawful Rate. If, from any circumstances whatsoever, the performance or fulfillment of any provision of the Note, or of this Deed of Trust, at the time performance of such provision shall be due, shall exceed the limit of validity prescribed by law, then, IPSO FACTO, the obligation to be performed or fulfilled shall be reduced to the limit of such validity, and, if from any such circumstance, the Beneficiary shall ever receive anything of value which is deemed to be interest by Colorado law which would exceed the Maximum Lawful Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal amount of the Note or on account of any other principal indebtedness of the Grantor to the Beneficiary and to the payment of interest thereon or, if such excessive interest exceeds the unpaid balance of principal of the Note and such other indebtedness, such excess shall be refunded to the Grantor. 25. SECONDARY MARKET 25.1 TRANSFER OF THE LOAN The Beneficiary may, at any time, grant Participations, and may transfer the Loan Documents by sale or other assignment, either to be held by the transferee, or for the purpose of the issuance of Securities. 25.2 SALE OR DELEGATION OF SERVICING The Beneficiary may, at any time, transfer any and all of the servicing rights with respect to the Loan, or delegate any or all of its responsibilities as Beneficiary under the Loan Documents. 25.3 DISSEMINATION OF INFORMATION In connection with any transfer of the Loan, the Beneficiary may forward all documents and information that the Beneficiary deems necessary or desirable concerning the Loan, including the financial statements of any Obligor, and such other information as may be reasonably related to the Obligors, the Property or the Leases to any: (a) transferee or prospective transferee of the Loan; (b) Rating Agency rating the Loan, a Participation, or Securities; or (c) any organization maintaining databases on the underwriting and performance of commercial mortgage loans. The Grantor irrevocably waives any and all rights it may have under applicable Legal Requirements to prohibit such disclosure, including any right of privacy. 25.4 COOPERATION The Grantor agrees to cooperate with the Beneficiary in connection with any transfer of the Loan or any Participation or Securities. The Grantor agrees to provide to the Beneficiary or to any persons described in Section 25.3 above to whom the Beneficiary may disseminate such information, at the Beneficiary's request, financial statements of Obligors, an estoppel certificate and such other documents as may be reasonably related to the Obligors, the Property, or the Leases. 25.5 RESERVES/ ESCROWS If Participations are granted or Securities issued in connection with the Loan, all funds held by the Beneficiary in escrow or as reserves in accordance with the Loan Documents may, at the Beneficiary's discretion, be deposited in "eligible accounts" at "eligible institutions" and invested in "permitted investments" as then defined and required by the Rating Agencies. 26. MISCELLANEOUS 26.1 SUCCESSORS AND ASSIGNS All of the terms of the Loan Documents shall apply to, be binding upon and inure to the benefit of the heirs, personal representatives, successors and assigns of the Obligors, or to the holder of the Note, as the case may be. 26.2 SURVIVAL OF OBLIGATIONS Each and all of the Obligations shall continue in full force and effect until the latest of (a) the date the Indebtedness has been paid in full and the Obligations have been performed and satisfied in full, (b) the last date permitted by law for bringing any claim or action with respect to which the Beneficiary may seek payment or indemnification in connection with the Loan Documents, and (c) the date on which any claim or action for which the Beneficiary seeks payment or indemnification is fully and finally resolved and, if applicable, any compromise thereof of judgment or award thereon is paid in full. 26.3 FURTHER ASSURANCES The Grantor, upon the request of the Beneficiary or the Trustee, shall complete, execute, acknowledge, deliver and record or file such further instruments and do such further acts as may be necessary to carry out more effectively the purposes of this Deed of Trust, to subject any property intended to be covered by this Deed of Trust to the liens and security interests it creates, to place third parties on notice of those liens and security interests, or to correct any defects which may be found in any Loan Document. 26.4 RIGHT OF INSPECTION The Beneficiary shall have the right from time to time, upon reasonable advance notice to the Grantor, to enter onto the Real Property for the purpose of inspecting and reporting on its physical condition, tenancy and operations. 26.5 EXPENSE INDEMNIFICATION The Grantor shall pay all filing and recording fees, documentary stamps, intangible taxes, and all expenses incident to the execution and acknowledgment of this Deed of Trust, the Note or any of the other Loan Documents, any supplements, amendments, renewals or extensions of any of them, or any instrument entered into under Subsection 26.3. The Grantor shall pay or reimburse the Beneficiary, upon demand, for all costs and expenses, including appraisal and reappraisal costs of the Property and reasonable attorneys' and legal assistants' fees, which the Beneficiary may incur in connection with enforcement proceedings under the Note, this Deed of Trust, or any of the other Loan Documents (including all fees and costs incurred in enforcing or protecting the Note, this Deed of Trust, or any of the other Loan Documents in any bankruptcy proceeding), and attorneys' and legal assistants' fees incurred by the Beneficiary in any other suit, action, legal proceeding or dispute of any kind in which the Beneficiary is made a party or appears as party plaintiff or defendant, affecting the Indebtedness, the Note, this Deed of Trust, any of the other Loan Documents, or the Property, or required to protect or sustain the lien of this Deed of Trust. The Grantor shall be obligated to pay (or to reimburse the Beneficiary) for such fees, costs and expenses and shall indemnify and hold the Beneficiary harmless from and against any and all loss, cost, expense, liability, damage and claims and causes of action, including attorneys' fees, incurred or accruing by reason of the Grantor's failure to promptly repay any such fees, costs and expenses. If any suit or action is brought to enforce or interpret any of the terms of this Deed of Trust (including any effort to modify or vacate any automatic stay or injunction, any trial, any appeal, any petition for review or any bankruptcy proceeding), the Beneficiary shall be entitled to recover all expenses reasonably incurred in preparation for or during the suit or action or in connection with any appeal of the related decision, whether or not taxable as costs. Such expenses include reasonable attorneys' fees, witness fees (expert or otherwise), deposition costs, copying charges and other expenses. Whether or not any court action is involved, all reasonable expenses, including the costs of searching records, obtaining title reports, appraisals, environmental assessments, surveying costs, title insurance premiums, trustee fees, and other reasonable attorneys' fees, incurred by the Beneficiary that are necessary at any time in the Beneficiary's opinion for the protection of its interest or enforcement of its rights shall become a part of the Indebtedness payable on demand and shall bear interest from the date of expenditure until repaid at the interest rate as provided in the Note. 26.6 GENERAL INDEMNIFICATION The Grantor shall indemnify, defend and hold the Beneficiary harmless against: (i) any and all claims for brokerage, leasing, finder's or similar fees which may be made relating to the Real Property or the Indebtedness, (ii) any and all liability, obligations, losses, damages, penalties, claims, actions, suits costs and expenses (including the Beneficiary's reasonable attorneys' fees, together with reasonable appellate counsel fees, if any) of whatever kind or nature which may be asserted against, imposed on or incurred by the Beneficiary in connection with the Indebtedness, this Deed of Trust, the Real Property or any part thereof, or the operation, maintenance and/or use thereof, or the exercise by the Beneficiary of any rights or remedies granted to it under this Deed of Trust or pursuant to applicable law; provided, however, that nothing herein shall be construed to obligate the Grantor to indemnify, defend and hold harmless the Beneficiary from and against any of the foregoing which is imposed on or incurred by the Beneficiary by reason of the Beneficiary's willful misconduct or gross negligence. 26.7 RECORDING AND FILING The Grantor shall cause this Deed of Trust and all amendments, supplements, and substitutions to be recorded, filed, re-recorded and refiled in such manner and in such places as the Beneficiary may reasonably request. The Grantor will pay all recording filing, re-recording and refiling taxes, fees and other charges. 26.8 NO WAIVER No deliberate or unintentional failure by the Beneficiary to require strict performance by the Grantor of any Obligation shall be deemed a waiver, and the Beneficiary shall have the right at any time to require strict performance by the Grantor of any Obligation. 26.9 COVENANTS RUNNING WITH THE LAND All Obligations are intended by the parties to be and shall be construed as covenants running with the Land. 26.10 SEVERABILITY The Loan Documents are intended to be performed in accordance with, and only to the extent permitted by, all applicable Legal Requirements. Any provision of the Loan Documents that is prohibited or unenforceable in any jurisdiction shall nevertheless be construed and given effect to the extent possible. The invalidity or unenforceability of any provision in a particular jurisdiction shall neither invalidate nor render unenforceable any other provision of the Loan Documents in that jurisdiction, and shall not affect the validity or enforceability of that provision in any other jurisdiction. If a provision is held to be invalid or unenforceable as to a particular person or under a particular circumstance, it shall nevertheless be presumed valid and enforceable as to others, or under other circumstances. 26.11 ENTIRE AGREEMENT The Loan Documents contain the entire agreements between the parties relating to the financing of the Real Property, and all prior agreements which are not contained in the Loan Documents are terminated. The Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. The Loan Documents may be amended, revised, waived, discharged, released or terminated only by a written instrument or instruments executed by the party against whom enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination that is not so documented shall be null and void. 26.12 NOTICES In order for any demand, consent, approval or other communication to be effective under the terms of this Deed of Trust, "Notice" must be provided under the terms of this Subsection. All Notices must be in writing. Notices may be (a) delivered by hand, (b) transmitted by fax (with a duplicate copy sent by first class mail, postage prepaid), (c) sent by certified or registered mail, postage prepaid, return receipt requested, or (d) sent by reputable overnight courier service, delivery charges prepaid. Notices shall be addressed as set forth below: If to the Beneficiary: AUSA Life Insurance Company, Inc. c/o AEGON USA Realty Advisors, Inc. 4333 Edgewood Road, N.E. Cedar Rapids, Iowa 52499-5443 Attn: Mortgage Loan Department Reference: Loan #88766 Fax Number: (319) 369-2277 If to the Grantor: Green River at Palomino Park LLC c/o Wellsford Park Highlands Corp. 6700 Palomino Pkwy Highlands Ranch, Colorado 80130 Fax Number: 303-534-4398 Attn: David M. Strong Notices delivered by hand or by overnight courier shall be deemed given when actually received or when refused by their intended recipient. Faxed Notices will be deemed delivered when a legible copy has been received (provided receipt has been verified by telephone confirmation or one of the other permitted means of giving Notices under this Subsection). Mailed Notices shall be deemed given on the date of the first attempted delivery (whether or not actually received). Either the Beneficiary or the Grantor may change its address for Notice by giving at least fifteen (15) Business Days' prior Notice of such change to the other party. 26.13 COUNTERPARTS This Deed of Trust may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute but one instrument. 26.14 CHOICE OF LAW This Deed of Trust shall be interpreted, construed, applied, and enforced according to, and will be governed by, the laws of Colorado, without regard to any choice of law principle which, but for this provision, would require the application of the law of another jurisdiction and regardless of where executed or delivered, where payable or paid, where any cause of action accrues in connection with this transaction, where any action or other proceeding involving the Loan is instituted, or whether the laws of Colorado otherwise would apply the laws of another jurisdiction. 26.15 FORUM SELECTION The Grantor agrees that the sole and exclusive forum for the determination of any action relating to the validity and enforceability of the Note, this Deed of Trust and the other Loan Documents, and any other instruments securing the Note shall be either in an appropriate court of the State of Colorado or the applicable United States District Court. 26.16 SOLE BENEFIT This Deed of Trust and the other Loan Documents have been executed for the sole benefit of the Grantor and the Beneficiary and the successors and assigns of the Beneficiary. No other party shall have rights thereunder or be entitled to assume that the parties thereto will insist upon strict performance of their mutual obligations hereunder, any of which may be waived from time to time. The Grantor shall have no right to assign any of its rights under the Loan Documents to any party whatsoever. 26.17 RELEASE OF CLAIMS The Grantor hereby RELEASES, DISCHARGES and ACQUITS forever the Beneficiary and its officers, directors, trustees, agents, employees and counsel (in each case, past, present or future) from any and all Claims existing as of the date hereof (or the date of actual execution hereof by the Grantor, if later). As used herein, the term "Claim" shall mean any and all liabilities, claims, defenses, demands, actions, causes of action, judgments, deficiencies, interest, liens, costs or expenses (including court costs, penalties, attorneys' fees and disbursements, and amounts paid in settlement) of any kind and character whatsoever, including claims for usury, breach of contract, breach of commitment, negligent misrepresentation or failure to act in good faith, in each case whether now known or unknown, suspected or unsuspected, asserted or unasserted or primary or contingent, and whether arising out of written documents, unwritten undertakings, course of conduct, tort, violations of laws or regulations or otherwise. 26.18 NO PARTNERSHIP Nothing contained in the Loan Documents is intended to create any partnership, joint venture or association between the Grantor and the Beneficiary, or in any way make the Beneficiary a co-principal with the Grantor with reference to the Property. 26.19 PAYOFF PROCEDURES If the Grantor pays or causes to be paid to the Beneficiary all of the Indebtedness, then the Trustee's interest in the Real Property shall cease, and upon receipt by the Beneficiary of such payment, the Beneficiary shall either (a) direct the Trustee to release this Deed of Trust or (b) assign the Loan Documents and endorse the Note (in either case without recourse or warranty of any kind) to a takeout lender, upon payment (in the latter case) of an administrative fee of $750. 26.20 SURVIVAL OF COMMITMENT TERMS The Commitment shall survive the execution of this Deed of Trust and the other Loan Documents. Any term of the Commitment that has been inadvertently omitted from the Loan Documents is hereby incorporated in this Deed of Trust by reference. If any term of the Commitment conflicts with a provision of this Deed of Trust that addresses the same subject, the terms of this Deed of Trust shall prevail. Any provision of the Commitment which specifically states that it shall survive the closing of the Loan shall so survive, and is hereby incorporated in this Deed of Trust by reference. 26.21 FUTURE ADVANCES Under this Deed of Trust, "Indebtedness" is defined to include certain advances made by the Beneficiary in the future. Such advances include any additional disbursements to the Grantor (unless in connection with another, independent mortgage financing) and any obligations under agreements which specifically provide that such obligations are secured by this Deed of Trust. In addition, Indebtedness is defined to include any amounts advanced to pay Impositions, to cure Defaults, or to pay the costs of collection and receivership. Accordingly, all such advances and obligations shall be equally secured with, and shall have the same priority as, the Indebtedness, and shall be subject to all of the terms and provisions of this Deed of Trust. The Grantor shall pay any taxes that may be due in connection with any such future advance. 26.22 INTERPRETATION (A) HEADINGS AND GENERAL APPLICATION The section, subsection, paragraph and subparagraph headings of this Deed of Trust are provided for convenience of reference only and shall in no way affect, modify or define, or be used in construing, the text of the sections, subsections, paragraphs or subparagraphs. If the text requires, words used in the singular shall be read as including the plural, and pronouns of any gender shall include all genders. (B) SOLE DISCRETION The Beneficiary may take any action or decide any matter under the terms of this Deed of Trust or of any other Loan Document (including any consent, approval, acceptance, option, election or authorization) in its sole and absolute discretion, for any reason or for no reason, unless the related Loan Document contains specific language to the contrary. Any approval or consent that the Beneficiary might withhold may be conditioned in any way. (C) RESULT OF NEGOTIATIONS This Deed of Trust results from negotiations between the Grantor and the Beneficiary and from their mutual efforts. Therefore, it shall be so construed, and not as though it had been prepared solely by the Beneficiary. (D) REFERENCE TO PARTICULARS The scope of a general statement made in this Deed of Trust or in any other Loan Document shall not be construed as having been reduced through the inclusion of references to particular items that would be included within the statement's scope. Therefore, unless the relevant provision of a Loan Document contains specific language to the contrary, the term "include" shall mean "include, but shall not be limited to" and the term "including" shall mean "including, without limitation." 26.23 INDEBTEDNESS MAY EXCEED NOTE'S FACE AMOUNT The Grantor's successors or assigns are hereby placed on Notice that the Note contains late charge, prepayment and other provisions which may result in the outstanding principal balance exceeding the face amount of the Note. 26.24 JOINT AND SEVERAL LIABILITY If there is more than one individual or entity executing this Deed of Trust as the Grantor, liability of such individuals and entities under this Deed of Trust shall be joint and several. 26.25 TIME OF ESSENCE Time is of the essence of each and every covenant, condition and provision of this Deed of Trust to be performed by the Grantor. 26.26 JURY WAIVER THE GRANTOR AND BY ITS ACCEPTANCE HEREOF, THE BENEFICIARY, HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (I) UNDER THIS DEED OF TRUST OR ANY OTHER LOAN DOCUMENT OR (II) ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH THIS DEED OF TRUST OR ANY OTHER LOAN DOCUMENT, AND THE GRANTOR AND BY ITS ACCEPTANCE HEREOF, THE BENEFICIARY, AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A JUDGE AND NOT BEFORE A JURY. 26.27 RENEWAL, EXTENSION, MODIFICATION AND WAIVER The Beneficiary, at its option, may at any time renew or extend this Deed of Trust, the Note or any other Loan Document. The Beneficiary may enter into a modification of any Loan Document without the consent of any person not a party to the document being modified. The Beneficiary may waive any covenant or condition of any Loan Document, in whole or in part, at the request of any person then having an interest in the Property or in any way liable for any part of the Indebtedness. The Beneficiary may take, release, or resort to any security for the Note and the Obligations and may release any party primarily or secondarily liable on any Loan Document, all without affecting any liability not expressly released in writing by the Beneficiary. 26.28 CUMULATIVE REMEDIES Every right and remedy provided in this Deed of Trust shall be cumulative of every other right or remedy of the Beneficiary, whether conferred by law or by grant or contract, and may be enforced concurrently with any such right or remedy. The acceptance of the performance of any obligation to cure any Default shall not be construed as a waiver of any rights with respect to any other past, present or future Default. No waiver in a particular instance of the requirement that any Obligation be performed shall be construed as a waiver with respect to any other Obligation or instance. 26.29 NO OBLIGATION TO MARSHAL ASSETS No holder of any deed of trust, security interest or other encumbrance affecting all or any portion of the Real Property, which encumbrance is inferior to the lien and security title of this Deed of Trust, shall have any right to require the Beneficiary to marshal assets. 26.30 TRANSFER OF OWNERSHIP The Beneficiary may, without notice to the Grantor, deal with any person in whom ownership of any part of the Real Property has vested, without in any way vitiating or discharging the Grantor from liability for any of the Obligations. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Grantor has caused this Deed of Trust to be effective as of the date first above written. BORROWER: GREEN RIVER AT PALOMINO PARK LLC, a Colorado limited liability company By: Wellsford Park Highlands Corp., a Colorado corporation, its manager By /s/ David M. Strong --------------------------------------------- David M. Strong Vice President ACKNOWLEDGEMENT STATE OF COLORADO) ) COUNTY OF DENVER ) The foregoing instrument was acknowledged before me by David M. Strong as Vice President of Wellsford Park Highlands Corp., a Colorado corporation, manager of Green River at Palomino Park LLC, a Colorado limited liability company on this 30th day of January, 2003. Witness my hand and official seal /s/ Evonne C. Wiseman - ---------------------- Notary Public EX-10.84 7 ex10-84.txt $40K SECURED NOTE BY GREEN RIVER 02/06/03 $40,000,000.00 February 6, 2003 SECURED PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, GREEN RIVER AT PALOMINO PARK LLC, a Colorado limited liability company, whose address is c/o Wellsford Park Highlands Corp., 6700 Palomino Parkway, Highlands Ranch, Colorado 80130, Attn: David M. Strong (the "Borrower"), promises to pay $40,000,000.00, together with interest according to the terms of this secured promissory note (this "Note"), to the order of AUSA LIFE INSURANCE COMPANY, INC., a New York life insurance company (together with any future holder, the "Lender"), whose address is c/o AEGON USA Realty Advisors, Inc., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-5443. 1. CONTRACT INTEREST RATE The principal balance of this Note shall bear interest at the rate of the lesser of (i) Five and Forty-Five One Hundredths percent (5.45%) per annum (the "Note Rate") and (ii) the Maximum Lawful Rate (as defined herein). Interest shall be calculated in arrears based on a 360-day year and shall accrue based on the actual number of days elapsed for any whole or partial month in which interest is being calculated. 2. SCHEDULED PAYMENTS 2.1 PREPAYMENT OF INTEREST FOR THE MONTH OF FUNDING Unless the funding of the loan evidenced by this Note (together with all additional charges, advances and accruals, the "Loan") occurs on the first day of a calendar month, the Borrower shall prepay, on the date of the funding, interest due from the date of the funding through and including the last day of the calendar month in which the funding occurs. 2.2 MONTHLY PRINCIPAL AND INTEREST PAYMENTS On the first day of April, 2003 and on the first day of each subsequent calendar month through February, 2013, the Borrower shall pay an installment in the amount of $225,862.36. Monthly installments of principal and interest shall be made when due, regardless of the prior acceptance by the Lender of unscheduled payments. 2.3 FINAL PAYMENT The Loan shall mature on the first day of March, 2013 (the "Maturity Date"), when the Borrower shall pay its entire principal balance, together with all accrued interest and any other amounts owed by the Borrower under this Note or under any of the other documents entered into now or in the future in connection with the Loan (the "Loan Documents"). 3. BALLOON PAYMENT ACKNOWLEDGMENT The Borrower acknowledges that the scheduled monthly installments referred to in Subsection 2.2 will not amortize fully the principal sum of this Note over its term, resulting in a "balloon" payment at maturity. Any future agreement to extend this Note or refinance the indebtedness it evidences may be made only by means of a writing executed by a duly authorized officer of the Lender. 4. APPLICATION OF MONTHLY PRINCIPAL AND INTEREST PAYMENTS When the Lender receives a monthly principal and interest payment, the Lender shall apply it first to interest in arrears for the previous month and then to the amortization of the principal amount of this Note, unless other amounts are then due under this Note or the other Loan Documents. If other amounts are due when a regular monthly payment is received, the Lender shall apply the payment first to accrued interest and then, at its discretion, either to those other amounts or to principal. 5. DEFAULT INTEREST If a Default exists (as defined in Section 9 below) the outstanding principal balance of this Note shall, at the option of the Lender, bear interest at a rate (the "Default Rate") equal to the lesser of (i) eighteen percent (18%) per annum and (ii) the maximum rate allowed by law. If interest has accrued at the Default Rate during any period, the difference between such accrued interest and interest which would have accrued at the Note Rate during such period shall be payable on demand. If a court of competent jurisdiction determines that any interest charged has exceeded the maximum rate allowed by law, the excess of the amount collected over the legal rate of interest will be applied to the indebtedness as a principal prepayment without premium, retroactively, as of the date of receipt, or if such excessive interest exceeds the unpaid balance of principal of this Note and such other indebtedness, such excess shall be refunded to the Borrower. 6. LATE CHARGE If the Lender does not receive any scheduled monthly principal and interest payment on or before the tenth day of the calendar month in which it is due, the Lender will send the Borrower notice that a late charge equal to five percent (5%) of the late payment has accrued. The Borrower shall pay any such late charge on or before the tenth day of the calendar month following the month during which the late payment was scheduled to have been received. Interest on unpaid late charges shall, at the Lender's discretion, accrue at the Note Rate beginning on the first day of the calendar month following their accrual. 7. PREPAYMENT This Note may be prepaid upon not less than thirty (30) days' prior written notice to the Lender. At the time of any prepayment, the Borrower shall pay all accrued interest on the principal balance of this Note and all other sums due to the Lender under the Loan Documents. In addition, unless the prepayment is a "Permitted Par Prepayment" (as defined in Section 8 below), the Borrower shall remit together with any prepayment a premium (the "Prepayment Premium Amount") equal to the greater of (A) one percent (1%) of the prepayment and (B) the amount (the "Yield Protection Amount") calculated in accordance with the next succeeding paragraph of this Note. The Yield Protection Amount shall be calculated as follows: First, the Lender shall determine the annual percentage yield on U.S. Treasury securities maturing at the end of the term of the Loan (the "Annual Treasury Instrument Yield"). The Annual Treasury Instrument Yield shall be determined as of ten (10) Business Days (as defined in the Deed of Trust) before the effective date of the prepayment. The Lender shall base its determination of the Annual Treasury Instrument Yield on the yield on U.S. Treasury instruments, as published in The Wall Street Journal (or, if The Wall Street Journal is not then being published or if no such reports are then being published in The Wall Street Journal, as reported in another public source of information nationally recognized for accuracy in the reporting of the trading of governmental securities). If no such instruments mature on the exact maturity date of this Note, the Lender shall interpolate the Annual Treasury Instrument Yield on a straight-line basis using the yield on the instrument whose maturity date most closely precedes that of this Note, and the yield on the instrument whose maturity date most closely succeeds that of this Note. Second, the Lender shall determine the monthly payment (the "Monthly Reinvestment Payment"), based on a 360-day year and 30-day months, which would be payable on a hypothetical interest-only promissory note having a principal balance equal to the prepaid amount and bearing interest at the rate (the "Reinvestment Rate") which, when compounded monthly, would produce a yield equal to the Annual Treasury Instrument Yield. Third, the Lender shall determine the hypothetical monthly interest-only payment (based on a 360-day year and 30-day months) which would be payable on a promissory note having a principal balance equal to the prepaid amount and bearing interest at this Note Rate (the "Monthly Coupon Rate Payment"). Fourth, the Lender shall determine the present value of a series of monthly payments, each equal in amount to the amount by which the Monthly Coupon Rate Payment exceeds the Monthly Reinvestment Payment, received on the first day of each calendar month from and including the first day of the first full calendar month immediately following the effective date of prepayment to and including the Maturity Date, using the Reinvestment Rate as the discount rate. The present value calculated in this paragraph shall be the Yield Protection Amount. Voluntary partial prepayments shall be permitted only in minimum amounts of $500,000. The Prepayment Premium Amount constitutes liquidated damages to compensate the Lender for reinvestment costs, lost opportunity costs, and the loss by the Lender of its bargained-for investment in the Loan. The Borrower agrees that such liquidated damages are not a penalty but are a reasonable estimate in good faith of the actual damages sustained by the Lender as a result of such prepayment, which actual damages are impossible to ascertain with precision. 8. PERMITTED PAR PREPAYMENTS The Lender shall not charge a prepayment premium on certain prepayments (the "Permitted Par Prepayments"). Permitted Par Prepayments include: (a) any prepayment in full of the Loan made no more than 180 days before the Maturity Date; and (b) any prepayment made as the result of the Lender's election to apply insurance or condemnation proceeds to the principal balance of this Note. 9. DEFAULT A default on this Note ("Default") shall exist if (a) the Borrower fails to pay any required installment of principal and interest on or before the tenth day of the calendar month in which it is due, (b) the Borrower fails to pay the matured balance of this Note on the Maturity Date or (c) a "Default" exists as defined in any other Loan Document. If a Default exists and the Lender engages counsel to collect any amount due under this Note or if the Lender is required to protect or enforce this Note in any probate, bankruptcy or other proceeding, then any expenses incurred by the Lender in respect of the engagement, including the reasonable fees and reimbursable expenses of counsel and including such costs and fees which relate to issues that are particular to any given proceeding, shall constitute indebtedness evidenced by this Note, shall be payable on demand, and shall bear interest at the Default Rate. Such fees and expenses include those incurred in connection with any action against the Borrower for a deficiency judgment after a trustee's sale of the Deed of Trust (defined below), including all of the Lender's reasonable attorneys' fees, property appraisal costs and witness fees. 10. ACCELERATION If a Default exists, the Lender may, at its option, by notice to the Borrower, declare the unpaid principal balance of this Note to be immediately due and payable, together with all accrued interest on the indebtedness, all costs of collection (including reasonable attorneys' fees and expenses) and all other charges due and payable by the Borrower under this Note or any other Loan Document, provided, however, that if the Default arises solely as the result of the failure of the Borrower to make a regular monthly payment of principal and interest, the Lender shall not accelerate the indebtedness unless the Lender has given the Borrower notice of its intent to accelerate the Loan, and a cure period of three (3) Business Days, prior to declaring the indebtedness to be immediately due and payable. 11. PREPAYMENT FOLLOWING ACCELERATION Any Default resulting in the acceleration of the indebtedness evidenced by this Note shall be presumed to be an attempt to avoid the provisions of Section 7 of this Note, which prohibit prepayment or condition the Lender's obligation to accept prepayment on the payment of a prepayment premium. Accordingly, if the indebtedness is accelerated, any amounts tendered to repay the accelerated indebtedness, or realized by the Lender through its remedies following acceleration, shall be subject to the prepayment premium that would have been applicable under Section 7 (calculated from the date of acceleration through the Maturity Date). 12. SECURITY This Note is secured by a Deed of Trust, Security Agreement and Fixture Filing (the "Deed of Trust") granted by the Borrower to the Public Trustee of Douglas County, the Trustee, for the benefit of the Lender, conveying certain real property (the "Real Property") located in the Douglas County, Colorado and granting a security interest in certain fixtures and personal property, and by an Absolute Assignment of Leases and Rents made by the Borrower to the Lender, assigning the landlord's interest in all present and future leases (the "Leases") of all or any portion of the Real Property encumbered by the Deed of Trust. Reference is made to the Loan Documents for a description of the security and rights of the Lender. This reference shall not affect the absolute and unconditional obligation of the Borrower to repay the Loan in accordance with its terms. 13. RECOURSE TO BORROWER The Lender agrees that it shall not seek to enforce any monetary judgment with respect to the indebtedness evidenced by this Note against the Borrower except through recourse to the Property (as defined in the Deed of Trust), unless the obligation from which the judgment arises is one of the "Carveout Obligations" defined in Section 14. 14. CARVEOUT OBLIGATIONS The "Carveout Obligations" are (a) the obligation to repay any portion of the indebtedness evidenced by this Note that arises from any of the "Carveouts" (as defined below), (b) the obligation to repay the entire indebtedness evidenced by this Note, if the Lender's exculpation of the Borrower from personal liability under this Section has become void as set forth below, (c) the obligation to indemnify the Lender in respect of its actual damages suffered in connection with any of the Carveouts, and (d) the obligation to defend and hold the Lender harmless from and against any claims, judgments, causes of action or proceedings arising from any of the Carveouts. The "Carveouts" are: (i) fraud or material written misrepresentation; (ii) waste of the Property (which shall include damage, destruction or disrepair of the Real Property caused by a willful act or grossly negligent omission of the Borrower, but shall exclude ordinary wear and tear in the absence of gross negligence); (iii) misappropriation of tenant security deposits (including proceeds of tenant letters of credit), insurance proceeds or condemnation proceeds; (iv) failure to pay property taxes, assessments or other lienable impositions; (v) failure to pay to the Lender all rents, income and profits, net of reasonable and customary operating expenses, received in respect of a period when the Loan is in default (including the last month's rent, if collected in advance, under any lease in force at the time of default); (vi) removal from the Real Property of fixtures or Personal Property, unless replaced in a commercially reasonable manner; (vii) the out-of-pocket expenses of enforcing the Loan Documents following default, not including expenses incurred after the Borrower has agreed in writing to transfer the Real Property to the Lender by the Lender's choice of either an uncontested foreclosure or delivery of a deed in lieu of foreclosure; (viii) terminating or amending a Lease in violation of the Loan Documents; and (ix) any liability of the Borrower under the Environmental Indemnity Agreement (as defined in the Deed of Trust). The Lender's exculpation of the Borrower from personal liability for the repayment of the indebtedness evidenced by this Note shall be void without notice if the Borrower (A) voluntarily transfers or creates any material voluntary lien on the Property in violation of the Loan Documents, or (B) files a voluntary petition for reorganization under Title 11 of the United States Code (or under any other present or future law, domestic or foreign, relating to bankruptcy, insolvency, reorganization proceedings or otherwise similarly affecting the rights of creditors), and has not offered, prior to the filing, to enter into the Lender's choice of either an agreement to permit an uncontested foreclosure, or an agreement to deliver a deed in lieu of foreclosure within sixty (60) days of the Lender's acceptance of the offer. After the Lender accepts such an offer, default by the Borrower in fulfilling the terms of the accepted offer shall trigger personal liability for the entire indebtedness. No such offer shall be conditioned on any payment by the Lender, on the release of any obligor from any Obligation (as defined in the Deed of Trust), or on any other concession. 15. SEVERABILITY If any provision of this Note is held to be invalid, illegal or unenforceable in any respect, or operates, or would if enforced operate to invalidate this Note, then that provision shall be deemed null and void. Nevertheless, its nullity shall not affect the remaining provisions of this Note, which shall in no way be affected, prejudiced or disturbed. 16. WAIVER Except to the extent that such rights are expressly provided in this Note, the Borrower waives demand, presentment for payment, notice of intent to accelerate, notice of acceleration, protest, notice of protest, dishonor and of nonpayment and any and all lack of diligence or delays in collection or enforcement of this Note. Without affecting the liability of the Borrower under this Note, the Lender may release any of the Property, grant any indulgence, forbearance or extension of time for payment, or release any other person now or in the future liable for the payment or performance of any obligation under this Note or any of the Loan Documents. The Borrower further (a) waives any homestead or similar exemption; (b) waives any statute of limitation; (c) agrees that the Lender may, without impairing any future right to insist on strict and timely compliance with the terms of this Note, grant any number of extensions of time for the scheduled payments of any amounts due, and may make any other accommodation with respect to the indebtedness evidenced by this Note; (d) waives any right to require a marshaling of assets; and (e) to the extent not prohibited by applicable law, waives the benefit of any law or rule of law intended for its advantage or protection as a debtor or providing for its release or discharge from liability under this Note, excepting only the defense of full and complete payment of all amounts due under this Note and the Loan Documents. 17. VARIATION IN PRONOUNS All the terms and words used in this Note, regardless of the number and gender in which they are used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine, or neuter, as the context or sense of this Note or any paragraph or clause herein may require, the same as if such word had been fully and properly written in the correct number and gender. 18. WAIVER OF JURY TRIAL THE BORROWER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (A) UNDER THIS NOTE OR ANY OTHER LOAN DOCUMENT OR (B) ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH THIS NOTE OR ANY OTHER LOAN DOCUMENT, AND THE BORROWER AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A JUDGE AND NOT BEFORE A JURY. 19. OFFSET RIGHTS In addition to all liens upon and rights of setoff against the money, securities, or other property of the Borrower given to the Lender by law, the Lender shall have a lien upon and a right of setoff against all money, securities, and other property of the Borrower, now or hereafter in possession of or on deposit with the Lender, whether held in a general or special account or deposit, or safe-keeping or otherwise, and, following a Default, every such lien and right of setoff may be exercised without demand upon, or notice to the Borrower. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of the Lender, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by an instrument in writing executed by the Lender. 20. COMMERCIAL LOAN The Borrower hereby represents and warrants to the Lender that the Loan was made for commercial or business purposes, and that the funds evidenced by this Note will be used solely in connection with such purposes. 21. REPLACEMENT OR BIFURCATION OF NOTE If this Note is lost or destroyed, the Borrower shall, at the Lender's request, execute and return to the Lender a replacement promissory note identical to this Note, provided the Lender delivers to the Borrower an affidavit to the foregoing effect. Upon delivery of the executed replacement Note, the Lender shall indemnify the Borrower from and against its actual damages suffered as a result of the existence of two Notes evidencing the same obligation. No replacement of this Note under this Section shall result in a novation of the Borrower's obligations under this Note. In addition, the Lender may at its sole and absolute discretion require that the Borrower execute and deliver two separate promissory notes, which shall replace this Note as evidence of the Borrower's obligations. The two replacement notes shall, taken together, evidence the exact obligations set forth in this Note. The replacement notes shall be independently transferable. If this Note is so replaced, the Lender shall return this Note to the Borrower marked to evidence its cancellation. 22. GOVERNING LAW This Note shall be construed and enforced according to, and governed by, the laws of Colorado without reference to conflicts of laws provisions which, but for this provision, would require the application of the law of any other jurisdiction. 23. TIME OF ESSENCE In the performance of the Borrower's obligations under this Note, time is of the essence. 24. Agreement Concerning Interest The Deed of Trust now or hereafter existing are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of the maturity of this Note or otherwise, shall the amount paid or agreed to be paid to the Lender for the use, forbearance or detention of the sums evidenced by this Note exceed the maximum amount permissible under Colorado law. If, from any circumstances whatsoever, the performance or fulfillment of any provision of this Note, or of the Deed of Trust, at the time performance of such provision shall be due, shall exceed the limit of validity prescribed by law, then, IPSO FACTO, the obligation to be performed or fulfilled shall be reduced to the limit of such validity, and, if from any such circumstance, the Lender shall ever receive anything of value which is deemed to be interest by Colorado law which would exceed the highest lawful rate, an amount equal to any excessive interest shall be applied to the reduction of the principal amount of this Note or on account of any other principal indebtedness of the Borrower to the Lender and to the payment of interest thereon or, if such excessive interest exceeds the unpaid balance of principal of this Note and such other indebtedness, such excess shall be refunded to the Borrower. 25. NO ORAL AGREEMENTS THIS NOTE AND ALL THE OTHER LOAN DOCUMENTS EMBODY THE FINAL, ENTIRE AGREEMENT OF THE BORROWER AND THE LENDER AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE LOAN AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE BORROWER AND THE LENDER. THERE ARE NO ORAL AGREEMENTS BETWEEN THE BORROWER AND THE LENDER. THE PROVISIONS OF THIS NOTE AND THE OTHER LOAN DOCUMENTS MAY BE AMENDED OR REVISED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY THE BORROWER AND THE LENDER. IN WITNESS WHEREOF, the undersigned has caused this Note to be duly executed as of the date first above written. BORROWER: GREEN RIVER AT PALOMINO PARK LLC, a Colorado limited liability company By: Wellsford Park Highlands Corp., a Colorado corporation, its manager By: /s/ David M. Strong ------------------- David M. Strong Vice President -----END PRIVACY-ENHANCED MESSAGE-----