-----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, WJmiVpNKAtTcg8CVxznWE/MxF0X4o0fm/w5S5JMxcldajePHNztI4t8wBGyFx6lw zpb7MpYp5YKx24JHcX64/w== 0001017062-98-000652.txt : 19980331 0001017062-98-000652.hdr.sgml : 19980331 ACCESSION NUMBER: 0001017062-98-000652 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILSHIRE REAL ESTATE INVESTMENT TRUST INC CENTRAL INDEX KEY: 0001048566 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: SEC FILE NUMBER: 333-39035 FILM NUMBER: 98577562 BUSINESS ADDRESS: STREET 1: C/O WILSHIRE FINANCIAL SERVICES GROUP IN STREET 2: 1776 SW MADISON STREET CITY: PORTLAND STATE: OR ZIP: 97205 BUSINESS PHONE: 5032235600 MAIL ADDRESS: STREET 1: C/O WILSHIRE FINANCIAL SERVICES GROUP IN STREET 2: 1776 SW MADISON STREET CITY: PORTLAND STATE: OR ZIP: 97205 S-11/A 1 FORM S-11 AMENDMENT NO. 3 FILING AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1998 REGISTRATION NO. 333-39035 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 3 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- WILSHIRE REAL ESTATE INVESTMENT TRUST INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS) C/O WILSHIRE FINANCIAL SERVICES GROUP INC. 1776 SW MADISON STREET PORTLAND, OREGON 97205 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICER) ---------------- LAWRENCE A. MENDELSOHN C/O WILSHIRE FINANCIAL SERVICES GROUP INC. 1776 SW MADISON STREET PORTLAND, OREGON 97205 (NAME AND ADDRESS OF AGENT FOR SERVICE) ---------------- COPIES TO: JAMES M. WADDINGTON, ESQ. DHIYA EL-SADEN, ESQ. PROSKAUER ROSE LLP GIBSON, DUNN & CRUTCHER LLP 1585 BROADWAY 333 SOUTH GRAND AVENUE NEW YORK, NEW YORK 10036 LOS ANGELES, CALIFORNIA 90071 (212) 969-3000 (213) 229-7000 (212) 969-2900 (TELECOPY) (213) 229-7520 (TELECOPY) APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earliest effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THIS REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 30, 1998 10,000,000 SHARES [LOGO OF WILSHIRE REAL ESTATE INVESTMENT TRUST INC.] Real Estate Investment Trust Inc. COMMON STOCK ---------- Wilshire Real Estate Investment Trust Inc. ("WREIT" or the "Company") is a Maryland corporation organized in October 1997 that will elect to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986. Wilshire Realty Services Corporation (the "Manager" or "WRSC"), a subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), will manage the day-to-day operations of the Company, subject to the supervision of the Company's Board of Directors. WRSC is a newly formed management company which will rely on WFSG and its affiliates to manage the Company and is not owned or controlled by the Company. Of the 10,000,000 shares of common stock, par value $0.0001 per share of the Company (the "Common Stock") offered hereby (the "Offering"), 990,000 shares will be sold to WFSG at the initial offering price net of any underwriting discounts or commissions and subject to certain resale restrictions. See "Common Stock Available for Future Sale." After such sale, WFSG will own approximately 9.9% of the outstanding Common Stock, assuming that the Underwriters do not exercise their over-allotment option. It is currently anticipated that the initial public offering price for shares of Common Stock will be between $15.00 and $17.00 per share. Prior to the Offering, there has been no market for the shares of Common Stock of the Company. The public offering price will be determined by negotiation between the Company and the Underwriters. See "Underwriting." An application has been submitted for approval for quotation of the Common Stock on the Nasdaq National Market under the symbol "WREI." (Continued on next page) SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN RISK FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS: . The Company and the Manager are both newly organized corporations with no operating histories, assets (to date the Company has $2,000 in total assets) or financing sources, and the directors and officers of the Company, the Manager and WFSG and affiliates thereof have no previous experience managing or operating a REIT; the Manager will rely on WFSG for its staffing; . The Company, the Manager and WFSG have common officers and directors, which will present conflicts of interest in the Company's dealings with the Manager and its affiliates, including the Company's purchase of assets from the Manager's affiliates (including all of the initial investments); additionally the Company will have no independent staff of employees to monitor the performance of the Manager and its affiliates; . The Manager will be entitled to receive incentive compensation for its services, which could result in the Manager recommending riskier or more speculative investments to the Company; . The Company intends to acquire significant amounts of non-investment grade mortgage-backed securities. These investments are subject to a greater risk of loss of principal and non-payment of interest than investments in senior, investment grade rated securities; . The Company intends to invest in sub-performing and non-performing real estate assets, including foreclosed real properties and commercial and multi- family mortgage loans, that are in default or for which default is likely or imminent, and such assets may not generate sufficient revenues to meet operating expenses and debt service obligations; . The Company intends to invest in international real properties and mortgage loans which carry additional risks including fluctuation of foreign currency exchange rates and heightened risks of political and economic instability in certain areas of the world; the Manager has limited experience in international business and legal requirements; (Continued on next page) ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNTS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share.................................... $ $ $ - -------------------------------------------------------------------------------- Total/(3)//(4)/.............................. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Footnotes begin on next page) The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1998. ---------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. PRUDENTIAL SECURITIES INCORPORATED BLACK & COMPANY, INC. The date of this Prospectus is , 1998. (Continued from previous page) The Company, through its subsidiary partnership (the "Operating Partnership"), will acquire $139.2 million of initial investments. The Company is expected to purchase substantially all of its initial investments from WFSG in exchange for $127.9 million of the net proceeds of the Offering. The remainder of the Company's initial investments will be acquired by the Operating Partnership from two companies owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn, the principal stockholders of WFSG, for approximately $5.7 million of the net proceeds of the Offering and the assumption of approximately $5.6 million of debt. See "Initial Investments." In addition, certain subsidiaries and affiliates of WFSG will receive management and servicing fees and options to acquire shares of Common Stock. See "Compensation and Fees to WFSG and Affiliates." The Underwriters have reserved 300,000 shares of Common Stock offered hereby for sale at the inital offering price, net of the Underwriting Discounts, to directors, officers and employees of WFSG and its subsidiaries and members of their immediate families. (Risk Factors continued from previous page) . The Company intends to leverage its investments primarily through mortgage loans, repurchase agreements, the issuance of mortgage-backed securities and other borrowing arrangements which may result in reduced or negative cash flow and reduced liquidity; . The Company's operating policies and strategies, including its degree of leverage, are not expressly limited and will be determined by the Manager, subject to the approval of the Company's Board of Directors; such operating policies and procedures may be changed without stockholder consent; . The yield on the Company's investments in mortgage loans and mortgage-backed securities may be affected adversely by changes in prevailing interest rates, rates of prepayment and losses due to borrower default or otherwise which may adversely affect the value of the Common Stock; . The Company will be taxed as a corporation if it fails to qualify as a REIT, which will substantially reduce the amount of cash available for distribution to the Company's stockholders; to avoid being taxed as a corporation, the Company must satisfy certain requirements relating to its assets and income, which may restrict the Company's investment opportunities, and the Company must distribute at least 95% of its taxable income each year, which could result in the Company selling assets, issuing equity or borrowing money in order to satisfy this requirement; and . Ownership of Common Stock by each stockholder other than WFSG is limited to 9.8% of the outstanding Common Stock, which may deter third parties from seeking to control or acquire the Company. (Footnotes continued from previous page) (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses in connection with the Offering, estimated at $2.0 million, which will be payable by the Company. (3) The Company has granted the several Underwriters a 30-day option to purchase up to 1,500,000 additional shares of Common Stock to cover over- allotments. If all such shares of Common Stock are purchased, the total Price to Public, Underwriting Discounts and Proceeds to Company, before expenses of this Offering, will be $ , $ and $ , respectively. See "Underwriting." (4) The total Price to Public and the total Proceeds to Company reflect the sale of 990,000 shares of Common Stock to WFSG, net of the Underwriting Discounts. THE COMMON STOCK MAY NOT BE OFFERED OR SOLD IN OR INTO THE UNITED KINGDOM EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR BUSINESSES (OR IN OTHER CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM FOR THE PURPOSES OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995), AND THIS DOCUMENT MAY ONLY BE ISSUED OR PASSED ON IN OR INTO THE UNITED KINGDOM TO ANY PERSON TO WHOM THE DOCUMENT MAY LAWFULLY BE ISSUED OR PASSED ON BY REASON OF, OR OF ANY REGULATION MADE UNDER, SECTION 58 FINANCIAL SERVICES ACT 1986. ALL APPLICABLE PROVISIONS OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995 AND THE FINANCIAL SERVICES ACT 1986 MUST BE COMPLIED WITH IN RESPECT OF ANYTHING DONE IN RELATION TO THE COMMON STOCK IN, FROM OR OTHERWISE INVOLVING, THE UNITED KINGDOM. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY....................................................... 1 ORGANIZATION AND RELATIONSHIPS........................................... 12 RISK FACTORS............................................................. 13 Conflicts of Interest................................................... 13 Conflicts of Interest in the Business of the Company.................... 13 Investment Activity Risks............................................... 14 Ownership of Mortgage-Backed Securities in Pools of Residential and Commercial Mortgage Loans Will Subject the Company to Special Credit and Prepayment Risks................................................... 14 Distressed Mortgage Loans Have Higher Risk of Future Default............ 15 International Investments Are Subject to Currency Conversion Risks and Differences in Foreign Laws and Markets................................ 15 Significant Competition May Affect Adversely the Company's Ability To Acquire Assets at Favorable Spreads Relative to Borrowing Costs........ 16 Commercial Properties May Have Unleased Space........................... 16 Subordinated Loans on Real Estate Are Subject to Higher Risks........... 17 Real Property Is Illiquid and its Value May Decrease.................... 17 Value of Real Property Dependent on Conditions Beyond Company's Control................................................................ 17 The Company's Insurance Will Not Cover All Losses....................... 17 Real Properties with Environmental Problems Will Increase Costs and May Create Liability for the Company....................................... 17 Compliance with Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations May Be Costly....................... 18 Economic and Business Risks............................................. 18 Interest Rate Changes May Adversely Affect the Company's Investments.... 18 Leverage Can Reduce Income Available for Distribution; No Limitation on the Amount of Leverage................................................. 19 Potential Interest Rate Mismatch between Asset Yields and Borrowing Rates.................................................................. 19 The Company May Not Be Able To Borrow Money on Favorable Terms.......... 19 Adverse Changes in General Economic Conditions Can Adversely Affect Company's Business..................................................... 19 Legal and Tax Risks..................................................... 20 Adverse Consequences of Failure To Comply with REIT Requirements May Include WREIT Being Subject to Taxation as a Regular Corporation or 100% Tax on Certain Gains.............................................. 20
PAGE ---- Ownership Limitation May Restrict Business Combination Opportunities.... 22 Preferred Stock May Prevent Change in Control........................... 22 Maryland Anti-Takeover Statutes May Restrict Business Combination Opportunities.......................................................... 22 Board of Directors May Change Certain Policies and Management Fees Without Stockholder Consent............................................ 22 Loss of Investment Company Act Exemption Would Adversely Affect the Company................................................................ 23 One Action Rules May Limit the Company's Rights Following Default....... 23 Plans Should Consider ERISA Risks of Investing in Common Stock.......... 23 The Company's Responsibility To Indemnify the Manager and Officers and Directors of the Company May Result in Liability for the Actions of the Manager and Officers and Directors of the Company...................... 23 Changes in the Regulations of the Manager's Affiliates May Affect Adversely the Manager's Ability To Carry Out Management Functions...... 24 Other Risks............................................................. 24 Uncertainty as to the Company's Ability To Successfully Implement its Operating Policies and Strategies Resulting from its Lack of Operating History................................................................ 24 The Company's Success May Depend on the Services of the Manager......... 24 Experience of the Manager in Managing a REIT............................ 25 The Failure To Develop a Market for Common Stock May Result in a Decrease in its Market Price........................................... 25 Possible Changes in Price of Common Stock May Result Due to Changes in Yields................................................................. 25 Future Offerings of Capital Stock May Result in Dilution of the Book Value or Earnings per Share of the Outstanding Common Stock............ 25 Possible Adverse Effects on Share Price May Result Arising from Shares Eligible for Future Sale............................................... 25 Market Interest Rates Could Adversely Impact the Market Price of the Common Shares.......................................................... 26 OPERATING POLICIES AND OBJECTIVES........................................ 27 General................................................................. 27 The Experience of WFSG and Affiliates................................... 28 U.S. Commercial Investments............................................. 28 Mortgage-Backed Securities.............................................. 31 International Investments............................................... 37 Other Real Estate Related Investments................................... 38 Portfolio Management.................................................... 39
i
PAGE ---- MANAGEMENT OF OPERATIONS.................................................. 41 General.................................................................. 41 Wilshire Financial Services Group Inc.................................... 41 Wilshire Realty Services Corporation..................................... 41 The Management Agreement................................................. 43 Stock Options............................................................ 46 Certain Relationships; Conflicts of Interest............................. 47 COMPENSATION AND FEES TO WFSG AND AFFILIATES.............................. 50 SERVICING ARRANGEMENTS.................................................... 51 THE COMPANY............................................................... 51 Directors Who Are Executive Officers..................................... 51 Independent Directors.................................................... 51 Executive Officers Who Are Not Directors................................. 51 Competition.............................................................. 53 DISTRIBUTION POLICY....................................................... 54 YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS................. 54 Mortgage-Backed Securities............................................... 55 U.S. Commercial Properties............................................... 56 Mortgage Loans........................................................... 56 INITIAL INVESTMENTS....................................................... 58 General.................................................................. 58 The Initial U.S. Commercial Investments.................................. 59 Initial Mortgage-Backed Securities....................................... 67 The International Investments............................................ 69 CAPITALIZATION............................................................ 74 MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES... 75 DESCRIPTION OF CAPITAL STOCK.............................................. 75 General.................................................................. 75 Common Stock............................................................. 75 Preferred Stock.......................................................... 75 Restrictions on Ownership................................................ 75 Restrictions on Transfer................................................. 75 Dividend Reinvestment Plan............................................... 77 Reports to Stockholders.................................................. 77 Transfer Agent and Registrar............................................. 77 Listing of the Common Stock.............................................. 77 CERTAIN PROVISIONS OF MARYLAND LAW AND OF WREIT'S CHARTER AND BYLAWS...... 78 Board of Directors....................................................... 78 Amendment................................................................ 78 Business Combinations.................................................... 78 Control Share Acquisitions............................................... 79 Operations............................................................... 79 Dissolution of the Company............................................... 79 Advance Notice of Director Nominations and New Business.................. 79 Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Charter and Bylaws............................................... 80 COMMON STOCK AVAILABLE FOR FUTURE SALE.................................... 81
PAGE ---- OPERATING PARTNERSHIP AGREEMENT........................................... 82 General.................................................................. 82 General Partner Not To Withdraw.......................................... 82 Capital Contribution..................................................... 82 Redemption Rights........................................................ 83 Operations............................................................... 83 Distributions............................................................ 84 Allocations.............................................................. 84 Term..................................................................... 84 Tax Matters.............................................................. 84 FEDERAL INCOME TAX CONSEQUENCES........................................... 85 Taxation of the Company.................................................. 85 Requirements for Qualification........................................... 86 Failure To Qualify....................................................... 93 Tax Aspects of the Operating Partnership................................. 94 Taxation of Taxable U.S. Stockholders.................................... 94 Taxation of Stockholders on the Disposition of the Common Stock.......... 96 Capital Gains and Losses................................................. 96 Information Reporting Requirements and Backup Withholding................ 97 Taxation of Tax-Exempt Stockholders...................................... 97 Taxation of Non-U.S. Stockholders........................................ 98 Information Reporting and Backup Withholding Tax......................... 100 State and Local Taxes.................................................... 100 Foreign Taxes............................................................ 101 Sale of the Company's Property........................................... 101 ERISA CONSIDERATIONS...................................................... 102 Employee Benefit Plans, Tax-Qualified Retirement Plans, and IRAs......... 102 Status of WREIT under ERISA.............................................. 103 CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL PROPERTY INVESTMENTS..... 105 General.................................................................. 105 Types of Mortgage Instruments............................................ 105 Interests in Real Property............................................... 105 Leases and Rents......................................................... 106 Condemnation and Insurance............................................... 106 Foreclosure.............................................................. 106 Bankruptcy Laws.......................................................... 109 Default Interest and Limitations on Prepayments.......................... 110 Forfeitures in Drug and RICO Proceedings................................. 110 Environmental Risks...................................................... 110 Applicability of Usury Laws.............................................. 112 Americans with Disabilities Act.......................................... 112 Ground Lease Risks....................................................... 112 Due on Sale and Due on Encumbrance....................................... 113 Subordinate Financing.................................................... 113 Acceleration on Default.................................................. 113 Certain Laws and Regulations; Types of Mortgaged Property................ 113 Soldiers' and Sailors' Civil Relief Act of 1940.......................... 114 USE OF PROCEEDS........................................................... 114 UNDERWRITING.............................................................. 115 LEGAL MATTERS............................................................. 117 EXPERTS................................................................... 117 ADDITIONAL INFORMATION.................................................... 117 The Company.............................................................. 117 Wilshire Financial Services Group Inc. .................................. 117 GLOSSARY OF TERMS......................................................... 118 FINANCIAL STATEMENT....................................................... F-1
ii PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information included elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes that (i) the transactions relating to the formation of the Company are consummated, (ii) the Underwriters' overallotment option is not exercised and (iii) the offering price (the "Offering Price") of the Common Stock is $16.00 per share. Capitalized terms used but not defined herein shall have the meanings set forth in the Glossary of Terms beginning on page 118. THE COMPANY Wilshire Real Estate Investment Trust Inc. ("WREIT"), a Maryland corporation organized on October 24, 1997 by Wilshire Financial Services Group Inc. ("WFSG"), will elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). The Company will be managed by Wilshire Realty Services Corporation (the "Manager" or "WRSC"), a wholly-owned subsidiary of WFSG. See "Management of Operations." The Company intends to invest primarily in the following: (i) commercial and multi-family mortgage loans that are delinquent in payments and commercial and multi-family real properties in the United States ("U.S. Commercial Investments"); (ii) subordinated interests in mortgage-backed securities ("Mortgage-Backed Securities"), primarily non- investment grade residential Mortgage-Backed Securities (other than Mortgage- Backed Securities backed by mortgage loans and/or real properties previously owned by WFSG or its affiliates); and (iii) international mortgage loans and real properties ("International Investments," and together with U.S. Commercial Investments and Mortgage-Backed Securities, the "Primary Investments"). PRIMARY INVESTMENTS U.S. Commercial Investments. U.S. Commercial Investments will consist primarily of non-performing and sub-performing commercial and multi-family mortgage loans and, to a lesser extent, performing commercial and multi-family mortgage loans ("Distressed U.S. Commercial Loans") and commercial and multi- family real properties located in the United States ("U.S. Commercial Properties"), including properties acquired by a mortgage lender or other party (including the Company) at foreclosure or by deed in lieu of foreclosure ("Foreclosed Properties"). See "Operating Policies and Objectives--U.S. Commercial Investments" and "Risk Factors--Investment Activity Risks--Default Risks Associated with Distressed Loans." "Non-performing" means, with respect to loans, a loan that is more than 12 payments delinquent, or that is two or more, but not more than 12 payments delinquent and had a ratio of the outstanding principal balance of such loan to its appraised value in excess of 90%, or that the Company otherwise believes that such loan will not be brought current, and with respect to property, a property that is more than 12 payments delinquent. "Sub-performing" means, with respect to loans, a loan that is two or more, but not more than 12, payments delinquent that had a ratio of the outstanding principal balance of such loan to its appraised value of 90% or less, except for those loans which the Company otherwise believes cannot be brought current, and with respect to property, a property that is more than two months, but less than 12 months, delinquent in payment. Mortgage-Backed Securities. Mortgage-Backed Securities will consist primarily of residential, non-investment grade, subordinated interests in Mortgage-Backed Securities and, to a lesser extent, residential and commercial investment-grade senior and subordinated interests in Mortgage-Backed Securities. More junior classes of Mortgage-Backed Securities offer the potential of a higher yield relative to more senior classes, but carry greater credit risk, including a substantially greater risk of loss of principal and non-payment of interest than senior, investment grade rated classes. Mortgage-Backed Securities are generally expected to be secured by residential mortgage loans which do not qualify for sale to the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA") because their principal balances exceed agency limits or the mortgage loans do not otherwise meet FHLMC's or FNMA's underwriting criteria. See 1 "Operating Policies and Objectives--Mortgage-Backed Securities" and "Risk Factors--Investment Activity Risks--Credit and Prepayment Risks from Ownership of Mortgage-Backed Securities in Pools of Residential and Commercial Loans." International Investments. International Investments will consist of (i) performing, sub-performing and non-performing commercial and multi-family mortgage loans and residential mortgage loans secured by real properties located outside the United States (collectively, "International Mortgage Loans"); (ii) commercial and multi-family real properties and residential real properties ("Residential Properties") located outside the United States ("International Real Properties"); and (iii) international Foreclosed Properties. International Investments may take the form of direct ownership, participation interests, mortgage-backed securities, investment in holding companies or other indirect ownership methods to accommodate local law requirements. The International Investments being acquired as Initial Investments will consist of loans. The Manager, WFSG and the Company have limited experience in purchasing and servicing loans in foreign countries. OTHER REAL ESTATE RELATED INVESTMENTS Although the Company is expected to invest principally in the Primary Investments, the Company may also acquire other mortgage loans or real properties such as performing, sub-performing or non-performing residential mortgage loans and performing commercial loans in the United States or other real estate related investments which are not Primary Investments. It may also originate loans (including second lien mortgage loans), engage in construction financing and invest in foreign entities (collectively, "Other Real Estate Related Assets"), but currently has no plans to do so. However, the Company does not currently have a loan origination program or underwriting criteria. See "Operating Policies and Objectives--Other Real Estate Related Investments." INITIAL INVESTMENTS At the closing of this Offering (the "Closing"), the Company, through the Operating Partnership, will acquire from WFSG or its affiliates approximately $139.2 million of assets for consideration (assuming a purchase date of February 28, 1998), consisting of approximately $133.6 million of the cash proceeds of this Offering and the assumption of approximately $5.6 million of indebtedness: (i) U.S. Commercial Investments for approximately $40.8 million; (ii) Mortgage-Backed Securities for approximately $95.0 million (including approximately $30.8 million of securities issued by affiliates of WFSG which are backed by loans that were previously held in the portfolio of WFSG or its affiliates and for which WCC is continuing to act as servicer ("Retained Securities")); and (iii) International Investments in the United Kingdom for approximately $3.4 million (collectively, the "Initial Investments"). The purchase price of the Initial Investments is based on the estimated fair market value of the assets. WFSG will realize a gain of $1.6 million from the sale of such assets; however, because of WFSG's 9.9% ownership in the Company, $0.2 million of this gain will be deferred and not immediately recognized by WFSG for financial reporting purposes. Wilshire Properties 1 Inc., an Oregon corporation ("Wilshire Properties 1") and Wilshire Properties 2 Inc., an Oregon corporation ("Wilshire Properties 2") will realize a gain of $3.0 million from sale of their assets. However, because certain of these assets are leased to WFSG, $1.0 million of gain will be deferred and not immediately recognized by Wilshire Properties 1 and Wilshire Properties 2 for financial reporting purposes. Certain of the U.S. Commercial Investments will be acquired from Wilshire Properties 1 and Wilshire Properties 2 for approximately $5.7 million. Wilshire Properties 1, organized on January 26, 1993, and Wilshire Properties 2, organized on November 7, 1994, were established to hold certain real estate investments of Messrs. Wiederhorn and Mendelsohn, who own all of the outstanding shares of both entities. These properties will be purchased subject to mortgage indebtedness of $5.6 million. WFSG has granted the Company an option to purchase for up to approximately $110.0 million all or a portion of WFSG's 50% interest in two portfolios of International Investments in France. The Company is currently evaluating the suitability of such investments under U.S. tax and French law. See "Initial 2 Investments." In the future, the Company may purchase assets (including Retained Securities) from WFSG and its affiliates, subject to the approval of the Independent Directors of WREIT. LEVERAGE The Company expects to leverage its assets in addition to the debt it will assume with the purchase of the Initial Investments, after the proceeds of the Offering have been fully invested, primarily through mortgage loans, repurchase agreements, the issuance of mortgage-backed securities and other borrowing arrangements. The Company intends to use the proceeds from its borrowings to invest in additional assets and, in turn, to borrow against such assets and to repeat this process of borrowing and investing until it has significantly leveraged its portfolio of assets. The amount that the Company's investments may be leveraged is not expressly limited and will be determined by the Manager and, ultimately, the Company's Board of Directors. See "Operating Policies and Objectives--Portfolio Management--Leverage and Borrowing" and "Risk Factors-- The Company's Ability To Incur Debt Is Not Expressly Limited." HEDGING The Company may hedge all or a portion of the interest rate risk associated with borrowings and foreign currency exchange rate risks associated with international investments through interest rate swaps, interest rate futures and foreign currency swaps and futures. To a lesser extent, the Company may hedge its interest rate risk through the use of interest rate caps and floors. The Company also may engage in a variety of interest rate risk management techniques for the purpose of managing the effective maturity of its assets. The use of these types of instruments to hedge a portfolio carries certain risks, including the risk that losses on a hedge position will reduce the funds available for distribution to shareholders, and such losses may exceed the amount invested in such instruments. There is no perfect hedge for any investment, and a hedge may not perform its intended purpose of offsetting losses on an instrument. See "Operating Policies and Objectives--Portfolio Management--Interest Rate Risk Management Techniques" and "Risk Factors-- Economic and Business Risks--Interest Rate Changes May Adversely Affect the Company's Investments." RISK FACTORS An investment in the Common Stock involves various risks, and prospective investors should consider carefully the matters discussed under "Risk Factors" prior to an investment in the Company. Such risks include, among others: . The Company and the Manager are both newly organized corporations with no operating histories, assets (to date WREIT has $2,000 in total assets) or financing sources, the directors and officers of the Company, the Manager and WFSG and affiliates thereof have no previous experience in managing or operating a REIT and the Manager will rely on WFSG for its staffing. . The Company, the Manager, WFSG, and certain of its affiliates (including certain entities which are expected to service the Company's investments) have common officers and directors, which will present conflicts of interest in the Company's dealings with the Manager and its affiliates, including the Company's purchase of assets from the Manager's affiliates (including all of the Initial Investments from WFSG, Wilshire Properties 1 and Wilshire Properties 2). These conflicts of interest may also arise because the Company may acquire additional assets from WFSG or its affiliates in the future or be a co-participant with WFSG or its affiliates in real estate investments. The Company, WFSG and WRSC may have competing business interests which could result in decisions with respect to the Company that reflect the interests of WFSG and do not fully reflect the interests of WREIT's stockholders. In addition, the Company must rely on the experience of WRSC's management generally, and in particular the Independent Directors will generally rely on information provided by WRSC to review transactions of the Company with WFSG and its affiliates. 3 . The Company's ability to achieve its investment objectives will be dependent on the Manager's ability to manage and operate a REIT, and its financial health, which in turn are dependent on WFSG's ability to do so, and its financial health. The Company currently has no employees and all of its officers are also officers of WFSG and will devote only as much of their time to the Company's affairs as is necessary to effectively conduct the Company's business. . The Manager, a wholly owned subsidiary of WFSG, manages the Company and provides extensive advice on the Company's operating policies and strategies. In addition, the Company, the Manager and WFSG have common officers and directors. Accordingly, WFSG and the Manager will have a significant amount of influence over the affairs of the Company. . The Manager will be entitled to receive incentive compensation for its services, which could result in the Manager recommending riskier or more speculative investments to the Company. . The Company intends to acquire significant amounts of non-investment grade mortgage-backed securities. These investments are subject to a greater risk of loss of principal and non-payment of interest than investments in senior, investment grade securities. . Foreclosed Properties which may now or in the future have significant amounts of unleased space and commercial and multi-family mortgage loans which are in default, or for which default is likely or imminent, may not generate sufficient revenue to provide a return on the investment after meeting operating expenses and debt service obligations. . The Company's international operations will be subject to most of the same risks associated with its U.S. operations as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, heightened risks of political and economic instability in certain geographic locations, difficulties in managing international operations, potentially adverse tax consequences, enhanced accounting and control expenses and the burden of complying with a wide variety of foreign laws. In addition, the management of WRSC has limited experience in the purchasing and servicing of real property loans and managing real properties in foreign countries, and its ability to evaluate and effectively price loan pool and real property acquisitions abroad may be subject to greater risk. Accordingly, there can be no assurance that one or more of these factors will not have a materially adverse effect on the Company's operations. . The Company intends to leverage its investments (through mortgage loans, repurchase agreements, the issuance of mortgage-backed securities and other borrowing arrangements) in an amount that is not expressly limited and that will be determined by the Manager and, ultimately, WREIT's Board of Directors, which could lead to reduced or negative cash flow and reduced liquidity. . The yield on the Company's investments in mortgage loans and mortgage- backed securities, particularly interest-only mortgage-backed securities such as those that comprise a portion of Initial Investments, may be affected adversely by changes in prevailing interest rates, rates of prepayment and losses due to borrower default or otherwise, and could affect the return to the Company's stockholders. . The Company's borrowings are likely to include repurchase agreements and other borrowings secured by the Company's assets. A decline in the market value of those assets could limit the Company's ability to borrow or result in lenders initiating margin calls, requiring the Company to sell assets under adverse market conditions in order to maintain liquidity. If these sales are made at prices lower than the carrying value of the assets, the Company will experience losses. If borrowing costs increase, or if the cash flow generated by the Company's assets decrease, the Company's use of leverage will increase the likelihood that the Company will experience reduced or negative cash flow. . In periods of declining interest rates, prepayments on mortgage loans and mortgage-backed securities generally increase and the Company likely will have to reinvest such funds in lower-yielding investments. Conversely, in periods of rising interest rates, prepayments on mortgage loans and mortgage-backed securities generally decrease and the value of the Company's fixed-rate investments generally declines. 4 . Borrower default, hazard losses and state of foreign law enforceability issues may result in losses on the Company's investment in mortgage loans and mortgage-backed securities. . Certain of the Company's real estate investments will require significant management resources, are illiquid, and may decrease in value because of changes in economic conditions. . The Company's performance may be affected adversely if the Company fails to hedge effectively against foreign currency exchange rate risks and interest rate risks. Losses may result if a hedge does not correlate correctly to the risks being hedged. . The operating policies of the Company are determined by its Board of Directors, which may change these policies without shareholder consent. . The Company has agreed to indemnify the Manager, its directors and its officers and the Company's directors and officers with respect to various matters, which may result in liability to the Company for the actions of such parties. . Future offerings of capital stock may result in dilution of the book value or earnings per share of the outstanding Common Stock. . To maintain its exemption from regulation under the Investment Company Act of 1940, as amended (the "Investment Company Act"), the Company, among other things, must maintain certain percentages of its investments in assets that qualify for exemption from such regulation, which requirement may restrict the Company's ability to invest in various types of assets. . In order to qualify as a REIT, WREIT must satisfy certain requirements concerning the nature of its assets and income, which may restrict the Operating Partnership's ability to invest in various types of assets, to dispose of assets and to invest in certain activities related to its core business. In addition, WREIT must distribute at least 95% of its taxable income (other than certain non-cash income and net capital gain) each year. Under certain circumstances WREIT could recognize income for tax purposes without any corresponding cash payment which could result in the need to sell assets, borrow money or raise capital in order to satisfy this distribution requirement. WREIT may be taxed as a corporation if it fails to qualify as a REIT which would substantially reduce the amount of cash available for distribution to the Company's stockholders. Additionally, WREIT may be subject to income tax on certain transactions or certain income even if it is not disqualified as a REIT. . Ownership of Common Stock by each stockholder other than WFSG is limited to 9.8% of the outstanding Common Stock, which may deter third parties from seeking to control or acquire the Company. THE MANAGER The business and investment affairs of the Company will be managed by WRSC, a newly formed Delaware corporation wholly-owned by WFSG, pursuant to a management agreement (the "Management Agreement") which will become effective on the Closing. See "Management of Operations--The Management Agreement." WFSG is primarily engaged in the acquisition, servicing and resolution of pools of performing, sub-performing and non-performing residential and commercial mortgage loans, as well as foreclosed real estate in the United States and foreign countries, currently France and the United Kingdom. WFSG also acquires mortgage-backed securities, originates residential mortgage and manufactured housing loans through correspondents, and services loans for third parties. WFSG, its affiliates (including WRSC), directors and officers have no previous experience in managing or operating a REIT. At December 31, 1997, WFSG had total assets of approximately $1.6 billion, and stockholders' equity of approximately $99.1 million. WFSG through its subsidiaries will provide WRSC with substantially all of the managerial and administrative services required in connection with the operations of the Company. The Manager will have no employees and will contract with WFSG to provide all necessary labor requirements in order for the Manager to perform under the Management Agreement. See "Management of Operations." 5 MANAGEMENT AGREEMENT Pursuant to the Management Agreement, WRSC, subject to the supervision of WREIT's Board of Directors, will formulate operating strategies for the Company, arrange for the acquisition of assets by the Company, arrange for various types of financing for the Company, including repurchase agreements, secured term loans, warehouse lines of credit, mortgage loans and the issuance of mortgage-backed securities, monitor the performance of the Company's assets and provide certain administrative and managerial services in connection with the operation of the Company. For performing these services, WRSC will receive the following compensation, fees and other benefits (including reimbursement of reasonable out-of-pocket expenses):
FEE(1) AMOUNT - ------ ------ Base Management Fee(2)(3)... Equal to 1% per annum of the first $1.0 billion of Average Invested Assets, 0.75% of the next $500.0 million of Average Invested Assets and 0.50% of Average Invested Assets above $1.5 billion. Incentive Fee(2)............ Based on the amount, if any, by which the Company's Funds from Operations plus certain gains (minus certain losses) exceed in general the Ten- Year Treasury Rate plus 5% per annum. Expense Reimbursement ...... Reimbursement of due diligence costs and reasonable out-of-pocket expenses.
- -------- (1) In the event that the Management Agreement is terminated or not extended by the Company without cause, the Company is obligated to pay WRSC a termination fee equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination. See "Risk Factors--Other Risks--The Company's Success May Depend on the Services of the Manager." (2) For a detailed explanation of the calculation of the base management and incentive fees payable to WRSC, see "Management of Operations--The Management Agreement--Management Fees and Expenses." (3) Average Invested Assets for any period shall mean the average of the aggregate book value of the assets of the Company (including all of WREIT's direct and indirect subsidiaries) before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the daily average of such values during such period. At Closing, the Company will grant WRSC options to purchase 985,000 shares of Common Stock (1,135,000 shares if the Underwriters exercise their over- allotment option in full) at a price per share equal to the initial offering price of the Common Stock. One quarter of WRSC's options will become exercisable on each of the first four anniversaries of the Closing. Unexercised options will terminate on the tenth anniversary of the Closing. See "Management of Operations--Stock Options." SERVICING ARRANGEMENTS The Company expects to acquire Primary Investments and Other Real Estate Related Assets on either a "servicing released" basis (i.e., the Company will have the right to service the loans or other assets it purchases) or "servicing retained" basis (i.e., the seller of the assets or other third party retains the right to service such assets). For assets acquired on a "servicing released" basis, the Company will enter into loan servicing agreements (the "Servicing Agreements") with Wilshire Credit Corporation ("WCC") and Wilshire Servicing Company UK Limited (the "European Servicer" and, together with WCC, the "Servicers") pursuant to which the Servicers will provide loan and real property management services, including billing, portfolio administration and collection services for the Company's real estate investments. Under the Servicing Agreements, the Company will agree to pay each of the Servicers a servicing fee at or below market rates for each pool of loans or real estate assets that they service for the Company and to reimburse them for certain out- of-pocket costs associated with servicing such assets. For assets acquired on a "servicing retained" basis, the Company will pay a servicing fee to the seller or other third party servicing the loans or other assets. The Company will not receive the servicing fees. The Management Agreement will provide that the Manager will monitor the servicing activities of Servicers. See "Servicing Arrangements." 6 CONFLICTS OF INTEREST GENERAL The Company will be subject to conflicts of interest arising from its relationship with WFSG and its affiliates (including the Manager and the Servicers). WFSG will own 9.9% of the outstanding shares of Common Stock of WREIT immediately after the Closing. All of the officers of the Company are also officers of both the Manager and WFSG. Andrew A. Wiederhorn and Lawrence A. Mendelsohn are the principal stockholders and directors of WFSG, directors of the Manager (which is wholly owned by WFSG), the sole stockholders and directors of Wilshire Properties 1 and Wilshire Properties 2 (both of which are sellers of certain of the Initial Investments) and WCC (one of the Servicers), and control trusts and a partnership which are the sole members of Small Cap Investors, LLC, an Oregon limited liability company ("Small Cap"), which will purchase approximately 1,875 units of limited partner interest of the Operating Partnership (the "LP Units," and together with the units of general partner interest (the "GP Units") are referred to herein as the "Units"). Small Cap was organized on October 15, 1997 by Messrs. Wiederhorn and Mendelsohn for investment opportunities. Since Units may be redeemed (under certain circumstances and following specified holding periods) on a one-for-one basis for shares of Common Stock or cash equal to the market value of the same number of shares of Common Stock (at the discretion of the Company, as the general partner), each Unit is being attributed the same value as a share of Common Stock. SmallCap is contributing $30,000 in cash in exchange for these Units (assuming an offering price of $16 per share). Neither the Company nor the Manager will have any employees and will rely on WFSG for all of their staffing needs. These relationships create conflicts of interest in the contexts described below. In order to mitigate against these conflicts of interest, the Company's charter provides that a majority of the Company's Board of Directors must be unaffiliated with WFSG (the "Independent Directors"). The Independent Directors are expected to approve the execution of the Management Agreement and the general guidelines for the Company's investments, borrowings and operations (the "Guidelines") as well as the Initial Investments and future transactions or agreements between the Company and WFSG or its affiliates. PURCHASE OF INITIAL INVESTMENTS The Company will purchase the approximately $139.2 million of Initial Investments from WFSG, Wilshire Properties 1 and Wilshire Properties 2 in exchange for approximately $133.6 million of cash and the assumption of certain indebtedness (approximately $5.6 million). The purchase price of the Initial Investments is based on the estimated fair market value of the assets. WFSG will realize a gain of $1.6 million from the sale of such assets; however, because of WFSG's 9.9% ownership in the Company, $0.2 million of this gain will be deferred and not immediately recognized by WFSG for financial reporting purposes. Wilshire Properties 1 and Wilshire Properties 2 will realize a gain of $3.0 million from sale of their assets. However, because certain of these assets are leased to WFSG, $1.0 million of gain will be deferred and not immediately recognized by Wilshire Properties 1 and Wilshire Properties 2 for financial reporting purposes. While the Independent Directors have approved the purchase of the Initial Investments, their decision was based solely on information provided by WFSG and without the benefit of independent financial advisors. Approximately 22.1% of the Initial Investments are Mortgage-Backed Securities issued by affiliates of WFSG and backed by loans that were previously held in the portfolio of an affiliate of WFSG. THE MANAGER AND MANAGEMENT AGREEMENT The Manager of the Company is WRSC, a wholly-owned subsidiary of WFSG. The Management Agreement entitles the Manager to an incentive fee for its services based, in part, on the Company's Funds from Operations. This fee structure may provide the Manager with an incentive to recommend to the Company risky or speculative investments. Additionally, the Manager is responsible for monitoring the performance of the Servicers, while the Manager and the Servicers are under the common control of Messrs. Wiederhorn and Mendelsohn. The Manager may also cause the Company to engage in future transactions with WFSG and its 7 affiliates, subject to the approval of the Independent Directors. The Independent Directors will, however, rely primarily on information supplied by the Manager in reaching their determinations. PURCHASE OF FUTURE ASSETS The Company may acquire other Primary Investments and Other Real Estate Related Assets from WFSG or its affiliates in the future, including investments as a co-participant in loans originated or acquired by WFSG or its affiliates. Further, pursuant to the Management Agreement and a services agreement among WFSG, WRSC and WREIT (the "Services Agreement"), WFSG and its subsidiaries have granted the Company a right of first refusal with respect to the Primary Investments (the "Right of First Refusal"), whereby WFSG and its affiliates will not invest in any particular Primary Investment unless a majority of the Independent Directors have determined that the Company should not invest in such asset. The Right of First Refusal does not apply to Mortgage-Backed Securities where the mortgage loans collaterizing such Mortgage-Backed Securities are owned by WFSG or one of its subsidiaries. While the Independent Directors are required to approve any purchase of assets from WFSG or its subsidiaries and any decision not to exercise the Right of First Refusal, they will rely primarily on information provided by the Manager in reaching their determinations. See "Management of Operations--Certain Relationships; Conflicts of Interest." 8 COMPENSATION AND FEES TO WFSG AND AFFILIATES WFSG and certain of its affiliates have a material interest in, and will receive material benefits in connection with, the Offering. The affiliates and the nature of their interests and benefits are summarized in the table below. Based upon the Company's proposed plan of operations for the first year, the transactions described in connection with this Offering (i.e., the acquisition of the Initial Investments), and certain assumptions set forth under "Compensation and Fees to WFSG and Affiliates," WFSG and its affiliates are expected to receive compensation and fees of approximately $9.8 million during such year. There can be no assurance that such assumptions will prove accurate or that WFSG and its affiliates will earn such fees. The fees and compensation earned by WFSG and its affiliates may be substantially higher or lower than this projected amount based on actual operating results. See "Compensation and Fees to WFSG and Affiliates." A chart illustrating the relationship among WREIT, WFSG and certain affiliates is set forth on page 12.
SECTIONS OF PROSPECTUS PROVIDING MORE DETAILED AFFILIATES RELATIONSHIP NATURE OF INTEREST INFORMATION - ---------------------------------------------------------------------------------------------- WFSG Controlled by WFSG or its subsidiaries Initial Investments; Use of Messrs. Wiederhorn will receive $127.9 million Proceeds; Management of and Mendelsohn for assets comprising Operations--Certain approximately 91.9% of the Relationships; Risk Factors-- Initial Investments and will Conflicts of Interest result in a gain to WFSG and its subsidiaries of approximately $1.6 million. - ---------------------------------------------------------------------------------------------- WRSC Wholly-owned WRSC will manage the Management of Operations; subsidiary of WFSG business and investment Risk Factors--Conflicts of affairs of the Company and Interest will receive a management fee, an incentive fee, expense reimbursement, and options to acquire 985,000 shares of Common Stock (1,135,000 if the Underwriters' over-allotment option is exercised in full). In the event that the Management Agreement is terminated or not extended by the Company without cause, the Company is obligated to pay WRSC a termination fee equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination. - ---------------------------------------------------------------------------------------------- WCC and Controlled by Such entities are expected Servicing Arrangements the Messrs. Wiederhorn to receive servicing fees European and Mendelsohn or for servicing WREIT's Servicer subsidiaries of assets. WFSG - ---------------------------------------------------------------------------------------------- Messrs. Sole stockholders Wilshire Properties 1 and Initial Investments; Use of Wiederhorn of Wilshire Wilshire Properties 2, of Proceeds; Risk Factors-- and Properties 1, which Messrs. Wiederhorn and Conflicts of Interest Mendelsohn Wilshire Properties Mendelsohn are the sole 2 and WCC, stockholders, will transfer principal certain assets, subject to stockholders of indebtedness of WFSG and control approximately $5.6 million, trusts and a to the Operating Partnership partnership which for approximately $5.7 are the sole million which will result in members of Small a gain of $3.0 million to Cap Wilshire Properties 1 and Wilshire Properties 2. Small Cap will purchase approximately 1,875 Units for $30,000.
9 THE OFFERING Shares offered to the public(1)(2)(3)................................ 9,010,000 Shares to be outstanding after the Offering(2)(3).................... 10,000,000 Nasdaq Symbol........................................................ WREI
- -------- (1) Excludes 990,000 shares of Common Stock to be purchased by WFSG at Closing. (2) Assumes that the Underwriters' option to purchase up to an additional 1,500,000 shares to cover over-allotments is not exercised. (3) Excludes 3,500,000 shares reserved for issuance under the Option Plan. Options for 1,000,000 of Common Stock (1,150,000 if the Underwriters exercise their over-allotment option in full) are expected to be granted to the Manager, the Independent Directors and any non-employee directors at Closing. USE OF PROCEEDS The net proceeds to the Company from its sale of the 10,000,000 shares of Common Stock offered by this Prospectus (assuming an initial public offering price of $16 per share), after deducting the estimated underwriting discounts and offering expenses, are estimated to be approximately $146.8 million ($169.1 million if the Underwriters exercise their over-allotment option in full). The Company, through the Operating Partnership, will contract with WFSG and its affiliates, including Wilshire Properties 1 and Wilshire Properties 2, to purchase the Initial Investments upon completion of this Offering for a purchase price of approximately $133.6 million in cash and the assumption of certain debt (approximately $5.6 million), resulting in a total purchase price of $139.2 million. Of this purchase price, $40.8 million shall be used to acquire U.S. Commercial Investments, $95.0 million shall be used to acquire Mortgage-Backed Securities (including $30.8 million of securities issued by affiliates of WFSG which are backed by the Retained Securities) and $3.4 million shall be used to acquire International Investments. The purchase price of the Initial Investments is based on the estimated fair market value of the assets. WFSG will realize a gain of $1.6 million from the sale of such assets; however, because of WFSG's 9.9% ownership in the Company, $0.2 million of this gain will be deferred and not immediately recognized by WFSG for financial reporting purposes. Wilshire Properties 1 and Wilshire Properties 2 will realize a gain of $3.0 million from sale of their assets. However, because certain of these assets are leased to WFSG, $1.0 million of gain will be deferred and not immediately recognized by Wilshire Properties 1 and Wilshire Properties 2 for financial reporting purposes. All of the expected net proceeds of this Offering will be used to purchase Units in the Operating Partnership. The purchase price for the Initial Investments was based on certain assumptions made with respect to the potential net cash flows to be generated by the Initial Investments. See "Initial Investments," "Yield Considerations Related to the Company's Investments" and "Risk Factor--Conflicts of Interest-- Conflicts of Interest in the Business of the Company." Pending investment, the balance of the net proceeds (approximately $13.2 million assuming the Underwriters do not exercise their over-allotment option) will be invested in investment-grade, interest-bearing securities and held by the Operating Partnership until used to originate or acquire International Investments, Commercial Real Property including U.S. Commercial Properties, Distressed U.S. Commercial Loans and Other Real Estate Related Assets as described herein. See "Operating Policies and Objectives--Portfolio Management." DISTRIBUTION POLICY WREIT intends to make distributions to its stockholders of at least 95% of its "REIT Taxable Income" each year (determined without the dividends paid deduction, certain non-cash income and any net capital gain) so as to qualify for the tax benefits accorded to REITs under the Code. REIT Taxable Income means taxable income (computed accordingly to normal corporate rules) with the following adjustments: (i) an exclusion of net income from foreclosure property; (ii) an exclusion of net income from prohibited transactions; (iii) a deduction is allowed for dividends paid reduced by the portion of such deduction attributable to net income from 10 foreclosure property; (iv) a deduction for the amount of tax imposed for failing to meet the 75% and/or 95% income tests; and (v) the dividends received deduction does not apply. Net income from foreclosure property is the excess of (i) gain from the sale or other disposition of foreclosure property held for sale in the ordinary course of business, plus other gross income derived from foreclosure property that does not qualify under the 75% income test, over (ii) the deductions which are directly connected with the production of such gain or income. See "Federal Income Tax Consequences." WREIT does not intend to make distributions that would be a return of principal. WREIT intends to make distributions at least quarterly. It is anticipated that the first distribution to stockholders will be made promptly after the first full calendar quarter following the Closing Date. See "Distribution Policy." TAX STATUS OF THE COMPANY WREIT intends to qualify and will elect to be taxed as a REIT under sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 1998. If WREIT qualifies for taxation as a REIT, WREIT generally will not be subject to federal corporate income tax on its taxable income that is distributed to its stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its annual REIT Taxable Income (determined without the dividends paid deduction, certain non-cash income and net capital gain). Although WREIT does not intend to request a ruling from the Internal Revenue Service (the "Service") as to its REIT status, WREIT has received an opinion of its legal counsel regarding its REIT status (see "Federal Income Tax Consequences--Taxation of the Company"), which opinion is based on certain assumptions and representations about WREIT's ongoing businesses and investment activities and other matters. No complete assurance can be given that WREIT will be able to comply with such assumptions and representations in the future. Furthermore, such opinion is not binding on the Service or on any court. Failure to qualify as a REIT would render WREIT subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates and distributions to WREIT's stockholders would not be deductible. Even if WREIT qualifies for taxation as a REIT, the Company and the Operating Partnership may be subject to certain federal, state and local taxes on its income and property. WREIT will adopt the calendar year as its tax year. In connection with WREIT's election to be taxed as a REIT, WREIT's Charter imposes restrictions on the transfer and ownership of the Common Stock. See "Risk Factors--Legal Risks--Tax Risks" and "Federal Income Tax Consequences-- Taxation of the Company." 11 ORGANIZATION AND RELATIONSHIPS WRSC will manage the day-to-day operations of the Company, subject to the supervision of WREIT's Board of Directors. The relationship among WREIT, its affiliates and WRSC is depicted in the chart shown below. [GRAPH APPEARS HERE] (1) WREIT, a Maryland corporation taxable as a REIT, will issue approximately 10% of its common stock to WFSG and approximately 90% of its common stock to public investors. (2) WREIT will contribute, as a general partner and as a limited partner, all of the net proceeds of the Offering to the Operating Partnership. The Operating Partnership will issue 100,000 GP Units and 9,900,000 LP Units (115,000 GP Units and 11,385,000 LP Units if the Underwriters exercise their over-allotment option in full) to WREIT for the contribution of such net proceeds. Small Cap will purchase 1,875 LP Units for $30,000. The Company, through the Operating Partnership, will acquire all of the Initial Investments from WFSG, Wilshire Properties 1 and Wilshire Properties 2, and will originate or acquire any future Primary Investments or Other Real Estate Related Assets. In the future, the Operating Partnership may seek to acquire additional assets and issue Units in payment of some or all of the purchase price therefor. (3) The Operating Partnership will assign to WCC any special servicing rights and obligations (other than the right to direct foreclosure) received in connection with the acquisition of Mortgage-Backed Securities covering U.S. assets. WCC is currently owned by Messrs. Wiederhorn and Mendelsohn. WCC and the European Servicer will provide loan servicing and real property management services to the Company. See "Servicing Arrangements." (4) WFSG incorporated and capitalized WRSC. (5) WRSC will enter into a Management Agreement with WREIT pursuant to which WRSC will formulate operating strategies and provide certain managerial and administrative functions for WREIT and the Operating Partnership, subject to the supervision of WREIT's Board of Directors. WRSC, WFSG and WREIT will also enter into a Services Agreement whereby WFSG will provide WRSC assistance in performing certain managerial and administrative services for WREIT. (6) Messrs. Weiderhorn and Mendelsohn are the sole stockholders of Wilshire Properties 1, Wilshire Properties 2, and WCC, the controlling stockholders of WFSG and control trusts and a partnership which are the sole members of Small Cap. WFSG is the sole stockholder of WRSC and Messrs. Wiederhorn and Mendelsohn are officers and directors of WFSG and WRSC. 12 This Prospectus contains forward-looking statements which can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "estimate," or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those described in such forward-looking statements as a result of certain factors, including those set forth in the following risk factors and the other factors described elsewhere in this Prospectus. RISK FACTORS An investment in the Common Stock involves the following material risks identified by the Company. Before investing in the shares of Common Stock offered hereby, prospective investors should give special consideration to the following risk factors, in addition to the information set forth elsewhere in this Prospectus. CONFLICTS OF INTEREST CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY. The Company will be subject to various conflicts of interest arising from its relationship with WFSG and its affiliates. WFSG will own 9.9% of the outstanding shares of Common Stock of WREIT after the Closing. All of the officers of the Company are also officers of both the Manager and WFSG. Messrs. Wiederhorn and Mendelsohn are principal stockholders and directors of WFSG, and directors of the Manager. Messrs. Wiederhorn and Mendelsohn control trusts and a partnership which are the sole members of Small Cap which will purchase approximately 1,875 Units for $30,000. Neither the Company nor the Manager will have any employees and will rely on WFSG for all of their staffing needs. With a view toward protecting the interests of the Company's stockholders, the Charter of the Company provides that a majority of the Board of Directors must be unaffiliated with WFSG. The Company will contract with WFSG and its subsidiaries to purchase the Initial Investments at the Closing for an aggregate purchase price of approximately $127.9 million in cash. WFSG will realize a gain of approximately $1.6 million as a result of the purchase of such assets. However, since WFSG will retain an economic interest in the Company, WFSG will not recognize the total amount of this gain for financial reporting purposes. The Operating Partnership also will acquire from two affiliates of WFSG, Wilshire Properties 1 and Wilshire Properties 2, all of the outstanding shares of which are owned by Messrs. Wiederhorn and Mendelsohn, certain U.S. commercial real property in exchange for $5.7 million and the assumption of certain indebtedness (approximately $5.6 million). While the Independent Directors have approved the purchase of the Initial Investments, their decision was based solely on information provided by WFSG and without the benefit of independent financial advisors. Approximately 22.1% of the Initial Investments are Mortgage-Backed Securities issued by affiliates of WFSG and backed by loans that were previously held in the portfolio of an affiliate of WFSG. The assets being purchased from WFSG, Wilshire Properties 1 and Wilshire Properties 2 are being acquired at their estimated fair market value. See "Use of Proceeds." The Manager, a wholly owned subsidiary of WFSG, will manage the Company and provide extensive advice on the Company's operating policies and strategies. The Manager is responsible for monitoring the performance of the Servicers, while the Manager and the Servicers are under the common control of Messrs. Wiederhorn and Mendelsohn. The Manager may also cause the Company to engage in future transactions with WFSG and its affiliates, subject to the approval of the Independent Directors. The Independent Directors, however, will rely primarily on information supplied by the Manager in reaching their determinations. In addition, the Company, the Manager and WFSG have common officers and directors. Accordingly, WFSG and the Manager will have a significant amount of influence over the affairs of the Company. The Management Agreement does not limit or restrict the right of WFSG or any of its officers, directors, employees or affiliates from engaging in any business, subject to the Right of First Refusal with respect to the Primary Investments granted to the Company, or rendering services of any kind to any other person, including the purchase of or rendering advice to others purchasing real property assets that meet the Company's policies 13 and criteria. In addition, the Manager will be entitled to receive incentive compensation for its services which could result in the Manager recommending riskier or more speculative investments. Pursuant to the Management Agreement and the Services Agreement, WFSG and its subsidiaries have granted the Company a Right of First Refusal with respect to the Primary Investments. WFSG expects to continue to purchase real property assets in the future, and has no obligation to make investment opportunities available to the Company except with respect to Primary Investments. Moreover, pursuant to the Management Agreement and the Services Agreement, WFSG and its subsidiaries have no obligation to offer mortgage- backed securities to the Company if the mortgage loans collateralizing such mortgage-backed securities were owned by WFSG or one of its affiliates. As a consequence, the opportunity for the Company to invest in Other Real Estate Related Assets will be limited if such investment opportunities would be attractive to WFSG or one of its subsidiaries. WFSG and its subsidaries will not invest in any Primary Investments unless a majority of the Independent Directors have decided that the Company should not invest in such asset. In deciding whether to invest in such an asset, the Independent Directors may consider, among other factors, whether the asset is well-suited for the Company and whether the Company is financially able to take advantage of the investment opportunity based primarily on information provided by the Manager. From time to time, mortgage lenders offer for sale large pools of real property assets containing assets which WFSG has granted a Right of First Refusal to the Company pursuant to a competitive bidding process. In such a case, WFSG may choose an unaffiliated entity with which to submit a joint bid for the pool, as long as WFSG takes title only to the real property assets as to which a right of first refusal has not been granted. In the alternative WFSG may, but is not required to, invite the Company to submit a joint bid for such a pool. If the Company and WFSG are successful bidders on such a pool, in general the Company would take title to the real property assets as to which a right of first refusal has been granted. The Company may, but does not currently intend to, participate in mortgage loans as a co-participant with WFSG or its affiliates. INVESTMENT ACTIVITY RISKS OWNERSHIP OF MORTGAGE-BACKED SECURITIES IN POOLS OF RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS WILL SUBJECT THE COMPANY TO SPECIAL CREDIT AND PREPAYMENT RISKS. The Company intends to acquire a significant amount of mortgage-backed securities, including "first loss" unrated and other subordinated classes. A first loss security is the most subordinated class of a multi-class issuance of pass-through or debt securities, and is the first to bear the loss upon a default on the underlying collateral. Such classes are subject to special risks, including a substantially greater risk of loss of principal and non-payment of interest than more senior, rated classes. While the market values of most subordinated classes tend to react less to fluctuations in interest rate levels than more senior, rated classes, the market values of subordinated classes tend to be more sensitive to changes in economic conditions than more senior classes. As a result of these and other factors, mortgage-backed securities generally are not actively traded and may not provide holders thereof with liquidity. The yield to maturity on mortgage-backed securities of the type the Company intends to acquire will be extremely sensitive to the default and loss experience of the underlying mortgage loans and the timing of any such defaults or losses. Because the mortgage-backed securities of the type the Company intends to acquire generally have less credit support than senior classes, to the extent there are realized losses on the mortgage loans comprising the mortgage collateral for such classes, the Company may not recover the full amount or, indeed, any of its initial investment in such mortgage-backed securities. When the Company acquires mortgage-backed securities, it may not acquire the right to service the underlying mortgage loans, even those that become defaulted, although the Company generally will seek to obtain the rights to service those loans, including oversight and management of the resolution of such mortgage loans by modification, foreclosure, deed in lieu of foreclosure or otherwise ("Special Servicing"). As a result of senior classes of mortgage- backed securities, the underlying mortgage loans may not be serviced in the same manner as they would be serviced by the Company or in a manner that is more advantageous to the Company as the holder of the subordinated classes of mortgage-backed securities. 14 The subordination of mortgage-backed securities to more senior classes may adversely affect the yield on the mortgage-backed securities even if realized losses are not ultimately allocated to such classes. On any payment date, interest and principal are paid on the more senior classes before interest and principal are paid with respect to the unrated or non-investment grade credit support classes. Typically, interest deferred on these credit support classes is payable on subsequent payment dates to the extent funds are available, but such deferral may not itself bear interest. Such deferral of interest will adversely affect the yield on the mortgage-backed securities. The yield of the mortgage-backed securities also will be affected by the rate and timing of payments of principal (including prepayments, repurchase, defaults and liquidations) on the mortgage loans underlying a series of mortgage-backed securities. The rate of principal payments may vary significantly over time depending on a variety of factors such as the level of prevailing mortgage loan interest rates, and economic, demographic, tax, legal and other factors. Prepayments on the mortgage loans underlying a series of mortgage-backed securities are generally allocated to the more senior classes of mortgage-backed securities for specified periods or based on over- collaterization levels. As a result, prepayments of principal from the mortgage loans are not received by the holders of subordinated mortgage-backed securities for a period of time. As a result, the weighted-average lives of the mortgage-backed securities may be longer than would be the case if, for example, prepayments were allocated pro rata to all classes of mortgage-backed securities. To the extent that the holder of mortgage-backed securities is not paid compensating interest on interest shortfalls due to prepayments, liquidations or otherwise, the yield on the mortgage-backed securities may be affected adversely. The Company may acquire IOs, which are classes of mortgage-backed securities that are entitled to no (or only nominal) payments of principal, but only to payments of interest. The yield to maturity of IOs is very sensitive to changes in the weighted average life of such securities, which in turn is dictated by the rate of prepayments on the underlying mortgage collateral. In periods of declining interest rates, rates of prepayments on mortgage loans generally increase, and if the rate of prepayments is faster than anticipated, then the yield on IOs will be affected adversely. The Company may also invest in Sub IOs, a class for which interest generally is withheld and used to make principal payments on more senior classes or to fund a reserve account for the protection of senior classes until overcollateralization or until the balance in the reserve account reaches a specified level. Interest on a Sub IO generally will be paid only after the overcollateralization or the balance in the reserve account reaches the specified level. Sub IOs provide credit support to the senior classes, and thus bear substantial credit risk. Moreover, because all IO classes only receive interest payments, their yields are extremely sensitive not only to prepayments which include defaults, but also to changes in the weighted average life of the relevant classes, which in turn will be dictated by the rate of prepayments on the underlying mortgage collateral. In addition, Sub IOs often generate taxable income in excess of cash received. See "--Legal and Tax Risks--Adverse Consequences of Failure to Comply with REIT Requirements May Include WREIT Being Subject to Taxation as a Regular Corporation or 100% Tax on Certain Gains." DISTRESSED MORTGAGE LOANS HAVE HIGHER RISK OF FUTURE DEFAULT. The Company intends to purchase distressed mortgage loans, as well as mortgage loans that have had a history of delinquencies. These distressed mortgage loans may presently be in default or may have a greater than normal risk of future defaults and delinquencies, as compared to a pool of newly originated, high quality loans of comparable type, size and geographic concentration. Returns on an investment of this type depend on accurate pricing of such investment, the borrower's ability to make required payments or, in the event of default, the ability of the loan's servicer (including the Servicers) to foreclose and liquidate the mortgage loan. There can be no assurance that the servicer can liquidate a defaulted mortgage loan in a cost effective manner or in a timely fashion. See "Certain Legal Aspects of Mortgage Loans and Real Property Investments." INTERNATIONAL INVESTMENTS ARE SUBJECT TO CURRENCY CONVERSION RISKS AND DIFFERENCES IN FOREIGN LAWS AND MARKETS. The Company may invest in real estate, or mortgage loans secured by real estate, located outside the United States. The management of the Company intends to consider International Investments in Western Europe. In the future, the Company may also consider investments in other geographic regions such as Asia, Eastern Europe and Latin America, but currently has no plans to do so. The Company's international 15 operations will be subject to most of the same risks associated with its U.S. operations as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, heightened risks of political and economic instability in certain geographic locations, difficulties in managing international operations, potentially adverse tax consequences, enhanced accounting and control expenses and the burden of complying with a wide variety of foreign laws. Legal systems abroad may differ in a number of respects from the U.S. legal system, including requiring transfer taxes and value-added taxes on certain transfers, imposing limits on usurious interest rates and subjecting lenders to liability for inappropriate lending. In addition, the management of WRSC has limited experience in the purchasing and servicing of real estate loans and managing real estate in foreign countries, and its ability to evaluate and effectively price loan pool and real estate acquisitions abroad may be subject to a higher risk of error. Moreover, investments in foreign assets are subject to currency conversion risks. See "Operating Policies and Objectives--International Investments." SIGNIFICANT COMPETITION MAY AFFECT ADVERSELY THE COMPANY'S ABILITY TO ACQUIRE ASSETS AT FAVORABLE SPREADS RELATIVE TO BORROWING COSTS. In acquiring its assets, the Company will compete with other REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, other lenders, and other entities purchasing similar assets, many of which have established operating histories and procedures, may have access to greater capital and other resources, and may have other advantages over the Company in conducting certain businesses and providing certain services. Increased competition for the acquisition of real properties, mortgage loans and Mortgage-Backed Securities or a diminution in the available supply could result in higher prices and thus lower yields on such real properties, mortgage loans and Mortgage-Backed Securities which could further narrow the yield spread over borrowing costs. In addition, the Company's competitors may seek to establish relationships with the financial institutions and other firms from whom the Company intends to acquire such assets. There can be no assurance that the Company will be able to acquire sufficient real estate assets at spreads above the Company's cost of funds to achieve the Company's yield objectives. The Company will engage in a business that may become increasingly competitive in the future as more companies enter the market. In acquiring the Primary Investments, the Company will compete with REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, other lenders, and other entities purchasing similar assets, many of which have established operating histories and procedures, may have access to greater capital and other resources and may have other advantages over the Company in conducting certain businesses and providing certain services. There are several REITs similar to the Company and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of the Primary Investments contemplated to be acquired by the Company. The Company's net income will depend, in large part, on the Company's ability to acquire and originate mortgage loans and Mortgage-Backed Securities having yields that produce favorable spreads over the Company's borrowing costs. Increased competition for the acquisition of mortgage loans, real properties and Mortgage-Backed Securities or a reduction in the available supply could result in higher prices and thus lower yields on such investments, which could narrow (or make negative) the yield spread relative to the Company's borrowing costs. In addition, the company's competitors may seek to establish relationships with financial institutions and other firms from whom the Company intends to acquire such assets. There can be no assurance that the Company will be able to acquire sufficient Primary Investments at favorable spreads relative to the Company's borrowing costs to achieve the Company's objectives. In addition, there can be no assurance that a supply of Primary Investments suitable for acquisition by the Company will continue to be available, or that changes in market conditions or applicable laws will not affect the availability of suitable Primary Investments. COMMERCIAL PROPERTIES MAY HAVE UNLEASED SPACE. The Company intends to invest in commercial and multi-family properties in the U.S. and abroad (the "Commercial Properties") or mortgage loans secured by the Commercial Properties (the "Commercial Mortgage Loans"), which may have significant amounts of unleased space or space which becomes vacant during the period of the Company's investment. The Company is subject to the risk that a property cannot be leased to the extent necessary to produce sufficient revenue both to meet operating expenses and debt service and to provide a return on the investment. 16 SUBORDINATED LOANS ON REAL ESTATE ARE SUBJECT TO HIGHER RISKS. The Company may originate or acquire loans secured by Commercial Properties, including loans that are subordinate to first liens on such real estate. Loans that are subordinate to first liens on real estate are subject to greater risks of loss than first lien mortgage loans. An overall decline in the real estate market could adversely affect the value of the real property securing such loans such that the aggregate outstanding balance of the second-lien loan and the balance of the more senior loan on the real property exceed the value of the real property. REAL PROPERTY IS ILLIQUID AND ITS VALUE MAY DECREASE. Real property investments are relatively illiquid. The ability of the Company to vary its portfolio in response to changes in economic and other conditions will be limited. No assurances can be given that the fair market value of any of the Commercial Properties or Commercial Mortgage Loans secured by Commercial Properties will not decrease in the future. VALUE OF REAL PROPERTY DEPENDENT ON CONDITIONS BEYOND COMPANY'S CONTROL. The Company expects to invest in real properties or mortgage loans secured by real properties, which are subject to varying degrees of risk generally incident to the ownership of real property. In the case of real properties (or related Commercial Mortgage Loans), the underlying value of such Commercial Properties (or related Commercial Mortgage Loans) and the Company's income and ability to make distributions to its stockholders are dependent upon the ability of WRSC or the management company to operate the Commercial Properties in a manner sufficient to maintain or increase revenues in excess of operating expenses and debt service or, in the case of real property leased to a single lessee, the ability of the lessee to make rent payments. The value of real properties or mortgage loans may be adversely affected by adverse changes in national or local economic conditions, competition from other properties offering the same or similar services, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements (particularly in older structures), changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, exchange rates, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses), acts of war, adverse changes in zoning laws, and other factors which are beyond the control of the Company. THE COMPANY'S INSURANCE WILL NOT COVER ALL LOSSES. The Company intends and will require borrowers under Commercial Mortgage Loans and mortgage loans secured by residential properties ("Residential Mortgage Loans") to maintain comprehensive insurance on each of the Commercial Properties and residential properties ("Residential Properties"), including liability and fire and extended coverage, in amounts determined to be: (i) the lesser of the unpaid principal balance of the related obligation; or (ii) the actual cash value of the improved real property which may be a security for such obligation, in the event of a covered cause of a loss, subject to applicable deductibles. The Company will endeavor to obtain, or cause to be obtained, coverage of the type and in the amount customarily obtained by owners of properties similar to the Commercial Properties and Residential Properties. There are certain types of losses, however, generally of a catastrophic nature, such as earthquakes, floods and hurricanes, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to the affected Commercial Property and Residential Properties. REAL PROPERTIES WITH ENVIRONMENTAL PROBLEMS WILL INCREASE COSTS AND MAY CREATE LIABILITY FOR THE COMPANY. Operating costs and the value of real property may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of future legislation. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Therefore, an environmental liability could have a material adverse effect on the underlying value of the real property, the Company's income and cash available for distribution to Stockholders. However, the Company is not aware of any necessary environmental remediation or other environmental liabilities with respect to the real properties being acquired as part of the Initial Investments. 17 The Company may obtain Phase I environmental assessments on Commercial Properties prior to their acquisition. The purpose of Phase I environmental assessments is to identify existing and potential environmental contamination that is made apparent from historical reviews of the properties, reviews of certain public records, preliminary investigations of the sites and surrounding properties and screening for the presence of hazardous substances, toxic substances and underground storage tanks. However, the Company will exercise judgment on this issue and may choose not to obtain Phase I environmental assessments on certain Commercial Properties prior to its acquisition and to purchase loans without Phase I environmental assessments on the underlying property if it deems that to do so is prudent. Further, even if a Phase I environmental assessment is obtained, there is no assurance it will reveal all existing and potential environmental risks and liabilities, and there is no assurance that there will be no unknown or material environmental obligations or liabilities. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN GOVERNMENTAL RULES AND REGULATIONS MAY BE COSTLY. Under the Americans with Disabilities Act of 1990 (the "ADA"), all U.S. public properties are required to meet certain federal requirements related to access and use by disabled persons. Commercial Properties acquired by the Company in the U.S. may not be in compliance with the ADA. If a property is not, the Company will be required to make modifications to such property to bring it in compliance, or face the possibility of an imposition of fines or an award of damages to private litigants. In addition, changes in governmental rules and regulations or enforcement policies (including foreign governmental rules) affecting the use and operation of the Commercial Properties and Residential Properties, including changes to building codes and fire and life-safety codes, may occur. If the Company were required to make substantial modifications at the Commercial Properties to comply with the ADA or other changes in governmental rules and regulations, the Company's ability to make expected distributions to its stockholders could be adversely affected. If U.S. properties that secure U.S. mortgage loans are found not to be in compliance with the ADA, their value could be diminished and thus the Company's security impaired. ECONOMIC AND BUSINESS RISKS INTEREST RATE CHANGES MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENTS. The Company's operating results depend in part on the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities. Changes in the general level of interest rates can affect the Company's income by affecting the spread between the Company's interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of the Company's interest-earning assets and its ability to realize gains from the sale of assets and the average life of the Company's interest-earning assets. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond the control of the Company. The Company may employ a hedging strategy to limit the effects of changes in interest rates on its operations, including engaging in interest rate swaps, caps, floors and interest rate futures. The use of these types of instruments to hedge a portfolio carries certain risks, including the risk that losses on a hedge position will reduce the funds available for distribution to shareholders and, indeed, that such losses may exceed the amount invested in such instruments. There is no perfect hedge for any investment, and a hedge may not perform its intended use of offsetting losses on an investment. Moreover, with respect to certain of the instruments used as hedges for the Company's portfolio, the Company is exposed to the risk that the counterparties with which the Company contracts may fail to perform, which may render the Company unable to enter into an offsetting transaction with respect to an open position. If the Company anticipates that the income from any such hedging transaction will not be qualifying income for REIT income test purposes, the Company may conduct part or all of its hedging activities through a to-be-formed corporate subsidiary that would be fully subject to federal corporate income taxation. However, the Company's ability to do so may be limited or prohibited. See "Federal Income Tax Consequences--Requirements for Qualification--Legislative Proposal." The profitability of the Company may be adversely affected during any period as a result of changing interest rates. 18 The value of mortgage-backed securities is significantly affected by prepayment rates on the mortgage loans comprising the mortgage collateral for such securities. Prepayment rates on mortgage-backed securities are influenced by changes in current interest rates and a variety of economic, geographic and other factors, and cannot be predicted with certainty. In periods of declining mortgage interest rates, prepayments on Mortgage-Backed Securities generally increase. If general interest rates also decline, the amounts available for reinvestment by the Company during such periods are likely to be reinvested at lower interest rates than the Company was earning on the mortgage-backed securities that were prepaid. Mortgage-backed securities may decrease in value as a result of increases in interest rates and may benefit less than other fixed-income securities from declining interest rates because of the risk of prepayment. In general, changes in both prepayment rates and interest rates will change the total return on mortgage-backed securities, which in turn will affect the amount available for distribution to stockholders. Under certain interest rate or prepayment rate scenarios, the Company may fail to recoup fully its cost of acquisition of such investments. LEVERAGE CAN REDUCE INCOME AVAILABLE FOR DISTRIBUTION; NO LIMITATION ON THE AMOUNT OF LEVERAGE. After the initial "start-up" period, the Company intends to leverage its portfolio through borrowings, generally through the use of mortgage loans and repurchase agreements, the issuance of mortgage-backed securities, including CMOs, and resecuritizations of mortgage-backed securities, and other borrowing arrangements. The percentage of leverage used will vary depending on the Company's and prospective lenders' estimate of the stability of the portfolio's cash flow. To the extent that changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from the assets acquired, the Company may reduce the amount of leverage it utilizes. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leverage can reduce the net income available for distributions to stockholders. The Company will leverage assets only when there is an expectation that it will enhance returns, although there can be no assurance that the Company's use of leverage will prove to be beneficial. The amount which the Company can leverage its assets is not expressly limited and will be determined by the Manager and, ultimately WREIT's Board of Directors. Moreover, there can be no assurance that the Company will be able to meet its debt service obligations and, to the extent that it cannot, the Company risks the loss of some or all of its assets. See "--Conflicts of Interest in the Business of the Company." POTENTIAL INTEREST RATE MISMATCH BETWEEN ASSET YIELDS AND BORROWING RATES. The Company's borrowings may be at interest rates based on indexes and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indexes and repricing terms of various of the Company's variable rate assets. While the historical spread between relevant short-term interest rate indexes has been relatively stable, there have been periods, such as the 1979 through 1982 high interest environment, when the spread between those indexes was volatile. Further, certain of the Company's assets will bear fixed rates of interest and have long-term maturities. There can be no assurance that such fixed rate of interest will exceed the variable rate of interest on related borrowings. Interest rate mismatches could impact the Company's net income in a material and adverse way, thus negatively impacting the Company's financial condition, dividend yield and the market price of the Common Stock. THE COMPANY MAY NOT BE ABLE TO BORROW MONEY ON FAVORABLE TERMS. The ability of the Company to achieve its investment objectives through leverage will depend on the Company's ability to borrow money on favorable terms. The Company has entered into limited borrowing arrangements at the present time, and there can be no assurance that the Company will be able to enter into further arrangements enabling it to borrow money on favorable terms. See "Operating Policies and Objectives--Leverage and Borrowing." ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT COMPANY'S BUSINESS. The Company's success is dependent upon the general economic conditions in the geographic areas in which a substantial number of its investments are located. Adverse changes in economic conditions in the countries in which the Company conducts substantial business, or in the economic conditions of the regions in which the 19 Company conducts substantial business likely would have an adverse effect on real estate values, interest rates and, accordingly, the Company's business. Approximately 88% of the aggregate principal balance outstanding of the real property securing the Initial Distressed U.S. Commercial Loans is located in the states of California, Connecticut, New Jersey and New York. California recently began to recover from an economic recession that has affected that state since the early 1990s. The Company's performance and its ability to make distributions to its stockholders likely would be affected significantly by future economic conditions in California, Connecticut, New Jersey and New York. See "--Value of Real Property Dependent on Conditions Beyond Company's Control." LEGAL AND TAX RISKS ADVERSE CONSEQUENCES OF FAILURE TO COMPLY WITH REIT REQUIREMENTS MAY INCLUDE WREIT BEING SUBJECT TO TAXATION AS A REGULAR CORPORATION OR 100% TAX ON CERTAIN GAINS. Effect of Failure to Qualify as a REIT. WREIT intends to operate in a manner so as to qualify as a REIT for federal income tax purposes. Although WREIT does not intend to request a ruling from the Internal Revenue Service (the "Service") as to its REIT status, WREIT has received an opinion of its legal counsel that, based on certain assumptions and representations, it so qualifies. Investors should be aware, however, that opinions of counsel are not binding on the Service or any court. The REIT qualification opinion only represents the view of counsel to WREIT based on counsel's review and analysis of existing law, and is conditioned upon certain representations made by WREIT as to factual matters, including representations regarding the nature of WREIT properties and the future conduct of its business. Furthermore, both the validity of the opinion and the continued qualification of WREIT as a REIT will depend on WREIT's satisfaction of certain asset, income, organizational, distribution and stockholder ownership requirements on a continuing basis. If WREIT were to fail to qualify as a REIT in any taxable year, WREIT would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates, and distributions to stockholders would not be deductible by WREIT in computing its taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders, which in turn could have an adverse impact on the value of, and trading prices for, the Common Stock. Unless entitled to relief under certain Code provisions, WREIT also would be disqualified from taxation as a REIT for the four taxable years following the year during which WREIT ceased to qualify as a REIT. See "Federal Income Tax Consequences--Taxation of the Company." When purchasing Mortgage-Backed Securities and IOs, WREIT may rely on opinions of counsel for the issuer or sponsor of such securities given in connection with the offering of such securities, or statements made in related offering documents, for purposes of determining whether and to what extent those securities constitute "real estate assets" for purposes of the REIT asset tests and produce income which qualifies under the REIT gross income tests. The inaccuracy of any such opinions or statements may have an adverse impact on WREIT's qualification as a REIT. See "Federal Income Tax Consequences--Requirements for Qualification." Potential Adverse Effect of Distribution Requirement on Company's Cash Flow. WREIT must distribute annually at least 95% of its taxable income (excluding certain non-cash income and any net capital gain) in order to avoid corporate income taxation of the earnings that it distributes. In addition, WREIT will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of its undistributed taxable income from prior years. Furthermore, to the extent that WREIT recognizes any "built-in gain" on the disposition of an asset, WREIT will be subject to tax at the highest regular corporate rate applicable on such gain, assuming that WREIT makes the election pursuant to Notice 88-19. See "Federal Income Tax Consequences--Taxation of the Company." WREIT intends to make distributions to its stockholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax. However, differences in timing between the recognition of taxable 20 income and the actual receipt of cash could cause the required distribution to exceed the Company's cash flow. For instance, the Operating Partnership's planned investment in various types of subordinated Mortgage-Backed Securities could result in the recognition of taxable income by the Company in excess of the Company's cash receipts. The payment of interest on certain types of subordinated Mortgage-Backed Securities may be deferred (or placed into a reserve account) until after the payment of all or a substantial portion of the interest or principal (or both) on senior debt obligations, or until the overcollateralization or reserve balance reaches a specified level, even though interest income would continue to accrue. REMIC Residual Interests and retained interests in non-REMIC securitization transactions also may generate taxable income in excess of cash flow. Thus, as a result of the Operating Partnership's ownership of such Mortgage-Backed Securities, the Company would recognize interest income but would receive no cash. Although the Company may benefit from tax deductions (such as interest and depreciation) from the Operating Partnership's investments and borrowings, such tax deductions may not be sufficient to offset completely the non-cash income recognized by the Company from investments in subordinated Mortgage-Backed Securities. In addition, the Operating Partnership may acquire Mortgage Loans, Mortgage- Backed Securities and other debt obligations that are deemed to have market discount for federal income tax purposes, which generally is equal to the excess of an obligation's redemption price over the holder's basis in the obligation at the time of acquisition. All or a portion of the gain recognized from the disposition of, or principal payments on, an obligation which has market discount would be treated as ordinary income and not capital gain, so that WREIT would be required to make a distribution to its shareholders in order to satisfy the requirement that a REIT distribute 95% of its taxable income (excluding certain non-cash items and net capital gain) to its shareholders each taxable year. Likewise, if a Mortgage Loan, Mortgage-Backed Security or other debt obligation with market discount is held by a REMIC in which the Operating Partnership acquires a REMIC Residual Interest, a portion of the market discount would be recognized as income each year by the REMIC and, hence, the Company. As a result, the market discount on obligations held by a REMIC in which the Operating Partnership holds a REMIC Residual Interest could increase the WREIT's annual distribution requirement. If the distributions required by WREIT exceed WREIT's cash receipts, whether due to these non-cash income items or otherwise, WREIT may be required (i) to borrow funds, issue additional equity or sell assets in adverse market conditions, (ii) to distribute amounts that represent a return of capital, or (iii) to distribute amounts that would otherwise be spent on future acquisitions, unanticipated capital expenditures, or repayment of debt. See "Federal Income Tax Consequences--Income Tests" and "--Asset Tests." Potential Restrictions on the Company's Business and Potential Entity-Level Taxes Relating to Primary Investments. Ownership by the Operating Partnership of the Primary Investments involves special considerations in applying the various REIT qualification tests. For instance, in order to maintain WREIT's REIT qualification and avoid a 100% tax on gains from the sale of certain properties, the Operating Partnership may be prohibited from disposing of properties, including properties acquired through foreclosure or deed in lieu of foreclosure, when a disposition otherwise would be in the best interests of the Company. As an alternative, the Operating Partnership may be required to transfer such property to a taxable corporation owned in part by the Operating Partnership, in which case there would be a corporate level income tax on any gain recognized upon the sale. However, the Operating Partnership's ability to use a taxable corporation in this manner may be limited or prohibited. See "Federal Income Tax Consequences--Requirements for Qualification--Legislative Proposal." If (i) the Operating Partnership disposes of property previously acquired through foreclosure, (ii) such property was deemed to be inventory or otherwise primarily held for sale to customers in the ordinary course of the Operating Partnership's business, and (iii) WREIT either does not properly make an election to treat the property as "foreclosure property" (or it makes the election but the property is later deemed ineligible for such an election) subsequent to the end of the third taxable year following the taxable year in which the Operating Partnership acquired the property, WREIT could be liable for a 100% tax on the gain from such sale. If WREIT is entitled to and does make the "foreclosure property" election with respect to such property, and the property is foreclosure property at the time of the sale, gain on the sale of such property generally will be subject to tax at the maximum corporate tax rate. WREIT could be prohibited from making the foreclosure property election for 21 any property acquired through foreclosure on a loan if the loan was acquired with an intent to evict or foreclose or where there was knowledge at the time the loan was acquired that the loan was in default or that default was imminent. See "Federal Income Tax Consequences--Requirements for Qualification--Income Tests." The Operating Partnership also will be prohibited from providing certain services to tenants of properties that it may acquire through foreclosure or deed in lieu of foreclosure, which may deter it from pursuing remedies that otherwise would be available upon a loan default. In addition, a portion of the interest that the Operating Partnership receives from distressed mortgage loans may not be includible in determining whether the Company satisfies the 75% gross income requirement, and as a result the Operating Partnership may be required to forego making certain investments that it otherwise would deem advisable. The REIT requirements also restrict the Company's ability to acquire certain direct or indirect interests in corporations or other entities, possibly preventing the acquisition of International Investments that otherwise would be in the best interests of the Company. The Company also expects to acquire certain Mortgage-Backed Securities and other debt obligations that are deemed to have original issue discount ("OID") for federal income tax purposes, which generally is equal to the difference between an obligation's issue price and its redemption price. The Company will be required to recognize as income each year the portion of the OID that accrues during that year, even though there may be no corresponding cash receipts to the Company. While OID and certain other items of non-cash income, to the extent they exceed 5% of the WREIT's taxable income (determined without regard to the dividends paid deduction and net capital gain) are excluded from the 95% distribution requirement, the inclusion of such amounts in WREIT's taxable income could result in a tax liability of WREIT without a corresponding receipt of cash. OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. In order for the Company to maintain its qualification as a REIT, not more than 50% in value of its outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). For the purpose of preserving the Company's REIT qualification, the Charter generally prohibits direct or indirect ownership of more than 9.8% (or, with respect to WFSG, 20%) of the number of outstanding shares of Common Stock or any series of Preferred Stock (the "Ownership Limitation"). The Ownership Limitation could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interests. See "Description of Capital Stock--Restrictions on Transfer" and "Federal Income Tax Consequences-- Requirements for Qualification." PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL. The Charter authorizes the Board of Directors to issue up to 25,000,000 shares of preferred stock and to establish the preferences and rights of any shares of preferred stock issued. Although the Company has no current intention to issue any series of preferred stock in the foreseeable future, the issuance of any series of preferred stock could have the effect of delaying or preventing a change in control of the Company even if a majority of the Company's Common Stockholders believed such change of control was in their best interest. See "Description of Capital Stock--Preferred Stock." MARYLAND ANTI-TAKEOVER STATUTES MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. As a Maryland corporation, WREIT is subject to various provisions of Maryland law, imposing certain restrictions and requiring certain procedures with respect to certain stock purchases and business combinations. See "Certain Provisions of Maryland Law and of WREIT's Charter and Bylaws--Business Combinations." BOARD OF DIRECTORS MAY CHANGE CERTAIN POLICIES AND MANAGEMENT FEES WITHOUT STOCKHOLDER CONSENT. The major policies of the Company, including its investment policy and other policies with respect to acquisitions, financing, growth, operations, debt and distributions, are determined by its Board of Directors. The Board of Directors may amend or revise these and other policies, or approve transactions that deviate from these policies, from time to time without a vote of the stockholders. The effect of any such changes may be positive or negative. The Company cannot change its policy of seeking to maintain its qualification as a REIT 22 without the approval of the holders of two-thirds of the outstanding shares of Common Stock. The Board of Directors may amend the management fees payable to WRSC under the Management Agreement after its initial two-year term without the vote of its stockholders. See "Operating Policies and Objectives--General" and "Certain Provisions of Maryland Law and WREIT's Charter and Bylaws." LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT THE COMPANY. The Company believes that it will not be, and intends to conduct its operations so as not to become, regulated as an investment company under the Investment Company Act. The Investment Company Act exempts entities that, directly or through majority-owned subsidiaries, are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" ("Qualifying Interests"). Under current interpretations by the Staff of the Securities and Exchange Commission (the "Commission"), in order to qualify for this exemption, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. The assets that the Company may acquire therefore may be limited by the provisions of the Investment Company Act. In connection with its acquisition of Mortgage-Backed Securities the Company intends, where available, to obtain foreclosure rights, by obtaining the Special Servicing, with respect to the underlying mortgage loans, although there can be no assurance that it will be able to do so on acceptable terms. As a result of obtaining such rights, the Company believes that the related Mortgage-Backed Securities will constitute Qualifying Interests for the purpose of the Investment Company Act. The Company does not intend, however, to seek an exemptive order, no-action letter or other form of interpretive guidance from the Commission or its Staff on this position. If the Commission or its staff were to take a different position with respect to whether such Mortgage-Backed Securities constitute Qualified Interests, the Company could, among other things, be required either (a) to change the manner in which it conducts its operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on the Company and the market price for the Common Stock. ONE ACTION RULES MAY LIMIT THE COMPANY'S RIGHTS FOLLOWING DEFAULT. Several states have laws that prohibit more than one action to enforce a mortgage obligation, and some courts have construed the term action broadly. In such jurisdictions, if the judicial action is not conducted according to law, the Company may have no other recourse in enforcing a mortgage obligation. See "Certain Legal Aspects of Mortgage Loans and Real Property Investments-- Foreclosure." PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK. The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975 of the Code prohibit certain transactions that involve (i) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts (each a "Plan") and (ii) the assets of a Plan. A "party in interest" or "disqualified person" with respect to a Plan will be subject to (x) an initial 15% excise tax on the amount involved in any prohibited transaction involving the assets of the Plan and (y) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. Consequently, the fiduciary of a Plan contemplating an investment in the Common Stock should consider whether the Company, any other person associated with the issuance of the Common Stock, or any affiliate of the foregoing is or might become a "party in interest" or "disqualified person" with respect to the Plan. In such a case, the acquisition or holding of Common Stock by or on behalf of the Plan could be considered to give rise to a prohibited transaction under ERISA and the Code. See "ERISA Considerations--Employee Benefit Plans, Tax Qualified Retirement Plans, and IRAs." THE COMPANY'S RESPONSIBILITY TO INDEMNIFY THE MANAGER AND OFFICERS AND DIRECTORS OF THE COMPANY MAY RESULT IN LIABILITY FOR THE ACTIONS OF THE MANAGER AND OFFICERS AND DIRECTORS OF THE COMPANY. Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law. See "The Company--Directors and Executive Officers." 23 The Company will indemnify the Manager and its officers and directors from any action or claim brought or asserted by any party by reason of any allegation that the Manager or one or more of its officers or directors is otherwise accountable or liable for the debts or obligations of the Company. In addition, the Manager and its officers and directors will not be liable to the Company, and the Company will indemnify the Manager and its officers and directors against third party claims for acts performed pursuant to the Management Agreement, except for acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. See "Management of Operations--The Management Agreement--Limits of Responsibility." In addition, the Company will indemnify, hold harmless and pay reasonable expenses in advance of final disposition to former directors and officers and certain other parties to the fullest extent permitted by Maryland law. See "The Company." CHANGES IN THE REGULATIONS OF THE MANAGER'S AFFILIATES MAY AFFECT ADVERSELY THE MANAGER'S ABILITY TO CARRY OUT MANAGEMENT FUNCTIONS. WRSC is a wholly- owned subsidiary of WFSG. A subsidiary of WFSG is a savings bank which is subject to extensive government supervision and regulation (including certain cease-and-desist orders), intended primarily for the protection of depositors. Any changes to such government regulation and supervision such as additional capital requirements or changes requiring WFSG to devote more time and personnel to the operation of the savings bank may increase the costs to such subsidiaries and have an adverse effect on WFSG, which in turn may affect WRSC's ability to act as Manager. In addition, each of WFSG, WCC and their respective subsidiaries are subject to changes in federal and state laws, including changes in tax laws that could materially affect the real estate industry, as well as changes in regulations, governmental policies and accounting principles. Such changes may increase WFSG's, WCC's and their respective subsidiaries costs of doing business and assist their competitors. Any such added burdens may adversely affect WRSC's ability to carry out its management functions or WCC to provide mortgage loan servicing and Special Servicing for the Company or may have an effect on the ability of WRSC and its affiliates to enter into other arrangements with the Company. OTHER RISKS UNCERTAINTY AS TO THE COMPANY'S ABILITY TO SUCCESSFULLY IMPLEMENT ITS OPERATING POLICIES AND STRATEGIES RESULTING FROM ITS LACK OF OPERATING HISTORY. The Company has no operating history, and its operating policies and strategies are untried. The Company will be dependent upon the experience and expertise of the Management of WRSC in administering its day-to-day operations. Certain officers, directors and employees of the Management of and WRSC and its affiliates have experience in managing real estate assets and Mortgage-Backed Securities, including Mortgage-Backed Securities. However, such officers, directors and employees have never managed a REIT. There can be no assurance that WRSC will be able to implement successfully the strategies that the Company intends to pursue. THE COMPANY'S SUCCESS MAY DEPEND ON THE SERVICES OF THE MANAGER. The Company will be managed by WRSC, subject to the supervision of the Board of Directors. Thus, the Company will depend on the services of WRSC and its officers and employees for the success of the Company. The Company will have no employees while the Management Agreement with WRSC is in effect. Moreover, WRSC's personnel are employees of WFSG, and, accordingly, the Company's success depends in part on the continuing ability of WFSG to hire and retain knowledgeable personnel. WFSG has undergone rapid and significant growth that has imposed a significant strain on its management resources and there can be no assurance that the Company will be able to attract and retain the necessary personnel to manage its operations effectively, in which event its business, operating results and financial condition could be materially and adversely affected. The Company is also subject to the risk that WRSC will terminate the Management Agreement and that no suitable replacement can be found to manage the Company. Furthermore, pursuant to the terms of the Management Agreement, in the event that the Management Agreement is terminated or not extended by the Company without cause, WRSC shall be entitled to receive a termination fee. The requirement to pay such a fee may effect the Company's decision to terminate the Management Agreement in order to avoid paying the termination fee. Likewise, if a decision is made to terminate WRSC, the amount of cash which the Company would pay WRSC may impact the financial condition of the Company, including, but not limited to, by delaying asset acquisitions or failing to make distributions to stockholders required to maintain REIT status. See "--Legal and Tax Risks--Adverse 24 Consequences of Failure to Comply with REIT Requirements May Include WREIT Being Subject to Taxation as a Regular Corporation or 100% Tax on Certain Gains." EXPERIENCE OF THE MANAGER IN MANAGING A REIT. The Company is dependent for the selection, structuring and monitoring of its assets and associated borrowings on the diligence and skill of its officers and directors as well as the Manager and WFSG, all of whom have no experience in managing a REIT. See "Management of Operations" and "The Company" for further descriptions of the business experience of key management personnel. THE FAILURE TO DEVELOP A MARKET FOR COMMON STOCK MAY RESULT IN A DECREASE IN ITS MARKET PRICE. Prior to this offering, there has not been a public market for the shares of Common Stock offered hereby. The initial public offering price will be determined by the Company and representatives of the Underwriters. There can be no assurance that the price at which the shares of Common Stock will sell in the public market after the offering will not be lower than the price at which they are sold by the Underwriter. The Common Stock has been approved for quotation on the Nasdaq National Market. Quotation on the Nasdaq National Market does not ensure, however, that an active market will develop for the Company's Common Stock. POSSIBLE CHANGES IN PRICE OF COMMON STOCK MAY RESULT DUE TO CHANGES IN YIELDS. The Company's earnings will be derived primarily from the expected positive spread between the yield on the Company's real estate assets and the costs to the Company of its borrowings. This expected positive spread will not necessarily be larger in high interest rate environments than in low interest rate environments. In periods of high interest rates, however, the net income of the Company, and therefore the dividend yield on the Common Stock, may be less attractive compared to alternative investments of equal or lower risk, which could impact adversely the price of the Common Stock. FUTURE OFFERINGS OF CAPITAL STOCK MAY RESULT IN DILUTION OF THE BOOK VALUE OR EARNINGS PER SHARE OF THE OUTSTANDING COMMON STOCK. The Company may increase its capital resources in the future by making additional offerings of its Common Stock, securities convertible into its Common Stock or preferred stock. The actual or perceived effect of such offerings may be the dilution of the book value or earnings per share of the Common Stock outstanding, which may result in the reduction of the market price of the Common Stock. POSSIBLE ADVERSE EFFECTS ON SHARE PRICE MAY RESULT ARISING FROM SHARES ELIGIBLE FOR FUTURE SALE. No prediction can be made as to the effect, if any, of future sales of Common Stock, or the availability of shares for future sales, on the market price of the Common Stock. Sales of substantial amounts of Common Stock (including Common Stock issued upon the exercise of options or the redemption of Units), or the perception that such sales could occur, may adversely affect prevailing market prices for the Common Stock. Small Cap will purchase approximately 1,875 Units at the Closing. After Units have been held for at least one year, holders thereof may cause the Operating Partnership to redeem such Units for cash, or at the option of the Company, as the general partner of the Operating Partnership, shares of Common Stock on a one-for-one basis. At the Closing, WFSG and its affiliates will sell all of the Initial Investments for $133.6 million of the net proceeds of the Offering and will purchase 990,000 shares of Common Stock at the initial offering price net of any underwriting discounts or commissions. WRSC will receive an option to purchase 985,000 shares (1,135,000 shares if the Underwriters exercise their over-allotment option in full). Pursuant to the Underwriting Agreement, WFSG has agreed not to offer, sell, contract to sell, or otherwise dispose of any shares without the prior written consent of the Underwriters for a period of two years from the date of the Prospectus so long as WRSC continues to serve as the Manager. The Company and Messrs. Wiederhorn and Mendelsohn have agreed not to offer, sell, contract to sell, or otherwise dispose of any Common Stock 180 days from the date of the Prospectus (other than pursuant to the Option Plan), without the prior written consent of the Underwriters, subject to certain limited exceptions. The Underwriters, at any time and without notice, may release all or any portion of the Common Stock subject to the foregoing lock-up 25 agreements. Following the expiration of the foregoing restrictions, any Common Stock issued to a limited partner in the Operating Partnership upon redemption of its Units may be sold in the public market pursuant to registration statements which the Company will be obligated to file pursuant to the exercise of registration rights that have been granted by the Company or available exemptions from registration. See "Common Stock Available for Future Sale" and "Underwriting." MARKET INTEREST RATES COULD ADVERSELY IMPACT THE MARKET PRICE OF THE COMMON SHARES. One of the factors that will influence the market prices of the Common Stock will be the annual yield on the price paid for Common Stock from distributions by the Company. An increase in market interest rates may lead prospective purchasers of the Common Stock to demand a higher annual yield from future distributions. Such an increase in the required yield from distributions may adversely affect the market price of the Common Shares. In addition, the market value of the Common Stock could be affected substantially by other general market conditions. Numerous other factors, such as government regulatory action and modification of tax laws, could have a significant effect on the future market price of the Common Stock. 26 OPERATING POLICIES AND OBJECTIVES GENERAL. The Company intends to invest in (i) U.S. Commercial Investments; (ii) Mortgage-Backed Securities; and (iii) International Investments. There can be no assurances that the Company will be able to acquire such assets, that the terms or results of such acquisitions will be beneficial to the Company, or that the Company will achieve its objectives. See "Risk Factors." Although the Company expects that its primary emphasis will be on the acquisition of assets described above, future acquisitions may include Other Real Estate Related Assets. Subject to the REIT qualification rules, the Company also may invest in assets, including foreign entities, which are necessary in order to acquire International Investments or to facilitate the Company's acquisition of its Primary Investments or Other Real Estate Related Assets. The Company, through WRSC and WFSG, will rely solely on the advice and counsel of third parties (i.e., accounting and law firms) for compliance of ongoing operations and future acquisition of assets with applicable REIT laws and regulations until such time as employees are hired to complete such tasks on behalf of the Company. Nonetheless, the hiring of these independent third parties does not relieve the officers and directors of the Company of their fiduciary duties to the Company. At Closing, the Company will acquire approximately $139.2 million of Initial Investments. The Initial Investments consist of approximately $40.8 million of U.S. Commercial Investments, $95.0 million of Mortgage-Backed Securities (including approximately $30.8 million of Retained Securities) and $3.4 million for International Investments. The Company intends to hold, whenever possible, the Initial Investments and any future investments for a period of time sufficient to avoid owning property characterized as property held "primarily for sale to customers in the ordinary course of business," gain from which would be treated as income from a prohibited transaction that is subject to a 100% penalty under the Code. See "Risk Factors--Adverse Consequences of Failure to Maintain REIT Status May Include WREIT Being Subject to Taxation as a Regular Corporation." The Guidelines establish certain qualitative parameters for the operations of the Company. Such parameters include avoiding geographic concentration of assets, seeking an appropriate portfolio composition for the Company's assets from a tax perspective and complying with tax and legal requirements for REIT qualification. Such Guidelines are only meant to provide general guidance and not provide quantitative requirements or limitations (other than with respect to the REIT requirements). The Guidelines are to assist and instruct WRSC and to establish restrictions applicable to transactions with affiliates of WFSG or with unrelated third parties. A majority of the Independent Directors will be asked to approve in advance any purchase of assets from WFSG or its affiliates or any other significant transaction not contemplated under the Management Agreement or the Servicing Agreements, relying, however, primarily on information provided by WRSC. The Independent Directors will review the Company's transactions with unrelated third parties on a quarterly basis to measure compliance with the Guidelines. The Company has no predetermined limitations or targets for concentration of property type or geographic location. Instead, the Company plans to make acquisition decisions through asset and collateral analysis, evaluating investments on a case-by-case basis. To the extent that the Company's assets become concentrated in a few regions or countries, the return on an investment in the Common Stock will become more dependent on the economy of such regions or countries. In making investments in Primary Investments and Other Real Estate Related Assets, the Company, through WRSC, will evaluate each potential investment to determine if such investment meets the Company's requirements with respect to anticipated rate of return based on the amount of risk associated with such investment. For each type of Primary Investment or Other Real Estate Related Asset, the Company, through WRSC, will conduct a due diligence review of such investment to assist in determining the anticipated return on such investment, potential risks associated therewith and the appropriate purchase price. For a more detailed description of the type of due diligence review conducted with respect to each type of investment, see "--U.S. Commercial Investments," "-- Mortgage-Backed Securities" and "--International Investments" below. 27 To create yields commensurate with its investment objectives, the Company intends to use mortgage loans and repurchase agreements, issue mortgage-backed securities or make other borrowing arrangements, in each case pledging its assets as collateral security for its repayment obligations. The Company intends to use the proceeds from securitizations and borrowings to invest in additional real estate assets and, in turn, to borrow against those newly acquired assets. The Company's strategy is to repeat this process to the extent opportunities to use leverage are available and WRSC determines and advises (and the Independent Directors agree) that using leverage is prudent and consistent with maintaining an acceptable level of risk until the Company has significantly leveraged its portfolio of assets. There can be no assurances that the Company will be able to acquire appropriate assets other than the Initial Investments, that the terms or results of the Company's acquisitions will be beneficial to it, or that the Company will achieve its objectives. See "Risk Factors." The Company may change its policies in connection with any of the foregoing without the approval of the stockholders, including but not limited to, the extent to which the Company may leverage its investments. THE EXPERIENCE OF WFSG AND AFFILIATES. WFSG is primarily engaged in the acquisition, servicing and resolution of pools of performing, sub-performing and non-performing residential and commercial mortgage loans, as well as foreclosed real estate in the United States and foreign countries, currently France and England. WFSG also acquires mortgage-backed securities, originates residential mortgage and manufactured housing loans through correspondents, and services loans for third parties. At December 31, 1997, WFSG and its subsidiaries had total assets of approximately $1.6 billion, of which approximately $928.0 million consisted of loans and $169.6 million consisted of foreclosed real estate and $356.4 million consisted of mortgage-backed securities. With respect to the Company's U.S. Commercial Investments, the Company currently expects to invest primarily in loans and real properties with a principal balance at origination and/or appraised value of $5 million or less because management believes that the market for these loans and properties is less competitive and potentially more profitable than the market for larger balance commercial loans and properties. The Company generally will evaluate and purchase smaller pools of loans (those with an aggregate unpaid principal balance of less than $20 million). It has been WFSG's experience that some investors are unwilling to incur the time and cost associated with reviewing smaller balance properties and loan pools for the smaller returns on a total dollar basis (though not in percentage terms) associated therewith, and therefore there may be less competitive demand for smaller balance properties and loan pools. Investing in real estate located in foreign countries creates risks associated with the uncertainty of foreign laws and markets and risks related to currency conversion, especially in certain geographic areas. See "Risk Factors--Investment Activity Risks--International Investments Are Subject to Currency Conversion Risks and Differences in Foreign Laws and Markets." The Company may be subject to foreign income tax with respect to its investments in foreign real estate. However, any foreign tax credit that otherwise would be available to the Company for U.S. federal income tax purposes will not flow through to the Company's stockholders. U.S. COMMERCIAL INVESTMENTS. The Company also expects to invest in U.S. Commercial Properties and Distressed U.S. Commercial Loans. U.S. Commercial Properties. The Company intends to invest in Commercial Properties located in the United States, including Commercial Properties acquired by a mortgage lender at foreclosure, or by receipt of a deed in lieu of foreclosure, and other distressed commercial and multi-family real properties. The Company expects to acquire U.S. Commercial Properties solely for its own portfolio. From time to time, however, the Company and a co-investor (which may be WFSG or an affiliate thereof) may submit a joint bid to acquire a pool of U.S. Commercial Properties in order to enhance the prospects of submitting a successful bid. If successful, the Company and the co-investor generally would split up the acquired assets in an agreed-upon manner, although in certain instances the Company and the co-investor may continue to have a joint interest in the acquired assets. 28 The Company's policy will be to conduct an investigation and evaluation of the properties in a portfolio of U.S. Commercial Properties before purchasing such a portfolio. Prior to purchasing assets, WRSC will generally identify and contact real estate brokers and/or appraisers in the market area of the subject properties to obtain rent and sale comparables and broker price opinions ("BPOs") for each material asset in a portfolio. This information is used to supplement due diligence that is performed by WRSC's employees. WRSC's due diligence, on behalf of the Company, will generally include the review of market studies for each market within a portfolio. The studies typically will include area economic data, employment trends, absorption rates and market rental rates. WRSC will supplement this information with data from WFSG's proprietary mortgage loan database, which contains, among other things, listings of property values and loan loss experience in local markets for similar assets. Due diligence will also include site inspections by WRSC's employees or agents of most properties in a portfolio and a review of available asset files and documentation. To the extent possible those will include examinations of available legal documents, litigation files, correspondence, title reports, operating statements, appraisals and engineering and environmental reports. The information compiled is then analyzed to determine a valuation for each property. The property valuation process utilizes a variety of tools which may include various proprietary financial models that have been developed by WFSG and will be available to the Company through the Management Agreement. Sources of information examined to determine value may include: (a) current and historical operating statements; (b) existing appraisals; (c) BPOs; (d) rent and sales comparables; (e) industry statistics and reports regarding operating expenses such as those compiled by the Institute of Real Estate Management; (f) leases; (g) information from WFSG's proprietary mortgage loan database; and (h) deferred maintenance observed during site inspections or described in structural reports, and correspondence found in the loan files. WRSC develops projections of net operating income and cash flows taking into account lease rollovers, tenant improvement costs and leasing commissions. WRSC will compare its estimates of revenue and expenses to historical operating statements and estimates provided in BPOs, appraisals and general industry and regional statistics. Market capitalization rates and discount rates are then applied to the cash flow projections to estimate values. These values are then compared to available appraisals, BPOs and market sale comparables to determine recommended bid prices for each asset. The bids take into account projected holding periods, capital costs and projected profit expectations. Recommended bid prices are then reviewed with senior management and a decision whether to bid is made. The amount offered by the Company generally will be the price that WRSC estimates is sufficient to generate an acceptable risk-adjusted return on the Company's investment. After the Company acquires U.S. Commercial Properties, including Foreclosed Properties, the Company's goal will be to improve management of the property so as to increase the cash flow from the property. The Company will value its holdings of Foreclosed Property at the lower of cost or fair value less estimated costs of sale. The Company will periodically re-evaluate Foreclosed Property to determine that it is being carried at the lower of cost or fair value less estimated costs of sale. If cash flows can be increased and the property stabilized, the Company may begin to seek an opportunity to sell the property, subject to the REIT qualification rules. Although the period during which the Company will hold U.S. Commercial Properties will vary considerably from asset to asset, the Company believes that most such properties will be held in its portfolio more than four years and generally fewer than ten years. If the Company is offered the opportunity to purchase U.S. Commercial Properties that are likely to be held for fewer than four years, the Company intends to establish a corporation to make the purchase in which the Operating Partnership will hold a 95% non-voting ownership interest. Such a corporation will not be eligible for taxation as a qualified REIT subsidiary, and any profits that it earns on its activities will be subject to federal corporate income tax before they are distributable to the Company. The ability to use a taxable corporation in this manner may be limited or prohibited. See "Federal Income Tax Consequences--Requirements for Qualification--Legislative Proposal." If a U.S. Commercial Property is purchased with the intent to hold it for more than four years, but an opportunity arises to sell the property sooner, the Company will consider certain strategies, such as a like-kind exchange, to reduce any negative tax consequences relating to the sale. 29 Although the Company believes that a permanent market for the acquisition of U.S. Commercial Properties has emerged in recent years within the private sector, there can be no assurance that the Company will be able to acquire the desired amount and type of U.S. Commercial Properties in future periods or that there will not be significant inter-period variations in the amount of such acquisitions. See "Risk Factors--Investment Activity Risks--Limited Available Investments May Inhibit Company's Objectives." Moreover, there can be no assurance that the Company will be effective in making any asset acquired more valuable than the price paid to acquire it. See "Risk Factors-- Investment Activity Risks." Distressed U.S. Commercial Loans. The Company plans to purchase Distressed U.S. Commercial Loans. Since the late 1980s, a significant market for the purchase of pools of mortgage loans has developed in the United States. Today's market is comprised primarily of pools of loans sold by banks, savings institutions, finance companies, leasing companies, mortgage companies and insurance companies. Management believes that private financial institutions, in order to reduce their servicing costs and more effectively employ their capital, are increasingly outsourcing the resolution of loans, particularly those that are sub-performing and non-performing, to specialized companies with the experience and infrastructure to most efficiently manage those loans. The Company expects to acquire Distressed U.S. Commercial Loans from a wide variety of sources. The Company will obtain information on available pools of loans from several sources, including referrals from sellers with whom WFSG and its affiliates have transacted business in the past. Pools of loans generally are acquired in auctions through competitive bids or in negotiated transactions. Generally, the Company will evaluate and purchase smaller pools of loans (those with an aggregate unpaid principal balance of less than $20.0 million) in negotiated transactions and auctions for which the Company believes there is currently less competitive demand. In addition, the Company generally targets Distressed Commercial Loans. Generally, these Commercial Loans had original principal balances of less than $5 million. Management believes that there is less competition for, and higher margins on, smaller balance Distressed Commercial Loans. Prior to making an offer to purchase a pool of loans, WRSC, on behalf of the Company, will conduct an investigation and evaluation of the individual loans comprising the pool of loans and/or the separate parcels of real estate in the pool. This examination typically consists of an analysis of the information provided by the seller (generally, the credit and collateral files for the loans), other relevant material that may be available (including tax records) and the underlying collateral. WRSC will compare this data with WFSG's proprietary mortgage loan database, which contains among other things, listings of property values and loan loss experience in local markets for similar assets, obtain value opinions from third parties and, in some cases, conduct site inspections. In addition, for all loans, WRSC will generally obtain a BPO on each parcel of real property. WRSC will also review information on the local economy and real estate markets including the amount of time generally required to complete foreclosure on real property in the jurisdiction in which the property is located. In connection with its review of a pool of loans being considered for acquisition, WRSC will review each loan or property in such pool of loans and design a preliminary servicing plan for each loan and property that is intended to maximize the cash flow from such loan or property. The Company's purchase of these U.S. Distressed Commercial Loans will focus on loans which do not meet the lending standards for the traditional commercial loan industry. Generally, the Company will focus its commercial mortgage purchasing and lending activities on loans which do not conform to general lending standards for "conduit" issuers (i.e., entities which acquire commercial loans with a view towards securitization or resale rather than long-term portfolio investment) in connection with commercial loan originations. The loans which the Company will target generally fall into two categories: (i) loans that will generally be well secured (e.g., loans which have less than a 80% loan-to-value ratio) but the borrower or the property, or both fall outside of such general lending standards; or (ii) loans that would result in the Company receiving a subordinate interest in the property with a contingent equity interest. The Company intends to analyze the property underlying a loan to calculate the loan's current and potential value, as well as other factors, including the borrower's ability to pay the loan, and the general economic and commercial real estate environment of the geographic location and region in which the property and borrower 30 are located. The Company through WRSC will also analyze current and potential cash flow from the property underlying the loan as well as the borrower, if applicable. The Company intends to value the property underlying the loan as owned by the borrower as well as if it were owned in case of foreclosure by the Company. The Company's policy will be to conduct an investigation and evaluation of each loan, before purchasing any loan. Prior to the Company purchasing a loan, WRSC will generally identify and contact real estate brokers and/or appraisers in the market area of the subject properties to obtain rent and sale comparables and BPOs for the property underlying the loan. This information will be used to supplement due diligence which will be performed by WRSC. WRSC's due diligence, on behalf of the Company, will generally include the review of market studies to include area economic data, employment trends, absorption rates and market rental rates. WRSC generally will supplement this information with data from WFSG's proprietary mortgage loan database, which contains, among other things, listings of property values and loan loss experience in local markets for similar assets. Due diligence will generally also include site inspections by WRSC of the properties underlying the loans and a review of available asset files and documentation. To the extent possible the inspections and reviews will include examinations of available legal documents, litigation files, correspondence, title reports, operating statements, appraisals and engineering and environmental reports. The information compiled will then be analyzed to determine a valuation for each loan. The loan valuation process will utilize a variety of tools which may include various proprietary financial models that have been developed by WFSG and will be available to the Company through the Management Agreement. Sources of information examined to determine value may include: (a) current and historical operating statements; (b) existing appraisals; (c) BPOs; (d) rent and sales comparables; (e) industry statistics and reports regarding operating expenses such as those compiled by the Institute of Real Estate Management; (f) leases; (g) information from WFSG's proprietary mortgage loan database; and (h) deferred maintenance observed during site inspections or described in structural reports, and correspondence found in loan files. WRSC is expected to develop projections of net operating income and cash flows taking into account lease rollovers, tenant improvement costs and leasing commissions. WRSC will generally compare its estimates of revenue and expenses to historical operating statements and estimates provided in BPOs, appraisals and general industry and regional statistics. Market capitalization rates and discount rates will then be applied to the cash flow projections to estimate values. These values will then be compared to available appraisals, BPOs and market sale comparables to determine recommended bid prices for each asset. The bids will take into account projected holding periods, capital costs and projected profit expectations. Recommended bid prices will then be reviewed with senior management and a decision whether to bid is made. The amount offered by the Company generally will be the price that WRSC estimates is sufficient to generate an acceptable risk-adjusted return on the Company's investment. WRSC's acquisition personnel, who will conduct the due diligence review of each pool of loans being considered for purchase, will recommend to management the price to be offered for the pool by using a proprietary modeling system that focuses on, among other things, the anticipated future cash flow from each component loan or property. In evaluating anticipated cash flow, the Company will make a number of assumptions concerning the overall pool of loans based on its review of each loan or property, including assumptions as to the percentage of loans to be foreclosed, the timing of the receipt of payments and the expenses associated with servicing the loans. If an offer is accepted by the seller, the Company and the seller will enter into a loan sale agreement, which generally contains representations and warranties by the seller concerning the loans being sold and an agreement by the seller to repurchase any loan found to be in breach of those representations and warranties. MORTGAGE-BACKED SECURITIES. The Company intends to acquire Mortgage-Backed Securities backed by one- to four-family residential mortgage loans ("Residential Mortgage-Backed Securities"), and, to a lesser 31 extent, commercial or multi-family mortgage loans ("Commercial Mortgage-Backed Securities"). Mortgage-Backed Securities are generally expected to be secured by residential mortgage loans which do not qualify for sale to FHLMC or FNMA because their principal balance exceeds agency limits or the mortgage loans do not otherwise meet FHLMC's or FNMA's underwriting criteria. Mortgage-Backed Securities typically are divided into two or more classes, sometimes called "tranches." The senior classes are higher "rated" securities, which would be rated from low investment grade "BBB" to higher investment grade "AAA." The junior, subordinated classes typically would include one or more lower rated, non-investment grade classes, which would be rated "BB" or lower, or unrated. It has been WFSG's experience that a number of fixed income investors focus on Mortgage-Backed Securities with large principal balances and do not bid on Mortgage-Backed Securities with small principal balances (typically $5 million or less). Consequently, there may be less competitive demand for Mortgage- Backed Securities with such small principal balances which may, in turn, make such Mortgage-Backed Securities illiquid and provide the opportunity to the Company to acquire such securities at more favorable prices. The Company may also seek to acquire Mortgage-Backed Securities which (i) management believes are likely to experience a ratings upgrade as a result of payment history, prepayment or default experience or otherwise (and the Company may initiate a review of such rating by requesting that one or more rating agencies re-rate the related Mortgage-Backed Securities) and (ii) are secured by pools of mortgage loans originated under guidelines with which management is familiar due to previous acquisitions of pools of loans originated thereunder. For accounting purposes, the Company is expected to assign a risk-adjusted yield to Mortgage-Backed Securities it acquires based on assumptions as to losses and prepayments on the underlying mortgage loans. Cash received in respect of Mortgage-Backed Securities will be applied to interest at the relevant risk-adjusted yield and the remainder will be applied to defease principal. The Company generally will seek to assign conservative risk- adjusted yields. To the extent the Company determines that, in light of actual default and prepayment experience, anticipated future cash flow in respect of a Mortgage-Backed Security will result in a lower risk-adjusted yield, the Company will assign a new, lower risk-adjusted yield. Even if actual default and prepayment experience is more favorable than the assumed experience, the Company generally will not increase risk-adjusted yields, but will instead defease more principal. Furthermore, if the cash received is less than the accrued yield on the Mortgage-Backed Securities, but the Company still anticipates a return equal to or in excess of its risk adjusted yield for such Mortgage-Backed Securities, then the amount by which the cash is less than the accrued yield will be added to its basis in the Mortgage-Backed Securities. Mortgage-Backed Securities generally are issued either as pass-through certificates or notes ("Pass-Through Certificates") or collateralized mortgage obligations ("CMOs" or "CMO Bonds"). Pass-Through Certificates generally evidence undivided interests in trusts or debt of the trust, the primary assets of which are generally mortgage loans. CMO Bonds are debt obligations of special purpose corporations, owner trusts or other special purpose entities secured by mortgage loans or Mortgage-Backed Securities. Pass-Through Certificates and CMO Bonds may be issued or sponsored by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and other entities. Private Mortgage-Backed Securities are not guaranteed by an entity having the credit status of a governmental agency or instrumentality and generally are structured with one or more of the types of credit enhancement described below. In addition, Mortgage-Backed Securities may be illiquid. See "Risk Factors--Investment Activity Risks--Credit and Prepayment Risks from Ownership of Mortgage-Backed Securities in Pools of Residential and Commercial Mortgage Loans." In most mortgage loan securitizations, a series of Mortgage-Backed Securities is issued in multiple classes in order to obtain investment-grade ratings for the senior classes and thus increase their marketability. Each class of Mortgage-Backed Securities may be issued with a specific fixed or variable coupon rate and has a stated maturity or final scheduled distribution date. Principal prepayments on the mortgage loans comprising the mortgage collateral may cause the Mortgage-Backed Securities to be retired substantially earlier than their stated maturities or final scheduled distribution dates, although, with respect to commercial mortgage loans, there generally are penalties for or limitations on the ability of the borrower to prepay the loan. Interest is paid or accrued on Mortgage-Backed Securities on a periodic basis, typically monthly. 32 The credit quality of Mortgage-Backed Securities depends on the credit quality of the underlying mortgage collateral. Among the factors determining the credit quality of the underlying mortgage loans will be the ratio of the mortgage loan balances to the value of the properties securing the mortgage loans, the purpose of the mortgage loans (e.g., refinancing or new purchase), the amount of the mortgage loans, their terms and the geographic diversification of the location of the properties, the credit quality of the borrower, and, in the case of commercial mortgage loans, the creditworthiness of tenants. Moreover, the principal of and interest on the underlying mortgage loans may be allocated among the several classes of mortgage-backed securities in many ways, and the credit rating of a particular class results primarily from the order and timing of the receipt of cash flow generated from the underlying mortgage loans. Mortgage-Backed Securities carry significant credit risks. Typically, in a "senior-subordinated" structure, the Mortgage-Backed Securities provide credit protection to the senior classes by absorbing losses from loan defaults or foreclosures before such losses are allocated to senior classes. Moreover, typically, as long as the more senior tranches of securities are outstanding, all prepayments on the mortgage loans generally are paid to those senior tranches, until certain overcollateralization targets are met in the case of Residential Mortgage-Backed Securities, or until the end of a lock-out period, which typically is five years or more in the case of Commercial Mortgage-Backed Securities. In some instances, particularly with respect to Mortgage-Backed Securities in securitizations, the holders of Mortgage-Backed Securities are not entitled to receive greater than pro-rata scheduled payments of principal until the more senior tranches are paid in full or in certain other limited circumstances. Because of this structuring of the cash flows from the underlying mortgage loans, Mortgage-Backed Securities in a typical securitization are subject to a substantially greater risk of non-payment than are those of more senior tranches. Accordingly, the Mortgage- Backed Securities are assigned lower credit ratings, or no ratings at all. Neither the Mortgage-Backed Securities nor the underlying mortgage loans are guaranteed by agencies or instrumentalities of the U.S. government or by other governmental entities and accordingly are subject, among other things, to credit risks. See "Risk Factors--Investment Activity Risks--Credit and Prepayment Risk from Ownership of Mortgage-Backed Securities in Pools of Commercial and Residential Mortgage Loans." As a result of the typical "senior-subordinated" structure, the Mortgage- Backed Securities will be extremely sensitive to losses on the underlying mortgage loans. For example, if the Company owns a $10 million Mortgage-Backed Security backed by a $100 million pool of underlying mortgage loans, where all other Mortgage-Backed Securities issued on such pool are senior, a 7% loss on the underlying mortgage loans would result in a 70% loss on the Mortgage- Backed Security. Accordingly, the holder of the Mortgage-Backed Security is particularly interested in minimizing the loss frequency (the percentage of the loan balances that default over the life of the mortgage collateral) and the loss severity (the amount of loss on defaulted mortgage loans, i.e., the principal amount of the mortgage loan unrecovered after applying any recovery to the expenses of foreclosure and accrued interest) on the underlying mortgage loans. The loss frequency on a pool of mortgage loans will depend upon a number of factors, many of which will be beyond the control of the Company or the applicable servicer. Among other things, the default frequency will reflect broad conditions in the economy generally and real estate particularly, economic conditions in the local area in which the underlying mortgaged property is located, the loan-to-value ratio of the mortgage loan, the purpose of the loan, and the debt service coverage ratio (with respect to commercial mortgage loans). The loss severity will depend upon many of the same factors described above, and will also be influenced by the servicer's ability to foreclose on the defaulted mortgage loan and sell the underlying mortgaged property. For a discussion of certain legal issues affecting the servicer's ability to foreclose on a mortgage loan, and the legal impediments to the sale of the underlying mortgaged property. See "Certain Legal Aspects of Mortgage Loans and Real Property Investments" and "Federal Income Tax Consequences-- Requirements for Qualification--Income Tests." These legal issues may extend the time of foreclosure proceedings or may require the expenditure of additional sums to sell the underlying mortgaged property, in either case increasing the amount of loss with respect to the loan. Losses on mortgage loans are measured two ways, loss frequency and loss severity. Loss frequency is estimated by using industry standard predictive models, supplemented by WFSG's historical data and experience. 33 Loss severity is estimated by projecting the net resolution proceeds expected to be derived from the loans based upon WFSG's proprietary in-house computer models which are then subject to stress testing. This net resolution analysis reviews all potential forms of resolution, including full payoff, discounted payoff, reinstatement, foreclosure and sale, deed-in-lieu and sale, and takes into account, among other things, real estate value (including BPOs), carrying costs (including, but not limited to, property taxes, insurance and maintenance) and average months to foreclose, and liquidate, if applicable, in the particular state. Because the rating agencies tend to be conservative in their rating of Mortgage-Backed Securities and many investors purchase Mortgage-Backed Securities primarily on the basis of ratings, the downgrade of the rating on a Mortgage-Backed Security may result in a decline in the price of the security which is disproportionate to the actual decline in value and result in a potential buying opportunity for a sophisticated investor, like WRSC, capable of evaluating the underlying mortgage collateral. With respect to Commercial Mortgage-Backed Securities, WRSC determines on a loan-by-loan basis which loans will undergo a full-scope review and which loans will undergo a more streamlined "desktop analysis." Although the choice is a subjective one, considerations that influence the choice for scope of review often include loan size, debt service coverage ratio, loan to value ratio, loan maturity, lease rollover, property type and geographic location. A full-scope review may include, among other factors, a property site inspection, tenant-by-tenant rent roll analysis, review of historical income and expenses for each property securing the loan, a review of major leases for each property (if available); recent appraisals (if available), engineering and environmental reports (if available), and a BPO review. For those loans that are selected for the more streamlined desktop analysis, WRSC's evaluation may include a review of the property operating statements, summary loan level data, third party reports, and a BPO review, each as available. If WRSC's review of such information does not reveal any unusual or unexpected characteristics or factors, no further due diligence will be performed. After completing the review of the documentation and the property inspection, the information compiled will be analyzed to determine collateral value for each property securing the loans. Based on these factors, WRSC will determine a resolution value for each loan for purposes of projecting future cash flows after adjustments for estimated future losses. Determining a resolution value is a subjective process, requiring, ultimately, a business judgment. In making this determination, WRSC will evaluate some of the following characteristics of the Mortgage-Backed Securities: (i) the type of collateral (residential multi-family mortgage collateral, or office, hotel, industrial or retail mortgage collateral); (ii) the payment status of the underlying mortgage (performing, non-performing or sub-performing); (iii) the actual mortgage prepayment and default history; (iv) the ratio of the unpaid mortgage balance to the current property value; (v) the current income and cash flows generated by commercial real estate as compared to the debt service requirements and (vi) the region of the country or the county in which the collateral is concentrated. However, which of these characteristics (if any) are important and how important each characteristic may be to the evaluation of a particular Mortgage-Backed Securities depends on the individual circumstances. Since there are so many characteristics to consider, each Mortgage-Backed Security must be analyzed individually, taking into consideration both objective data as well as subjective analysis. After completing the foregoing evaluations, WRSC will model the structure of the residential or commercial Mortgage-Backed Security securitization based on the disclosure documents that reveal the payment structure of the Mortgage- Backed Securities and the characteristics of the underlying mortgage collateral. This modeling is done in order to estimate future cash flows to be received by the Mortgage-Backed Security, after adjustments for estimated future losses. Using that information, WRSC will determine the price at which it would effect the purchase of the Subordinated Interest on behalf of the Company. The Company also intends in certain instances to acquire Special Servicing rights with respect to the mortgage loans underlying Mortgage-Backed Securities in which the Company owns a subordinated interest. Such Special Servicing rights will give the Company, among other things, some control over the timing of foreclosures on such mortgage loans and, thus, may enable the Company to reduce losses on such mortgage loans. No assurances can be made, however, that the Company will be able to acquire such Special Servicing rights or that losses on the mortgage loans will not exceed the Company's expectations. Although the Company's 34 strategy is to purchase Mortgage-Backed Securities at a price designed to return the Company's investment and generate a profit thereon, there can be no assurance that such goal will be met, or that the Company's investment in a subordinated interest will be returned in full or at all. See "Risk Factors-- Investment Activity Risks" and "--Economic and Business Risks." Moreover, many of the Mortgage-Backed Securities to be acquired by the Company will not have been registered under the Securities Act, but instead initially were sold in private placements. Because Mortgage-Backed Securities acquired in private placements have not been registered under the Securities Act, they will be subject to certain restrictions on resale and, accordingly, will have more limited marketability and liquidity. Although there are exceptions, most issuers of multi-class Mortgage-Backed Securities elect to be treated, for federal income tax purposes, as REMICs. Residential Mortgage-Backed Securities. The Company intends to acquire Subordinated Interests in Residential Mortgage-Backed Securities backed by "non-conforming" mortgage loans, that is, one- to four-family mortgage loans that do not qualify for sale to FHLMC or FNMA. Typically, non-conforming mortgage loans do not meet agency guarantee criteria because their principal balance exceeds agency limits (e.g., $227,150 is the current single-family mortgage loan limit of both FNMA and FHLMC). Sometimes the mortgage loans or the borrower does not meet other agency credit underwriting standards or other requirements. A typical Residential Mortgage-Backed Securities series allocates the cash flow on the underlying mortgage loans so that the Subordinated Interests shield the more senior classes from losses due to defaults on the underlying residential mortgage loans, resulting in substantially greater credit risk to the Subordinated Interests. In addition to creating credit support for the more senior classes, another general goal in allocating cash flows from the mortgage loans to the various classes of a securitization, particularly a Residential Mortgage-Backed Securities issuance, is to create certain tranches on which the expected cash flows have a higher degree of predictability than the cash flow on the underlying mortgage loans. As a general matter, the more predictable the cash flow is on a particular Residential Mortgage-Backed Securities tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on certain other Residential Mortgage- Backed Securities. As part of the process of creating more predictable cash flows on certain tranches of a non-conforming mortgage loan securitization, one or more tranches generally must be created that absorb most of the changes in the cash flows from the mortgage collateral. The yields on these tranches generally are higher than prevailing market yields on mortgage-backed securities with similar expected average lives. Due to the uncertainty of the cash flows on these tranches, the market prices of, and yields on, these tranches are more volatile. Although subordinated interests in Residential Mortgage-Backed Securities bear substantial credit risk, because of the "shifting interest" structure typically provided, such subordinated interests tend to be less subject to a substantial prepayment risk. A shifting interest structure shifts all prepayments of principal to the more senior, generally investment-grade, Residential Mortgage-Backed Securities classes in order to increase the outstanding percentage of subordination. After this initial period during which prepayments are shifted to the more senior Residential Mortgage-Backed Securities classes, prepayments then are made pro rata or more likely phased in over a five-year period until all classes are receiving their pro rata share. The net effect on the subordinated classes is a degree of call protection because the principal amounts of the subordinated classes are not reduced by prepayments of the mortgage loans, generally for at least five years. The "shifting interest" mechanism creates a subordinated interest in Residential Mortgage-Backed Securities with a longer but more predictable average life. In certain limited circumstances, the Company may, to a lesser extent, acquire subordinated interests in Residential Mortgage-Backed Securities secured by lower credit quality mortgage loans known as "B," "C" and "D" mortgage loans, based on price, availability of Special Servicing, and additional appraisal information. B, C and D mortgage loans are loans made to borrowers who have credit histories of a lower overall quality than 35 "A" borrowers. These credit histories generally result from previous repayment difficulties, brief job histories, previous bankruptcies or other causes. Except with respect to loans originated under programs sponsored by HUD, the loan-to-value ratio for a B, C and D mortgage loan is typically stated to be significantly lower than the loan-to-value of an "A" mortgage loan, and the pass-through coupon of a B, C and D mortgage loan is typically higher than the coupon on an A mortgage loan. As a result of the typically lower loan-to-value ratios and higher yields on B, C and D mortgage loans, the Company believes these Residential Mortgage-Backed Securities may justify accepting the higher credit risk associated with such borrowers. Commercial Mortgage-Backed Securities. Unlike Residential Mortgage-Backed Securities, which typically are backed by thousands of single family mortgage loans, Commercial Mortgage-Backed Securities are backed generally by a more limited number of commercial or multi-family mortgage loans with larger principal balances than those of single family mortgage loans. As a result, a loss on a single mortgage loan underlying an issue of Commercial Mortgage- Backed Securities will have a greater negative effect on the yield of such Commercial-Backed Securities, particularly the subordinated interests in such Commercial Mortgage-Backed Securities. The Company believes that there will be opportunities to invest in subordinated interests in Commercial Mortgage-Backed Securities. Increasingly, owners of commercial mortgage loans are choosing to securitize their portfolios. However, no assurances can be made that appropriate opportunities for investment in Commercial Mortgage-Backed Securities will continue to be available. Other Mortgage-Backed Securities. The Company may invest not only in subordinated classes of Mortgage-Backed Securities but also in other classes of mortgage-backed securities. For example, the Company may invest in IOs, which are entitled to no (or only nominal) payments of principal, but only to payments of interest. The holder of an IO may be entitled to receive a stated rate of interest on a notional principal balance equal to the principal balance of the mortgage collateral. For example, if a pool of mortgages carries an 8.5% interest rate after servicing costs, and the holders of the senior and subordinated non-IO classes are entitled to receive 8.0% interest, the IO class would receive the difference of 0.5%. Alternatively, the holder of an IO may be entitled to a variable rate of interest on a nominal principal balance that adjusts based upon adjustment in the interest rate of the underlying mortgage collateral. To the extent the Company seeks to purchase IOs, it will do so to hedge against maturity extension risk in the event that the Company encounters slower than anticipated prepayments while still achieving an acceptable return on the purchase of such IOs. The Company generally intends to invest in IOs to hedge against maturity extension risk and does not intend to invest in IOs for speculative purposes. Because IOs often pay at a relatively low rate of interest on a large notional principal balance, an accelerated reduction of that principal balance will have an adverse effect on the anticipated yield to maturity of such IO. Accordingly, if the underlying mortgage collateral prepays (including prepayments as a result of default and repurchases by the seller) at a rate faster than anticipated, the weighted average life of the IO will be reduced, and the yield to maturity adversely affected. Conversely, if the underlying mortgage collateral prepays at a rate slower than anticipated, the weighted average life of the IO will be extended, with the consequent positive effect on the anticipated yield to maturity. Due to this structural feature, IOs can be effective as prepayment hedges. It should be noted that IOs generally present a higher risk of loss of the entire investment. The Company may acquire subordinated IOs, known as Sub IOs, which are entitled to no payments of principal; moreover, interest on a Sub IO often is withheld in a reserve fund or spread account and is used to fund required payments of principal and interest on the more senior classes. Once the balance in the reserve fund or spread account reaches a certain level, interest on the Sub IO is paid to the holders of the Sub IO. Sub IOs provide credit support to the more senior classes, and thus bear substantial credit risks. Moreover, because a Sub IO receives only interest payments, its yield is extremely sensitive to changes in the weighted average life of the class, which in turn is dictated by the rate of prepayments (including those resulting from default) on the underlying loans. See "Risk Factors--Investment Activity Risks--Ownership of Mortgage-Backed Securities in Pools of Residential and Commercial Mortgage Loans Will Subject the Company to Special Credit and Prepayment Risks." 36 Residential mortgage loans typically do not have any prepayment penalty, with the result that prepayments tend to increase during periods of falling interest rates, and decrease during periods of rising interest rates. However, prepayments are dependent upon a number of other factors as well (such as employment rates, general economic conditions and the borrower's need for additional financing). Commercial loans often carry prepayment restrictions, or require that the borrower pay a prepayment penalty (which generally is not for the benefit of the holder of the IO). There can be no assurance that the Company's prepayment expectations will be reached. Special Servicing. The Company intends generally to acquire Special Servicing rights with respect to the mortgage loans underlying Mortgage-Backed Securities it purchases when available. Acquiring these rights will give the Company some ability to mitigate losses characteristic of defaulted mortgage loans. The terms of Special Servicing agreements vary considerably, and the Company cannot predict with certainty the precise terms of the Special Servicing agreements into which it will enter. In general, however, the Company will attempt to negotiate Special Servicing agreements that will permit the Company to service, or to direct the servicing of, mortgage loans that are more than 90-days delinquent. At that point, the Company would have the right (and the obligation) to decide whether to begin foreclosure proceedings or to seek alternatives to foreclosure, such as forbearance agreements, partial payment forgiveness, repayment plans, loan modification plans, loan sales and loan assumption plans. Thus, the Company will have within its control, subject to obligations to the related senior classes, some ability to minimize losses on mortgage loans underlying Mortgage-Backed Securities owned by the Company. Because the Operating Partnership generally will be the entity that acquires the Mortgage-Backed Securities, it also will acquire the related Special Servicing rights, if any. The Operating Partnership intends to assign WCC all of its Special Servicing rights and obligations (other than the right to direct foreclosure). Because the acquisition and Special Servicing of troubled real estate is one of WCC's business focuses, WCC has an established network of real estate professionals throughout the United States to assist its asset management activities. WFSG and WCC maintain working relationships with approved engineers, environmental consultants, real estate brokers and local counsel nationwide, and call upon these local advisors for assistance when appropriate. See "Servicing Agreements." The Company will seek to resolve Distressed U.S. Commercial Loans as expeditiously as possible, generally within one to two years. The Company's servicing plan for such loans will consist of foreclosure, compromise, a discounted payoff or, in some cases, reinstatement. Distressed U.S. Commercial Loans may become Foreclosed Property on the Company's balance sheet if the Company obtains title to the underlying properties through foreclosure or otherwise as part of its resolution of those loans. See "Risk Factors-- Investment Activities--Default Risk Associated with Distressed Mortgage Loans." The legal aspects of the mortgage loans that underlie the Mortgage-Backed Securities owned and to be acquired by the Company affect the value of those assets. For a discussion of certain legal aspects of mortgage loans. See "Certain Legal Aspects of Mortgage Loans and Real Property." INTERNATIONAL INVESTMENTS. The Company's International Investments may consist of performing and non-performing Commercial Mortgage Loans and Residential Mortgage Loans or Commercial Properties and Residential Properties located outside the United States, including Foreclosed Properties. The Company's focus on International Investments is based on two primary factors: (i) difficulties in the European economies and (ii) the introduction of U.S.- style lending and secondary financing techniques in foreign economies (i.e., Western Europe and Latin America). In much of Europe, real properties have generally experienced a sharp decline in value, resulting in higher mortgage loan default rates and the need for financial institutions to dispose of distressed mortgage loans and raise new capital. The Company believes it can acquire such distressed loans and enhance their value through WFSG's expertise in loan acquisitions, U.S.-style loan servicing and aggressive work-out approaches. The Company also believes it can finance its acquisitions through local currencies and 37 through U.S.-style financing techniques. The Manager and the Company have no experience in purchasing and servicing loans in foreign countries. In addition, in recent years lenders in the United States have entered the European market with U.S. mortgage lending techniques, including expedited approval and closing procedures, which are more efficient than the techniques traditionally offered by European financial institutions. U.S.-style lending techniques involve the application of standardized and automated lending procedures, including uniform credit and property underwriting criteria. U.S.- style secondary financing techniques involve the development of a secondary market for mortgage loan product through government and private sector programs and securitizations. This has resulted in an increase in mortgage production in Europe and the need for secondary financing sources. The Company intends to exploit these opportunities through wholesale acquisitions and direct origination. In Latin America, U.S. secondary financing sources have recently begun extending credit to local loan originators, thereby increasing loan origination volume. The Company intends to use such secondary financing sources to originate government-guaranteed loans or to buy wholesale in certain Latin American markets. The Company believes that U.S-style loan servicing, as opposed to certain foreign customary procedures, with its automated systems and detailed investor reporting and aggressive work-out approaches, results in enhanced or quicker access to cash flow, thereby increasing the value of the assets. Most purchasers of distressed loans in the United Kingdom and France are U.S.-based and have utilized U.S.-style servicing and investor reporting. With the exception of recently originated loans, the prevailing loan servicing and reporting systems in the United Kingdom and France are less technologically developed and more labor intensive than those in the United States. WFSG's loan servicing operations in the United Kingdom and France utilize WCC's U.S.- based servicing system, which has been adapted for servicing loans in each such country. WFSG has established offices in the United Kingdom and France with a total of approximately 38 full-time employees as of December 31, 1997, including the former chief executive officer of Securum Holdings N.V., a Swedish banking company responsible for the resolution of distressed real estate loans made by Swedish banks throughout Europe. Upon the closing of this Offering, the Company intends to engage the European Servicer to service loans in the United Kingdom. In the future, management of the Company intends to also consider International Investments in the rest of Western Europe. The management of the Company may in the future also consider investments in other geographic regions like Asia, Eastern Europe and Latin America, but currently has no plans to do so. OTHER REAL ESTATE RELATED INVESTMENTS Construction Financing and Loans Subject to Prior Liens. The Company may take advantage of opportunities to provide construction or rehabilitation financing on commercial property, lending generally 85% to 90% of total project costs, and taking a first lien mortgage to secure the debt. The Company also may invest in loans that are subordinate to first lien mortgage loans on commercial real estate. For example, on a commercial property subject to a first lien mortgage loan with a principal balance equal to 70% of the value of the property, the Company could lend the owner of the property (typically a partnership) an additional 15% to 20% of the value of the property. Typically the loan would be secured, either by the property subject to the first lien (giving the Company a second lien position) or by a controlling equity interest in the owner. If the equity interest is pledged, then the Company would be in a position to make decisions with respect to the operation of the property in the event of a default by the owner. These loans generally would provide the Company with the right to receive a stated interest rate on the loan balance plus a percentage of net operating income (where such amounts would not jeopardize WREIT's status as a REIT) or gross revenues from the property, payable to the Company on an ongoing basis, and a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan, or otherwise would allow the Company to charge an interest rate that would provide an attractive risk-adjusted return. The Company may also originate residential or commercial loans in the future. The Company does not currently have a loan origination program or underwriting criteria. 38 Sale Leaseback Transactions. In addition, the Company may participate in sale leaseback transactions, in which the Company would purchase improved or unimproved real estate and then lease such real estate back to the seller under a long-term triple net lease. The Company also may provide financing necessary to build commercial improvements on the land, to refinance existing debt on the property or to provide additional funds to operate the business. After participating in a number of these transactions, the Company may pool the leased real estate, and issue debt backed by the real estate and the related leases in a securitization transaction. PORTFOLIO MANAGEMENT The following describes some of the investment management practices that the Company may employ from time to time to earn income, facilitate portfolio management (including managing the effect of maturity or interest rate sensitivity) and mitigate risk (such as the risk of changes in interest rates). There can be no assurance that the Company will not amend or deviate from these policies or adopt other policies in the future. Leverage and Borrowing. The Company intends to leverage its assets after the proceeds of the Offering have been fully invested, primarily through repurchase agreements, secured term loans, warehouse lines of credit, mortgage loans, issuance of Mortgage Backed Securities (including CMOs and resecuritizations) and other borrowing arrangements. The Company does not intend to borrow funds from WRSC or its affiliates. If changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from securities purchased with the proceeds thereof, the Company may reduce the amount of leverage it utilizes. The real properties which the Operating Partnership is purchasing from Wilshire Properties 1 and Wilshire Properties 2 are subject to existing indebtedness of $5.6 million, which the Operating Partnership will assume at Closing. Leverage creates an opportunity for increasing return on investment but, at the same time, creates additional risk. For example, leveraging magnifies changes in the return on an investment to the Company and affects the amounts available for distribution to stockholders. Although the amount owed will be fixed, the Company's assets may change in value during the time the debt is outstanding. Leverage will create interest expenses for the Company which can exceed the revenues from the leveraged assets. Furthermore, the amount which the Company can leverage its assets is not expressly limited and will be determined by the Manager, and ultimately, WREIT's Board of Directors. See "Risk Factors--Economic and Business Risks." To the extent that leveraging permits the Company to acquire a large amount of assets, the net income can be greater than would be generated by fewer assets on a unleveraged basis. If the incremental revenues derived from the additional assets acquired with borrowed funds exceed the interest expense the Company will have to pay, the Company's return on investment will be greater than if borrowing had not been used. Conversely, if the incremental additional revenues from the larger asset base acquired using borrowed funds are not sufficient to cover the cost of borrowing, the net income of the Company will be less than if borrowing had not been used. See "Risk Factors--Economic and Business Risks--Leverage Can Reduce Income Available for Distribution." Under certain circumstances, and notwithstanding adverse interest rate or market conditions, the Company may use leverage to obtain sufficient cash to make required distributions of dividends or to fund share repurchases and tender offers when such leveraging is deemed to be in the best interests of stockholders. Repurchase Agreements. The Company intends to enter into repurchase agreements, which are agreements under which the Company would sell assets to a third party with the commitment that the Company repurchase such assets from the purchaser at a fixed price on an agreed date. Repurchase agreements may be characterized as loans to the Company from the other party that are secured by the underlying assets. The repurchase price reflects the purchase price plus an agreed market rate of interest. Bank Credit Facilities. The Company intends to borrow money through various bank credit facilities or term loans, which will have varying interest rates, which may be fixed or adjustable, and have varying maturities. Mortgage-Backed Securities and Warehouse Lines of Credit. The Company may purchase mortgage loans or other real property assets and issue Mortgage- Backed Securities collateralized by such assets. Moreover, the 39 Company may issue Mortgage-Backed Securities collateralized by previously issued Mortgage-Backed Securities in transactions known as "resecuritizations." The Company anticipates that in securitizing mortgage loans or other real property assets or resecuritizing Mortgage-Backed Securities, the Operating Partnership will generally transfer such underlying loans or assets to a trust or other special purpose vehicle, which generally will be consolidated with the Company for tax and accounting purposes. To the extent that the Company decides to structure any such securitization or resecuritization as a sale for tax and accounting purposes, it is expected that the Operating Partnership would form a taxable subsidiary to sell the mortgage loans or assets to the issuer in such securitization. If a taxable subsidiary were formed, the Company would comply with the current REIT ownership requirements under section 856(c)(4) of the Code whereby the Company's ownership would not exceed 10% of the voting securities of such subsidiary and would not exceed 5% of the value of the Company's gross assets. However, the ability to use a taxable subsidiary in this manner may be limited or prohibited. See "Federal Income Tax Consequences--Requirements for Qualification--Legislative Proposal." Interest Rate Risk Management Techniques. The Company may engage in a variety of interest rate risk management techniques to manage effective maturity or interest rate spread. These techniques also may be used to attempt to protect against changes in the market value of the Company's assets or liabilities resulting from general trends in debt markets. Any such transaction is subject to risks, and may limit the potential earnings on the Company's investment in real estate related assets. Such techniques may include puts and calls on securities or indices of securities, interest rate futures contracts and options on such contracts, interest rate swaps (the exchange of fixed-rate payments for floating-rate payments), or other such transactions. Applicable REIT qualification rules may limit the Company's ability to use certain of these techniques, except through a corporate subsidiary that is fully subject to corporate income taxation. See "Federal Income Tax Consequences--Requirements for Qualification--Income Tests." 40 MANAGEMENT OF OPERATIONS GENERAL The business and investment affairs of the Company will be managed by WRSC, a newly formed Delaware corporation wholly-owned by WFSG, pursuant to the Management Agreement which will become effective at the Closing. WFSG through its subsidiaries will provide WRSC with substantially all of the managerial and administrative services required in connection with the operations of the Company. The Company does not own or control WRSC, WFSG or any of their affiliates. WILSHIRE FINANCIAL SERVICES GROUP INC. The Experience of WFSG and its Affiliates. WFSG is primarily engaged in the acquisition, servicing and resolution of pools of performing, sub-performing and non-performing residential and commercial mortgage loans, as well as foreclosed real estate. WFSG also acquires mortgage-backed securities, originates residential mortgage and manufactured housing loans through correspondents and services loans for third parties. At December 31, 1997, WFSG and its subsidiaries had total assets of approximately $1.6 billion, of which approximately $928.0 million consisted of loans, $169.6 million consisted of foreclosed real estate and $356.4 million consisted of Mortgage- Backed Securities. Although many of the Company's prospective competitors may have access to greater capital, the Company believes that the experience of WFSG in managing, servicing and resolving real estate assets will provide the Company with the means to compete. No assurances can be made, however, in this regard. WFSG through its subsidiaries will provide WRSC with substantially all of the administrative and managerial services in connection with the operations of the Company. WFSG, its affiliates, directors and officers have no previous experience managing or operating a REIT. WFSG's executive offices are located at 1776 SW Madison Street, Portland, Oregon 97205, and the telephone number of its executive offices is (503) 223- 5600. WILSHIRE REALTY SERVICES CORPORATION WRSC is a wholly-owned subsidiary of WFSG. The following tables set forth certain information about the directors and executive officers of WRSC. Messrs. Wiederhorn and Mendelsohn are also directors of the Company and WFSG. The Manager will have no employees and WFSG will provide all necessary labor requirements in order for the Manager to perform under the Management Agreement. No director or executive officer is related by blood, marriage or adoption to any other director or executive officer of the Company or WRSC or any of their respective affiliates. Directors of WRSC
NAME AGE POSITION(S) HELD - ---- --- ---------------- Andrew A. Wiederhorn................ 32 Chairman of the Board, Chief Executive Officer, Secretary, Treasurer and Director Lawrence A. Mendelsohn.............. 36 President and Director
Executive Officers Who Are Not Directors
NAME AGE POSITION(S) HELD - ---- --- ---------------- Chris Tassos....................................... 40 Executive Vice President Philip D. Vincent.................................. 43 Executive Vice President Bo G. Aberg........................................ 48 Senior Vice President Peter O'Kane....................................... 31 Senior Vice President Glenn J. Ohl....................................... 43 Chief Financial Officer
41 The principal occupation for the last five years of each director and executive officers of WRSC, as well as some other information, is set forth below. Andrew A. Wiederhorn is the Chairman of the Board of Directors, Chief Executive Officer, Secretary, Treasurer, and a director of both WRSC and WFSG. In 1987 Mr. Wiederhorn founded WCC and continues to serve as the Chief Executive Officer of WCC and certain of its affiliates. Mr. Wiederhorn received his B.S. degree in Business Administration from the University of Southern California. Lawrence A. Mendelsohn is the President and a director of WRSC. He is also the President and a director of WFSG, and since October 1996 Mr. Mendelsohn serves as the President of WCC and certain of its affiliates. From February 1993 until October 1996, he was the Executive Vice President of WCC and certain of its affiliates. From January 1992 until February 1993 Mr. Mendelsohn was Vice President, Principal and Head of Capital Markets for Emerging Markets of Bankers Trust New York Corporation/BT Securities Corporation. From August 1987 until January 1992 Mr. Mendelsohn was the Vice President, Senior Options Principal and Head of Proprietary Trading for Equities, Equity Options and Distressed Debt for J.P. Morgan and Co./J.P. Morgan Securities. Mr. Mendelsohn received an A.B. degree in Economics from the University of Chicago, an M.A. degree in International Politics from the University of Texas, an M.S. degree in Business Research from the University of Southern California and a Ph.D./ABD in Finance from the University of Southern California. Chris Tassos is an Executive Vice President of WRSC. Mr. Tassos is also Executive Vice President and Chief Financial Officer of WFSG. Since August, 1997, Mr. Tassos has been the Executive Vice President of Finance of WCC previously serving as the Senior Vice President from August, 1995 until August, 1997. From March 1992 until February 1995 he was the Chief Financial Officer and/or Senior Vice President of Finance of Long Beach Mortgage Company (formerly Long Beach Bank). Mr. Tassos received a B.A. degree from California State University, Fullerton. From July 1979 until April 1984 and May 1985 until September 1990 Mr. Tassos was an auditor for Deloitte & Touche LLP. Phillip D. Vincent is an Executive Vice President of WRSC and Executive Vice President, Loan Servicing of WFSG. Mr. Vincent was Senior Vice President, Loan Servicing of WFSG from October 1996 until June 1997. Mr. Vincent was Senior Vice President and Chief Administrative Officer of the J.E. Robert Company, Inc., one of the largest real estate and mortgage investment managers in the U.S., from April 1995 until July 1996, Senior Vice President and Managing Officer of The J.E. Robert Company, Inc. from June 1992 until September 1995, and Vice President and Division Manager of The J.E. Robert Company, Inc. from January 1991 until May 1992. Mr. Vincent is a member of the American Institute of Certified Public Accountants. Mr. Vincent received a B.S. degree in Finance from Oklahoma State University. Bo G. Aberg is a Senior Vice President of WRSC. Mr. Aberg is also Senior Vice President, European Operations of WFSG. From November 1994 to September 1996, Mr. Aberg was Chief Executive Officer of Securum Holding B.V., a Kingdom of Sweden owned work-out company in Europe. From September 1992 to November 1994, Mr. Aberg was Chief Executive Officer of Securum Real Estate Group, Malmo, Sweden. From January 1982 to September 1992 Mr. Aberg held several positions within the PK Group (a Swedish banking group), and from September 1974 to January 1982 he was a Chartered Accountant for Hagstroms Revisions Byra AB Sweden (now Ernst & Young). Mr. Aberg received the equivalent of a B.S. degree in Economics (Ekonomexanon) and an academic degree in Law (Jurkandexamen), both from the University of Stockholm, Sweden. Peter O'Kane is a Senior Vice President of WRSC. Mr. O'Kane is also Senior Vice President, Loan Acquisitions of WFSG from June, 1997. Mr. O'Kane was Vice President, Loan Acquisitions form October 1996 until June 1997. From May 1994 until October 1996 Mr. O'Kane was the Vice President, Loan Acquisitions of WCC and its affiliates. From September 1992 until April 1994 Mr. O'Kane was an Asset Manager, Investment Division of J.E. Robert Company, Inc. From September 1991 until September 1992 Mr. O'Kane was a staff consultant with Arthur Andersen & Company. From March 1990 until August 1991 Mr. O'Kane was an analyst 42 for GranCorp, Inc., a real estate investment company. Mr. O'Kane received a B.A. degree from the University of Washington. Glenn J. Ohl is the Chief Financial Officer of WRSC. He is also the Senior Vice President and Chief Financial Officer of Wilshire Funding Corporation ("WFC") and WCC. Mr. Ohl was Chief Financial Officer of WFC from November 1996 until June 1997. From August 1995 until October 1996 Mr. Ohl was the Senior Vice President and Corporate Treasurer of CWM Mortgage Holdings, Inc., an affiliate of Countrywide Credit Industries Inc., a residential financing company. From September 1992 until August 1995 Mr. Ohl was the Executive Vice President and Chief Financial Officer of ARCS Mortgage, Inc., a financing company. Mr. Ohl received a B.A. degree from Franklin and Marshall College and an M.B.A. degree from New York University. Officers, directors and other personnel have significant experience in mortgage finance and the operation of commercial real estate; however, none have previously managed a REIT. See "Risk Factors--Other Risks--Newly Organized Corporation." THE MANAGEMENT AGREEMENT The Company will enter into the Management Agreement with WRSC for an initial term expiring on the second anniversary of the Closing Date. Thereafter, the Management Agreement will automatically renew for successive one-year periods unless either party delivers a notice of termination at least 120 days prior to the end of the then current term. The Company may terminate, or decline to extend the term of, the Management Agreement without cause at any time after the first two years upon 60 days written notice by a majority vote of the Independent Directors or by a vote of the holders of a majority of the outstanding shares of Common Stock; provided that a termination fee, equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination, will be due. In addition, the Company has the right to terminate the Management Agreement upon the occurrence of certain specified events, including a material breach by WRSC of any provision contained in the Management Agreement, without the payment of any termination fee. WRSC at all times will be subject to the supervision of the Company's Board of Directors and will have only such functions and authority as the Company may delegate to it. WRSC will be responsible for the day-to-day operations of the Company and will perform (or cause to be performed) such services and activities relating to the assets and operations of the Company as WRSC deems to be appropriate, including (or cause to be performed): (i) serving as the Company's consultant with respect to formulation of investment criteria and preparation of policy Guidelines by the Board of Directors; (ii) representing the Company in connection with the purchase and commitment to purchase assets, the sale and commitment to sell assets, and the maintenance and administration of its portfolio of assets; (iii) furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by WRSC; (iv) monitoring and providing to the Board of Directors on an ongoing basis price information and other data obtained from certain nationally recognized dealers that maintain markets in assets identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; (v) providing executive and administrative personnel, office space and office services required in rendering services to the Company; (vi) except for servicing operations to be conducted by the Servicers pursuant to the Servicing Agreements, administering the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by WRSC and the Board of Directors, including the collection of revenues (other than 43 servicing) and the payment of the Company's debts and obligations and maintenance of appropriate computer services to perform such administrative functions; (vii) communicating on behalf of the Company with the holders of any equity or debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders; (viii) to the extent not otherwise subject to an agreement executed by the Company, designating a servicer for mortgage loans sold to the Company and arranging for the monitoring and administering of such servicers; (ix) advising the Company in connection with policy decisions to be made by the Board of Directors and in connection with the Company's borrowings and leverage; (x) engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT and with the Guidelines; (xi) upon request by and in accordance with the directions of the Board of Directors, investing or reinvesting any money of the Company; and (xii) advising the Company regarding the maintenance of its status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Code and Treasury Regulations thereunder. Portfolio Management. WRSC will perform portfolio management services on behalf of the Company and the Operating Partnership pursuant to the Management Agreement with respect to the Company's investments. Such services will include, but not be limited to, consulting with the Company on purchase and sale opportunities, collection of information and submission of reports pertaining to the Company's assets, interest rates, and general economic conditions, periodic review and evaluation of the performance of the Company's portfolio of assets, acting as liaison between the Company and banking, mortgage banking, investment banking and other parties with respect to the purchase, financing and disposition of assets, and other customary functions related to portfolio management. WRSC may enter into subcontracts with other parties, including its affiliates, to provide any such services to the Company. Monitoring Services. WRSC will perform monitoring services on behalf of the Company pursuant to the Management Agreement with respect to the Company's portfolio of Mortgage Loans and Special Servicing rights. Such monitoring services will include, but not be limited to, the following activities: negotiating Special Servicing agreements; serving as the Company's consultant with respect to the Special Servicing of mortgage loans; collection of information and submission of reports pertaining to the mortgage loans and to moneys remitted to WRSC or the Company; acting as a liaison between the servicers of the mortgage loans and the Company and working with servicers to the extent necessary to improve their servicing performance; with respect to mortgage loans for which the Company is Special Servicer, periodic review and evaluation of the performance of each servicer to determine its compliance with the terms and conditions of the related servicing agreement; review of and recommendations as to fire losses, easement problems and condemnation, delinquency and foreclosure procedures with regard to mortgage loans; review of servicers' delinquency, foreclosure and other reports on mortgage loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase mortgage loans. WRSC may enter into subcontracts with other parties, including WFSG and its affiliates, to provide any such services for WRSC. Management Fees and Expenses. WRSC will receive a base management fee equal to 1% per annum, of the first $1.0 billion of the Average Invested Assets, and 0.75% of the next $500.0 million of the Average Invested Assets and 0.50% of the Average Invested Assets above $1.5 billion. The term "Average Invested Assets" for any period means the average of the aggregate book value of the assets of the Company, including the assets of all of its direct and indirect subsidiaries, before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period. For example, if the Company has Average Invested Assets of $750.0 million during a one-year period, the Manager will be 44 entitled to a base management fee of $7.5 million. WRSC will not receive any management fee for the period prior to the sale of the shares of Common Stock offered hereby. The base management fee is intended to compensate WRSC for its costs in providing management services to the Company. WRSC shall be entitled to receive incentive compensation for each fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds from Operations (before the incentive fee) of the Company per share of Common Stock (based on the weighted average number of shares outstanding) (b) plus gains (or minus losses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share at the initial offering and the prices per share at any secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus five percent per annum multiplied by (B) the weighted average number of shares of Common Stock outstanding during such period. "Funds from Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT") means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. As used in calculating WRSC's compensation, the term "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. The ability of the Company to generate Funds from Operations in excess of the Ten-Year U.S. Treasury Rate, and of WRSC to earn the incentive compensation described in the preceding paragraph, is dependent upon the level and volatility of interest rates, the Company's ability to react to changes in interest rates and to utilize successfully the operating strategies described herein, and other factors, many of which are not within the Company's control. Because WRSC and its affiliates will perform certain due diligence tasks that purchasers of real estate (including managers of REITs) typically hire outside consultants to perform, WRSC will be reimbursed for (or charge the Company directly for) WRSC's out-of-pocket costs in performing such due diligence on assets purchased or considered for purchase by the Company. The Company does not expect to maintain an office or to employ full-time personnel. WFSG and its affiliates will track the time their employees spend in performing such due diligence tasks and will be entitled to reimbursement for the allocated portion of the salary and benefits of such employees. Expense reimbursement will be made quarterly. The management fees are payable in arrears. WRSC's base and incentive fees and due diligence and other expenses shall be calculated by WRSC within 45 days after the end of each quarter, and such calculation shall be promptly delivered to the Company. The Company is obligated to pay such fees and expenses within 60 days after the end of each fiscal quarter. There is no cap or ceiling for any fees, compensation, income distributions or other payments due to WRSC from the Company pursuant to the Management Agreement. In the event that the Management Agreement is terminated or not extended by the Company without cause, the Company is obligated to pay WRSC a termination fee equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination. 45
FEE AMOUNT - --- ------ Base Management Fee.......... Equal to 1% per annum of the first $1.0 billion of Average Invested Assets, 0.75% of the next $500.0 million of Average Invested Assets and 0.50% of Average Invested Assets above $1.5 billion. Incentive Fee................ Based on the amount, if any, by which the Company's Funds from Operations plus certain gains (minus certain losses) exceed in general the Ten- Year Treasury Rate plus 5% per annum. Expense Reimbursement........ Reimbursement of due diligence costs and reasonable out-of-pocket expenses.
Limits of Responsibility. Pursuant to the Management Agreement, WRSC will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of the Company's Board of Directors in following or declining to follow its advice or recommendations. WRSC, its stockholders, affiliates, directors, officers and employees will not be liable to the Company, any subsidiary of the Company, the Independent Directors, the Company's stockholders or any subsidiary's stockholders for acts performed in accordance with and pursuant to the Management Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. The Company has agreed to indemnify WRSC, its stockholders, affiliates, directors, officers and employees with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of WRSC not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement. Under New York law, WRSC will owe fiduciary duties to the Company with respect to its obligations under the Management Agreement. The Management Agreement does not limit or restrict the right of WRSC or any of its officers, directors, employees or Affiliates from engaging in any business or rendering services of any kind to any other person, including the purchase of, or rendering advice to others purchasing, assets that meet the Company's policies and criteria. WRSC has agreed, however, to give the Company right of first refusal with respect to International Investments, U.S. Commercial Investments and Mortgage-Backed Securities, subject to certain exceptions. See "Risk Factors--Potential Conflicts of Interest" and "--Certain Relationships; Conflicts of Interest." STOCK OPTIONS The Company intends to adopt a non-qualified stock option plan (the "Option Plan"), which provides for options to purchase shares of Common Stock. The maximum aggregate number of shares of Common Stock that may be issued pursuant to options granted under the Option Plan is 3,500,000 shares. Before Closing, the Company will grant to WRSC, the Independent Directors and other members of the Board of Directors who are neither an employee of the Company nor an Independent Director (the "Non-Employee Director") options under the Option Plan, representing the right to acquire 1,000,000 shares of Common Stock (1,150,000 assuming the Underwriters exercise their over- allotment option in full), at an exercise price per share equal to the initial offering price of the Common Stock. If the options could be exercised immediately (assuming that the Underwriters exercise their over-allotment option in full), they would represent 10.0% of the number of shares of Common Stock outstanding after completion of this Offering. However, WRSC's options cannot be exercised immediately. One quarter of WRSC's options will vest and become exercisable on each of the first four anniversaries of the Closing. In addition, all of WRSC's options will vest and become exercisable upon a change in control of the Company (as defined in the Option Plan). The options terminate on the tenth anniversary of the Closing. Under the Option Plan, the Company may grant restricted stock, stock appreciation rights and additional options to WRSC. 46 Upon the Closing, the Company will grant each Independent Director an option to purchase 5,000 shares of Common Stock at an exercise price equal to the initial offering price. In the future, newly elected Independent Directors and Non-Employee Directors will receive options to purchase 5,000 shares of Common Stock at the closing price on the day that they join the Board. These options shall vest with the recipient and be exercisable immediately. In addition, on the last trading day of each calendar quarter, the Company will automatically grant each Independent Director and Non-Employee Director a non-statutory stock option to purchase 1,500 of shares of Common Stock at 110% of the fair market value on that day. Each of these director options will vest and be exercisable as follows: one-third on each of the first, second and third anniversaries of the grant date and upon a change in control of the Company (as defined in the Option Plan) and will terminate (unless sooner terminated under the terms of the Option Plan) ten years after the date of grant. If such a director ceases to be a member of the board for any reason other than death, disability or for cause, the currently vested options will terminate on the first anniversary of the date the director ceases to be a board member. If such a director dies or becomes disabled while a member of the board, these options will terminate on the second anniversary of the date the director dies or becomes disabled. If such a director ceases to be a member of the board for cause, the options shall immediately terminate. Under the Option Plan, the Company may grant restricted stock, stock appreciation rights and additional options to Independent Directors. The Board of Directors may amend the Option Plan any time, except that approval by WREIT's stockholders is required for any amendment that increases the aggregate number of shares of Common Stock that may be issued pursuant to the Option Plan, decreases the minimum exercise price of any award, increases the maximum number of shares of Common Stock that may be issued to any person, changes the class of persons eligible to receive such options, modifies the period within which the options may be granted, modifies the period within which the options may be exercised or the terms upon which options may be exercised increases the material benefits accruing to the participants under the Option Plan or make any other amendment that would require stockholder approval under the rules of any exchange or system on which the Common Stock is listed. After the Closing, the Company expects to cause to be filed with the Securities and Exchange Commission a Registration Statement on Form S-8 covering the shares of Common Stock underlying the options granted to the Independent Directors and, if applicable, Non-Employee Directors. CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST The Company, on the one hand, and WFSG and its affiliates (including WRSC and the Servicers), on the other, will enter into a number of relationships other than those governed by the Management Agreement, some of which may give rise to conflicts of interest. Moreover, two of the members of the Board of Directors of the Company and all of its officers are also employed by WFSG or its affiliates. In addition, certain of the Initial Investments are being purchased from Wilshire Properties 1 and Wilshire Properties 2, which are corporations in which the sole stockholders are Messrs. Wiederhorn and Mendelsohn. Messrs. Wiederhorn and Mendelsohn which control trusts and a partnership which are the sole members of Small Cap which will purchase Units from the Operating Partnership. The Company may also purchase additional assets from these individuals in the future, although the Company does not currently have any plans to do so. The Guidelines establish certain parameters for the operations of the Company, including qualitative limitations on the Company's assets that may be acquired. The Guidelines are to assist and instruct WRSC and to establish restrictions applicable to transactions with affiliates of WFSG or with unrelated third parties. A majority of the Independent Directors will be asked to approve in advance any purchase of assets from WFSG or its affiliates or any other significant transaction not contemplated under the Management Agreement or the Servicing Agreements. Although the Independent Directors will review the Guidelines quarterly and will monitor compliance with those Guidelines, investors should be aware that, in conducting this review, the Independent Directors will rely primarily on information provided to them by WRSC. WRSC will obtain price evaluations concerning the price for Mortgage-Backed Securities and appraisals for real estate and loans purchased from WRSC or its affiliates, 47 but the Independent Directors are likely to rely substantially on information and analysis provided by WRSC to evaluate the Company's Guidelines, compliance therewith and other matters relating to the Company's investments. Moreover, price evaluations and appraisals are not always reliable indicators of the value of assets. In particular, price evaluations of Mortgage-Backed Securities generally are obtained from the entity providing the financing of the Mortgage-Backed Securities. Moreover, the market for unregistered Mortgage-Backed Securities is illiquid, and therefore accurate prices are difficult to estimate. See "Risk Factors--Conflicts of Interest--Conflicts of Interest in the Business of the Company." If the Independent Directors determine in their periodic review of transactions that a particular transaction does not comply with the Guidelines, then the Independent Directors will consider what corrective action, if any, can be taken. If the transaction is one with WRSC or an affiliate of WRSC, then WRSC will be required to repurchase the asset at the purchase price to the Company. Moreover, if transactions are consummated that materially and adversely deviate from the Guidelines (which determination shall be made by the Independent Directors), then the Independent Directors will have the option, under the terms of the Management Agreement, to terminate WRSC without the Company being required to pay a termination fee. See "Management of Operations--The Management Agreement." The Management Agreement and Services Agreement do not limit the right of WRSC or WFSG to engage in business or render services to others that compete with the Company, except that the Manager and WFSG have granted a Right of First Refusal to the Company with respect to real estate investments which constitute Primary Investments for the Company. WFSG and its subsidiaries will not invest in any Primary Investments unless a majority of the Independent Directors have decided that the Company should not invest in such asset. In deciding whether to invest in such an asset, the Independent Directors may consider, among other factors, whether the asset is well-suited for the Company and whether the Company is financially able to take advantage of the investment opportunity. However, WFSG and its subsidiaries have no obligation to offer Mortgage-Backed Securities to the Company if the mortgage loans collateralizing such Mortgage-Backed Securities are owned by WFSG or one of its subsidiaries. Moreover, WFSG has no obligation to reveal to the Company any business opportunities to invest in Other Real Estate Related Assets. As a consequence, the opportunity for the Company to invest in Other Real Estate Related Assets will be limited if such investment opportunities would be attractive to WFSG or one of its subsidiaries. The Company, through the Operating Partnership, will contract with WFSG and its affiliates to acquire the approximately $139.2 million of Initial Investments at the Closing for an aggregate purchase price of approximately $133.6 million in cash (of which $5.7 million will be used to purchase assets from Wilshire Properties 1 and Wilshire Properties 2) and the assumption of indebtedness of approximately $5.6 million. The purchase price of the Initial Investments is based on the estimated fair market value of the assets. WFSG will realize a gain of $1.6 million from the sale of such assets; however, because of WFSG's 9.9% ownership in the Company, $0.2 million of this gain will be deferred and not immediately recognized by WFSG for financial reporting purposes. Wilshire Properties 1 and Wilshire Properties 2 will realize a gain of $3.0 million from sale of their assets. However, because certain of these assets are leased to WFSG, $1.0 million of gain will be deferred and not immediately recognized by Wilshire Properties 1 and Wilshire Properties 2 for financial reporting purposes. All of the outstanding shares of Wilshire Properties 1 and Wilshire Properties 2 are owned by Messrs. Wiederhorn and Mendelsohn. From time to time, mortgage lenders offer for sale large pools of mortgage loans and real properties pursuant to a competitive bidding process. In such a case, WFSG or its affiliates may choose an unaffiliated entity with which to submit a joint bid for the pool, as long as WFSG or its affiliates takes title only to assets as to which it has not given the Company the Right of First Refusal. At closing, WFSG will receive $127.9 million of the net proceeds of the Offering for the Initial Investments. WFSG will purchase 990,000 shares of Common Stock at a price equal to the public offering price, net of any underwriting discounts or commissions. This will result in WFSG's ownership of approximately 9.9% of the total shares offered hereby, exclusive of the Underwriters' over-allotment option. WRSC also will receive stock options pursuant to the Company's Option Plan. See "Management of Operations--Stock Options." 48 WFSG is expected to retain its shares of the Company for at least two years after the Company's initial public offering of shares of Common Stock, but may dispose of its shares any time thereafter in accordance with the provisions of Rule 144 under the Securities Act of 1933. Notwithstanding the foregoing, if the Company terminates the Management Agreement, WRSC may require the Company to register for public resale its shares of Common Stock acquired pursuant to the Option Plan. See "Management of Operations--Stock Options." The market in which the Company expects to purchase assets is characterized by rapid evolution of products and services and, thus, there may in the future be relationships between the Company, WFSG, and its affiliates in addition to those described herein. The Company may change its policies in connection with any of the foregoing without the approval of the stockholders, including, but not limited to, the amount in which the Company may leverage its investments. 49 COMPENSATION AND FEES TO WFSG AND AFFILIATES WFSG and certain of its affiliates have a material interest in, and will receive material benefits in connection with, the Offering. The affiliates and the nature of their interests and benefits are summarized in the table below. Based upon the Company's proposed plan of operations for the first year, the transactions described in this Offering (i.e., the acquisition of the Initial Investments), and the assumptions described below, WFSG and its affiliates are expected to receive compensation and fees of approximately $9.8 million during such year. In calculating the anticipated fees and compensation to WFSG and its affiliates, the following assumptions were made: (i) Average Invested Assets of $607.7 million during the first year; (ii) net income during the first year of $42.4 million without any gain/loss resulting from debt, restructuring or the sale of property; (iii) the weighted average price per share was $16; (iv) the ten-year treasury rate was 5.6%; (v) the weighted average number of shares of Common Stock outstanding was 10,000,000; and (vi) Servicers or affiliates thereof received approximately $1.6 million in servicing fees. There can be no assurance that these assumptions will prove accurate or that WFSG and its affiliates will earn such fees. The compensation and fees earned by WFSG and its affiliates may be substantially higher or lower than this projected amount based on actual operating results. A chart illustrating the relationship among WREIT, WFSG and certain affiliates is set forth on page 12.
SECTIONS OF PROSPECTUS PROVIDING MORE DETAILED AFFILIATES RELATIONSHIP NATURE OF INTEREST INFORMATION - ---------------------------------------------------------------------------------------------- WFSG Controlled by WFSG or its subsidiaries Initial Investments; Use of Messrs. Wiederhorn will receive $127.9 million Proceeds; Management of and Mendelsohn for assets comprising Operations--Certain approximately 91.9% of the Relationships; Risk Factors-- Initial Investments and will Conflicts of Interest result in a gain to WFSG and its subsidiaries of approximately $1.6 million. - ---------------------------------------------------------------------------------------------- WRSC Wholly-owned WRSC will manage the Management of Operations; subsidiary of WFSG business and investment Risk Factors--Conflicts of affairs of the Company and Interest will receive a management fee, an incentive fee, expense reimbursement and options to acquire 980,000 shares of Common Stock (1,135,000 if the Underwriters' over-allotment option is exercised). In the event that the Management Agreement is terminated or not extended by the Company without cause, the Company is obligated to pay WRSC a termination fee equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination. - ---------------------------------------------------------------------------------------------- WCC and Controlled by Such entities are expected Servicing Arrangements the Messrs. Wiederhorn to receive servicing fees European and Mendelsohn or for servicing WREIT's Servicer subsidiaries of assets. WFSG - ---------------------------------------------------------------------------------------------- Messrs. Sole stockholders Wilshire Properties 1 and Initial Investments; Use of Wiederhorn of Wilshire Wilshire Properties 2, of Proceeds; Risk Factors-- and Properties 1, which Messrs. Wiederhorn and Conflicts of Interest Mendelsohn Wilshire Properties Mendelsohn are the sole 2 and WCC, stockholders, will transfer principal certain assets, subject to stockholders of indebtedness of WFSG approximately $5.6 million, and control trusts to the Operating Partnership and a partnership for approximately $5.7 which are the sole million and will result in a members of Small gain of approximately $3.0 Cap million to Wilshire Properties 1 and Wilshire Properties 2. Small Cap will purchase approximately 1,875 Units for $30,000.
50 SERVICING ARRANGEMENTS The Company expects to acquire Primary Investments and Other Real Estate Related Assets on either a "servicing released" basis (i.e., the Company will have the right to service the loans or other assets it purchases) or "servicing retained" basis (i.e., the seller of the assets or other third party retains the right to service such assets). For assets acquired on a "servicing released" basis, the Company will enter into the Servicing Agreements pursuant to which the Servicers will provide loan and real property management services, including billing, portfolio administration and collection services for the Company's real estate investments. Under the Servicing Agreements, the Company has agreed to pay each of the Servicers a servicing fee at or below market rates for each pool of loans or real estate assets that they service for the Company and to reimburse them for certain out-of-pocket costs associated with servicing such assets. For assets acquired on a "servicing retained" basis, the Company will pay a servicing fee to the seller or other third party servicing the loans or other assets. The Company will not receive servicing fees. As the Company acquires assets in other countries, the Company anticipates entering into similar servicing arrangements with WFSG affiliates in such countries. The Management Agreement will provide that the Manager will monitor the servicing activities of the Servicers. WCC is primarily engaged in the specialty loan servicing and resolution business. At December 31, 1997, WCC was servicing approximately $2.8 billion aggregate principal amount of loans. WCC has developed specialized procedures and proprietary software designed to effectively service performing, non- performing and sub-performing loans. Such procedures and software have been adapted for French and United Kingdom requirements and are used by the European Servicer and other affiliates of WFSG. The Servicers design a servicing plan for each underlying loan or property and actively service each loan and property to maximize cash flow. THE COMPANY WREIT was incorporated in the State of Maryland on October 24, 1997 and will elect to be taxed as a REIT under the Code. The principal executive offices of the Company are located at 1776 SW Madison Street, Portland, Oregon 97205. The Company's telephone number is (503) 223-5600. The following tables set forth certain information about the directors and executive officers of WREIT. Directors Who Are Executive Officers
NAME AGE POSITION(S) HELD - ---- --- ---------------- Andrew A. Wiederhorn................ 32 Chairman of the Board, Chief Executive Officer, Secretary, Treasurer and Director Lawrence A. Mendelsohn.............. 36 President and Director
Independent Directors
NAME AGE POSITION(S) HELD - ---- --- ---------------- David C. Egelhoff................ 49 Director and Member of the Audit Committee Steven Kapiloff.................. 36 Director and Member of the Audit Committee Jordan D. Schnitzer.............. 46 Director and Member of the Audit Committee
Executive Officers Who Are Not Directors
NAME AGE POSITION(S) HELD - ---- --- ---------------- Chris Tassos............................. 40 Executive Vice President and Chief Financial Officer Bo G. Aberg.............................. 48 Senior Vice President
51 The principal occupation for the last five years of each Independent Director of the Company, as well as some other information, is set forth below. David C. Egelhoff has been a director of the Company since October 24, 1997. Mr. Egelhoff has been President of Macadam Forbes, Inc., a commercial real estate brokerage company headquartered in Portland, Oregon since 1981. Mr. Egelhoff is a licensed real estate broker who has extensive brokerage experience, including transactions with REITs. He is a member of the Oregon and National Board of Realtors and the Builders and Owners Management Association. Mr. Egelhoff received a degree in Finance and Marketing from the University of Wisconsin-Madison in 1971. Steven Kapiloff has been a director of the Company since October 24, 1997. Mr. Kapiloff is an attorney with the law firm of Winthrop, Stimson, Putnam & Roberts in its Stamford, Connecticut office, where he represents owners and developers of commercial real estate. Mr. Kapiloff received his undergraduate degree in Economics from Boston University and his J.D. from the University of Southern California. Jordan D. Schnitzer has been a director of the Company since March 27, 1998. Mr. Schnitzer has been President of Jordan Schnitzer Properties, an owner and developer of commercial and residential properties in Oregon, Washington and California since 1976. Mr. Schnitzer is also President of SF Property Investments, LLC which owns and operates a portfolio of 25 properties in four western U.S. states. Mr. Schnitzer received his undergraduate degree in Literature from the University of Oregon in 1973 and his J.D. from the Northwestern School of Law of Lewis and Clark College in 1976. For biographical information on Messrs. Wiederhorn, Mendelsohn, Tassos and Aberg, see "Management of Operations--WRSC." An additional Independent Director and John C. Condas may be added to the Board of Directors within 90 days of Closing. Certain biographical information on Mr. Condas is set forth below. John C. Condas is a shareholder with the law firm of Jackson, DeMarco & Peckenpaugh, where he specializes in real property, land use, financial institutions and environmental litigation, as well as processing land use entitlements. Mr. Condas received his A.B. with honors from the University of Chicago, an M.A. in Urban Planning from University of California at Los Angeles, and his J.D. from the University of Southern California. Jackson, De Marco & Peckenpaugh provides legal services to WFSG and its affiliates, including WCC. All directors will be elected at each annual meeting of WREIT's stockholders for a term of one year, and hold office until their successors are elected and qualified. All officers serve at the discretion of the Board of Directors. Although the Company may have salaried employees, it currently does not have employees and does not expect to employ anyone as long as the Management Agreement is in force. The Company will pay an annual director's fee to each Independent Director and Non-Employee Director equal to $12,000, with no additional fee to be paid for the first four meetings of the Board of Directors. Each Independent Director and Non-Employee Director will be paid a fee of $1,000 for each additional meeting of the Board of Directors or committee thereof attended in person by such Independent Director and Non- Employee Director which is not a regularly scheduled quarterly meeting. For meetings attended telephonically, the Independent Directors will be paid a fee of $100 per hour. All Independent Directors and Non-Employee Directors will be reimbursed for their costs and expenses in attending all meetings of the Board of Directors. Directors affiliated with WFSG, however, will not be separately compensated by the Company. See "Management of Operations--Stock Options." Directors and executive officers of WREIT will be required to devote only so much of their time to the Company's affairs as is necessary or required for the effective conduct and operation of the Company's business. Because the Management Agreement provides that WRSC will assume principal responsibility for managing the affairs of the Company, the officers of the Company, in their capacities as such, are not expected to devote substantial portions of their time to the affairs of the Company. However, in their capacities as officers or 52 employees of WRSC, or its affiliates, they will devote such portion of their time to the affairs of WREIT as is required for the performance of the duties of WREIT under the Management Agreement. The Bylaws of WREIT provide that, except in the case of a vacancy, the majority of the members of the Board of Directors will at all times after the issuance of the shares offered hereby be Independent Directors. Vacancies occurring on the Board of Directors among the Independent Directors will be filled by the vote of a majority of the directors, including a majority of the Independent Directors. WREIT's Charter limits the liability of its directors and officers to WREIT and its stockholders to the fullest extent permitted from time to time by Maryland law. Maryland law presently permits the liability of directors and officers to a corporation or its stockholders for money damages to be limited, except (i) to the extent that it is proved that the director or officer actually received an improper benefit or profit in money property or services for the amount of the benefit or profit in money, property or services actually received, or (ii) if a judgment or other final adjudication is entered in a proceeding based on a finding that the director's or officer's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. This provision does not limit the ability of WREIT or its stockholders to obtain other relief, such as an injunction or rescission. The Charter and Bylaws require WREIT to indemnify and hold harmless and, without requiring a determination of the ultimate entitlement to indemnification, pay reasonable expenses in advance of the final disposition of any proceeding to its present and former directors and officers and certain other parties to the fullest extent permitted from time to time by Maryland law. The Maryland General Corporation Law ("MGCL") permits a corporation to indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses incurred by them in connection with any proceeding to which they may be made a party by reason of their service to or at the request of the corporation, unless it is established that (i) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and (x) was committed in bad faith or (y) was the result of active and deliberate dishonesty, (ii) the indemnified party actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding. Indemnification is limited to court ordered reimbursement for expenses; however, if the proceeding is one by or in the right of the corporation, and the director or officer was adjudged to be liable to the corporation or if the proceeding is one charging improper personal benefit to the director or officer and the director or officer was adjudged to be liable on the basis that personal benefit was improperly received. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttal presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. Maryland law requires a corporation (unless its charter provides otherwise, which WREIT's Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. It is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and is unenforceable pursuant to Section 14 of the Securities Act. COMPETITION The Company will engage in a business that may become increasingly competitive in the future as more people enter the market. In acquiring the Primary Investments, the Company will compete with REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, other lenders, and other entities purchasing similar assets, many of which have established operating histories and procedures, may have access to greater capital and other resources and may have other advantages over the Company in conducting certain businesses and providing certain services. There are several REITs similar to the Company and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of the Primary Investments contemplated to be acquired 53 by the Company. The Company's net income will depend, in large part, on the Company's ability to acquire and originate mortgage loans and Mortgage-Backed Securities having yields that produce favorable spreads over the Company's borrowing costs. Increased competition for the acquisition of mortgage loans, real properties and Mortgage-Backed Securities or a reduction in the available supply could result in higher prices and thus lower yields on such investments, which could narrow (or make negative) the yield spread relative to the Company's borrowing costs. In addition, the Company's competitors may seek to establish relationships with financial institutions and other firms from whom the Company intends to acquire such assets. DISTRIBUTION POLICY WREIT intends to make distributions to its stockholders of at least 95% of its "REIT Taxable Income" each year (determined without the dividends paid deduction, certain non-cash income and any net capital gain) so as to qualify for the tax benefits accorded to REITs under the Code. REIT Taxable Income means taxable income (computed accordingly to normal corporate rules) with the following adjustments: (i) an exclusion of net income from foreclosure property; (ii) an exclusion of net income from prohibited transactions; (iii) a deduction is allowed for dividends paid reduced by the portion of such deduction attributable to net income from foreclosure property; (iv) a deduction for the amount of tax imposed for failing to meet the 75% and/or 95% income tests; and (v) the dividends received deduction does not apply. Net income from foreclosure property is the excess of (i) gain from the sale or other disposition of foreclosure property held for sale in the ordinary course of business, plus other gross income derived from foreclosure property that does not qualify under the 75% income test, over (ii) the deductions which are directly connected with the production of such gain or income. See "Federal Income Tax Consequences." WREIT does not intend to make distributions that would be a return of principal. WREIT intends to make distributions at least quarterly. It is anticipated that the first distribution to stockholders will be made promptly after the first full calendar quarter following the Closing. Subject to the distribution requirements referred to in the immediately preceding paragraph, WREIT intends, to the extent practicable, to cause the Operating Partnership to invest substantially all of the principal from repayments, sales and refinancings of the Operating Partnership's assets in U.S. Commercial Property and Mortgage-Backed Securities. WREIT may, however, under certain circumstances, make a distribution of principal. Such distributions, if any, will be made at the discretion of WREIT's Board of Directors. It is anticipated that distributions generally will be taxable as ordinary income to non-exempt stockholders of WREIT, although a portion of such distributions may be designated by WREIT as long-term capital gain or may constitute a return of capital. WREIT will furnish annually to each of its stockholders a statement setting forth distributions paid during the preceding year and their federal income tax status. For a discussion of the federal income tax treatment of distributions by WREIT and certain adverse tax consequences for stockholders associated with REMIC Residual Interests held by the Operating Partnership, see "Federal Income Tax Consequences--Taxation of the Company" and "--Taxation of Taxable U.S. Stockholders." YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS Before purchasing any real estate related assets, the Company, with the assistance of WRSC, will consider the expected yield of the investment. The Company considers the expected yield of an investment to be a benchmark for evaluating profitability of all types of assets over time. "Yield" or "yield to maturity" is the interest rate that will make the present value of the future cash flow from an investment equal to its price. Despite WFSG's substantial experience in evaluating potential yields on Mortgage-Backed Securities and real estate related assets, no assurances can be given that the Company can make an accurate assessment of the actual yield to be produced by an asset. Many factors beyond the control of the Company are likely to influence the yield on the Company's investments, as described in more detail below, such that the actual yield on an investment may vary substantially from its expected yield. 54 MORTGAGE-BACKED SECURITIES The yield to maturity on any class of Mortgage-Backed Securities will depend upon, among other things, the price at which such class is purchased, the interest rate for such class and the timing and aggregate amount of distributions on the securities of such class, which in turn will depend primarily on (i) whether there are any losses on the underlying loans allocated to such class and (ii) whether and when there are any prepayments of the related mortgage loans (which include both voluntary prepayments by the obligors on the mortgage loans and prepayments resulting from liquidations due to defaults and foreclosures). The yield on the Mortgage-Backed Securities acquired by the Company will be extremely sensitive to defaults on the mortgage loans comprising the mortgage collateral for such securities and the severity of losses resulting from such defaults, as well as the timing of such defaults and actual losses. The Company's right as a holder of Mortgage-Backed Securities to distributions of principal and interest will be subordinated to all of the more senior classes of securities. Actual losses on the mortgage collateral (after default, where the proceeds from the foreclosure sale of the real estate securing the loan are less than the unpaid balance of the mortgage loan plus interest thereon and disposition costs) will be allocated first to the subordinated classes prior to being allocated to the more senior classes. The Mortgage-Backed Securities the Company intends to acquire with the proceeds from this offering are subject to special risks, including a substantially greater risk of loss of principal and non-payment of interest than the more senior classes of such securities. If the Company acquires Mortgage-Backed Securities with an anticipated yield as of the acquisition date based on an assumed rate of default and severity of loss on the mortgage loans comprising the mortgage collateral that is lower than the actual default rate and severity of loss, its yield will be lower than the Company initially anticipated. In the event of substantial losses, the Company may not recover the full amount (or, indeed, any) of its acquisition cost. The timing of actual losses also will affect the Company's yield, even if the number of defaults and severity of loss are consistent with the Company's anticipation. In general, the earlier a loss occurs, the greater the adverse effect on the Company's yield. Additionally, the yield on Commercial Mortgage-Backed Securities and Residential Mortgage-Backed Securities collateralized by adjustable rate mortgage loans will vary depending on the amount of and caps on the adjustments to the interest rates of such mortgage loans. There can be no assurance as to the rate of delinquency, severity of loss or the timing of any such losses on mortgage loans underlying Mortgage-Backed Securities and thus as to the actual yield received by the Company. The aggregate amount of distributions on the Company's Mortgage-Backed Securities and their yield also will be affected by the amount and timing of principal prepayments on the mortgage loans underlying the Mortgage-Backed Securities. To the extent that more senior tranches of Mortgage-Backed Securities are outstanding, all prepayments of principal on the underlying mortgage loans typically will be paid to the holders of more senior classes, and typically none (or very little) will be paid to the Company during the first five years, and in some cases a longer period, after the original issue date of the related Mortgage-Backed Securities. This subordination of the Mortgage-Backed Securities to more senior classes may affect adversely the yield on the Mortgage-Backed Securities acquired by the Company. Even if there are no actual losses on the mortgage loans, interest and principal payments may be made on the more senior classes before interest and principal are paid with respect to the Mortgage-Backed Securities. Typically, interest deferred on Mortgage-Backed Securities is payable on subsequent payment dates to the extent funds are available, but such deferral does not itself bear interest. Such deferral of interest will reduce the actual yield on the Company's Mortgage-Backed Securities. Because the Company will acquire Mortgage-Backed Securities at a significant discount from their outstanding principal balance, if the Company estimates the yield on a security based on a faster rate of payment of principal than actually occurs, the Company's yield on that security will be lower than the Company anticipated. Whether and when there are any principal prepayments on the mortgage loans will be affected by a variety of factors, including, without limitation, the terms of the mortgage loans, the level of prevailing interest rates, the availability of mortgage credit and economic, tax, legal and other factors. Principal prepayments on mortgage loans secured by multi- family residential and commercial properties are likely to be affected by lock-out periods and prepayment premium provisions applicable to each of the mortgage loans, and by the extent to 55 which the servicer is able to enforce such prepayment premium provisions. Moreover, the yield to maturity on such Mortgage-Backed Securities may also be affected by any extension of the scheduled maturity dates of the mortgage loans as a result of modifications of the mortgage loans by the related servicer, if permitted. The timing of any prepayments on the mortgage loans underlying Mortgage- Backed Securities owned by the Company may significantly affect the Company's yield to maturity, even if the average rate of principal payments is consistent with the Company's expectation. In general, the earlier a prepayment of principal of the mortgage loans, the greater the effect on an investor's yield. The effect on the Company's yield of principal payments occurring at a rate higher (or lower) than the rate anticipated by the Company during any particular period may not be fully offset by a subsequent like decrease (or increase) in the rate of principal payments. Because the rate and timing of principal payments on the underlying mortgage loans will depend on future events and on a variety of factors, no assurances can be given as to such rate or the timing of principal payments on the Mortgage-Backed Securities the Company owns or acquires. U.S. COMMERCIAL PROPERTIES The yield on the Company's investments in real properties, including U.S. Commercial Properties, will depend upon the price that the Company pays for such investments, the costs of capital improvements and other costs of managing the properties, the level of rents and other income generated by the properties, the length of time between acquisition and disposition and the price at which the Company ultimately disposes of such properties. The yield of such an investment may be adversely affected by factors beyond the Company's control, such as adverse changes in economic conditions, neighborhood characteristics and competition from other properties offering the same or similar services. See "Risk Factors--Investment Activity Risks." The Company will rely on the substantial experience of WFSG, made available to the Company through the Management Agreement, in acquiring, managing and disposing of U.S. Commercial Property, and in predicting and managing problems that arise. See "Management of Operations." No assurances can be given, however, that the Company will be successful in this endeavor. MORTGAGE LOANS The yield to maturity on the Company's investment in mortgage loans will depend, among other things, upon (i) whether there are any losses on such mortgage loans, (ii) whether and when there are any prepayments of such mortgage loans, (iii) the interest rates on such mortgage loans, and (iv) the purchase price of such mortgage loans. The yield to maturity on all mortgage loans will be sensitive to defaults by the borrower and the severity of the losses that might result from such defaults. Construction and junior lien loans will be particularly sensitive to defaults because they generally have higher loan to value ratios than traditional mortgage loans. The borrower generally will have an equity investment of 10% to 15% of total project costs, but if the borrower defaults there can be no assurance that losses will not exceed such amount. Because the borrower's equity may not be adequate to protect the Company's investment, the Company's yield on such loans is particularly sensitive to defaults. If the Company acquires a mortgage loan at a significant discount from its outstanding principal balance and the Company estimates the yield on the mortgage loan based on a faster rate of payment of principal than actually occurs, the Company's yield on that mortgage loan will be lower than the Company anticipated. Conversely, if the Company acquires a mortgage loan at a significant premium to its outstanding principal balance, estimating the yield on such mortgage loan based on a slower rate of payment of principal than actually occurs, the Company's yield on that mortgage loan will be lower than anticipated. Whether and when there are any principal prepayments on the mortgage loans will be affected by a variety of factors, including, without limitation, the terms of the mortgage loans, the level of prevailing interest rates, the availability of mortgage credit and economic, tax, legal and other factors. Principal prepayments on mortgage 56 loans secured by multi-family residential and commercial properties are likely to be affected by lock-out periods and prepayment premium provisions applicable to each of the mortgage loans, and by the extent to which the servicer is able to enforce such prepayment premium provisions. Moreover, the yield to maturity on mortgage loans may also be affected by any extension of the scheduled maturity dates of the mortgage loans as a result of modifications of the mortgage loans by the servicer, if permitted. 57 INITIAL INVESTMENTS GENERAL At the Closing, the Company will acquire from WFSG, Wilshire Properties 1 and Wilshire Properties 2 approximately $139.2 million of assets (assuming a purchase date of February 28, 1998) consisting of (i) approximately $40.8 million of U.S. Commercial Investments; (ii) approximately $95.0 million in Mortgage-Backed Securities (including approximately $30.8 million of Retained Securities); and (iii) approximately $3.4 million of International Investments in the United Kingdom (collectively, the "Initial Investments"). The purchase of the Initial Investments by the Company was approved by the Independent Directors. The balance of the net proceeds of the Offering, constituting up to approximately 9.0% of the total net proceeds (assuming that the Underwriters do not exercise their over-allotment option), will be invested by the Operating Partnership as opportunities arise. WFSG has granted the Company an option to purchase for up to $110.0 million all or a portion of WFSG's 50% interest in two portfolios of International Investments in France. The Company is currently evaluating the suitability of such investments under U.S. tax and French law. The purchase price for the Initial Investments was derived by considering a number of factors, including the amount and timing of potential net cash flows on the Initial Investments, the range of possible returns on such purchases and the risks associated with such purchases, including the risk that the ultimate return will be significantly affected by losses, if any, realized on the underlying mortgage loans and other factors that are not controlled by the Company, such as prepayment experience on the underlying mortgage loans. These factors may result in a below market rate of return or a loss on the purchase price in certain situations. See "Risk Factors--Investment Activity Risks-- Credit and Prepayment Risks from Ownership of Mortgage-Backed Securities in Pools of Commercial and Residential Mortgage Loans." The number of Units to be issued in connection with the acquisition of the commercial properties was based on recent appraisals of these properties and the public offering price of the shares of Common Stock. The Company believes that the descriptions of the Initial Investments set forth below are summaries of the material terms of the Initial Investments. In the case of U.S. Commercial Investments, the material terms have been taken from information provided by the servicer of those assets or information provided by Wilshire Properties 1 and Wilshire Properties 2. The material terms of the Mortgage-Backed Securities have been taken from the information provided to the Company by the trustees of the series of the Mortgage-Backed Securities. In the case of the International Investments, they have been taken from information provided by WFSG or its affiliates. Such information with respect to the Initial Investments which is within the control of third parties has not been independently confirmed by the Company, WRSC or the Underwriters, and is all the information on the subject that the Company possesses or can acquire without unreasonable effort or expense. The tables contained in this section present information as of February 28, 1998 for the aggregate principal balances for loans or various dates of appraisals or BPOs for the real properties. The appraisal or BPO dates for all of the real properties were completed after December 31, 1996. The information for the Mortgage-Backed Securities is as of August 31, 1997, except for the purchase price which is reported as of February 28, 1998. The totals in the charts may not add up to 100% due to rounding. 58 The Initial Investments will consist of the following:
AGGREGATE PRINCIPAL BALANCE PURCHASE CLASSIFICATION NUMBER OR APPRAISED VALUE PRICE(1) - -------------- ------- ------------------- ------------ U.S. Commercial Investments Distressed U.S. Commercial Loans...... 170 $ 44,328,432 $ 26,854,217 U.S. Commercial Properties............ 14 13,978,000 13,978,000 Mortgage-Backed Securities............. 28 487,372,671 95,014,881 International Investments.............. 16 4,002,265 3,349,454 ------------ Total........................................................... $139,196,552 ============
- -------- (1) Purchase price will be paid from the net proceeds of this Offering and the assumption of certain debt. The purchase price was calculated assuming a sale date of February 28, 1998. Approximately 88% of the aggregate principal balance outstanding of the real property securing the Initial Distressed U.S. Commercial Loans is located in the states of California, Connecticut, New Jersey and New York. For example, California recently began to recover from an economic recession that has affected the state since the early 1990s. The Company's performance and its ability to make distributions to its stockholders likely would be effected significantly by future economic conditions in California, Connecticut, New Jersey and New York. THE INITIAL U.S. COMMERCIAL INVESTMENTS The Initial Distressed U.S. Commercial Loans The Distressed U.S. Commercial Loans included in the Initial Investments (the "Initial Distressed U.S. Commercial Loans") have, as of February 28, 1998, an aggregate principal balance of $44.3 million and are secured by mortgages or deeds of trust on commercial real property. The Initial Distressed U.S. Commercial Loans were originated by various unrelated parties under different underwriting criteria at different times and were acquired by WFSG at various times. The Company will receive varying representations and warranties with respect to certain of the Initial Distressed U.S. Commercial Loans. To the extent that any representations and warranties were offered by the respective sellers of such loans to WFSG, these representations and warranties will be transferred to the Company to the extent such representations and warranties can be transferred. 59 The following tables describe the Initial Distressed U.S. Commercial Loans and related properties as of February 28, 1998. Some of the aggregate percentages or aggregate principal balances in the following tables may not total due to rounding. CLASSIFICATION OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
PERCENTAGE OF AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL CLASSIFICATION NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - -------------- ------- -------------------- ------------------- Performing Loans(1)............ 55 $14,211,952 32.06% Sub-Performing Loans(2)........ 5 1,195,741 2.70% Non-Performing Loans(3)........ 110 28,920,738 65.24% --- ----------- ------ Total........................ 170 $44,328,432 100.00% === =========== ======
- -------- (1) "Performing" means a loan that was not more than one payment delinquent as of February 28, 1998 determined under the terms of the original loan agreement or subsequent modification thereof. A "Performing" loan may have been previously delinquent but has been brought current. (2) "Sub-Performing" means a loan (x) that was, as of February 28, 1998, two or more, but not more than 12, payments delinquent, determined under the terms of the original loan agreement or subsequent modification thereof, and (y) that had a ratio of the outstanding principal balance of such loan to its appraised value expressed as a percentage of 90% or less, except for those loans which the servicer otherwise believes cannot be brought current. (3) "Non-Performing" means a loan (x) that was, as of February 28, 1998, more than 12 payments delinquent, determined under the terms of the original loan agreement or subsequent modification thereof, or (y) that was, as of February 28, 1998, two or more, but not more than 12 (determined under the terms of the original loan agreement or subsequent modification thereof), payments delinquent and had a ratio of the outstanding principal balance of such loan to its appraised value in excess of 90%, or the servicer otherwise believes that such loan will not be brought current. DELINQUENCY STATUS OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
PERCENTAGE AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL NUMBER OF PAYMENTS DELINQUENT NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - ----------------------------- ------- ------------------- ------------------- Current(1)....................... 45 $11,797,003 26.61% 1-3 Payments..................... 14 3,579,939 8.08% 4-6 Payments..................... 0 0 0.00% 7-12 Payments.................... 2 406,635 0.92% 13-18 Payments................... 25 8,168,298 18.43% 19-24 Payments................... 3 679,026 1.53% 25 or more Payments.............. 81 19,697,531 44.44% --- ----------- ------ Total.......................... 170 $44,328,432 100.00% === =========== ======
- -------- 60 GEOGRAPHIC DISTRIBUTION OF REAL PROPERTIES SECURING INITIAL DISTRESSED U.S. COMMERCIAL LOANS
NUMBER OF INITIAL DISTRESSED PERCENTAGE OF U.S. COMMERCIAL AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL LOCATION OF REAL PROPERTY LOANS BALANCE OUTSTANDING BALANCE OUTSTANDING - ------------------------- ----------------- ------------------- ------------------- Arkansas................. 1 $ 49,236 0.11% Arizona.................. 1 35,549 0.08% California............... 25 11,434,348 25.79% Connecticut.............. 44 14,530,784 32.78% Florida.................. 1 64,192 0.14% Georgia.................. 5 1,275,786 2.88% Illinois................. 1 43,330 0.10% Indiana.................. 1 405,610 0.92% Massachusetts............ 4 447,390 1.01% North Carolina........... 1 51,748 0.12% New Hampshire............ 1 30,420 0.07% New Jersey............... 27 4,769,259 10.76% New York................. 43 8,181,800 18.46% Oregon................... 2 1,602,900 3.62% Pennsylvania............. 2 133,091 0.30% Puerto Rico.............. 4 675,213 1.52% Rhode Island............. 1 92,816 0.21% Tennessee................ 1 30,751 0.07% Texas.................... 2 57,043 0.13% Virginia................. 3 417,158 0.94% --- ----------- ------ Total.................. 170 $44,328,432 100.00% === =========== ======
TYPES OF REAL PROPERTY SECURING INITIAL DISTRESSED U.S. COMMERCIAL LOANS
PERCENTAGE OF AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL PROPERTY TYPE NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - ------------- ------ ------------------- ------------------- Commercial...................... 3 $ 293,491 0.66% Commercial Land................. 8 1,810,001 4.08% Commercial Other................ 7 1,912,498 4.31% Convalescent Facility........... 2 1,378,732 3.11% Hotel and Motel................. 5 1,448,548 3.27% Low Rise Office................. 12 3,643,193 8.22% Medical/Dental Office........... 5 821,528 1.85% Mini Warehouse.................. 1 16,683 0.04% Mixed Use Residential/Retail.... 40 9,531,891 21.50% Multi-Family.................... 26 9,010,397 20.33% Office Condominium(s)........... 5 266,495 0.60% Retail Building................. 38 8,005,217 18.06% Warehouse....................... 18 6,189,758 13.96% --- ----------- ------ Total......................... 170 $44,328,432 100.00% === =========== ======
61 INTEREST RATE TYPE OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
PERCENTAGE OF AGGREGATE AGGREGATE PRINCIPAL PRINCIPAL BALANCE INTEREST RATE TYPE NUMBER BALANCE OUTSTANDING OUTSTANDING - ------------------ ------ ------------------- ----------------------- Fixed........................ 60 $13,254,441 29.90% ARM.......................... 110 31,073,991 70.10% --- ----------- ----- Total...................... 170 $44,328,432 100.0% === =========== =====
MORTGAGE RATES OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS(1)
PERCENTAGE OF AGGREGATE AGGREGATE PRINCIPAL PRINCIPAL BALANCE MORTGAGE RATES NUMBER BALANCE OUTSTANDING OUTSTANDING - -------------- ------ -------------------- ----------------- Less than 7.00%................... 4 $ 257,159 0.58% 7.00%-7.49%....................... 2 1,039,062 2.34% 7.50%-7.99%....................... 8 4,921,269 11.10% 8.00%-8.49%....................... 7 1,169,909 2.64% 8.50%-8.99%....................... 10 3,763,530 8.49% 9.00%-9.49%....................... 20 5,076,244 11.45% 9.50%-9.99%....................... 9 3,025,899 6.83% 10.00%-10.49%..................... 20 4,720,060 10.65% 10.50%-10.99%..................... 20 2,946,884 6.65% 11.00%-11.49%..................... 17 2,948,872 6.65% 11.50%-11.99%..................... 9 1,830,647 4.13% 12.00%-12.49%..................... 9 3,966,899 8.95% 12.50%-12.99%..................... 6 2,333,865 5.26% 13.00%-13.49%..................... 7 1,662,659 3.75% 13.50%-13.99%..................... 4 742,436 1.67% 14.00%-14.99%..................... 7 1,004,964 2.27% 15.00%-15.99%..................... 5 1,836,752 4.14% 16.00%-16.99%..................... 1 525,000 1.18% 17.00% and Greater................ 5 556,321 1.25% --- ----------- ------ Total........................... 170 $44,328,432 100.00% === =========== ======
- -------- (1) The weighted average mortgage rate of the Initial Distressed U.S. Commercial Loans is approximately 10.53%. LIEN POSITION OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS
PERCENTAGE OF AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL LIEN POSITION NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - ------------- ------ ------------------- ------------------- First Lien....................... 145 $38,251,701 86.29% Second Lien...................... 21 4,038,957 9.11% Third Lien....................... 2 1,296,134 2.92% Fourth Lien...................... 1 336,028 0.76% Fifth Lien....................... 1 405,609 0.92% --- ----------- ------ Total.......................... 170 $44,328,432 100.00% === =========== ======
62 YEAR OF ORIGINATION/MODIFICATION OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS(1)
PERCENTAGE OF AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL YEAR OF ORIGINATION/MODIFICATION NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - -------------------------------- ------ ------------------- ------------------- Prior to 1985............. 7 $ 875,999 1.98% 1985...................... 3 306,799 0.69% 1986...................... 9 1,698,656 3.83% 1987...................... 17 3,532,076 7.97% 1988...................... 29 6,757,515 15.24% 1989...................... 22 6,974,512 15.73% 1990...................... 19 6,761,720 15.25% 1991...................... 12 3,165,701 7.14% 1992...................... 11 2,865,491 6.46% 1993...................... 7 1,086,988 2.45% 1994...................... 5 1,020,878 2.30% 1995...................... 11 2,911,221 6.57% 1996...................... 9 1,892,459 4.27% 1997...................... 9 4,478,417 10.10% --- ----------- ------ Total................... 170 $44,328,432 100.00% === =========== ======
- -------- (1) The weighted average seasoning of the Initial Distressed U.S. Commercial Loans is approximately 84.05 months. DISTRIBUTION OF PRINCIPAL BALANCES OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS(1)
PERCENTAGE OF AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL RANGE OF PRINCIPAL BALANCES NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - --------------------------- ------ ------------------- ------------------- $250,000 or less................ 113 $12,596,250 28.42% $250,001-$500,000............... 31 10,655,764 24.04% $500,001-$750,000............... 12 7,021,862 15.84% $750,001-$1,000,000............. 9 7,843,985 17.70% $1,000,001-$1,250,000........... 2 2,045,568 4.61% $1,250,001-$1,500,000........... 2 2,578,356 5.82% $1,500,001-$2,000,000........... 1 1,586,647 3.58% --- ----------- ------ Total......................... 170 $44,328,432 100.00% === =========== ======
- -------- (1) The average outstanding principal balance of the Initial Distressed U.S. Commercial Loans is approximately $260,755. 63 STATED REMAINING TERM TO MATURITY OF INITIAL DISTRESSD U.S. COMMERCIAL LOANS(1)
PERCENTAGE OF AGGREGATE AGGREGATE PRINCIPAL PRINCIPAL STATED REMAINING TERM--MONTHS NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - ----------------------------- ------ ------------------- ------------------- Matured Loans................... 55 $14,055,862 31.71% 1-60............................ 38 11,383,627 25.68% 61-120.......................... 28 4,894,874 11.04% 121-180......................... 13 4,048,885 9.13% 181-240......................... 10 2,237,776 5.05% 241-300......................... 11 4,019,029 9.07% 301-360......................... 7 2,681,438 6.05% Due on Demand................... 8 1,006,941 2.27% --- ----------- ------ Total......................... 170 $44,328,432 100.00% === =========== ======
- -------- (1) The weighted average stated remaining term to maturity of the Initial Distressed U.S. Commercial Loans (excluding matured loans) is approximately 127.63 months. ORIGINAL/MODIFIED LOAN-TO-VALUE RATIOS OF INITIAL DISTRESSED U.S. COMMERCIAL LOANS(1)
PERCENTAGE OF RANGE OF ORIGINAL/ AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL MODIFIED LOAN-TO-VALUE RATIOS NUMBER BALANCE OUTSTANDING BALANCE OUTSTANDING - ----------------------------- ------ ------------------- ------------------- 50.00% or less.................. 13 $ 3,747,632 8.45% 50.01%-55.00%................... 5 780,109 1.76% 55.01%-60.00%................... 11 3,480,546 7.85% 60.01%-65.00%................... 4 1,610,389 3.63% 65.01%-70.00%................... 17 2,941,173 6.63% 70.01%-75.00%................... 14 4,636,138 10.46% 75.01%-80.00%................... 10 2,350,078 5.30% 80.01%-85.00%................... 3 674,045 1.52% 85.01%-90.00%................... 4 1,371,067 3.09% 90.01%-95.00%................... 3 432,275 0.98% 95.01%-100.00%.................. 4 1,434,579 3.24% 100.01%-125.00%................. 2 729,762 1.65% Greater than 125.00%............ 3 1,879,391 4.24% Other(2)........................ 77 18,261,249 41.20% --- ----------- ------ Total......................... 170 $44,328,432 100.00% === =========== ======
- -------- (1) The weighted average loan to value ratio at origination/modification of the Initial Distressed U.S. Commercial Loans (excluding "Other") is approximately 75.82%. (2) "Other" includes Initial Distressed U.S. Commercial Loans as to which the mortgage loan file did not contain an appraisal at origination or modification of such loans. The Company has obtained either an appraisal or BPO on such loans in connection with or subsequent to acquisition. 64 The Initial U.S. Commercial Properties The U.S. Commercial Properties included in the Initial Investments (the "Initial U.S. Commercial Properties") will consist of 14 properties with an aggregate appraised value of approximately $14.0 million, of which four properties with an appraised value of approximately $11.3 million will be purchased from Wilshire Properties 1 and Wilshire Properties 2 for approximately $5.7 million and the assumption of approximately $5.6 million of indebtedness. The 10 real properties being acquired from WFSG were acquired by WFSG through foreclosure and are being purchased by the Company, through the Operating Partnership, for approximately $2.7 million, which will result in a gain of approximately $0.2 million to WFSG. The purchase price was calculated using the BPOs for the 10 properties. The Company will maintain comprehensive insurance on the properties being acquired from WFSG, Wilshire Properties 1 and Wilshire Properties 2, including liability, fire and extended coverage, in amounts sufficient to permit the replacement of the properties in the event of a total loss, subject to an applicable deduction. The following tables present information concerning the 10 properties to be acquired from WFSG or its subsidiaries. Some of the aggregate percentages and appraised values in the following tables may not total due to rounding. GEOGRAPHIC DISTRIBUTION OF INITIAL U.S. COMMERCIAL PROPERTIES BEING ACQUIRED FROM WFSG
PERCENTAGE OF TOTAL STATE NUMBER OF REAL PROPERTIES APPRAISED VALUE APPRAISED VALUE - ----- ------------------------- --------------- ------------------- California....... 3 $ 704,000 26.05% Connecticut...... 4 1,370,000 50.68% Florida.......... 1 570,000 21.09% New Jersey....... 1 49,000 1.81% Texas............ 1 10,000 0.37% --- ---------- ------ Total.......... 10 $2,703,000 100.00% === ========== ======
TYPE OF INITIAL U.S. COMMERCIAL PROPERTIES BEING ACQUIRED FROM WFSG
PERCENTAGE OF TOTAL PROPERTY TYPE NUMBER OF REAL PROPERTIES APPRAISED VALUE APPRAISED VALUE - ------------- ------------------------- --------------- ------------------- Commercial Land......... 4 $ 659,000 24.38% Commercial Other........ 1 65,000 2.40% Low Rise Office......... 2 1,174,000 43.43% Multi-Family............ 2 625,000 23.12% Retail.................. 1 180,000 6.66% --- ---------- ------ Total................. 10 $2,703,000 100.00% === ========== ======
65 The Company will acquire four commercial and industrial real estate properties from Wilshire Properties 1 and Wilshire Properties 2. All leases will be assigned to the Company from Wilshire Properties 1 and Wilshire Properties 2 at Closing. The following table presents information concerning the properties to be acquired from Wilshire Properties 1 and Wilshire Properties 2:
RENT PER SQUARE FOOT OCCUPANCY PERCENTAGE LEASABLE NUMBER TOTAL -------------------- -------------------------------------------- DATE SQUARE OF ANNUALIZED DEC. 31, SEPT. 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, PROPERTY COMPLETED FOOTAGE TENANTS BASE RENT 1996 1997 1993 1994 1995 1996 1997 -------- --------- -------- ------- ---------- -------- --------- -------- -------- -------- -------- -------- 1776 SW Madison Street, Portland, Oregon......... 1961 15,000 1 $240,000 $13.00 $16.00 100% 100% 100% 100% 100% Taylor Street Buildings, Portland, Oregon......... * * * 1705 SW Taylor 1960 20,000 Street......... 1723 SW Taylor 1960 4,600 Street......... 919 SW 17th 1982 3,400 Avenue......... ------- --- Total Taylor Street Buildings..... 28,000 2 317,600 N/A(2) 11.34 N/A(2) 100% Tigard Industrial Park, 9800-9920 SW Tigard Street, Tigard, Oregon......... 1974 113,841 6 515,280 4.44 4.53 95% 95% 95% 100% 100% 90001 Prairie Road, Eugene, Oregon......... 1965 84,912 1 271,068 2.93 3.19 100% 100% 100% 100% 100% APPRAISED PROPERTY VALUE(1) -------- ---------- 1776 SW Madison Street, Portland, Oregon......... $1,800,000 Taylor Street Buildings, Portland, Oregon......... 1705 SW Taylor Street......... 1723 SW Taylor Street......... 919 SW 17th Avenue......... Total Taylor Street Buildings..... 2,600,000 Tigard Industrial Park, 9800-9920 SW Tigard Street, Tigard, Oregon......... 4,175,000 90001 Prairie Road, Eugene, Oregon......... 2,700,000
- ------- * No information is available on the occupancy rates for these years because the building was owner-occupied during this period, and that owner is no longer conducting business. (1) Appraisals completed as of October 10, 1997. (2) Not leased until January 1997. Properties Acquired from Wilshire Properties 1 1776 SW Madison Street. This three-story, brick office building is located 16 blocks from downtown Portland and is adjacent to the light-rail transit line. The building, which is currently leased to WFSG and its affiliates, serves as WFSG's corporate headquarters. This property, which was upgraded and remodeled in 1996, was originally constructed in 1961. The lease with WFSG expires in December 2001 and the rent is competitive for the Portland, Oregon marketplace. Taylor Street Buildings. The Taylor Street Buildings consist of three office/industrial buildings located 16 blocks from downtown Portland. Currently the properties are occupied by WFSG and an affiliate of WFSG, Wilshire Leasing Limited, under leases which expire in December 2001 on competitive terms in the Portland, Oregon marketplace. WFSG and Wilshire Leasing Limited will pay the rent as indicated in the table above after the Closing. Properties Acquired from Wilshire Properties 2 Tigard Industrial Park. This multi-tenant, industrial business park consists of four buildings located on 7.7 acres close to I-5 and Highway 217. The buildings are tilt-up concrete construction with 14 grade-level doors and 18 dock-high doors. The facility currently has six tenants with leases which expire between 1998 and 2002. 90001 Prairie Road. This building is located on 7.5 acres with access to the I-5 freeway via Belt Line Road and to the Eugene-Springfield metropolitan and Gateway areas. The property is served by an on-site rail spur, and the property is within the West Eugene enterprise zone. Included in the 7.5 acres are three acres of industrial land which may be developed. The facility has one tenant which is not affiliated with WFSG or the Company under a lease which expires in November 2000. 66 The commercial properties being acquired by the Operating Partnership from Wilshire Properties 1 and Wilshire Properties 2 have an aggregate appraised value of approximately $11.3 million, and are subject to existing indebtedness of approximately $5.6 million at interest rates ranging from 9.1% to 10.6%. The indebtedness matures from September 1998 until November 2006 and will be assumed by the Company. See "Operating Partnership Agreement." INITIAL MORTGAGE-BACKED SECURITIES The Initial Mortgage-Backed Securities included in the Initial Investments (the "Initial Mortgage-Backed Securities") consist of 28 classes of Mortgage- Backed Securities representing interests in 17 securitizations. All of the securities to be purchased had issue dates ranging from March 30, 1994 to November 30, 1997. The Initial Mortgage-Backed Securities consist of private-label securities backed by loans that were originated and are being serviced by unaffiliated non-governmental third parties ("Private-Label Securities") and securities backed by loans that were previously held in the portfolio of WFSG or its affiliates and for which WCC is continuing to act as servicer ("Retained Securities"). The purchase prices of the Initial Mortgage-Backed Securities will be approximately $64.2 million for Private-Label Securities and approximately $30.8 million for Retained Securities. In addition, approximately $6.0 million (by purchase price) of the Initial Mortgage-Backed Securities consist of IOs. The purchase price for the Initial Mortgage-Backed Securities was derived by considering a number of factors, including the amount and timing of potential net cash flows on the Initial Mortgage-Backed Securities, the range of possible returns on such purchases and the risks associated with such purchases, including the risk that the ultimate return will be significantly affected by losses, if any, realized on the underlying mortgage loans and other factors that are not controlled by the Company, such as prepayment experience on the underlying mortgage loans. These factors may result in a below market rate of return or a loss on the purchase price in certain situations. See "Risk Factors--Investment Activity Risks--Credit and Prepayment Risks from Ownership of Mortgage-Backed Securities in Pools of Residential and Commercial Mortgage Loans." The following table sets forth information regarding the Company's Initial Mortgage-Backed Securities as reported as of August 31, 1997, except for the purchase price which is reported as of February 28, 1998. 67 INITIAL MORTGAGE-BACKED SECURITIES
INVESTMENT/ NON- PERCENTAGE OF POOL INVESTMENT ISSUE COLLATERAL PAID DOWN SINCE ISSUE NAME CLASS RATING(6) GRADE(7) DATE TYPE ISSUANCE - ---------------- ----- --------- ----------- -------- ------------ ------------------ PRIVATE LABEL SECURITIES - ------------- BSMSI 96-6 B3 Baa2 I 12/30/96 Residential 11.54% B4 Ba2 N 12/30/96 Residential 11.54% CHASE 94-H B5 B N 5/1/94 Residential 15.95% CSFBMSC 97-1R 1-B1 Ba2 N 9/21/97 Residential 0.51% 1-B2 Ba3 N 9/21/97 Residential 0.51% 1-B3 B2 N 9/21/97 Residential 0.51% 2-B1 BB N 9/21/97 Residential 0.51% 2-B2 BB- N 9/21/97 Residential 0.51% 2-B3 B N 9/21/97 Residential 0.51% INMC B4 BB N 9/27/94 Residential 28.68% GNMA9716 FIO AAA I 10/30/97 Residential 20.88% HMSI 97-2 B4 BB N 4/1/97 Residential 3.86% HMSI 97-1 B4 BB N 2/28/97 Residential 6.75% RFMSI 96-S4 B1 BB N 2/28/96 Residential 11.70% SASI 94-4 M2 Baa3 I 3/30/94 Residential 28.99% SBMS 97-HUD2(1) B6 NR N 11/30/97 Residential 0.00% SBMS VII 96- LB3(1) B NR N 11/25/96 Residential 23.62% SBFT 97-1 BB N 10/27/97 Residential 0.00% SBMS VII 97- LB1(1) CE NR N 1/27/97 Residential 16.90% RETAINED SECURITIES - ---------- WFC 96-3(1) AIO AAA I 12/20/96 Residential 13.23% WFC 96-3(1) B1 BB N 12/20/96 Residential 13.23% WFC 96-3(1) B2 B N 12/20/96 Residential 13.23% WFC 96-3(1) B3 NR N 12/20/96 Residential 13.23% WFC 96-3(1) FIO AAA I 12/20/96 Residential 13.23% WILSHIRE CON- SUMER 95A(1) B NR N 3/7/95 Consumer 49.83% WILSHIRE MORT- B NR N 6/22/95 Manufactured 45.19% GAGE 95A Housing WILSHIRE MORT- GAGE 95-MA1(1) B NR N 7/1/95 Home Equity 40.48% WILSHIRE MORTGAGE 95-MF1(1) B NR N 7/1/95 Home Equity 40.48% TOTAL................................................................................ AGGREGATE CLASS BALANCE COMPANY INVESTMENT --------------------------------------------- -------------------------- PERCENTAGE PERCENTAGE AUGUST 31, PAID DOWN OF PURCHASE ISSUE NAME INITIAL 1997 SINCE ISSUANCE CLASS AMOUNT PRICE - ---------------- --------------- ------------ ---------------- ---------- --------------- ----------- PRIVATE LABEL SECURITIES - ------------- BSMSI 96-6 $ 5,427,000 $ 5,369,413 1.06% 50.0% $ 2,684,707 $ 2,667,195 4,824,000 4,772,811 1.06% 50.0% 2,386,406 2,204,881 CHASE 94-H 250,000 240,618 3.75% 100.0% 240,618 191,381 CSFBMSC 97-1R 12,268,000 12,262,606 0.04% 50.0% 6,131,303 5,755,804 3,225,000 3,223,582 0.04% 50.0% 1,611,791 1,402,655 6,852,000 6,852,000 0.00% 50.0% 3,426,000 2,665,077 5,007,000 4,994,594 0.25% 50.0% 2,497,297 2,272,397 1,320,000 1,316,729 0.25% 50.0% 658,365 577,273 2,554,000 2,547,672 0.25% 50.0% 1,273,836 935,118 INMC 479,877 424,116 11.62% 100.0% 424,116 390,699 GNMA9716 296,318,416(3) 234,458,698 20.88% 100.0% 234,458,698(4) 3,985,349 HMSI 97-2 1,507,000 1,501,391 0.37% 100.0% 1,501,391 1,381,319 HMSI 97-1 2,021,000 2,010,414 0.52% 100.0% 2,010,414 1,833,709 RFMSI 96-S4 2,849,500 2,808,011 1.46% 100.0% 2,808,011 2,533,947 SASI 94-4 30,900,000 30,308,486 1.91% 25.0% 7,577,122 6,251,186 SBMS 97-HUD2(1) 29,408,177 29,408,177 0.00% 100.0% 29,408,177 8,784,860 SBMS VII 96- LB3(1) 4,897,473 4,897,474 0.00% 50.0% 2,448,737 7,419,672 SBFT 97-1 40,000,000 40,000,000 0.00% 12.1% 4,840,000 4,261,551 SBMS VII 97- LB1(1) 5,059,267 5,059,267 0.00% 50.0% 2,529,634 8,701,740 RETAINED SECURITIES - ---------- WFC 96-3(1) 166,577,385 141,836,793 14.85% 100.0% 141,836,793(4) 1,606,271 WFC 96-3(1) 6,261,433 6,168,890 1.48% 50.0% 3,084,445 2,905,492 WFC 96-3(1) 4,870,004 4,798,022 1.48% 50.0% 2,399,011 1,771,596 WFC 96-3(1) 12,522,867 12,337,772 1.48% 50.0% 6,168,886 2,445,923 WFC 96-3(1) 48,211,248 37,260,368 22.71% 100.0% 37,260,368(4) 426,724 WILSHIRE CON- SUMER 95A(1) 16,637,757 18,834,558 (13.20%)(2) 50.0% 9,417,279 8,501,005 WILSHIRE MORT- 5,006,883 5,127,436 (2.41%)(2) 100.0% 5,127,436 3,930,312 GAGE 95A WILSHIRE MORT- GAGE 95-MA1(1) 5,912,302 6,768,326 (14.48%)(2) 100.0% 6,768,326 6,605,223 WILSHIRE MORTGAGE 95-MF1(1) 2,312,642 2,740,483 (18.50%)(2) 100.0% 2,740,483 2,606,322 ------------ ------------ ------------ ----------- TOTAL......... $723,480,231 $628,328,707 $523,719,650 $95,014,881 ============ ============ ============ ===========
- ---- (1) Special Servicing rights attached. (2) Includes prepaid senior class principal due to application of excess interest to senior class principal, thereby increasing subordinate class balance. (3) The pools of GNMA Securities which underlie this issue were accumulated over a period of time prior to the issuance of this security and the principal amount of such securities was $296,318,416 paid down to $234,458,898 at the time of issuance. (4) IO classes are notional classes and, as such, are not entitled to distributions of principal. (5) CE bonds represent subordinated principal plus a notional IO class. (6) NR means the security is not rated. (7) I means investment grade (BBB rating and above) and N means non-investment grade (BBB- and below) or not rated. 68 RATINGS OF INITIAL MORTGAGE-BACKED SECURITIES
NET BOOK RATING CATEGORY(1) VALUE - ------------------ ----------- AAA/Aaa1 to A-/A3................................................... $ 6,018,344 BBB+/Baa1 to BBB-/Baa3.............................................. 8,918,381 BB+/Ba1 to BB-/Ba3.................................................. 25,519,727 B+/B1 to B-/B3...................................................... 5,563,172 Unrated............................................................. 48,995,257 ----------- Total............................................................. $95,014,881 ===========
- -------- (1) Most recent rating by an independent rating agency. The ratings of the Rating Agencies on mortgage pass-through certificates address the likelihood of the receipt of all distributions to which such holders are entitled. The ratings do not represent any assessment of (i) the likelihood or frequency of principal prepayments on the underlying mortgage loans, (ii) the degree to which such prepayments might differ from those originally anticipated or (iii) whether and to what extent yield maintenance premiums (if any) will be received. Also, a security rating does not represent any assessment of the yield to maturity that investors may experience on any security nor does it assess any possibility that the holders of the IOs might not fully recover their investment in the event of rapid prepayments of the underlying mortgage loans (including both voluntary and involuntary prepayments). A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by assigning the rating agency. Structure and Subordination. The majority of the principal amount of the Initial Mortgage-Backed Securities is subordinated in right of payment of principal and interest, thus protecting the more senior securities from losses on the underlying mortgage loans. In general, on any distribution date, prepayments of principal will typically be distributed to the most senior class of securities, and not to the Initial Mortgage-Backed Securities, as long as the more senior securities are outstanding or certain overcollateralization levels are not met. Generally, on any distribution date, no interest is distributed to the Initial Mortgage-Backed Securities until interest allocable to more senior classes for that distribution date has been distributed. In addition, as losses are incurred on the underlying mortgage loans, such losses will be borne by the most junior class of Mortgage-Backed Securities then having an outstanding balance. Restrictions on Transfer of Initial Mortgage-Backed Securities. Substantially all of the Initial Mortgage-Backed Securities have not been registered under the Securities Act or any state securities laws, and, accordingly, transfer of the Initial Mortgage-Backed Securities is restricted. Moreover, the Initial Mortgage-Backed Securities cannot be transferred to an ERISA plan or related party except in certain limited circumstances. As a result, there is no liquid market for the Initial Mortgage-Backed Securities. THE INTERNATIONAL INVESTMENTS At Closing the Company will purchase participation interests in two pools of secured loans in the United Kingdom: (i) a pool of non-performing loans with an aggregate outstanding principal balance of approximately $7.9 million that because of their delinquent status were purchased at prices that reflected a significant discount from their unpaid principal balances (the "United Kingdom Non-Performing Loans"), and (ii) a pool of performing and sub-performing loans with an aggregate outstanding principal balance of approximately $2.3 million that were purchased at prices that more closely approximated their unpaid principal balances (the "United Kingdom Performing and Sub-Performing Loans"). The aggregate purchase price for these loans in the United Kingdom will be approximately $3.4 million based on a February 28, 1998 exchange rate of $1.643 to the English Pound. Where the property securing the loan is situated in England, the Company will have a first or second legal charge which is fully enforceable under English law. Where property securing the loan is situated in Scotland, the Company will have a first ranking standard security which is fully enforceable under Scottish Law. WFSG has granted the Company an option to purchase for up to $110.0 million all or a portion of up to WFSG's 50% interest in two portfolios of International Investments in France. 69 The following tables describe the United Kingdom Non-Performing Loans and the United Kingdom Performing and Sub-Performing Loans and related properties as of February 28, 1998. Some of the aggregate percentages and appraised and principal balances in the following tables may not total due to rounding. TYPES OF REAL PROPERTY SECURING UNITED KINGDOM NON-PERFORMING LOANS
PERCENTAGE OF AGGREGATE APPRAISED APPRAISED AGGREGATE PROPERTY TYPE NUMBER VALUE VALUE - ------------- ------ ---------- ------------- Mixed/Use....................................... 4 $1,043,305 61.65% Multi Family.................................... 1 336,815 19.90% Undeveloped Land................................ 2 312,170 18.45% Recreational Camp (/1/)......................... 1 0 0.00% --- ---------- ------ Total......................................... 8 $1,692,290 100.00% === ========== ======
(1) The appraised value of the recreational camp is de minimis and therefore the Company has placed no value on this asset. GEOGRAPHIC DISTRIBUTION OF REAL PROPERTY SECURING UNITED KINGDOM NON- PERFORMING LOANS
AGGREGATE PERCENTAGE OF APPRAISED AGGREGATE LOCATION NUMBER VALUE APPRAISED VALUE - -------- ------ ---------- ---------------- South East................................... 1 451,825 26.70% South West................................... 2 336,815 19.90% North........................................ 1 197,160 11.65% Scotland..................................... 3 706,490 41.75% --- ---------- ------ Total...................................... 8 $1,692,290 100.00% === ========== ======
LOAN-TO-VALUE RATIOS OF UNITED KINGDOM PERFORMING AND SUB-PERFORMING LOANS
AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS NUMBER OUTSTANDING BALANCE OUTSTANDING - -------------------------------------- ------ ------------ ------------------- 50.01% to 55.00%......................... 1 $ 8,458 0.37% 55.01% to 60.00%......................... 1 155,929 6.75% 60.01% to 65.00%......................... 0 -- 0.00% 65.01% to 70.00%......................... 0 -- 0.00% 70.01% to 75.00%......................... 1 65,365 2.83% 75.01% to 80.00%......................... 1 509,389 22.05% 80.01% to 85.00%......................... 0 -- 0.00% 85.01% to 90.00%......................... 0 -- 0.00% 90.01% to 95.00%......................... 0 -- 0.00% 95.01% to 100.00%........................ 0 -- 0.00% 100.01% to 125%.......................... 2 1,009,453 43.70% Greater than 125%........................ 2 561,381 24.30% --- ---------- ------ Total.................................. 8 $2,309,975 100.00% === ========== ======
70 DELINQUENCY STATUS OF UNITED KINGDOM PERFORMING AND SUB-PERFORMING LOANS
AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL NUMBER OF PAYMENTS DELINQUENT NUMBER OUTSTANDING BALANCE OUTSTANDING - ----------------------------- ------ ------------ ------------------- Current................................. 5 $ 795,749 34.45% 12 or more Payments..................... 3 1,514,226 65.55% --- ---------- ------- Total................................. 8 $2,309,975 100.00% === ========== ======= DISTRIBUTION OF PRINCIPAL BALANCES OF UNITED KINGDOM PERFORMING AND SUB- PERFORMING LOANS AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL RANGE OF PRINCIPAL BALANCES NUMBER OUTSTANDING BALANCE OUTSTANDING - --------------------------- ------ ------------ ------------------- $75,000 or less......................... 4 $ 174,840 7.57% $75,001-$200,000........................ 1 155,929 6.75% $400,001-$600,000....................... 2 1,026,361 44.43% Greater than $600,001................... 1 952,845 41.25% --- ---------- ------- Total................................. 8 $2,309,975 100.00% === ========== ======= MORTGAGE RATES OF UNITED KINGDOM PERFORMING AND SUB-PERFORMING LOANS AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL MORTGAGE RATES NUMBER OUTSTANDING BALANCE OUTSTANDING - -------------- ------ ------------ ------------------- 9.00%-9.50%............................. 1 $ 509,389 22.05% 9.50%-9.99%............................. 3 166,382 7.20% 10.00%-10.49%........................... 2 1,469,817 63.63% 10.50%-11.49%........................... 1 8,458 0.37% 11.50%-11.99%........................... 1 155,929 6.75% --- ---------- ------- Total................................. 8 $2,309,975 100.00% === ========== =======
71 STATED REMAINING TERM TO MATURITY OF UNITED KINGDOM PERFORMING AND SUB- PERFORMING LOANS
AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL STATED REMAINING TERM-MONTHS NUMBER OUTSTANDING BALANCE OUTSTANDING - ---------------------------- ------ ------------ ------------------- Matured Loans........................... 1 $ 44,409 1.92% 61-120.................................. 1 952,845 41.25% 121-180................................. 4 739,141 32.00% 181-240................................. 1 56,608 2.45% On Demand(1)............................ 1 516,972 22.38% --- ---------- ------- Total................................. 8 $2,309,975 100.00% === ========== =======
- -------- (1) This loan is due on demand and the remaining term could not be determined. CLASSIFICATION OF UNITED KINGDOM PERFORMING AND SUB-PERFORMING LOANS
AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL CLASSIFICATION NUMBER OUTSTANDING BALANCE OUTSTANDING - -------------- ------ ----------- ------------------- Performing Loans......................... 5 $ 795,749 34.45% Non-Performing Loans..................... 3 1,514,226 65.55% --- ---------- ------ Total.................................. 8 $2,309,975 100.00% === ========== ======
YEAR OF ORIGINATION/MODIFICATION OF UNITED KINGDOM PERFORMING AND SUB- PERFORMING LOANS
AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL YEAR OF ORIGINATION/MODIFICATION NUMBER OUTSTANDING BALANCE OUTSTANDING - -------------------------------- ------ ----------- ------------------- 1987..................................... 1 $ 952,845 41.25% 1988..................................... 1 56,608 2.45% 1989..................................... 2 517,847 22.42% 1990..................................... 1 65,365 2.83% 1991..................................... 2 561,381 24.30% 1992..................................... 1 155,929 6.75% --- ---------- ------ Total.................................. 8 $2,309,975 100.00% === ========== ======
TYPE OF MORTGAGED PROPERTIES SECURING UNITED KINGDOM PERFORMING AND SUB- PERFORMING LOANS
AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL PROPERTY TYPE NUMBER OUTSTANDING BALANCE OUTSTANDING ------------- ------ ----------- ------------------- Hospitality.............................. 2 $ 672,901 29.13% Multi-Family............................. 5 684,229 29.62% Mixed Use................................ 1 952,845 41.25% --- ---------- ------ Total.................................. 8 $2,309,975 100.00% === ========== ======
72 LIEN POSITION OF UNITED KINGDOM PERFORMING AND SUB-PERFORMING LOANS
AGGREGATE PRINCIPAL PERCENTAGE OF BALANCE AGGREGATE PRINCIPAL LIEN POSITION NUMBER OUTSTANDING BALANCE OUTSTANDING - ------------- ------ ----------- ------------------- First Lien(1)................... 4 $2,135,135 92.43% Second Lien..................... 4 174,840 7.57% --- ---------- ------ Total......................... 8 $2,309,975 100.00% === ========== ====== - -------- (1) Two loans with a combined balance of $1,026,361 are each secured by two properties, one with a first lien and the other secured by a second lien. For each such loan, the property with the first lien has a higher appraised value than the property secured by the second lien. GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING UNITED KINGDOM PERFORMING AND SUB-PERFORMING LOANS AGGREGATE PRINCIPAL PERCENTAGE OF NUMBER OF BALANCE AGGREGATE PRINCIPAL LOCATION OF REAL PROPERTY MORTGAGE LOANS OUTSTANDING BALANCE OUTSTANDING ------------------------- -------------- ----------- ------------------- South East...................... 2 $1,469,817 63.63% South West...................... 1 44,409 1.92% London.......................... 4 639,820 27.70% North........................... 1 155,929 6.75% --- ---------- ------ Total......................... 8 $2,309,975 100.00% === ========== ======
73 CAPITALIZATION The total stockholders equity of the Company as of February 28, 1998 and as adjusted to reflect the sale of the shares of Common Stock offered hereby, is as follows:
AS ACTUAL ADJUSTED(1)(2) ------ -------------- (IN THOUSANDS) Common Stock, par value $0.01, $0.0001, as adjusted...... $ 0 $ 0 Authorized--1,000 shares, 200,000,000 shares, as adjusted Outstanding--100 shares, 100 shares, as adjusted Preferred Stock, par value $0.0001, as adjusted.......... 0 0 Authorized--25,000,000 shares, as adjusted Outstanding--0 shares, as adjusted Additional Paid-in Capital............................... 2 146,802 --- -------- Total................................................ $2 $146,802 === ========
- -------- (1) Assumes that the initial public offering price is $16.00 per share. Includes 990,000 shares of Common Stock to be purchased by WFSG, after deducting offering and organizational expenses estimated to be $2.0 million payable by the Company, and assuming that the Underwriters do not exercise their over-allotment option to purchase up to an additional 1,500,000 shares of Common Stock. (2) The Company's articles of incorporation were amended and restated on March 12, 1998 to increase the number of authorized shares of Common Stock to 200,000,000 with a par value of $0.0001 per share. 25,000,000 shares of Preferred Stock were also authorized with a par value of $0.0001 per share. MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES WREIT has no operating history. WREIT's opening audited balance sheet as of December 31, 1997, and related footnotes are presented elsewhere herein. The Management's Discussion and Analysis of Liquidity and Capital Resources should be read in conjunction with such opening balance sheet and related notes. WREIT has been organized and will elect to qualify as a REIT under the Code and, as such, anticipates distributing annually at least 95% of its taxable income (other than net capital gain), subject to certain adjustments. Cash for such distributions is expected to be generated from the Company's operations, although the Company also may borrow funds to make distributions. The Company's revenues will be derived from (i) ownership of U.S. Commercial Properties; (ii) ownership of Mortgage-Backed Securities; (iii) International Investments; (iv) ownership of Other Real Estate Related Assets; and (v) interest and revenues from other (generally short-term) investments. See "Distribution Policy" and "Federal Income Tax Consequences." The principal sources of the Company's funds in the near term will be the proceeds of this Offering. At Closing, the Company, through the Operating Partnership, will acquire approximately $139.2 million in assets. The proceeds of the Offering will fund the purchase of approximately $133.6 million of the Initial Investments with the remainder (approximately $13.2 million) to be used to fund the operations of the Company and the Operating Partnership and to acquire new assets. The remainder of the Initial Investments will be purchased through the assumption of certain indebtedness of approximately $5.6 million. In this regard, WFSG has granted the Company an option to purchase, for approximately $110.0 million, all or a portion of up to WFSG's 50% interest in two portfolios of International Investments in France. The Company is currently evaluating the suitability of such investment under U.S. tax and French law. The Company plans to raise additional operating funds by leveraging its assets, primarily through repurchase agreements, secured term loans warehouse lines of credit, mortgage loans, issuance of mortgage-backed securities and other borrowing arrangements, which management believes will be sufficient to enable the Company to meet its anticipated liquidity and capital requirements in the long term. See "Operating Policies and Objectives" and "Use of Proceeds." 74 DESCRIPTION OF CAPITAL STOCK GENERAL The Charter provides that WREIT may issue up to 225,000,000 shares of capital stock, consisting of 200,000,000 shares of Common Stock, $0.0001 par value per share, and 25,000,000 shares of preferred stock, $0.0001 par value per share ("Preferred Stock"). Upon completion of the Offering, 10,000,000 shares of Common Stock (11,500,000 of the Underwriters' over-allotment option is exercised in full) will be issued and outstanding, and 6,000,000 shares of Common Stock will be reserved for issuance upon exercise of options, and no Preferred Stock will be issued and outstanding. The authorized capital stock of WREIT may be increased and altered from time to time as permitted by Maryland law. COMMON STOCK All outstanding shares of Common Stock will be duly authorized, fully paid and nonassessable upon the Closing. Subject to the preferential rights of any other shares or series of shares of capital stock, holders of Common Stock are entitled to receive dividends if and when authorized and declared by the Board of Directors of WREIT out of assets legally available therefor and to share ratably in the assets of WREIT legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding-up after payment of, or adequate provision for, all known debts and liabilities of WREIT. WREIT currently intends to pay quarterly dividends. Each outstanding share of Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as otherwise required by law or except as provided with respect to any other class or series of shares of capital stock, the holders of Common Stock will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means in all elections of directors, each holder of Common Stock has the right to cast one vote for each share of stock for each candidate. PREFERRED STOCK Pursuant to the Charter, Preferred Stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. Because the Board of Directors has the power to establish the preferences and rights of each class or series of Preferred Stock, the Board of Directors may afford the holders of any series or class of Preferred Stock preferences, powers and rights, voting or otherwise, senior to the rights of the holders of Common Stock. This could effect the ability of WREIT to make dividend distributions to the holders of Common Stock. The Board could also authorize the issuance of Preferred Stock with terms and conditions which could have the effect of discouraging a takeover or other transaction which holders of some, or a majority, of the shares of Common Stock might believe to be in their best interests or in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then market price of such shares of Common Stock. As of the date hereof, no shares of Preferred Stock are outstanding. RESTRICTIONS ON OWNERSHIP Pursuant to the Charter, no "Disqualified Organization" may own or be deemed to own by virtue of the attribution provisions of the Code any outstanding shares of capital stock. A "Disqualified Organization" includes the United States, any state or political subdivision thereof, any foreign government, any international organization, any agency or instrumentality of any of the foregoing, any other tax-exempt organization (other than a farmer's cooperative described in section 521 of the Code) that is exempt from taxation under the unrelated business taxable income provisions of the Code, or any rural electrical or telephone cooperative. RESTRICTIONS ON TRANSFER For WREIT to qualify as a REIT under the Code, it must meet certain requirements concerning the ownership of its outstanding shares of capital stock. Specifically, not more than 50% in value of WREIT's outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the 75 Code to include certain entities) during the last half of a taxable year, and WREIT must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. See "Federal Income Tax Consequences--Requirements for Qualification." Because the Board of Directors believes it is essential for WREIT to continue to qualify as a REIT, the Charter, subject to certain exceptions and waivers described below, provides that no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% (or, with respect to WFSG, 20%) of the number of outstanding shares of Common Stock or any series of Preferred Stock (the "Ownership Limitation"). Subject to certain exceptions described below, any purported transfer of shares of Common Stock or Preferred Stock that would (i) result in any person owning, directly or indirectly, shares of Common Stock or Preferred Stock in excess of the Ownership Limitation, (ii) result in the shares of Common Stock and Preferred Stock, collectively, being owned by fewer than 100 persons (determined without reference to any rules of attribution), (iii) result in WREIT being "closely held" within the meaning of section 856(h) of the Code, or (iv) cause WREIT to own, actually or constructively, 10% or more of the ownership interests in a tenant of the Company's real property, within the meaning of section 856(d)(2)(B) of the Code, or (v) result in a "Disqualified Organization" owning shares of Common Stock or Preferred Stock of the Company, will be designated as "Shares-in-Trust" and transferred automatically to a trust (the "Trust") effective on the day before the purported transfer of such shares of Common Stock or Preferred Stock. The record holder of the shares of Common Stock or Preferred Stock that are designated as Shares-in-Trust (the "Prohibited Owner") will be required to submit such number of shares of Common Stock or Preferred Stock to WREIT for registration in the name of the Trust. The trustee of the Trust (the "Trustee") will be designated by WREIT, but will not be affiliated with WREIT. The beneficiary of the Trust (the "Beneficiary") will be one or more charitable organizations that are named by WREIT. Shares-in-Trust will remain issued and outstanding shares of Common Stock or Preferred Stock and will be entitled to the same rights and privileges as all other shares of the same class or series. The Trustee will receive all dividends and distributions on the Shares-in-Trust and will hold such dividends or distributions in trust for the benefit of the Beneficiary. The Trustee will vote all Shares-in-Trust. The Trustee will designate a permitted transferee of the Shares-in-Trust, provided that the permitted transferee (i) purchases such Shares-in-Trust for valuable consideration and (ii) acquires such Shares-in-Trust without such acquisition resulting in a transfer to another Trust. The Prohibited Owner with respect to Shares-in-Trust will be required to repay to the Trustee the amount of any dividends or distributions received by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii) the record date of which was on or after the date that such shares became Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee the lesser of (i) the price per share such Prohibited Owner paid for the shares of Common Stock or Preferred Stock that were designated as Shares-in- Trust (or, in the case of a gift or devise, the Market Price (as defined below) per share on the date of such transfer) or (ii) the price per share received by the Trustee from the sale of such Shares-in-Trust. Any amounts received by the Trustee in excess of the amounts to be paid to the Prohibited Owner will be distributed to the Beneficiary. The Shares-in-Trust will be deemed to have been offered for sale to WREIT, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of a gift or devise, the Market Price per share on the date of such transfer) or (ii) the Market Price per share on the date that WREIT, or its designee, accepts such offer. WREIT will have the right to accept such offer for a period of ninety days after the later of (i) the date of the purported transfer which resulted in such Shares-in-Trust or (ii) the date WREIT determines in good faith that a transfer resulting in such Shares-in-Trust occurred. "Market Price" on any date shall mean the average of the Closing Price (as defined below) for the five consecutive Trading Days (as defined below) ending on such date. The "Closing Price" on any date shall mean the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market. "Trading Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. 76 Any person who acquires or attempts to acquire shares of Common Stock or Preferred Stock in violation of the foregoing restrictions, or any person who owned shares of Common Stock or Preferred Stock that were transferred to a Trust, will be required (i) to give immediately written notice to WREIT of such event and (ii) to provide to WREIT such other information as it may request in order to determine the effect, if any, of such transfer on WREIT's status as a REIT. All persons who own, directly or indirectly, more than 5% (or such lower percentages as required pursuant to regulations under the Code) of the outstanding shares of Common Stock and Preferred Stock must, within 30 days after January 1 of each year, provide to WREIT a written statement or affidavit stating the name and address of such direct or indirect owner, the number of shares of Common Stock and Preferred Stock owned directly or indirectly, and a description of how such shares are held. In addition, each direct or indirect stockholder shall provide to WREIT such additional information as WREIT may request in order to determine the effect, if any, of such ownership on WREIT's status as a REIT and to ensure compliance with the Ownership Limitation. The Ownership Limitation generally will not apply to the acquisition of shares of Common Stock or Preferred Stock by an underwriter that participates in a public offering of such shares. In addition, the Board of Directors, upon receipt of a ruling from the Service or an opinion of counsel and upon such other conditions as the Board of Directors may direct, in its sole discretion, may exempt a person from the Ownership Limitation under certain circumstances. The foregoing restrictions will not be removed until (A)(i) such restrictions are no longer required in order to qualify as a REIT, and (ii) the Board of Directors determines that it is no longer in the best interest of the Company to retain such restrictions; or (B)(i) the Board of Directors determines that it is no longer in the best interests of WREIT to attempt to qualify, or to continue to qualify, as a REIT and (ii) there is an affirmative vote of two- thirds of the number of shares of Common Stock and Preferred Stock entitled to vote on such matter at a regular or special meeting of the stockholders of WREIT. All certificates representing shares of Common Stock or Preferred Stock will bear a legend referring to the restrictions described above. The Ownership Limitation could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interest. DIVIDEND REINVESTMENT PLAN WREIT may implement a dividend reinvestment plan whereby stockholders may automatically reinvest their dividends in WREIT's Common Stock. Details about any such plan would be sent to WREIT's stockholders following adoption thereof by the Board of Directors. REPORTS TO STOCKHOLDERS WREIT will furnish its stockholders with annual reports containing audited financial statements certified by independent public accountants and distribute quarterly reports containing unaudited financial information for each of the first three quarters of the year. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is The Bank of New York. LISTING OF THE COMMON STOCK An application has been submitted for approval for quotation of the Common Stock on the Nasdaq National Market under the symbol "WREI." 77 CERTAIN PROVISIONS OF MARYLAND LAW AND OF WREIT'S CHARTER AND BYLAWS The following summary of certain provisions of Maryland law and of the Charter and Bylaws of WREIT does not purport to be complete and is subject to Maryland law as well as the Charter and Bylaws of WREIT, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. BOARD OF DIRECTORS The Charter and Bylaws provide that the number of Directors of WREIT may be increased or decreased by the Board of Directors but may not be fewer than the minimum number required by Maryland law nor without certain approvals more than nine. Generally, any vacancy on the Board of Directors may be filled by a majority of the remaining Directors, except that a vacancy resulting from an increase in the number of Directors may be filled by a majority of the entire Board of Directors. WREIT's Charter provides that a director may be removed from office at any time, but only for cause and then only by the affirmative vote of at least two-thirds of all of the votes ordinarily entitled to be cast in the election of Directors voting together as a single class. In addition, the Charter provides that a majority of the Board of Directors must be Independent Directors. AMENDMENT WREIT reserves the right from time to time to make any amendment to its Charter now or hereafter authorized by law, including any amendments which alter the contract rights as expressly set forth in the Charter of any shares of outstanding stock; provided, however, that provisions relating to WREIT's election to be taxed as a REIT, and certain restrictions on the transferability of Common Stock or Preferred Stock cannot be amended without the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter voting together as a single class. The Charter provisions relating to WREIT's Board of Directors are also subject to certain super- majority amendment requirements. WREIT's Bylaws may be amended by the Board of Directors or by the affirmative vote of at least two-thirds of all of the votes ordinarily entitled to be cast in the election of directors voting together as a single class. The Charter provides that any amendment of the provisions of the Charter relating to indemnification of officers and directors shall not retroactively affect any act or failure to act that occurred prior to the amendment. BUSINESS COMBINATIONS Under MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person (i) who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation's shares or (ii) who is an affiliate of the corporation and, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate of such an Interested Stockholder, are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Any such business combination not prohibited above must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. 78 CONTROL SHARE ACQUISITIONS The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquirer, by officers or by directors who are employees of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (1) one-fifth or more but less than one-third, (2) one-third or more but less than a majority, or (3) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of or ownership of, or the power to direct the exercise of voting power with respect to, control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders' meeting. If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition. Also, certain restrictions and limitations otherwise applicable to the exercise of dissenter's rights do not apply in the context of a "control share acquisition." The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange effected under the MGCL if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. WREIT's Bylaws currently contain a provision exempting WREIT's capital stock from this statute, but the provision may be amended or eliminated by the Board of Directors. OPERATIONS The Company is generally prohibited from engaging in certain activities and acquiring or holding property or engaging in any activity that would cause the Company to fail to qualify as a REIT. DISSOLUTION OF THE COMPANY Under the MGCL, the Company may not be dissolved without the affirmative vote of the holders of two-thirds of the total number of shares of capital stock outstanding and entitled to vote thereon voting as a single class. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The Bylaws of WREIT provide (a) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by such stockholders may be made only (i) pursuant to WREIT's notice of the meeting, (ii) by the Board of Directors or (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws and (b) with respect to special meetings of stockholders, only the business specified in WREIT's 79 notice of meeting may be brought before the meeting of stockholders, and nominations of persons for election to the Board of Directors may be made only (i) pursuant to WREIT's notice of meeting, (ii) by the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the Bylaws. POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND BYLAWS The business combination provisions and the control share acquisition provisions of the MGCL, the provisions of the Charter on removal of directors and the advance notice provisions of the Bylaws could delay, defer or prevent a change in control of WREIT or other transaction that might involve a premium price for holders of Common Stock or otherwise be in their best interest. Although the Bylaws of WREIT contain a provision exempting the acquisition of Common Stock by any person from the control share acquisition provisions of the MGCL, there can be no assurance that such provision will not be amended or eliminated at any time in the future. 80 COMMON STOCK AVAILABLE FOR FUTURE SALE Upon the closing of the Offering, WREIT will have outstanding 10,000,000 shares of Common Stock (assuming the Underwriters do not exercise their over- allotment option). Of the outstanding shares, 9,010,000 shares of Common Stock to be sold in this Offering will be freely tradeable by persons other than "Affiliates" of the Company without restriction under the Securities Act of 1933, as amended (the "Securities Act"), subject to certain limitations on ownership set forth in the Charter. See "Description of Capital Stock-- Restrictions on Transfer." Shares of Common Stock issued to holders of Units upon exercise of the Redemption Rights will be "restricted" securities under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. See "Operating Partnership Agreement--Redemption Rights." As described below, WREIT has granted certain holders registration rights with respect to their Common Stock. In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any "Affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of restricted shares from the Company or from any Affiliate of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an Affiliate of the Company at any time during the three months preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company and Messrs. Wiederhorn and Mendelsohn have agreed not to offer, sell or contract to sell or otherwise dispose of any Common Stock without the prior consent of the Representatives (as defined herein) for a period of 180 days from the date of this Prospectus. WFSG has agreed not to offer, sell or contract to sell or otherwise dispose of the Common Stock acquired on the Closing Date without the prior consent of the Representatives, for a period of two years from the date of this Prospectus, provided that WRSC continues to serve as the Manager during such period. Additionally, upon Closing, stock options will be granted at the initial public offering price to WRSC and the Independent Directors and, if applicable, Non-Employee Directors of the Company. None of the options issued to WRSC will be immediately exercisable. One quarter of WRSC's options become exercisable on each of the first four anniversaries of the Closing. The 15,000 options issued to the Independent Directors will be immediately exercisable. The number of shares to be subject to such stock options will be 10% of the number of shares to be issued pursuant to the Offering, assuming the Underwriters fully exercise their over-allotment option. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, may adversely affect prevailing market prices of the Common Stock. 81 OPERATING PARTNERSHIP AGREEMENT The Operating Partnership has been organized as a Delaware limited partnership, the general partner of which is WREIT (the "General Partner"). The Company organized the Operating Partnership in order to provide future sellers of assets with the opportunity to transfer those assets to the Operating Partnership in a tax-deferred exchange. At Closing, WREIT will purchase 10,000,000 (11,500,000 if the Underwriters exercise their over- allotment option in full) Units with the net proceeds of the Offering. In addition, approximately 1,875 Units will be purchased by Small Cap for $30,000. Of the Units being purchased by WREIT, 100,000 Units will be GP Units (115,000 GP Units if the Underwriters exercise their over-allotment option in full), representing WREIT's 1% general partner interest in the Operating Partnership. WREIT and Small Cap will become limited partners of the Operating Partnership holding 9,900,000 and 1,875 LP Units, respectively (11,385,000 and 1,875 LP Units, respectively, if the Underwriters exercise their over- allotment option in full). WREIT and Small Cap and future holders of additional Units are hereafter referred to as the "Limited Partners." The following is a summary of the Operating Partnership Agreement entered into between WREIT and Small Cap. The following summary of the Operating Partnership Agreement, and the descriptions of certain provisions thereof set forth elsewhere in this Prospectus, describe certain provisions which appear in the Operating Partnership Agreement. GENERAL Pursuant to the Operating Partnership Agreement, WREIT, as the sole general partner of the Operating Partnership, has the full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership. The Limited Partners have no authority in their capacity as Limited Partners to transact business for, or participate in the management activities or decisions of, the Operating Partnership except as required by applicable law. Consequently, WREIT controls the assets and business of the Operating Partnership. However, it is anticipated that any amendment to the Operating Partnership Agreement would require the consent of Limited Partners to, among other things: (i) affect the Redemption Rights (as defined below), (ii) adversely affect the Limited Partners' rights to receive cash distributions, (iii) alter the Operating Partnership's allocations of income or loss, or (iv) impose on the Limited Partners any obligations to make additional contributions to the capital of the Operating Partnership. GENERAL PARTNER NOT TO WITHDRAW The General Partner can not voluntarily withdraw from the Operating Partnership or transfer or assign its interest in the Operating Partnership unless there is a successor general partner admitted as the general partner. CAPITAL CONTRIBUTION WREIT will contribute, as a General Partner and as a Limited Partner, all of the net proceeds of the Offering to the Operating Partnership plus its interest in the assets acquired from WFSG in exchange for Common Stock. The Operating Partnership will issue 100,000 GP Units and 9,900,000 LP Units (115,000 GP Units and 11,385,000 LP Units if the Underwriters exercise their over-allotment option in full) to WREIT for the contribution of such net proceeds. Small Cap will purchase 1,875 LP Units for $30,000. As a result of the foregoing, WREIT will hold a 1% general partner interest in the Operating Partnership, and WREIT and Small Cap collectively will hold a 99% limited partner interest in the Operating Partnership. Upon completion of the Offering, WREIT will issue a total of 10,000,000 shares of Common Stock and own, as the General Partner and as a Limited Partner, approximately 99.9% of the partnership interests in the Operating Partnership. Although the Operating Partnership will receive the net proceeds of the Offering, WREIT will be deemed to have made a capital contribution to the Operating Partnership in the aggregate amount of the gross proceeds of the Offering and the Operating Partnership will be deemed simultaneously to have paid the underwriter's discount and other expenses paid or incurred in connection with the Offering. 82 The Operating Partnership Agreement provides that if the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowing or capital contributions, the General Partner may borrow such funds from a financial institution or other lender and lend such funds to the Operating Partnership on the same terms and conditions as are applicable to the General Partner's borrowing of such funds. Moreover, the General Partner is authorized to cause the Operating Partnership to issue partnership interests for less than fair market value if the Company (i) has concluded in good faith that such issuance is in the best interest of the Company and the Operating Partnership and (ii) the General Partner makes a capital contribution in an amount equal to the proceeds of such issuance. Under the Operating Partnership Agreement, WREIT as the General Partner and a Limited Partner is obligated to contribute the net proceeds of any future share offering by WREIT as additional capital to the Operating Partnership in exchange for an additional partnership interest. Upon such contribution, WREIT's percentage interests in the Operating Partnership would be increased on a proportionate basis based upon the amount of such additional capital contributions. The percentage interests of the Limited Partners (other than WREIT) would be decreased on a proportionate basis in the event of additional capital contributions by WREIT. In addition, if WREIT were to contribute additional capital to the Operating Partnership, the General Partner would revalue the property of the Operating Partnership to its fair market value (as determined by the General Partner) and the capital accounts of the partners would be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the capital accounts previously) would be allocated among the partners under the terms of the Operating Partnership Agreement as if there were a taxable disposition of such property for such fair market value on the date of the revaluation. REDEMPTION RIGHTS The Operating Partnership Agreement provides that the Limited Partners will have the right (the "Redemption Rights") to cause the Operating Partnership, one year after issuance, to redeem its Units for cash or, at the election of the General Partner, shares of Common Stock on a one-for-one basis. The redemption price will be paid in cash in the discretion of the Company or in the event that the issuance of shares of Common Stock to the redeeming Limited Partner would (i) result in any person owning, directly or indirectly, shares of Common Stock in excess of the Ownership Limitation, (ii) result in shares of capital stock of the Company being owned by fewer than 100 persons (determined without reference to any rules of attribution), (iii) result in the Company being "closely held" within the meaning of section 856(h) of the Code, (iv) cause the Company to own, actually or constructively, 10% or more of the ownership interests in a tenant of the Company's or the Operating Partnership's real property, within the meaning of section 856(d)(2)(B) of the Code, or (v) cause the acquisition of shares of Common Stock by such redeeming Limited Partner to be "integrated" with any other distribution of shares of Common Stock for purposes of complying with the Securities Act. WRSC holds options to acquire shares of Common Stock. See "Management of Operations-- Stock Options." OPERATIONS The Operating Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable WREIT to satisfy the requirements for being classified as a REIT for federal tax purposes, to avoid any federal income or excise tax liability imposed by the Code, and to ensure that the Operating Partnership will not be classified as a "publicly traded partnership" for purposes of section 7704 of the Code. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership, the Operating Partnership will pay all administrative costs and expenses of the Company (collectively, the "Company Expenses") and the Company Expenses will be treated as expenses of the Operating Partnership. The Company Expenses generally include (i) all expenses relating to the formation and continuity of existence of the Company, (ii) all expenses relating to the public offering and registration of securities by the Company, (iii) all expenses associated with the preparation and filing of any periodic reports by the Company under federal, state or local laws or regulations, (iv) all expenses associated with compliance by the Company with laws, rules and regulations promulgated by any regulatory body, (v) all expenses relating to the Servicing Arrangements 83 and Management Agreement, and (vi) all other operating or administrative costs of the General Partner incurred in the ordinary course of its business on behalf of the Operating Partnership. DISTRIBUTIONS The Operating Partnership Agreement provides that the Operating Partnership distribute cash from operations (including net sale or refinancing proceeds, but excluding net proceeds from the sale of the Operating Partnership's property in connection with the liquidation of the Operating Partnership) on a quarterly (or, at the election of the General Partner, more frequent) basis, in amounts determined by the General Partner in its sole discretion, to the partners in accordance with their respective percentage interests in the Operating Partnership. Upon liquidation of the Operating Partnership, after payment of, or adequate provision for, debts and obligations of the Operating Partnership, including any partner loans, it is anticipated that any remaining assets of the Operating Partnership will be distributed to all partners with positive capital accounts in accordance with their respective positive capital account balances. ALLOCATIONS The income, gain and loss of the Operating Partnership for each fiscal year generally will be allocated among the partners in accordance with their respective interests in the Operating Partnership, subject to compliance with the provisions of Code sections 704(b) and 704(c) and Treasury regulations ("Treasury Regulations") promulgated thereunder. TERM The Operating Partnership shall continue until December 31, 2050, or until sooner terminated as provided in the Operating Partnership Agreement or by operation of law. TAX MATTERS Pursuant to the Operating Partnership Agreement, WREIT, as the General Partner, is the tax matters partner of the Operating Partnership and, as such, has authority to handle tax audits and to make tax elections under the Code on behalf of the Operating Partnership. 84 FEDERAL INCOME TAX CONSEQUENCES The following is a summary of material federal income tax consequences that may be relevant to a prospective holder of Common Stock in WREIT. Proskauer Rose LLP has acted as counsel to WREIT and has reviewed this summary and has rendered an opinion that the descriptions of the law and the legal conclusions contained herein are correct in all material respects, and the discussions hereunder fairly summarize the federal income tax consequences that are likely to be material to WREIT and a holder of the Common Stock. The discussion contained herein does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders (including insurance companies, tax-exempt organizations (except as discussed under the heading "Taxation of Tax-Exempt Stockholders"), financial institutions or broker- dealers, or foreign corporations and persons who are not citizens or residents of the United States (except as discussed under the heading "Taxation of Non- U.S. Stockholders")) subject to special treatment under the federal income tax laws. The statements in this discussion and the opinion of Proskauer Rose LLP are based on current provisions of the Code, existing, temporary, and currently proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, existing administrative rulings and practices of the Service, and judicial decisions. No assurance can be given that future legislative, judicial, or administrative actions or decisions, which may be retroactive in effect, will not affect the accuracy of any statements in this Prospectus with respect to the transactions entered into or contemplated prior to the effective date of such changes. EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF WREIT'S ELECTION TO BE TAXED AS A REIT, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY WREIT plans to make an election to be taxed as a REIT under sections 856 through 860 of the Code and applicable Treasury Regulations, which are the requirements for qualifying as a REIT, commencing with its taxable year ending on December 31, 1998. The sections of the Code relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth the material aspects of the Code sections that govern the federal income tax treatment of a REIT and its stockholders. Proskauer Rose LLP has acted as counsel to WREIT in connection with the Offering and WREIT's election to be taxed as a REIT. In the opinion of Proskauer Rose LLP, assuming that the elections and other procedural steps described in this discussion of "Federal Income Tax Consequences" are completed by WREIT in a timely fashion, commencing with WREIT's taxable year ending December 31, 1998, WREIT will qualify to be taxed as a REIT pursuant to sections 856 through 860 of the Code, and WREIT's organization and proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. All factual assumptions and representations relied upon in the federal income tax opinion that will be delivered by Proskauer Rose LLP at the closing of the Offering are described in this Prospectus and in WREIT's charter. Investors should be aware, however, that opinions of counsel are not binding upon the Service or any court. It must be emphasized that Proskauer Rose LLP's opinion is based on various assumptions and is conditioned upon the representations made by WREIT and described herein as to factual matters, including representations regarding the nature of WREIT's properties and the future conduct of its business. Moreover, such qualification and taxation as a REIT depends upon WREIT's ability to meet on a continuing basis, through actual annual operating results, distribution levels, and stock ownership, the various qualification tests imposed under the Code discussed below. Proskauer Rose LLP will not review WREIT's compliance with those tests on 85 a continuing basis. Accordingly, no assurance can be given that the actual results of WREIT's operations for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of failure to qualify as a REIT, see "Federal Income Tax Consequences--Failure to Qualify." If WREIT qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its net income that is distributed currently to its stockholders. That treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) that generally results from an investment in a corporation. However, WREIT will be subject to federal income tax in the following circumstances. First, WREIT will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. However, with respect to any tax paid on undistributed net capital gains, the stockholders of WREIT will receive a credit for their share of the tax paid by WREIT. Second, under certain circumstances, WREIT may be subject to the "alternative minimum tax" on its undistributed items of tax preference, if any. Third, if WREIT has (i) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business, or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if WREIT has net income from "prohibited transactions" (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if WREIT should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and nonetheless has maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which WREIT fails the 75% or 95% gross income test multiplied by a fraction intended to reflect the average profitability of WREIT. Sixth, if WREIT should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, WREIT would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if WREIT acquires any asset from a C corporation (i.e., a corporation generally subject to full corporate-level tax) in a merger or other transaction in which the basis of the asset in WREIT's hands is determined by reference to the basis of the asset (or any other asset) in the hands of the C corporation and WREIT recognizes gain on the disposition of such asset during the 10-year period beginning on the date on which it acquired such asset, then to the extent of such asset's "built-in-gain" (i.e., the excess of the fair market value of such asset at the time of acquisition by WREIT over the adjusted basis in such asset at such time), WREIT will be subject to tax at the highest regular corporate rate applicable (as provided in Treasury Regulations that have not yet been promulgated). The results described above with respect to the tax on "built-in-gain" assume that WREIT will elect pursuant to IRS Notice 88-19 to be subject to the rules described in the preceding sentence if it were to make any such acquisition. Finally, WREIT will be subject to tax at the highest marginal corporate rate on the portion of any Excess Inclusion derived by WREIT from REMIC Residual Interests equal to the percentage of the stock of WREIT held by the United States, any state or political subdivision thereof, any foreign government, any international organization, any agency or instrumentality of any of the foregoing, any other tax-exempt organization (other than a farmer's cooperative described in section 521 of the Code) that is exempt from taxation under the unrelated business taxable income provisions of the Code, or any rural electrical or telephone cooperative (each, a "Disqualified Organization"). Any such tax on the portion of any Excess Inclusion allocable to stock of WREIT held by a Disqualified Organization will reduce the cash available for distribution from WREIT to all stockholders. REQUIREMENTS FOR QUALIFICATION The Code defines a REIT as a corporation, trust, or association (i) that is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for sections 856 through 859 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, by five or fewer individuals (as 86 defined in the Code to include certain entities) during the last half of each taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Service that must be met in order to elect and maintain REIT status; (viii) that uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the Code and Treasury Regulations promulgated thereunder; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets. The Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made by WREIT to be taxed as a REIT. For purposes of determining stock ownership under the 5/50 Rule, a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. A trust that is a qualified trust under Code section 401(a), however, generally is not considered an individual and beneficiaries of such trust are treated as holding shares of a REIT in proportion to their actuarial interests in such trust for purposes of the 5/50 Rule. WREIT will be treated as satisfying the 5/50 Rule if it complies with the demand letter and recordkeeping requirements described below, and if it does not know, and by exercising reasonable diligence would not have known, whether it failed to satisfy the 5/50 Rule. Prior to the consummation of the Offering, WREIT did not satisfy conditions (v) and (vi) in the preceding paragraph. WREIT anticipates issuing sufficient Common Stock with sufficient diversity of ownership pursuant to the Offering to allow it to satisfy requirements (v) and (vi). In addition, WREIT's Charter provides for restrictions regarding the transfer of Common Stock that are intended to assist WREIT in continuing to satisfy the share ownership requirements described in clauses (v) and (vi) above. Such transfer restrictions are described in "Description of Capital Stock--Restrictions on Transfer." To monitor WREIT's compliance with the share ownership requirements, WREIT is required to maintain records regarding the actual ownership of its shares of stock. To do so, WREIT must demand written statements each year from the record holders of certain percentages of its shares of stock in which the record holders are to disclose the actual owners of the shares (i.e., the persons required to include in gross income the REIT dividends). (A REIT with 2,000 or more record shareholders must demand statements from record holders of 5% or more of its shares, one with less than 2,000, but more than 200, record shareholders must demand statements from record holders of 1% or more of the shares, while a REIT with 200 or fewer record shareholders must demand statements from record holders of 0.5% or more of the shares.) A list of those persons failing or refusing to comply with this demand must be maintained as part of WREIT's records. A shareholder who fails or refuses to comply with the demand must submit a statement with his tax return disclosing the actual ownership of the shares of stock and certain other information. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share (based on its capital interest) of the assets of the partnership and will be deemed to be entitled to the gross income of the partnership attributable to such share. In addition, the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of section 856 of the Code, including satisfying the gross income and asset tests described below. A summary of the rules governing the federal income taxation of partnerships and their partners is provided below in "--Tax Aspects of the Operating Partnership." The Company will have direct control of the Operating Partnership and has represented that it will operate the Operating Partnership consistently with the requirements for qualification as a REIT. WREIT currently does not have any subsidiaries but may have subsidiaries in the future. Code section 856(i) provides that a corporation that is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital stock of which is held by the REIT. Thus, in applying the 87 requirements described herein, any "qualified REIT subsidiaries" of WREIT will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiaries will be treated as assets, liabilities, and items of income, deduction, and credit of WREIT. A qualified REIT subsidiary will not be subject to federal corporate income taxation, provided WREIT maintains its status as a REIT, although it may be subject to state and local taxation. Income Tests. In order for WREIT to qualify and to maintain its qualification as a REIT, two requirements relating to WREIT's gross income must be satisfied annually. First, at least 75% of WREIT's gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and interest on obligations secured by mortgages on real property or on interests in real property) or from certain types of temporary investments of new capital. Second, at least 95% of WREIT's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property or mortgages on real property and from dividends, other types of interest, and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. The specific application of these tests to WREIT is discussed below. The term "interest," as defined for purposes of the 75% and 95% gross income tests, generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. In addition, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on the income or profits of a debtor if the debtor derives substantially all of its gross income from the related property through the leasing of substantially all of its interests in the property, to the extent the amounts received by the debtor would be characterized as rents from real property if received by a REIT. Furthermore, to the extent that interest from a loan that is based on the cash proceeds from the sale of the property securing the loan constitutes a "shared appreciation provision" (as defined in the Code), income attributable to such participation feature will be treated as gain from the sale of the secured property, which generally is qualifying income for purposes of the 75% and 95% gross income tests. Interest on obligations secured by mortgages on real property or on interests in real property is qualifying income for purposes of the 75% gross income test. Any amount includible in gross income with respect to a regular or residual interest in a REMIC generally also is treated as interest on an obligation secured by a mortgage on real property. If, however, less than 95% of the assets of a REMIC consists of real estate assets (determined as if WREIT held such assets), WREIT will be treated as receiving directly its proportionate share of the income of the REMIC. In addition, if WREIT receives interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date WREIT became committed to make or purchase the mortgage loan, a portion of the interest income, equal to (i) such highest principal amount minus such value, divided by (ii) such highest principal amount, generally will not be qualifying income for purposes of the 75% gross income test. WREIT may acquire or originate mortgage loans secured only by real property at a time when the fair market value of the real property may be less than the principal amount of the loan. It is not entirely clear whether the apportionment rules described in the previous paragraph apply to interest derived from loans that are partially secured by mortgages on real property and otherwise unsecured. In making its own REIT qualification calculations, WREIT will assume that such apportionment rules do apply where the loan is secured solely by real property. Proskauer Rose LLP is of the opinion that the interest, original issue discount, and market discount income that WREIT derives from its investments in Mortgage-Backed Securities and IOs generally will be qualifying interest income for purposes of both the 75% and the 95% gross income tests, except to the extent that less than 95% of the assets of a REMIC in which WREIT holds an interest consists of real estate assets (determined as if 88 WREIT held such assets), and WREIT's proportionate share of the income of the REMIC includes income that is not qualifying income for purposes of the 75% and 95% gross income tests. Most of the income that WREIT recognizes with respect to its investments in U.S. Commercial Loans will be qualifying income for purposes of both gross income tests. In some cases, however, the loan amount may exceed the value of the real property securing the loan, which may result in a portion of the income from the loan being classified as qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. Some of the Initial Investments will, and future Primary Investments may, consist of non-REMIC CMOs that are not treated as debt secured by interests in or mortgages on real property for purposes of the REIT income tests. Thus, interest income from any such non-REMIC CMOs will not be treated as real estate-related interest for purposes of the 75% gross income test, but will be treated as interest for purposes of the 95% gross income test. It is also possible that, in some instances, the interest income may be based in part on the borrower's profits or net income, which generally will disqualify the income from the loan for purposes of both the 75% and the 95% gross income tests. WREIT has represented that the amount of such recharacterized interest, together with the amount of its other income that is not included for purposes of determining compliance with the 75% gross income test, will not result in a violation of that test. The rent received by WREIT (directly or indirectly) from the tenants of its Real Property ("Rent") will qualify as "rents from real property" in satisfying the gross income tests for a REIT described above only if several conditions are met. First, the amount of Rent must not be based, in whole or in part, on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Code provides that the Rent received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if WREIT, or a direct or indirect owner of 10% or more of WREIT, owns 10% or more of such tenant, taking into account both direct and constructive ownership (a "Related Party Tenant"). Third, if Rent attributable to personal property, leased in connection with a lease of Real Property, is greater than 15% of the total Rent received under the lease, then the portion of Rent attributable to such personal property will not qualify as "rents from real property." Finally, for the Rent to qualify as "rents from real property," WREIT and the Operating Partnership generally must not operate or manage the Real Property or furnish or render services to the tenants of such Real Property, other than through an "independent contractor" who is adequately compensated and from whom WREIT derives no revenue. However, WREIT and the Operating Partnership may provide certain services to tenants without having to engage an independent contractor if the services in question are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered services furnished or rendered to the tenants of such property (any such non-permitted services, "Disqualified Services"). The performance of Disqualified Services with respect to any property will not cause rents from the property to fail to be treated as "rents from real property," however, if the amount received or accrued for such Disqualified Services is less than or equal to, one percent of all amounts received or accrued, directly or indirectly, by the Company with respect to such property. For purposes of the preceding sentence, the amount treated as received for any Disqualified Services may not be less than 150% of the direct cost in furnishing or rendering the Disqualified Services. WREIT and the Operating Partnership anticipate they will not charge Rent for any portion of any Real Property that is based, in whole or in part, on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of receipts of sales, as described above) to the extent that the receipt of such Rent would jeopardize WREIT's status as a REIT. In addition, WREIT and the Operating Partnership anticipate that, to the extent that WREIT receives Rent from a Related Party Tenant, such Rent will not cause WREIT to fail to satisfy either the 75% or 95% gross income test. WREIT and the Operating Partnership also anticipate that they will not allow the Rent attributable to personal property leased in connection with any lease of Real Property to exceed 15% of the total Rent received under the lease, if the receipt of such Rent would cause WREIT to fail to satisfy either the 75% or 95% gross income test. Finally, WREIT and the Operating Partnership anticipate that they will not provide Disqualified Services other than through an "independent contractor," to the extent such Disqualified Services would jeopardize WREIT's status as a REIT. 89 Income and gain from "foreclosure property" generally is qualifying income for purposes of the 75% and 95% gross income tests. However, REITs generally are subject to tax at the maximum corporate rate on any income from "foreclosure property" (other than income that would be qualifying income for purposes of the 75% gross income test), less expenses directly connected with the production of such income. "Foreclosure property" is defined as any real property (including interests in real property) and any personal property incident to such real property (i) that is acquired by a REIT as the result of such REIT having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness owed to the REIT that such property secured, (ii) for which the related loan was entered into or acquired by the REIT both (A) at a time when the REIT did not intend to evict or foreclose, and (B) at a time when the REIT did not know or have reason to know that default would occur, and (iii) for which such REIT makes a proper election to treat such property as foreclosure property. In general, property ceases to be foreclosure property three years after the day the REIT acquired such property, subject to certain exceptions. WREIT has represented that if it or the Operating Partnership acquires property that satisfies requirements (i) and (ii) above, it will properly make the foreclosure property election unless the failure to make the election will not jeopardize WREIT's status as a REIT. If property is not eligible for the election to be treated as foreclosure property ("Ineligible Property") because the related loan was entered into or acquired with an intent to evict or foreclose or WREIT or the Operating Partnership knew or had reason to know default would occur, income received with respect to such Ineligible Property may not be qualifying income for purposes of the 75% or 95% gross income test, and a sale of such property could be treated as giving rise to a "prohibited transaction," which would result in a 100% tax on any gain from such sale. As a result, the Operating Partnership may be required to hold such property for investment in lieu of selling such property or, alternatively, the Operating Partnership may transfer such property to a taxable corporation, owned in part by the Operating Partnership that could sell the property and pay a corporate-level tax on the gain. However, the ability to use a taxable corporation in this manner may be limited or prohibited. See "--Legislative Proposal." It is possible that some of the assets to be acquired by the Operating Partnership, including some of the Initial Investments, may be treated as Ineligible Property. The net income derived from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (other than foreclosure property as defined above) that is held primarily for sale to customers in the ordinary course of a trade or business. The Company believes that no asset owned by WREIT or the Operating Partnership will be held for sale to customers and that a sale of any such asset will not be in the ordinary course of WREIT's or the Operating Partnership's business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the facts and circumstances in effect from time to time, including those related to a particular property. The Code also provides a limited safe harbor pursuant to which certain sales by a REIT of real estate assets will not constitute prohibited transactions. This safe harbor applies when (i) the Operating Partnership has held the property for at least four years, (ii) the aggregate capital expenditures made by the Operating Partnership (or any partner of the Operating Partnership) during the four-year period preceding the date of the sale do not exceed 30% of the net selling price of the property, (iii) either (A) during the taxable year the Operating Partnership does not make more than seven sales of property (other than foreclosure property, and treating all sales to one buyer in one transaction as one sale), or (B) the aggregate adjusted bases (with certain adjustments) of property other than foreclosure property sold by the Company during the taxable year does not exceed 10% of the aggregate bases of all assets of the Operating Partnership as of the beginning of the year, (iv) in the case of property not acquired through foreclosure or deed in lieu of foreclosure, the Operating Partnership has held the property for at least four years for the production of rental income and (v) where the seven-sale requirement described above is not satisfied, substantially all the marketing and development expenditures with respect to the property were made through an independent contractor from whom the Company does not derive or receive any income. WREIT and the Operating Partnership will attempt to comply with the terms of the safe-harbor provisions of the Code prescribing when asset sales will not be characterized as prohibited transactions. Complete assurance cannot be given, however, that WREIT and the Operating Partnership can comply with the 90 safe-harbor provisions of the Code or avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of a trade or business." It is possible that, from time to time, WREIT or the Operating Partnership will enter into hedging transactions with respect to one or more of its assets or liabilities. Any such hedging transactions could take a variety of forms, including interest rate swaps or interest rate cap agreements, options, futures contracts, forward rate agreements or any similar financial interest entered into by the Company or the Operating Partnership to reduce the interest rate risks with respect to any indebtedness incurred to acquire or carry real estate assets (collectively, "Hedging Transactions"). To the extent that WREIT or the Operating Partnership enters into a Hedging Transaction, any periodic income or gain from the disposition of such contract owned by WREIT will be treated as qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. To the extent that WREIT or the Operating Partnership hedges with other types of financial instruments or in other situations, it may not be entirely clear how the income from those transactions will be treated for purposes of the various income tests that apply to REITs under the Code. WREIT and the Operating Partnership intend to structure any hedging transactions in a manner that does not jeopardize WREIT's status as a REIT. While WREIT and the Operating Partnership may conduct some or all of their hedging activities that would not qualify as a Hedging Transaction through a corporate subsidiary that is fully subject to federal corporate income tax, the ability to do so may be limited or prohibited. See "--Legislative Proposal." WREIT may receive income not described above that is not qualifying income for purposes of the 75% and 95% gross income tests. For example, certain fees for services rendered by the Operating Partnership will not be qualifying income for purposes of the gross income tests. It is not anticipated that the Operating Partnership will receive a significant amount of such fees. WREIT will monitor the amount of nonqualifying income produced by assets owned by WREIT and the Operating Partnership and has represented that it will manage such assets in order to comply at all times with the two gross income tests. If WREIT fails to satisfy one or both of the 75% and 95% gross income tests for any taxable year, it nevertheless may qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. Those relief provisions generally will be available if WREIT's failure to meet such tests is due to reasonable cause and not due to willful neglect. WREIT attaches a schedule of the sources of its income to its return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances WREIT would be entitled to the benefit of those relief provisions. As discussed above in "-- Taxation of the Company," even if those relief provisions apply, a 100% tax would be imposed on the net income attributable to the greater of the amount by which WREIT fails the 75% or 95% gross income test. Asset Tests. WREIT, at the close of each quarter of each taxable year, also must satisfy two tests relating to the nature of its assets. First, at least 75% of the value of WREIT's total assets must be represented by cash or cash items (including certain receivables), government securities, "real estate assets," or, in cases where WREIT raises new capital through stock or long- term (at least five-year) debt offerings, temporary investments in stock or debt instruments during the one-year period following WREIT's receipt of such capital. The term "real estate assets" includes interests in real property, interests in mortgages on real property to the extent the principal balance of a mortgage does not exceed the fair market value of the associated real property, regular or residual interests in a REMIC (except that, if less than 95% of the assets of a REMIC consists of "real estate assets" (determined as if WREIT held such assets), WREIT will be treated as holding directly its proportionate share of the assets of such REMIC), and shares of other REITs. For purposes of the 75% asset test, the term "interest in real property" includes an interest in mortgage loans or land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold of real property, and an option to acquire real property (or a leasehold of real property). An interest in real property also generally includes an interest in mortgage loans secured by controlling equity interests in entities treated as partnerships for federal income tax purposes that own real property, to the extent that the principal balance of the mortgage does not exceed the fair market value of the real property that is allocable to the equity interest. Second, of the investments not included in the 75% asset class, the value of any 91 one issuer's securities owned by WREIT may not exceed 5% of the value of WREIT's total assets, and WREIT may not own more than 10% of any one issuer's outstanding voting securities (except for its interests in entities treated as partnerships and any qualified REIT subsidiary). See "--Legislative Proposal." WREIT may originate or acquire loans and securitize such loans through the issuance of non-REMIC CMOs. As a result of such transactions, WREIT will retain an equity ownership interest in the Performing Mortgage Loans that has economic characteristics similar to those of a Subordinated Interest. In addition, WREIT may resecuritize Mortgage-Backed Securities (or non-REMIC CMOs) through the issuance of non-REMIC CMOs, retaining an equity interest in the Mortgage-Backed Securities used as collateral in the resecuritization transaction. The Company may seek to issue non-REMIC CMOs that (i) are secured by real estate mortgages, (ii) are treated as debt instruments for federal income tax purposes, and (iii) provide for payments that bear a relationship to the underlying mortgages. The issuance of any such instruments could result in the Operating Partnership being classified as a taxable mortgage pool ("TMP") which would be treated as a separate corporation for federal income tax purposes, which in turn could jeopardize WREIT's status as a REIT. WREIT has represented that it will not structure its Mortgage-Backed Securities, including non-REMIC CMOs, in a manner that would result in the creation of a TMP. WREIT expects that any U.S. Commercial Investments, Mortgage-Backed Securities, International Investments, IOs, and temporary investments that it acquires generally will be qualifying assets for purposes of the 75% asset test, except to the extent that less than 95% of the assets of a REMIC in which WREIT owns an interest consists of "real estate assets" and WREIT's proportionate share of those assets includes assets that are nonqualifying assets for purposes of the 75% asset test. Distressed U.S. Commercial Loans, International Mortgage Loans and Construction Loans also will be qualifying assets for purposes of the 75% asset test to the extent that the principal balance of each mortgage loan does not exceed the value of the associated real property. Some of the Initial Investments will, and future Primary Investments may, consist of non-REMIC CMOs that are not treated as debt secured by interests in or mortgages on real property for purposes of the REIT asset tests. Thus, such securities will not be treated as real estate assets for purposes of the 75% asset test. WREIT has represented that it will monitor the status of the assets that it and the Operating Partnership acquire for purposes of the various asset tests and has represented that it will manage its portfolio in order to comply at all times with such tests. If WREIT should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause it to lose its REIT status if (i) it satisfied the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of WREIT's assets and the asset test requirements arose from changes in the market values of its assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets. If the condition described in clause (ii) of the preceding sentence were not satisfied, WREIT still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. Legislative Proposal. The Clinton Administration's budget proposal announced on February 2, 1998, includes a proposal to amend the REIT asset tests to prohibit a REIT from owning more than 10% of the value of the outstanding stock of any corporation that is not a qualified REIT subsidiary (a "non- qualified REIT subsidiary"). Existing non-qualified REIT subsidiaries would be exempt from this provision, and therefore subject only to the 5% asset test and 10% voting securities test of current law, except that such exemption would terminate if the subsidiary engaged in a new trade or business or acquired substantial new assets after the legislation becomes effective. If this proposal were enacted, the Company's ability to engage in certain activities through a non-qualified REIT subsidiary, such as certain types of hedging (see "Risk Factors--Economic and Business Risks--Interest Rate Changes May Adversely Affect the Company's Investments"), purchasing of U.S. Commercial Properties, including the Foreclosed Properties, that the Company intends to hold for less than four years (see "Operating Policies and Objectives--U.S. Commercial Investments"), selling Ineligible Property (in lieu of holding such property for investment) (see "--Requirements for Qualification--Income Tests"), or 92 structuring the securitization of mortgage loans or other real property assets or resecuritization of Mortgage-Backed Securities as a sale for tax and accounting purposes (see "Operating Policies and Objectives--Portfolio Management--Mortgage-Backed Securities and Warehouse Lines of Credit"), would be limited or prohibited. Reliance on Other Opinions. When purchasing Mortgage-Backed Securities and IOs, WREIT may rely on opinions of counsel for the issuer or sponsor of such securities given in connection with the offering of such securities, or statements made in related offering documents, for purposes of determining whether and to what extent those securities constitute "real estate assets" for purposes of the REIT asset tests and produce income which qualifies under the REIT gross income tests discussed above. The inaccuracy of any such opinions or statements may have an adverse impact on WREIT's qualification as a REIT. Distribution Requirements. WREIT, in order to avoid corporate income taxation of the earnings that it distributes, is required to distribute with respect to each taxable year dividends (other than capital gain dividends) to its stockholders in an aggregate amount at least equal to (i) the sum of (A) 95% of its REIT Taxable Income (computed without regard to the dividends paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before WREIT timely files its federal income tax return for such year and if paid on or before the first regular dividend payment date after such declaration. To the extent that WREIT does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its REIT Taxable Income, as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates. With respect to capital gains, assuming WREIT properly elects to retain and pay tax on its net capital gains, the stockholders will include their proportionate share of the undistributed capital gains in income and receive a credit for their share of income tax paid by WREIT and a basis adjustment to their interest in WREIT. See "--Taxation of Taxable U.S. Stockholders." Furthermore, if WREIT should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of the January immediately following such year) at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, WREIT would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. WREIT has represented that it will make timely distributions sufficient to satisfy the annual distribution requirements. It is possible that, from time to time, WREIT may experience timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of that income and deduction of such expenses in arriving at its REIT taxable income. See "Risk Factors--Legal and Tax Risks--Adverse Consequences of Failure To Comply with REIT Requirements May Include WREIT Being Subject to Tax as a Regular Corporation or 100% Tax on Certain Gains." Under certain circumstances, WREIT may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to its stockholders in a later year, which may be included in WREIT's deduction for dividends paid for the earlier year. Although WREIT may be able to avoid being taxed on amounts distributed as deficiency dividends, it will be required to pay to the Service interest based upon the amount of any deduction taken for deficiency dividends. FAILURE TO QUALIFY If WREIT fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, WREIT will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to WREIT's stockholders in any year in which WREIT fails to qualify will not be deductible by WREIT nor will they be required to be made. In such event, to the extent of WREIT's current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, WREIT also will be disqualified from taxation as a 93 REIT for the four taxable years following the year during which WREIT ceased to qualify as a REIT. It is not possible to state whether in all circumstances WREIT would be entitled to such statutory relief. TAX ASPECTS OF THE OPERATING PARTNERSHIP General. Substantially all of the Company's investments will be held indirectly through the Operating Partnership. In general, partnerships are "pass-through" entities which are not subject to federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax thereon, without regard to whether the partners receive a distribution from the partnership. The Company will include in its income its proportionate share of the foregoing partnership items (based on its capital interest in the Operating Partnership) for purposes of the various REIT income tests and (based on the Partnership Agreement) in the computation of its REIT taxable income. Moreover, for purposes of the REIT asset tests, the Company will include its proportionate share (based on its capital interest) of assets held through the Operating Partnership. See "--Taxation of the Company-- Requirements for Qualification." Entity Classification. The Company's interests in the Operating Partnership involve special tax considerations, including the possibility of a challenge by the Service of the status of such partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If the Operating Partnership were treated as an association, it would be taxable as a corporation and therefore be subject to an entity-level tax on its income. In such a situation, the character of the Company's assets and items of gross income would change and preclude the Company from satisfying the asset tests and possibly the income tests (see "Taxation of the Company-- Requirements for Qualification," "--Asset Tests" and "--Income Tests"), and, in turn, would prevent the Company from qualifying as a REIT. See "--Taxation of the Company--Failure of the Company To Qualify as a REIT" above for a discussion of the effect of the Company's failure to meet such tests for a taxable year. In addition, a change in the status of the Operating Partnership for tax purposes might be treated as a taxable event, in which case the Company might incur a tax liability without any related cash distributions. The Service recently finalized and published certain Treasury Regulations (the "Final Regulations") which provide that a domestic business entity not otherwise classified as a corporation and which has at least two members (an "Eligible Entity") may elect to be taxed as a partnership for federal income tax purposes. The Final Regulations apply for tax periods beginning on or after January 1, 1997 (the "Effective Date"). The Operating Partnership will not make an election to be excluded from the partnership provisions of the Code and will not make an election under Treasury regulation section 301.7701- 3 to be treated as a corporation for federal income tax purposes. The Company has not requested, and does not intend to request, a ruling from the Service that the Operating Partnership will be treated as a partnership for federal income tax purposes. However, the Company believes that the Operating Partnership will be so treated. In addition, in the opinion of Proskauer Rose LLP, based on the provisions of the Partnership Agreement and certain factual assumptions and representations described in the opinion and the Final Regulations which have been described in this Prospectus, the Operating Partnership will be treated as a partnership for federal income tax purposes (and not as an association or a publicly traded partnership taxable as a corporation). Unlike a private letter ruling, an opinion of counsel is not binding on the Service, and no assurance can be given that the Service will not challenge the status of the Operating Partnership as a partnership for federal income tax purposes. If such a challenge were sustained by a court, the Operating Partnership could be treated as a corporation for federal income tax purposes. TAXATION OF TAXABLE U.S. STOCKHOLDERS As long as WREIT qualifies as a REIT, distributions made to WREIT's taxable U.S. stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such U.S. stockholders as ordinary income and will not be eligible for the dividends received deduction generally available to corporations. As used herein, the term "U.S. stockholder" means a holder of Common Stock that for U.S. federal income tax purposes is (i) a citizen or resident of the U.S., (ii) a corporation, partnership, or other 94 entity created or organized in or under the laws of the U.S. or of any political subdivision thereof, (iii) an estate whose income from sources without the United States is includible in gross income for U.S. federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States, or (iv) any trust with respect to which (A) a U.S. court is able to exercise primary supervision over the administration of such trust and (B) one or more U.S. persons have the authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in regulations, certain trusts in existence on August 20, 1996, and treated as United States persons prior to such date, that elect to continue to be treated as United States persons, shall also be considered U.S. Stockholders. Distributions that are designated as capital gain dividends will be taxed as gains (to the extent they do not exceed WREIT's actual net capital gain for the taxable year) from the sale or disposition of a capital asset without regard to the period for which the stockholder has held his Common Stock. Depending on the period of time the Company held the assets which produced such gains, and on certain designations, if any, which may be made by the Company, such gains may be taxable to non-corporate U.S. stockholders at a 20%, 25% or 28% rate. However, corporate stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such stock, with distributions in excess of a U.S. Stockholder's adjusted basis in its shares taxable as capital gain, provided that the shares have been held as a capital asset (which, depending on the period of time the Company held the assets which produced such gains, and on certain designations, if any, which may be made by the Company, may be taxable to non-corporate U.S. stockholders at a 20%, 25% or 28% rate). In addition, any distribution declared by WREIT in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by WREIT and received by the stockholder on December 31 of such year, provided that the distribution is actually paid by WREIT during January of the following calendar year. Pursuant to the Taxpayer Relief Act of 1997 enacted in August 1997, if WREIT elects to retain and pay tax on its capital gains, and WREIT makes a written designation to its stockholders prior to the expiration of 60 days after the close of the taxable year, the stockholder's portion of undistributed capital gains will be included in the stockholder's long-term capital gain for the taxable year. The stockholder's proportionate share of tax imposed on WREIT with respect to the undistributed capital gains will be deemed to have been paid by the stockholder and will be allowed as a credit or refund, as the case may be, for the taxes deemed to have been paid by the stockholder. In addition, the stockholder will receive an increase in basis in the stockholder's interest in WREIT. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of WREIT. Instead, such losses would be carried over by WREIT for potential offset against its future income (subject to certain limitations). Taxable distributions from WREIT and gain from the disposition of the Common Stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any "passive activity losses" (such as losses from certain types of limited partnerships in which a stockholder is a limited partner) against such income. In addition, taxable distributions from WREIT generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of Common Stock (or distributions treated as such), however, will be treated as investment income only if the stockholder so elects, in which case such capital gains will be taxed at ordinary income rates. WREIT will notify stockholders after the close of WREIT's taxable year as to the portions of the distributions attributable to that year that constitute ordinary income or capital gain dividends. Investments in Subordinated Interests and certain types of Mortgage-Backed Securities may cause it under certain circumstances to recognize taxable income in excess of its economic income ("phantom income") and to experience an offsetting excess of economic income over its taxable income in later years. As a result, stockholders may from time to time be required to pay federal income tax on distributions that economically represent a return of capital, rather than a dividend. Such distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Accordingly, if the Operating Partnership receives phantom income, WREIT's stockholders may be required to pay federal income tax with respect to such income on an accelerated basis, i.e., before such income 95 is realized by the stockholders in an economic sense. Taking into account the time value of money, such an acceleration of federal income tax liabilities would cause stockholders to receive an after-tax rate of return on an investment in WREIT that would be less than the after-tax rate of return on an investment with an identical before-tax rate of return that did not generate phantom income. For example, if an investor subject to an effective income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an annual interest rate of 10% for its face value, his before-tax return on his investment would be 10%, and his after-tax return would be 7%. However, if the same investor purchased stock of WREIT at a time when the before-tax rate of return was 10%, his after-tax rate of return on his stock might be somewhat less than 7% as a result of WREIT's phantom income. In general, as the ratio of phantom income to total income increases, the after-tax rate of return received by a taxable stockholder of WREIT will decrease. WREIT will consider the potential effects of phantom income on its taxable stockholders in managing its investments. Because the Operating Partnership expects to own at least some REMIC Residual Interests, it is likely that WREIT's stockholders (other than certain thrift institutions) will not be permitted to offset certain portions of the dividend income they derive from WREIT with their current deductions or net operating loss carryovers or carrybacks. The portion of a stockholder's dividends that will be subject to this limitation will equal his allocable share of any Excess Inclusion income derived by WREIT with respect to the REMIC Residual Interests. The Company's Excess Inclusion income for any calendar quarter will equal the excess of its income from REMIC Residual Interests over its "daily accruals" with respect to such REMIC Residual Interests for the calendar quarter. Daily accruals for a calendar quarter are computed by allocating to each day on which a REMIC Residual Interest is owned a ratable portion of the product of (i) the "adjusted issue price" of the REMIC Residual Interest at the beginning of the quarter and (ii) 120% of the long-term federal interest rate (adjusted for quarterly compounding) on the date of issuance of the REMIC Residual Interest. The adjusted issue price of a REMIC Residual Interest at the beginning of a calendar quarter equals the original issue price of the REMIC Residual Interest, increased by the amount of daily accruals for prior quarters and decreased by all prior distributions to WREIT with respect to the REMIC Residual Interest. To the extent that may be provided in Treasury regulations that have not yet been issued, the Excess Inclusion income with respect to any REMIC Residual Interests owned by the Operating Partnership that does not have significant value will equal the entire amount of the income derived from such REMIC Residual Interests. Furthermore, to the extent that the Operating Partnership acquires or originates mortgage loans and uses those loans to collateralize one or more multiple-class offerings of Mortgage-Backed Securities for which no REMIC election is made ("Non-REMIC Transactions"), it is possible that, to the extent that may be provided in Treasury regulations that have not yet been issued, stockholders (other than certain thrift institutions) will not be permitted to offset certain portions of the dividend income that they derive from WREIT that are attributable to Non-REMIC Transactions with current deductions or net operating loss carryovers or carrybacks. Although no applicable Treasury regulations have yet been issued, no assurance can be provided that such regulations will not be issued in the future or that, if issued, such regulations will not prevent WREIT's stockholders from offsetting some portion of their dividend income with deductions or losses from other sources. TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK In general, any gain or loss realized upon a taxable disposition of the Common Stock by a stockholder who is not a dealer in securities will be treated as long-term capital gain or loss if the Common Stock has been held for more than one year and otherwise as short-term capital gain or loss. See "--Capital Gains and Losses." However, any loss upon a sale or exchange of Common Stock by a stockholder who has held such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from WREIT required to be treated by such stockholder as long-term capital gain. All or a portion of any loss realized upon a taxable disposition of the Common Stock may be disallowed if other shares of Common Stock are purchased within 30 days before or after the disposition. CAPITAL GAINS AND LOSSES A capital asset generally must be held for more than one year in order for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is 96 39.6%, and the tax rate on long-term capital gains attributable to the sale of a capital asset held for more than 12 months and 18 months or less applicable to individuals is 28% while the rate attributable to the sale of a capital asset held for more than 18 months is 20%. Thus, the differential between the capital gain tax rates and the ordinary income tax rate for individuals may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. Capital losses not offset by capital gains may be deducted against an individual's ordinary income only up to a maximum annual amount of $3,000. Unused capital losses may be carried forward indefinitely by individuals. All net capital gain of a corporate taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING WREIT will report to its U.S. stockholders and to the Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. A stockholder who does not provide WREIT with his correct taxpayer identification number also may be subject to penalties imposed by the Service. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, WREIT may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their nonforeign status to WREIT. See "-- Taxation of Non-U.S. Stockholders." TAXATION OF TAX-EXEMPT STOCKHOLDERS Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, the Service has issued a published ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed by WREIT to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Stock with debt, a portion of its income from WREIT will constitute UBTI pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of section 501(c) of the Code are subject to different UBTI rules, which generally will require them to characterize distributions from WREIT as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of WREIT's stock is required to treat a percentage of the dividends from WREIT as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by WREIT from an unrelated trade or business (determined as if WREIT were a pension trust) divided by the gross income of WREIT for the year in which the dividends are paid. The UBTI rule applies to a pension trust holding more than 10% of WREIT's stock only if (i) the UBTI Percentage is at least 5%, (ii) WREIT qualifies as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of WREIT in proportion to their actuarial interests in the pension trust, and (iii) either (A) one pension trust owns more than 25% of the value of WREIT's stock or (B) a group of pension trusts individually holding more than 10% of the value of WREIT's stock collectively owns more than 50% of the value of WREIT's stock. However, the Charter generally prohibits direct or indirect ownership of more than 9.8% of the number of outstanding shares of Common Stock. See "Description of Capital Stock--Restrictions on Transfer." Any dividends received by an Exempt Organization that are allocable to Excess Inclusion will be treated as UBTI. In addition, WREIT will be subject to tax at the highest marginal corporate rate on the portion of any Excess Inclusion income derived by WREIT from REMIC Residual Interests that is allocable to stock of WREIT 97 held by Disqualified Organizations. Any such tax would be deductible by WREIT against its income that is not Excess Inclusion income. The Charter prohibits ownership of Common Stock by Disqualified Organizations. See "Description of Capital Stock--Restrictions on Ownership." If WREIT derives Excess Inclusion income from REMIC Residual Interests, a tax similar to the tax on WREIT described in the preceding paragraph may be imposed on stockholders who are (i) pass-through entities (i.e., partnerships, estates, trusts, regulated investment companies, REITs, common trust funds, and certain types of cooperatives (including farmers' cooperatives described in section 521 of the Code)) in which a Disqualified Organization is a record holder of shares or interests and (ii) nominees who hold Common Stock on behalf of Disqualified Organizations. Consequently, a brokerage firm that holds shares of Common Stock in a "street name" account for a Disqualified Organization may be subject to federal income tax on the Excess Inclusion income derived from those shares. However, the Charter prohibits ownership of Common Stock by Disqualified Organizations. See "Description of Capital Stock--Restrictions on Ownership." The Treasury Department has been authorized to issue regulations regarding issuances by a REIT of multiple-class mortgage-backed securities for which no REMIC election is made. If such Treasury regulations are issued in the future preventing taxable stockholders from offsetting some percentage of the dividends paid by WREIT with deductions or losses from other sources, that same percentage of WREIT's dividends would be treated as UBTI for stockholders that are Exempt Organizations. See "--Taxation of Taxable U.S. Stockholders." TAXATION OF NON-U.S. STOCKHOLDERS The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt will be made herein to provide more than a summary of such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS. Distributions to Non-U.S. Stockholders that are not attributable to gain from sales or exchanges by the Operating Partnership of U.S. real property interests and are not designated by WREIT as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of WREIT. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the Common Stock is treated as effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment), the Non-U.S. Stockholder generally will be subject to federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such distributions (and also may be subject to the 30% branch profits tax in the case of a Non- U.S. Stockholder that is a non-U.S. corporation). WREIT expects to withhold U.S. income tax at the rate of 30% on the gross amount of any such distributions made to a Non-U.S. Stockholder unless (i) a lower treaty rate applies and any required form evidencing eligibility for that reduced rate is filed with WREIT or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with WREIT claiming that the distribution is effectively connected income (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment). Under new Treasury Regulations that are not effective until January 1, 1999, the gross amount of any distribution by WREIT to a Non-U.S. Stockholder will generally be subject to withholding tax at a 30% or lower treaty rate, unless the distribution is designated as a capital gain dividend or a return of basis or is effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment). Any tax withheld in excess of the Non-U.S. Stockholder's U.S. federal income tax liability may be refundable. These Treasury Regulations will also require, beginning in 1999, that a Non-U.S. Stockholder satisfy certain certification and other requirements when claiming the benefit of an applicable treaty with respect to withholding on the distributions. 98 (Under current law, distributions paid to an address in a foreign country are generally presumed to be paid to a resident of such country for purposes of determining withholding and the applicability of a treaty tax rate.) If the Operating Partnership derives Excess Inclusion income from REMIC Residual Interests, the portion of the dividends paid to Non-U.S. Stockholders that is treated as Excess Inclusion income will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate. In addition, if Treasury regulations are issued in the future preventing taxable stockholders from offsetting some percentage of the dividends paid by WREIT with deductions or losses from other sources, that same percentage of WREIT's dividends would not be eligible for a reduced withholding tax rate under an otherwise applicable tax treaty. See "--Taxation of Taxable U.S. Stockholders." Distributions in excess of current and accumulated earnings and profits of WREIT will not be taxable to a stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of his Common Stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, amounts so withheld are refundable to the extent it is determined subsequently that such distribution was, in fact, in excess of current and accumulated earnings and profits of WREIT. The Small Business Job Protection Act of 1996, enacted in August 1996, requires WREIT to withhold 10% of any distribution in excess of WREIT's current and accumulated earnings and profits. Consequently, although WREIT intends to withhold at a rate of 30% on the entire amount of any distribution, to the extent that WREIT does not do so, any portion of a distribution not subject to withholding at a rate of 30% will be subject to withholding at a rate of 10%. Distributions to a Non-U.S. Stockholder that are designated by WREIT at the time of distribution as capital gains dividends (other than those arising from the disposition of a United States real property interest) generally will not be subject to United States federal income taxation, unless (i) investment in the Common Stock is effectively connected with the Non-U.S. Stockholder's United States trade or business (or, if an income tax treaty applies, is attributable to a United States permanent establishment of the Non-U.S. Stockholder), in which case the Non-U.S. Stockholder will be subject to the same treatment as domestic stockholders with respect to such gain (except that a stockholder that is a foreign corporation may also be subject to the branch profits tax, as discussed above) or (ii) the Non-U.S. Stockholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. For any year in which WREIT qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by the Operating Partnership of U.S. real property interests will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. business. Non-U.S. Stockholders thus would be taxed at the normal capital gain rates applicable to U.S. stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a non-U.S. corporate stockholder not entitled to treaty relief or exemption. WREIT is required to withhold 35% of any distribution that is designated by WREIT as a capital gains dividend. The amount withheld is creditable against the Non-U.S. Stockholder's FIRPTA tax liability. WREIT or any nominee (e.g., a broker holding shares in street name) may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to determine whether withholding is required on gains realized from the disposition of United States real property interests. A domestic person who holds shares of Common Stock 99 on behalf of a Non-U.S. Stockholder will bear the burden of withholding, provided that the Company has properly designated the appropriate portion of a distribution as a capital gain dividend. Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock generally will not be taxed under FIRPTA if WREIT is a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the common stock was held directly or indirectly by non-U.S. persons. It is currently anticipated that WREIT will be a "domestically controlled REIT" and, therefore, the sale of the Common Stock will not be subject to taxation under FIRPTA. However, because the Common Stock will be publicly traded, no assurance can be given that WREIT will be a "domestically controlled REIT." Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the Common Stock is effectively connected with the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain (or, if an income tax treaty applies, is attributable to a permanent establishment of the Non-U.S. Stockholder), or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. If the gain on the sale of the Common Stock were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S. stockholders with respect to such gain (subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations). INFORMATION REPORTING AND BACKUP WITHHOLDING TAX Backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) and information reporting will generally not apply to distributions paid to Non- U.S. Stockholders outside the United States that are treated as (i) dividends subject to the 30% (or lower treaty rate) withholding tax discussed above, (ii) capital gains dividends or (iii) distributions attributable to gain from the sale or exchange by the Company of United States real property interests. As a general matter, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of Common Stock by or through a foreign office of a foreign broker. Information reporting (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of Common Stock by a foreign office of a broker that (a) is a United States person, (b) derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States or (c) is a "controlled foreign corporation" (generally, a foreign corporation controlled by United States stockholders) for United States tax purposes, unless the broker has documentary evidence in its records that the holder is a Non-U.S. Stockholder and certain other conditions are met, or the stockholder otherwise establishes an exemption. Payment to or through a United States office of a broker of the proceeds of a sale of Common Stock is subject to both backup withholding and information reporting unless the stockholder certifies under penalty of perjury that the stockholder is a Non-U.S. Stockholder, or otherwise establishes an exemption. Backup withholding is not an additional tax. A Non-U.S. Stockholder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS. STATE AND LOCAL TAXES WREIT, the Operating Partnership or WREIT's stockholders may be subject to state and local tax in various states and localities, including those states and localities in which it or they transact business, own property, or reside. The state and local tax treatment of the Company and its stockholders in such jurisdictions may differ from the federal income tax treatment described above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in the Common Stock. 100 FOREIGN TAXES WREIT or the Operating Partnership may be subject to foreign taxes on certain activities conducted in foreign countries. To the extent that the Company or the Operating Partnership pays any foreign tax, the stockholders of WREIT will not obtain a foreign tax credit. SALE OF THE COMPANY'S PROPERTY Any gain realized by the Operating Partnership on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of its trade or business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. Such prohibited transaction income also may have an adverse effect upon WREIT's ability to satisfy the income tests for REIT status. See "--Requirements For Qualification--Income Tests" above. The Operating Partnership, however, does not presently intend to acquire or hold a material amount of property that represents inventory or other property held primarily for sale to customers in the ordinary course of its or WREIT's trade or business. 101 ERISA CONSIDERATIONS The following is a summary of material considerations arising under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the prohibited transaction provisions of section 4975 of the Code that may be relevant to a prospective purchaser (including, with respect to the discussion contained in "--Status of the Company and the Operating Partnership under ERISA," to a prospective purchaser that is not an employee benefit plan, another tax-qualified retirement plan, or an individual retirement account ("IRA")). The discussion does not purport to deal with all aspects of ERISA or section 4975 of the Code that may be relevant to particular stockholders (including plans subject to Title I of ERISA, other retirement plans and IRAs subject to the prohibited transaction provisions of section 4975 of the Code, and governmental plans or church plans that are exempt from ERISA and section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances. The discussion is based on current provisions of ERISA and the Code, existing and currently proposed regulations under ERISA and the Code, the legislative history of ERISA and the Code, existing administrative rulings of the Department of Labor ("DOL") and reported judicial decisions. No assurance can be given that legislative, judicial, or administrative changes will not affect the accuracy of any statements herein with respect to transactions entered into or contemplated prior to the effective date of such changes. A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK BY SUCH PLAN OR IRA. EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS Each fiduciary of a pension, profit-sharing, or other employee benefit plan (a "Plan") subject to Title I of ERISA should consider carefully whether an investment in the Common Stock is consistent with his fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require a Plan's investment to be (i) prudent and in the best interests of the Plan, its participants, and its beneficiaries, (ii) diversified in order to minimize the risk of large losses, unless it is clearly prudent not to do so, and (iii) authorized under the terms of the Plan's governing documents (provided the documents are consistent with ERISA). In determining whether an investment in the Common Stock is prudent for purposes of ERISA, the appropriate fiduciary of a Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the Plan's portfolio for which the fiduciary has investment responsibility, to meet the objectives of the Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification, cash flow, and funding requirements of the Plan's portfolio. A fiduciary also should take into account the nature of the Company's business, the management of the Company, the length of the Company's operating history, the fact that certain investment assets may not have been identified yet, and the possibility of the recognition of UBTI. The fiduciary of an IRA or of a qualified retirement plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents and under applicable state law. Fiduciaries of Plans and persons making the investment decision for an IRA or other Non-ERISA Plan should consider the application of the prohibited transaction provisions of ERISA and the Code in making their investment decision. A "party in interest" or "disqualified person" with respect to a Plan or with respect to a Plan or IRA subject to Code section 4975 other than a fiduciary acting as such is subject to (i) an initial 15% excise tax on the amount involved in any prohibited transaction involving the assets of the plan or IRA and (ii) an 102 excise tax equal to 100% of the amount involved if any prohibited transaction is not timely corrected. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax-exempt status and its assets will be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. In addition, a fiduciary who permits a Plan to engage in a transaction that the fiduciary knows or should know is a prohibited transaction may be liable to the Plan for any loss the Plan incurs as a result of the transaction or for any profits earned by the fiduciary in the transaction. STATUS OF WREIT UNDER ERISA The following section discusses certain principles that apply in determining whether the fiduciary requirements of ERISA and the prohibited transaction provisions of ERISA and the Code apply to an entity because one or more investors in the equity interests in the entity is a Plan or is a Non-ERISA Plan or IRA subject to section 4975 of the Code. A Plan fiduciary also should consider the relevance of those principles to ERISA's prohibition on improper delegation of control over or responsibility for "plan assets" and ERISA's imposition of co-fiduciary liability on a fiduciary who participates in, permits (by action or inaction) the occurrence of, or fails to remedy, a known breach by another fiduciary. If the assets of the Company are deemed to be "plan assets" under ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to any transactions involving the Company's assets, (ii) persons who exercise any authority over the Company's assets, or who provide investment advice to the Company, would (for purposes of the fiduciary responsibility provisions of ERISA) be fiduciaries of each Plan that acquires Common Stock, and transactions involving the Company's assets undertaken at their direction or pursuant to their advice might violate their fiduciary responsibilities under ERISA, especially with regard to conflicts of interest, (iii) a fiduciary exercising his investment discretion over the assets of a Plan to cause it to acquire or hold the Common Stock could be liable under Part 4 of Title I of ERISA for transactions entered into by the Company that do not conform to ERISA standards of prudence and fiduciary responsibility, and (iv) certain transactions that the Company might enter into in the ordinary course of its business and operations might constitute "prohibited transactions" under ERISA and the Code. Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA acquires a security that is an equity interest in an entity and the security is neither a "publicly-offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the Plan's or Non-ERISA Plan's or IRA's assets include both the equity interest and an undivided interest in each of the underlying assets of the issuer of such equity interest, unless one or more exceptions specified in the Plan Asset Regulations are satisfied. The Plan Asset Regulations define a publicly-offered security as a security that is "widely-held," "freely transferable," and either part of a class of securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The Common Stock is being sold in an offering registered under the Securities Act and will be registered under the Exchange Act. The Plan Asset Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be widely held because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The Company anticipates that upon completion of this offering, the Common Stock will be "widely held." The Plan Asset Regulations provide that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The Plan Asset Regulations further provide that where a security is part of an offering in which the minimum investment is $10,000 or less (as is the case with this offering), certain restrictions ordinarily will not, alone or in combination, affect a finding that such 103 securities are freely transferable. The restrictions on transfer enumerated in the Plan Asset Regulations as not affecting that finding include: (i) any restriction on or prohibition against any transfer or assignment that would result in the termination or reclassification of an entity for federal or state tax purposes, or that otherwise would violate any federal or state law or court order, (ii) any requirement that advance notice of a transfer or assignment be given to the issuer, (iii) any administrative procedure that establishes an effective date, or an event (such as completion of an offering), prior to which a transfer or assignment will not be effective, and (iv) any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer. The Company believes that the restrictions imposed under the Charter on the transfer of the Company's stock will not result in the failure of the Common Stock to be "freely transferable." The Company also is not aware of any other facts or circumstances limiting the transferability of the Common Stock other than those enumerated in the Plan Asset Regulations as those not affecting free transferability. However no assurance can be given that the DOL or the Treasury Department will not reach a contrary conclusion. Assuming that the Common Stock will be "widely held" and that no other facts and circumstances other than those referred to in the preceding paragraph exist that restrict transferability of the Common Stock, the shares of Common Stock should be publicly offered securities and the assets of the Company should not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan that invests in the Common Stock. 104 CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL PROPERTY INVESTMENTS The Company intends primarily to acquire U.S. Commercial Investments, Mortgage-Backed Securities and International Investments but also may acquire Other Real Estate Related Assets. The Company's return on any mortgage loans it acquires will depend on, among other things, the ability of the servicer of such mortgage loans to foreclose upon the mortgage loans in default and, if it is the successful bidder at the foreclosure sale, thereafter to sell the underlying real properties. Moreover, the Company's return on Mortgage-Backed Securities depends upon the ability of the servicer of the underlying mortgage loans to foreclose upon those loans. There are a number of legal considerations involved in the acquisition of mortgage loans, Mortgage-Backed Securities and real property, and the foreclosure and sale of defaulted mortgage loans (whether individually or as part of a series of Mortgage-Backed Securities or real property). The following discussion provides general summaries of certain legal aspects of mortgage loans and real property. Because such legal aspects are governed by applicable state or international law (which laws vary from state to state and country to country), the summaries do not purport to be complete, to reflect the laws of any particular state or country, or to encompass the laws of all states and countries. Accordingly, the summaries are qualified in their entirety by reference to the applicable laws of the states or countries where the property is located. GENERAL Each mortgage loan will be evidenced by a note or bond and secured by an instrument granting a security interest in real property, which may be a mortgage, deed of trust or a deed to secure debt, depending upon the prevailing practice and law in the state in which the related Mortgaged Property is located. Mortgages, deeds of trust and deeds to secure debt are herein collectively referred to as "mortgages." A mortgage creates a lien upon, or grants a title interest in, the real property covered thereby, and represents the security for the repayment of the indebtedness customarily evidenced by a promissory note. The priority of the lien created or interest granted will depend on the terms of the mortgage and, in some cases, on the terms of separate subordination agreements or intercreditor agreements with others that hold interests in the real property, the knowledge of the parties to the mortgage and, generally, the order of recordation of the mortgage in the appropriate public recording office. However, the lien of a recorded mortgage will generally be subordinate to later-arising liens for real estate taxes and assessments and other charges imposed under governmental police powers. TYPES OF MORTGAGE INSTRUMENTS There are two parties to a mortgage: a mortgagor (the borrower and usually the owner of the subject property) and a mortgagee (the lender). In contrast, a deed of trust is a three-party instrument, among a trustor (the equivalent of a borrower), a trustee to whom the real property is conveyed, and a beneficiary (the lender) for whose benefit the conveyance is made. Under a deed of trust, the trustor grants the property, irrevocably until the debt is paid, in trust and generally with a power of sale, to the trustee to secure repayment of the indebtedness evidenced by the related note. A deed to secure debt typically has two parties. The grantor (the borrower) conveys title to the real property to the grantee (the lender), generally with a power of sale, until such time as the debt is repaid. The mortgagee's authority under a mortgage, the trustee's authority under a deed of trust and the grantee's authority under a deed to secure debt are governed by the express provisions of the related instrument, the law of the state in which the real property is located, certain federal laws and, in some deed of trust transactions, the directions of the beneficiary. INTERESTS IN REAL PROPERTY The interests in real property typically covered by a mortgage, deed of trust or deed to secure debt is most often the fee simple estate in land and improvements. However, such instruments may encumber other interests in real property such as a tenant's interest in the lease of land or improvements, or both, and the leasehold estate created by such lease. An instrument covering an interest in real property other than the fee estate requires special 105 provisions in the instrument creating such interest or in the mortgage, deed of trust or deed to secure debt, to protect the mortgagee against termination of such interest before the mortgage, deed of trust or deed to secure debt is paid. LEASES AND RENTS Mortgages that encumber income-producing property often contain an assignment of rents and leases, pursuant to which the borrower assigns to the lender the borrower's right, title and interest as landlord under each lease and the income derived therefrom, while (unless rents are to be paid directly to the lender) retaining a revocable license to collect the rents for so long as there is no default. If the borrower defaults, the license terminates and the lender is entitled to collect the rents. Local law may require that the lender take possession of the property and/or obtain a court-appointed receiver before becoming entitled to collect the rents. The potential payments from a property may be less than the periodic payments due under the mortgage. For example, the net income that would otherwise be generated from the property may be less than the amount that would be needed to service the debt if the leases on the property are at below-market rents, the market rents have fallen since the original financing, vacancies have increased, or as a result of excessive or increased maintenance, repair or other obligations to which a lender succeeds as landlord. CONDEMNATION AND INSURANCE The form of the mortgage or deed of trust used by many lenders confers on the mortgagee or beneficiary the right both to receive all proceeds collected under any hazard insurance policy and all awards made in connection with any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the mortgage or deed of trust, in such order as the mortgage or beneficiary may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the mortgagee or beneficiary under the senior mortgage or deed of trust will have the prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation and to apply the same to the indebtedness secured by the senior mortgage or deed of trust. Proceeds in excess of the amount of senior mortgage indebtedness will, in most cases, be applied to the indebtedness of a junior mortgage or trust deed to the extent the junior mortgage or deed of trust so provides. The laws of certain states may limit the ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance and partial condemnation awards to the secured indebtedness. In such states, the mortgagor or trustor must be allowed to use the proceeds of hazard insurance to repair the damage unless the security of the mortgagee or beneficiary has been impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled to the award for a partial condemnation of the real property security only to the extent that its security is impaired. FORECLOSURE General. Foreclosure is a legal procedure that allows the lender to recover its mortgage debt by enforcing its rights and available legal remedies under the mortgage. If the borrower defaults in payment or performance of its obligations under the note or mortgage, the lender has the right to institute foreclosure proceedings to sell the real property at public auction to satisfy the indebtedness. Foreclosure procedures vary from state to state. Two primary methods of foreclosing a mortgage are judicial foreclosure, involving court proceedings, and non-judicial foreclosure pursuant to a power of sale granted in the mortgage instrument. Other foreclosure procedures are available in some states, such as strict foreclosure, but they are either infrequently used or available only in limited circumstances. Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a court having jurisdiction over the mortgaged property. Generally, the action is initiated by the service of legal pleadings upon all parties having a subordinate interest of record in the real property and all parties in possession of the property, under leases or 106 otherwise, whose interests are subordinate to the mortgage. A foreclosure action is subject to most of the delays and expenses of other lawsuits if defenses are raised or counterclaims are interposed, and sometimes requires several years to complete. When the lender's right to foreclose is contested, the legal proceedings can be time-consuming. Upon successful completion of a judicial foreclosure proceeding, the court generally issues a judgment of foreclosure and appoints a referee or other officer to conduct a public sale of the mortgaged property, the proceeds of which are used to satisfy the judgment. Such sales are made in accordance with procedures that vary from state to state. Public Sale. A third party may be unwilling to purchase a mortgaged property at a public sale following judicial foreclosure because of the difficulty in determining the value of such property at the time of sale, due to, among other things, redemption rights which may exist and the possibility of physical deterioration of the property during the foreclosure proceedings. For these reasons, it is common for the lender to purchase the mortgaged property for an amount equal to or less than the underlying debt and accrued and unpaid interest plus the expenses of foreclosure. Generally, state law controls the amount of foreclosure costs and expenses which may be recovered by a lender. Thereafter, subject to the mortgagor's right in some states to remain in possession during a redemption period, if applicable, the lender will become the owner of the property and have both benefits and burdens of ownership of the mortgaged property. For example, the lender will have the obligation to pay debt service on any senior mortgages, to pay taxes, obtain casualty insurance and make such repairs at its own expense as are necessary to render the property suitable for sale. The costs of operating and maintaining a commercial or multifamily residential property may be significant and may be greater than the income derived from that property. Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is generally accomplished by a non-judicial trustee's sale pursuant to a power of sale typically granted in the deed of trust. A power of sale may also be contained in any other type of mortgage instrument if applicable law so permits. A power of sale under a deed of trust allows a non-judicial public sale to be conducted generally following a request from the beneficiary/lender to the trustee to sell the property upon default by the borrower and after notice of sale is given in accordance with the terms of the mortgage and applicable state law. The borrower or junior lienholder may then have the right, during a reinstatement period required in some states, to cure the default by paying the entire actual amount in arrears (without regard to the acceleration of the indebtedness), plus the lender's expenses incurred in enforcing the obligation. In other states, the borrower or the junior lienholder is not provided a period to reinstate the loan, but has only the right to pay off the entire debt to prevent the foreclosure sale. Generally, state law governs the procedure for public sale, the parties entitled to notice, the method of giving notice and the applicable time periods. Equitable Limitations on Enforceability of Certain Provisions. United States courts have traditionally imposed general equitable principles to limit the remedies available to lenders in foreclosure actions. These principles are generally designed to relieve borrowers from the effects of mortgage defaults perceived as harsh or unfair. Relying on such principles, a court may alter the specific terms of a loan to the extent it considers necessary to prevent or remedy an injustice, undue oppression or overreaching, or may require the lender to undertake affirmative actions to determine the cause of the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lender's and have required that lenders reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from a temporary financial disability. In other cases, courts have limited the right of the lender to foreclose in the case of a non-monetary default, such as a failure to adequately maintain the mortgaged property or an impermissible further encumbrance of the mortgaged property. Even if the lender is successful in the foreclosure action and is able to take possession of the property, the costs of operating and maintaining a commercial or multi-family property may be significant and may be greater than the income derived from that property. The costs of management and operation of those mortgaged properties which are hotels, motels, restaurants, nursing homes, convalescent homes or hospitals may be particularly significant because of the expertise, knowledge and, with respect to nursing or convalescent homes, regulatory compliance required to run such operations, and the effect which foreclosure and a change in 107 ownership may have with respect to consent requirements, and on the public's and the industry's (including franchisors') perception of the quality of such operations. The lender also will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale or lease of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. Moreover, because of the expenses associated with acquiring, owning and selling a mortgaged property, a lender could realize an overall loss on a mortgage loan even if the mortgaged property is sold at foreclosure, or resold after it is acquired through foreclosure, for an amount equal to the full outstanding principal amount of the loan plus accrued interest. The holder of a junior mortgage that forecloses on a mortgaged property does so subject to senior mortgages and any other prior liens, and may be obliged to keep senior mortgage loans current in order to avoid foreclosure of its interest in the property. In addition, if the foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale" clause contained in a senior mortgage, the junior mortgagee could be required to pay the full amount of the senior mortgage indebtedness or face foreclosure. Post-sale Redemption. In a majority of states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors are given a statutory period in which to redeem the property. In some states, statutory redemption may occur only upon payment of the foreclosure sale price. In other states, redemption may be permitted if the former borrower pays only a portion of the sums due. In some states, the borrower retains possession of the property during the statutory redemption period. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property because the exercise of a right of redemption would defeat the title of any purchaser through a foreclosure. Consequently, the practical effect of the redemption right is to force the lender to maintain the property and pay the expenses of ownership until the redemption period has expired. In some states, a post-sale statutory right of redemption may exist following a judicial foreclosure, but not following a trustee's sale under a deed of trust. Anti-Deficiency Legislation. Any commercial or multi-family residential mortgage loans acquired by the Company are likely to be nonrecourse loans, as to which recourse in the case of default will be limited to the property and such other assets, if any, that were pledged to secure the mortgage loan. However, even if a mortgage loan by its terms provides for recourse to the borrower's other assets, a lender's ability to realize upon those assets may be limited by state law. For example, in some states a lender cannot obtain a deficiency judgment against the borrower following foreclosure or sale under a deed of trust or by non-judicial means. Other statutes may require the lender to exhaust the security afforded under a mortgage before bringing a personal action against the borrower. In certain other states, the lender has the option of bringing a personal action against the borrower on the debt without first exhausting such security; however, in some of those states, the lender, following judgment on such personal action, may be deemed to have elected a remedy and thus may be precluded from foreclosing upon the security. Consequently, lenders in those states where such an election of remedy provision exists may choose to proceed first against the security. Finally, other statutory provisions, designed to protect borrowers from exposure to large deficiency judgments that might result from bidding at below-market values at the foreclosure sale, limit any deficiency judgment to the excess of the outstanding debt over the fair market value of the property at the time of the sale. Cooperatives. Mortgage loans may be secured by a security interest on the borrower's ownership interest in shares, and the proprietary leases appurtenant thereto (or cooperative contract rights), allocable to cooperative dwelling units that may be vacant or occupied by non-owner tenants. Such loans are subject to certain risks not associated with mortgage loans secured by a lien on the fee estate of a borrower in real property. Such a loan typically is subordinate to the mortgage, if any, on the cooperative's building which, if foreclosed, could extinguish the equity in the building and the proprietary leases of the dwelling units derived from ownership of the shares of the cooperative. Further, transfer of shares in a cooperative are subject to various regulations as well as to restrictions (including transfer restrictions) under the governing documents of the cooperative, and the shares may be canceled in the event that associated maintenance charges due under the related proprietary leases are not paid. Typically, a recognition agreement between the lender and the cooperative provides, among other things, the lender with an opportunity to cure a default under a proprietary lease but such recognition agreements 108 may not have been obtained in the case of all the mortgage loans secured by cooperative shares (or contract rights). Under the laws applicable in many states, "foreclosure" on cooperative shares is accomplished by a sale in accordance with the provisions of Article 9 of the UCC and the security agreement relating to the shares. Article 9 of the UCC requires that a sale be conducted in a "commercially reasonable" manner, which may be dependent upon, among other things, the notice given to the debtor and the method, manner, time, place and terms of the sale. Article 9 of the UCC provides that the proceeds of the sale will be applied first to pay the costs and expenses of the sale and then to satisfy the indebtedness secured by the lender's security interest. A recognition agreement, however, generally provides that the lender's right to reimbursement is subject to the right of the cooperative to receive sums due under the proprietary leases. BANKRUPTCY LAWS Operation of the Bankruptcy Code and related state laws may interfere with or affect the ability of a lender to realize upon collateral and/or to enforce a deficiency judgment. For example, under the Bankruptcy Code, virtually all actions (including foreclosure actions and deficiency judgment proceedings) to collect a debt are automatically stayed upon the filing of the bankruptcy petition and, often, no interest or principal payments are made during the course of the bankruptcy case. The delay and the consequences thereof caused by such automatic stay can be significant. Also, under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a junior lien or may stay the senior lender from taking action to foreclose out such junior lien. Under the Bankruptcy Code, provided certain substantive and procedural safeguards protective of the lender are met, the amount and terms of a mortgage loan secured by a lien on property of the debtor may be modified under certain circumstances. For example, the outstanding amount of the loan may be reduced to the then-current value of the property (with a corresponding partial reduction of the amount of lender's security interest) pursuant to a confirmed plan or lien avoidance proceeding, thus leaving the lender a general unsecured creditor for the difference between such value and the outstanding balance of the loan. Other modifications may include the reduction in the amount of each scheduled payment, by means of a reduction in the rate of interest and/or an alteration of the repayment schedule (with or without affecting the unpaid principal balance of the loan), and/or by an extension (or shortening) of the term to maturity. Federal bankruptcy law may also have the effect of interfering with or affecting the ability of the secured lender to enforce the borrower's assignment of rents and leases related to the mortgaged property. Under section 362 of the Bankruptcy Code, the lender will be stayed from enforcing the assignment, and the legal proceedings necessary to resolve the issue could be time-consuming, with resulting delays in the lender's receipt of the rents. In addition, the Bankruptcy Code has been amended to provide that a lender's perfected pre-petition security interest in leases, rents and hotel revenues continues in the post-petition leases, rents and hotel revenues, unless a bankruptcy court orders to the contrary "based on the equities of the case." In a bankruptcy or similar proceeding, action may be taken seeking the recovery as a preferential transfer of any payments made by the mortgagor under the related mortgage loan to the owner of such mortgage loan. Payments on long-term debt may be protected from recovery as preferences if they are payments in the ordinary course of business made on debts incurred in the ordinary course of business. Whether any particular payment would be protected depends upon the facts specific to a particular transaction. A trustee in bankruptcy, in some cases, may be entitled to collect its costs and expenses in preserving or selling the mortgaged property ahead of payment to the lender. In certain circumstances, a debtor in bankruptcy may have the power to grant liens senior to the lien of a mortgage, and analogous state statutes and general principles of equity may also provide a mortgagor with means to halt a foreclosure proceeding or sale and to force a restructuring of a mortgage loan on terms a lender would not otherwise accept. Moreover, the laws of certain states also give priority to certain tax liens over the lien of a mortgage or deed of trust. Under the 109 Bankruptcy Code, if the court finds that actions of the mortgagee have been unreasonable, the lien of the related mortgage may be subordinated to the claims of unsecured creditors. The Company's acquisition of real property, particularly REO Property, may be affected by many of the considerations applicable to mortgage loan lending. For example, the Company's acquisition of certain property at foreclosure sale could be affected by a borrower's post-sale right of redemption. In addition, the Company's ability to derive income from real property will generally be dependent on its receipt of rent payments under leases of the related property. The ability to collect rents may be impaired by the commencement of a bankruptcy proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against the commencement or continuation of any state court proceeding for past due rent, for accelerated rent, for damages or for a summary eviction order with respect to a default under the lease that occurred prior to the filing of the lessee's petition. In addition, the Bankruptcy Code generally provides that a trustee or debtor-in- possession may, subject to approval of the court, (i) assume the lease and retain it or assign it to a third party or (ii) reject the lease. If the lease is assumed, the trustee or debtor-in-possession (or assignee, if applicable) must cure any defaults under the lease, compensate the lessor for its losses and provide the lessor with "adequate assurance" of future performance. Such remedies may be insufficient, and any assurances provided to the lessor may, in fact, be inadequate. If the lease is rejected, the lessor will be treated as an unsecured creditor with respect to its claim for damages for termination of the lease. The Bankruptcy Code also limits a lessor's damages for lease rejection to the rent reserved by the lease (without regard to acceleration) for the greater of one year, or 15%, not to exceed three years, of the remaining term of the lease. DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS Notes and mortgages may contain provisions that obligate the borrower to pay a late charge or additional interest if payments are not timely made, and in some circumstances, may prohibit prepayments for a specified period and/or condition prepayments upon the borrower's payment of prepayment fees or yield maintenance penalties. In certain states, there are or may be specific limitations upon the late charges that a lender may collect from a borrower for delinquent payments. Certain states also limit the amounts that a lender may collect from a borrower as an additional charge if the loan is prepaid. In addition, the enforceability of provisions that provide for prepayment fees or penalties upon an involuntary prepayment is unclear under the laws of many states. FORFEITURES IN DRUG AND RICO PROCEEDINGS Federal law provides that property owned by persons convicted of drug- related crimes or of criminal violations of the Racketeer Influenced and Corrupt Organizations ("RICO") statute can be seized by the government if the property was used in, or purchased with the proceeds of, such crimes. Under procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the government may seize the property even before conviction. The government must publish notice of the forfeiture proceeding and may give notice to all parties "known to have an alleged interest in the property," including the holders of mortgage loans. A lender may avoid forfeiture of its interest in the property if it establishes that: (i) its mortgage was executed and recorded before commission of the crime upon which the forfeiture is based, or (ii) the lender was, at the time of execution of the mortgage, "reasonably without cause to believe" that the property was used in, or purchased with the proceeds of, illegal drug or RICO activities. ENVIRONMENTAL RISKS General. The Company will be subject to environmental risks when taking a security interest in real property, as well as when it acquires any real property. Of particular concern may be properties that are or have been used for industrial, manufacturing, military or disposal activity. Such environmental risks include the risk of the diminution of the value of a contaminated property or, as discussed below, liability for the costs of 110 compliance with environmental regulatory requirements or the costs of clean-up or other remedial actions. These compliance or clean-up costs could exceed the value of the property or the amount of the lender's loan. In certain circumstances, a lender could determine to abandon a contaminated mortgaged property as collateral for its loan rather than foreclose and risk liability for compliance or clean-up costs. CERCLA. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on present and past "owners" and "operators" of contaminated real property for the costs of clean-up. A secured lender may be liable as an "owner" or "operator" of a contaminated mortgaged property if agents or employees of the lender have become sufficiently involved in the management of such mortgaged property or the operations of the borrower. Such liability may exist even if the lender did not cause or contribute to the contamination and regardless of whether the lender has actually taken possession of a mortgaged property through foreclosure, deed in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at any given contaminated site is a function of the actions required to address adequately the risks to human health and the environment posed by the particular conditions at the site. As a result, such liability is not constrained by the value of the property or the amount of the original or unamortized principal balance of any loans secured by the property. Moreover, under certain circumstances, liability under CERCLA may be joint and several (i.e., any liable party may be obligated to pay the entire cleanup costs regardless of its relative contribution to the contamination). The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996 (the "1996 Lender Liability Act") provides for a safe harbor for secured lenders from CERCLA liability even though the lender forecloses and sells the real estate securing the loan, provided the secured lender sells "at the earliest practicable, commercially reasonable time, at commercially reasonable terms, taking into account market conditions and legal and regulatory requirements." Although the 1996 Lender Liability Act provides significant protection to secured lenders, it has not been construed by the courts and there are circumstances in which actions taken could expose a secured lender to CERCLA liability. And, the transferee from the secured lender is not entitled to the protections enjoyed by a secured lender. Hence, the marketability of any contaminated real estate continues to be suspect. Certain Other Federal and State Laws. Many states have environmental clean- up statutes similar to CERCLA, and not all those statutes provide for a secured creditor exemption. In addition, underground storage tanks are commonly found on a wide variety of commercial and industrial properties. Federal and state laws impose liability on the owners and operators of underground storage tanks for any cleanup that may be required as a result of releases from such tanks. These laws also impose certain compliance obligations on the tank owners and operators, such as regular monitoring for leaks and upgrading of older tanks. The Company may become a tank owner or operator and subject to compliance obligations and potential cleanup liabilities, either as a result of becoming involved in the management of a site at which a tank is located or, more commonly, by taking title to such a property. Federal and state laws also obligate property owners and operators to maintain and, under some circumstances, to remove asbestos-containing building materials and lead-based paint. As a result, the presence of these materials can increase the cost of operating a property and thus diminish its value. In a few states, transfers of some types of properties are conditioned upon cleanup of contamination prior to transfer. In these cases, a lender that becomes the owner of a property through foreclosure, deed in lieu of foreclosure or otherwise, may be required to clean up the contamination before selling or otherwise transferring the property. Beyond statute-based environmental liability, there exist common law causes of action (for example, actions based on nuisance or on toxic tort resulting in death, personal injury or damage to property) related to hazardous environmental conditions on a property. Superlien Laws. Under the laws of many states, contamination of a property may give rise to a lien on the property for clean-up costs. In several states, such a lien has priority over all existing liens, including those of existing mortgages. In these states, the lien of a mortgage may lose its priority to such a "superlien." 111 Additional Considerations. The cost of remediating environmental contamination at a property can be substantial. To reduce the likelihood of exposure to such losses, the Company will not acquire title to a Mortgaged Property or take over its operation unless, based on an environmental site assessment prepared by a qualified environmental consultant, it has made the determination that it is appropriate to do so. The Company expects that it will organize a special purpose subsidiary to acquire any environmentally contaminated real property. Environmental Site Assessments. In addition to possibly allowing a lender to qualify for the innocent landowner defense (see discussion under "-- Environmental Risks--CERCLA" above), environmental site assessments can be a valuable tool in anticipating, managing and minimizing environmental risk. They are commonly performed in many commercial real estate transactions. Environmental site assessments vary considerably in their content and quality. Even when adhering to good professional practices, environmental consultants will sometimes not detect significant environmental problems because an exhaustive environmental assessment would be far too costly and time-consuming to be practical. Nevertheless, it is generally helpful in assessing and addressing environmental risks in connection with commercial real estate (including multi-family properties) to have an environmental site assessment of a property because it enables anticipation of environmental problems and, if agreements are structured appropriately, can allow a party to decline to go forward with a transaction. APPLICABILITY OF USURY LAWS Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("Title V") provides that state usury limitations shall not apply to certain types of residential (including multi-family) first mortgage loans originated by certain lenders after March 31, 1980. Title V authorized any state to reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision that expressly rejects application of the federal law. In addition, even where Title V is not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits and/or to limit discount points or other charges. AMERICANS WITH DISABILITIES ACT Under Title III of the Americans with Disabilities Act of 1990 and rules promulgated thereunder (collectively, the "ADA"), in order to protect individuals with disabilities, public accommodations (such as hotels, restaurants, shopping centers, hospitals, schools and social service center establishments) must remove architectural and communication barriers that are structural in nature from existing places of public accommodation to the extent "readily achievable." In addition, under the ADA, alterations to a place of public accommodation or a commercial facility are to be made so that, to the maximum extent feasible, such altered portions are readily accessible to and usable by disabled individuals. The "readily achievable" standard takes into account, among other factors, the financial resources of the affected site, owner, landlord or other applicable person. In addition to imposing a possible financial burden on the borrower in its capacity as owner or landlord, the ADA may also impose such requirements on a foreclosing lender who succeeds to the interest of the borrower as owner or landlord. Furthermore, since the "readily achievable" standard may vary depending on the financial condition of the owner or landlord, a foreclosing lender who is financially more capable than the borrower of complying with the requirements of the ADA may be subject to more stringent requirements than those to which the borrower is subject. GROUND LEASE RISKS Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold mortgages are subject to certain risks not associated with mortgage loans secured by a fee estate. The most significant of these risks is that the ground lease creating the leasehold estate could terminate, leaving the leasehold mortgagee without its security. The ground lease may terminate if, among other reasons, the ground lessee breaches or defaults in its 112 obligations under the ground lease or there is a bankruptcy of the ground lessee or ground lessor. This risk may be minimized if the ground lease contains certain provisions protective of the mortgagee, but the ground leases that secure mortgage loans may not contain some of these protective provisions. DUE ON SALE AND DUE ON ENCUMBRANCE Certain of the mortgage loans may contain due on sale and due on encumbrance clauses. These clauses generally provide that the lender may accelerate the maturity of the loan if the mortgagor sells or otherwise transfers or encumbers the mortgaged property. The enforceability of due on sale clauses has been subject of legislation or litigation in many states and, in some cases, the enforceability of these clauses has been limited or denied. However, with respect to certain loans, the Garn-St. Germain Depository Institutions Act of 1982 preempts state constitutional, statutory and case law that prohibits the enforcement of due on sale clauses and permits lenders to enforce these clauses in accordance with their terms subject to certain limited exceptions. SUBORDINATE FINANCING When a mortgagor encumbers mortgaged property with one or more junior liens, the senior lender is subjected to additional risk. First, the mortgagor may have difficulty servicing and repaying multiple loans. In addition, if the junior loan permits recourse to the mortgagor (as junior loans often do) and the senior loan does not, a mortgagor may be more likely to repay sums due on the junior loan than those on the senior loan. Second, acts of the senior lender that prejudice the junior lender can cause the senior lender to lose its priority. For example, if the mortgagor and the senior lender agree to increase the principal amount of or the interest rate payable on the senior loan, the senior lender may lose its priority to the extent any existing junior is harmed or the mortgagor is additionally burdened. Third, if the mortgagor defaults on the senior loan and/or any junior loan or loans, the existence of junior loans and the action taken by junior lenders can impair the security available to the senior lender and can interfere with or delay the taking of action by the senior lender. ACCELERATION ON DEFAULT Some of the mortgage loans may include "Debt--Acceleration" clauses, which permit the lender to accelerate the full debt upon a monetary or nonmonetary default of the mortgagor. The courts of all states will enforce clauses providing for acceleration in the event of a material payment default after giving effect to any appropriate notices. Such courts, however, may refuse to foreclose on a mortgage or deed of trust when an acceleration of the indebtedness would be inequitable or unjust under the circumstances or would render the acceleration unconscionable. Furthermore, in some states, the mortgagor may avoid foreclosure and reinstate an accelerated loan by paying only the defaulted amounts and the costs and attorneys' fees incurred by the lender in collecting such defaulted payments. CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTY The real property securing the mortgage loans will be subject to compliance with various federal, state and local statutes and regulations. Failure to comply (together with an inability to remedy any such failure) could result in material diminution in the value of the mortgaged properties which could, together with the possibility of limited alternative uses for a particular property (e.g., a nursing home or convalescent home or hospital), result in the failure to realize the full principal amount of the related mortgage loan. Mortgages on properties which are owned by a mortgagor under a condominium form of ownership are subject to declarations, bylaws and other regulations of the condominium association. Mortgaged properties which are hotels or motels may present additional risks in that hotels and motels are typically operated pursuant to franchise, management and operating agreements which may be terminated by the operator, and the transferability of the hotel's operating liquor and other licenses to the entity acquiring the hotel either through purchases or foreclosure is subject to the peculiarities of local law requirements. In addition, mortgaged properties which are multifamily residential properties may be subject to rent control laws, which could impact the future cash flows of such properties. 113 SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), a mortgagor who enters military service after the origination of such mortgagor's mortgage loan (including a mortgagor who is in reserve status and is called to active duty after origination of the mortgage loan), may not be charged interest (including fees and charges) above an annual rate of 6% during the period of such mortgagor's active duty status, unless a court orders otherwise upon application of the lender. Because the Relief Act applies to mortgagors who enter military service after origination of the related mortgage loan, no information can be provided as to the number of mortgage loans that may be affected by the Relief Act. Application of the Relief Act would adversely affect, for an indeterminate period of time, the ability of any servicer to collect full amounts of interest on certain mortgage loans. In addition, the Relief Act imposes limitations that would impair the ability of a servicer to foreclosure on an affected mortgage loan during the mortgagor's period of active duty status, and, under certain circumstances, during an additional three-month period thereafter. USE OF PROCEEDS The net proceeds to the Company from its sale of the 10,000,000 shares of Common Stock offered by this Prospectus (assuming an initial public offering price of $16 per share), after deducting the estimated underwriting discounts and offering expenses, are estimated to be approximately $146.8 million ($169.1 million if the Underwriters exercise their over-allotment option in full). The Company, through the Operating Partnership, will contract with WFSG and its affiliates, including Wilshire Properties 1 and Wilshire Properties 2, to purchase the Initial Investments upon completion of this Offering for a purchase price of approximately $133.6 million in cash and the assumption of certain debt (approximately $5.6 million) resulting in a total purchase price of $139.2 million. Of this purchase price, $40.8 million shall be used to acquire U.S. Commercial Investments, $95.0 million shall be used to acquire Mortgage-Backed Securities (including $30.8 million of securities issued by affiliates of WFSG which are backed by the Retained Securities) and $3.4 million shall be used to acquire International Investments. All of the expected net proceeds of this Offering will be used to purchase Units in the Operating Partnership. The purchase price for the Initial Investments was based on certain assumptions made with respect to the potential net cash flows to be generated by the Initial Investments. See "Initial Investments," "Yield Considerations Related to the Company's Investments" and "Risk Factor-- Conflicts of Interest--Conflicts of Interest in the Business of the Company." Pending investment, the balance of the net proceeds (approximately $13.2 million) will be invested in investment-grade, interest-bearing securities and held by the Operating Partnership until used to originate or acquire International Investments, Commercial Real Property including U.S. Commercial Properties, Distressed U.S. Commercial Loans and Other Real Estate Related Assets as provided herein. See "Operating Policies and Objectives." The Company intends to leverage its portfolio through borrowings, generally through the use of mortgage loans and repurchase agreements, the issuance of mortgage-backed securities and other borrowing arrangements. 114 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company has agreed to sell to each of the underwriters named below (the "Underwriters"), and each of the Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc., Prudential Securities Incorporated, and Black & Company, Inc. are acting as representatives (the "Representatives"), has severally agreed to purchase from the Company the number of shares of Common Stock offered hereby set forth below opposite its name.
NUMBER UNDERWRITER OF SHARES ----------- --------- Friedman, Billings, Ramsey & Co., Inc. ............................... Prudential Securities Incorporated.................................... Black & Company, Inc. ................................................ ---- Total............................................................... ====
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to purchase all the shares of Common Stock offered hereby if any are purchased. The Underwriters propose initially to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such offering price less a concession not to exceed $ per share of Common Stock. The Underwriters may allow and such dealers may reallow a concession not to exceed $ per share of Common Stock to certain other dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may be changed by the Underwriters. At the request of the Company, the Underwriters have reserved up to 300,000 shares of Common Stock for sale to directors, officers and employees of WFSG and its subsidiaries and members of their immediate families at the initial public offering price set forth on the cover page of this Prospectus net of any underwriting discounts or commissions. The Company has granted to the Underwriters an option exercisable during a 30-day period after the date hereof to purchase, at the initial offering price less underwriting discounts and commissions, up to an additional 1,500,000 shares of Common Stock for the sole purpose of covering over-allotments, if any. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment. The Company and WFSG have agreed to indemnify the several Underwriters against certain civil liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. Prior to this Offering, there has been no public market for the shares of Common Stock. The initial public offering price has been determined by negotiation between the Company and the Representatives. Among the factors considered in making such determination were the history of, and the prospects for, the industry in which the Company will compete, an assessment of the skills of WRSC, the Company's prospects for future earnings, the general conditions of the economy and the securities market and the prices of offerings by similar issuers. There can, however, be no assurance that the price at which the shares of Common Stock will sell in the public market after this offering will not be lower than the price at which they are sold by the Underwriters. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of the shares offered hereby to any accounts over which they exercise discretionary authority. Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for or purchase the Common Stock. As an exception 115 to these rules, the representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), the representatives may reduce that short position by purchasing Common Stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the representatives purchase Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those Common Stock as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Company and Messrs. Wiederhorn and Mendelsohn have agreed not to offer, sell or contract to sell or otherwise dispose of any Common Stock without the prior consent of the Representatives for a period of 180 days from the date of this Prospectus. WFSG has agreed not to offer, sell or contract to sell or otherwise dispose of the Common Stock acquired at the Closing without the prior consent of the Representatives, for a period of two years from the date of this Prospectus provided that WRSC continues to serve as the Manager during such period. Each of the Underwriters has represented and agreed that (i) it has not offered or sold and will not offer or sell the Common Stock to persons in the United Kingdom, other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 of the United Kingdom; (ii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue and sale of the Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisement) (Exemptions) Order 1996 or is a person to whom such a document may otherwise lawfully be issued or passed on; and (iii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Common Stock from or otherwise involving the United Kingdom. 116 LEGAL MATTERS Certain legal matters will be passed upon for the Company by Proskauer Rose LLP, New York, New York and for the Underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles, California. Proskauer Rose LLP and Gibson, Dunn & Crutcher LLP will be relying as to matters of Maryland law on the opinion of Piper & Marbury LLP, Baltimore, Maryland. The legality of the Common Stock will be passed upon for the Company by Piper & Marbury LLP, Baltimore, Maryland. EXPERTS The financial statement of Wilshire Real Estate Investment Trust Inc. as of February 28, 1998 included in this Prospectus has been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving said reports. ADDITIONAL INFORMATION THE COMPANY The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (of which this Prospectus forms a part) under the Securities Act of 1933, as amended, with respect to the Common Stock offered pursuant to the Prospectus. This Prospectus contains summaries of the material terms of the documents referred to herein and therein, but does not contain all of the information set forth in the Registration Statement pursuant to the rules and regulations of the Commission. For further information, reference is made to such Registration Statement and the exhibits thereto. Such Registration Statement and exhibits as well as reports and other information filed by WREIT can be inspected without charge and copied at prescribed rates at the public reference facilities maintained by the Commission at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as follows: Chicago Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a Web site that contains reports, proxy, and information statements and other information regarding registrants that file electronically with the Commission. The Web site is located at http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document that is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. The Company will be required to file reports and other information with the Commission pursuant to the Securities Exchange Act of 1934. In addition to applicable legal requirements, if any, holders of Common Stock will receive annual reports containing audited financial statements with a report thereon by the Company's independent certified public accounts, and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. WILSHIRE FINANCIAL SERVICES GROUP INC. WFSG files reports and other information with the Commission pursuant to the Securities Exchange Act of 1934. Additional information about WFSG, therefore, may be inspected or copied at the public reference facilities maintained by the Commission at the locations mentioned above. 117 GLOSSARY OF TERMS Except as otherwise specified or as the context may otherwise require, the following terms used herein shall have the meanings assigned to them below. All terms in the singular shall have the same meanings when used in the plural and vice-versa. "1996 Lender Liability Act" shall mean the Asset Conservation, Lender Liability and Deposit Insurance Act of 1996. "5/50 Rule" shall mean that under the Code, not more than 50% in value of the outstanding shares of a REIT is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include entities) during the last half of each taxable year. "ADA" shall mean the Americans with Disabilities Act of 1990, as amended. "Affiliate" shall mean (i) any person directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other person, (ii) any person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other person, (iii) any person directly or indirectly controlling, controlled by, or under common control with such other person, (iv) any executive officer, director, trustee or general partner of such other person, and (v) any legal entity for which such person acts as an executive officer, director, trustee or general partner. The term "person" means and includes any natural person, corporation, partnership, association, limited liability company or any other legal entity. An indirect relationship shall include circumstances in which a person's spouse, children, parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been associated with a person. "Affiliated Transaction" shall mean any material acquisition transaction between the Company and any Interested Stockholder. "Average Invested Assets" shall mean the average of the aggregate book value of the assets of the Company (including all of WREIT's direct and indirect subsidiaries), before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period. "Bankruptcy Code" shall mean Title 11 of the United States Code, as amended. "Beneficiary" shall mean the beneficiary of the Trust. "Board of Directors" shall mean the Board of Directors of the Company. "BPO" shall mean a broker's price opinion obtained by WRSC or one of its affiliates from one of its approved brokers with respect to a loan. "Bylaws" shall mean the Bylaws of the Company. "CERCLA" shall mean the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Charter" shall mean the Charter of the Company. "Closing" shall mean the closing of the Offering. "Closing Price" on any date shall mean the average of the high bid and low asked prices in the over-the-counter market as reported by the Nasdaq Stock Market. "CMO or CMO Bonds" shall mean collateralized mortgage obligations. "Commercial Mortgage-Backed Securities" shall mean commercial or multi- family Mortgage-Backed Securities. "Code" shall mean the Internal Revenue Code of 1986, as amended. 118 "Commercial Mortgage Loans" shall mean mortgage loans secured by Commercial Properties. "Commercial Properties" shall mean commercial and multi-family properties in the U.S. and abroad. "Commission" shall mean the Securities and Exchange Commission. "Common Stock" shall mean the Common Stock, par value $.0001 per share, of WREIT. "Company" shall mean Wilshire Real Estate Investment Trust Inc., a Maryland corporation, together with its subsidiaries, unless the context indicates otherwise. "Company Expenses" shall mean all administrative costs and expenses of the WREIT. "Crime Control Act" shall mean the Comprehensive Crime Control Act of 1984. "Directors" means the members of the Company's Board of Directors. "Discounted Loans" shall mean non-performing loans that because of their delinquent status are available for purchase at prices that reflect a significant discount from their unpaid principal balances. "Disqualified Organization" shall mean any organization, domestic and international, that is exempt from taxation under the unrelated business taxable income provisions of the Code, or any rural electric or telephone cooperative. "Disqualified Services" shall mean certain services which may be provided by a REIT to tenants without having to engage an independent contractor if the services in question are "usual or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered services furnished or rendered to the tenants of such property. "Distressed U.S. Commercial Loans" shall mean distressed commercial and multi-family mortgage loans. "DOL" shall mean the Department of Labor. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "European Servicer" shall mean Wilshire Servicing Company UK Limited. "Excess Inclusion" shall have the meaning specified in section 860E(c) of the Code. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exempt Organizations" shall mean tax-exempt entities, including, but not limited to, charitable organizations, qualified employee pension and profit sharing trusts and individual retirement accounts. "FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of 1980. "FLHMC" shall mean the Federal Loan Home Mortgage Corporation, a corporate instrumentality of the United States created and existing under Title III of the Emergency Home Finance Act of 1970, as amended, or any successor thereto. "Foreclosed Properties" shall mean properties acquired by a mortgage lender or other party (including the Company) at foreclosure or by deed in lieu of foreclosure. "FNMA" shall mean the Federal National Mortgage Association, a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act, or any successor thereto. 119 "Funds From Operations" shall mean net income (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring or sales of property, plus depreciation, and after adjustments for unconsolidated partnerships and joint ventures. "GAAP" shall mean generally accepted accounting principles. "Garn Act" shall mean the Garn-St. Germain Depository Institutions Act of 1982. "General Partner" shall mean Wilshire Real Estate Investment Trust, Inc., as the sole general partner of the Operating Partnership. "GP Units" shall mean units of general partner interest in the Operating Partnership. "Guidelines" shall mean guidelines that set forth general parameters for the Company's investments, borrowings and operations. "Hedging Transactions" shall mean hedging transactions which the Company will enter into with respect to one or more of its assets or liabilities, including interest rate swaps, or interest rate cap agreements, options, futures contracts, forward rate agreements or any similar financial interest entered into by the Company to reduce the interest rate risks with respect to any indebtedness incurred to acquire or carry real estate assets. "HUD" shall mean the Department of Housing and Urban Development. "Independent Director" shall mean a director who within the last two years has not (i) been employed by WFSG or any of its Affiliates, (ii) been an officer or director of WFSG or any of its Affiliates, (iii) or whose business or employer within the last two years has not performed services for WFSG or any of its Affiliates that annually exceeded the lesser of (a) the dollar amount provided in Item 404(a) of Regulation S-K or (b) 10% of the gross revenue of the entity that provided such services, or (iv) had any material business or professional relationship with WFSG or any of its Affiliates. "Ineligible Property" shall mean property that is not eligible for the REIT election to be treated as foreclosure property. "Initial Investments" shall mean the U.S. Commercial Investments, Mortgage- Backed Securities, and International Investments described under "Initial Investments," which are to be acquired on or soon after the Closing. "Initial Distressed U.S. Commercial Loans" shall mean Distressed U.S. Commercial Loans included in the Initial Investments. "Initial Mortgage-Backed Securities" shall mean the Initial Mortgage-Backed Securities included in the Initial Investments. "Interested Stockholder" shall mean any holder of more than 10% of any class of outstanding voting shares of the Company. "International Mortgage Loans" shall mean performing and distressed commercial and multi-family mortgage loans and residential mortgage loans secured by real properties located outside the United States. "International Real Properties" shall mean commercial and multi-family real properties and residential real properties located outside of the United States. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended. 120 "IO" shall mean a class of Mortgage-Backed Securities that is entitled to no (or only nominal) distributions of principal. "IRA" shall mean an individual retirement account. "Lease" shall mean, with respect to each Mortgaged Property or Real Property, the agreement pursuant to which the Borrower rents and leases to the Lessee and the Lessee rents and leases from the Borrower, such Mortgaged Property or Real Property. "LIBOR" shall mean the London Interbank Offering Rate for one-month U.S. Dollar deposits. "Limited Partners" shall mean initially, the Company, Wilshire Properties 1 and Wilshire Properties 2 and any other holder of Units in the future. "LP Units" shall mean units of limited partner interest in the Operating Partnership. "Management Agreement" shall mean an agreement or agreements among the Company, WRSC and WFSG pursuant to which WRSC performs various services for the Company. "Manager" shall mean Wilshire Realty Services Corporation. "Market Price" shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. "MGCL" shall mean the Maryland General Corporation Law. "Mortgage-Backed Securities" shall mean classes of mortgage-backed securities that are subordinated in right of payments of principal and interest to more senior classes. "Mortgage Collateral" shall mean mortgage pass-through securities or pools of whole loans securing or backing a series of Mortgage-Backed Securities. "Mortgage Loan" shall mean a mortgage loan underlying a series of Mortgage- Backed Securities or a Mortgage Loan held by the Company, as the context indicates. "Mortgaged Property" shall mean the real property securing a mortgage loan. "NAREIT" shall mean the National Association of Real Estate Investment Trusts, Inc. "Net Income" shall mean the income of the Company as reported for federal income tax purposes before WRSC's incentive compensation, net operating loss deductions arising from losses in prior periods and the deduction for dividends paid, plus the effects of adjustments, if any, necessary to record hedging and interest transactions in accordance with generally accepted accounting principles. "Non-Discounted Loans" shall mean performing and sub-performing loans that are available for purchase at prices that more closely approximate their unpaid principal balances. "Non-Employee Director" shall mean a director who is neither an employee of the Company nor an Independent Director. "Non-ERISA Plan" shall mean a plan that does not cover common law employees. "Non-Performing Mortgage Loans" shall mean with respect to loans, a loan that is more than 12 payments delinquent, or that is two or more, but not more than 12, payments delinquent and had a ratio of the outstanding principal balance of such loan to its appraised value in excess of 90%, or that the Company otherwise believes 121 that such loan will not be brought current and with respect to property, a property that is more than 12 payments delinquent. "Non-REMIC Transactions" shall mean the use of loans to collateralize one or more multiple-class offerings of Mortgage-Backed Securities for which no REMIC election is made. "Non-U.S. Stockholders" shall mean nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign stockholders. "Offering" shall mean the offering of Common Stock hereby. "Offering Price" shall mean the offering price of $16.00 per Common Share offered hereby. "Operating Partnership" shall mean Wilshire Real Estate Partnership L.P. "Operating Partnership Agreement" shall mean the partnership agreement of the Operating Partnership, as amended from time to time. "Option Plan" shall mean a plan which provides for options to purchase Units. "Other Real Estate Related Assets" shall mean real estate related assets other than the Primary Investments. "Ownership Limitation" shall mean the restriction on ownership (or deemed ownership by virtue of the attribution provisions of the Code) of (a) more than 9.8% of the outstanding shares of Common Stock or Preferred Stock by any stockholder other than WFSG or (b) more than 20% of the outstanding shares of Common Stock by WFSG. "Pass-Through Certificates" shall mean interests in trusts, the assets of which are primarily mortgage loans. "Performing Mortgage Loans" shall mean commercial and residential mortgage loans for which the payment of principal and interest is not more than one payment delinquent. "Plan" shall mean certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts. "Plan Asset Regulations" shall mean regulations of the Department of Labor that define "plan assets." "Preferred Stock" shall mean the preferred stock of the Company. "Primary Investments" shall mean U.S. Commercial Investments, Mortgage- Backed Securities and International Investments. "Private-Label Securities" shall mean Initial Mortgage-Backed Securities consisting of securities backed by loans that were originated and are being serviced by unaffiliated non-governmental third parties. "Prohibited Owner" shall mean the record holder of the shares of Common Stock or Preferred Stock that are designated as Shares-in-Trust. "Qualifying Interests" shall mean mortgages and other liens on and interests in real estate. "Real Property" shall mean real property owned by the Company. "Realized Losses" shall mean, generally, the aggregate amount of losses realized on loans that are liquidated and losses on loans due to fraud, mortgagor bankruptcy or special hazards. 122 "Redemption Rights" shall mean the rights that it is anticipated the Limited Partners will have pursuant to the Operating Partnership Agreement to redeem all or a portion of their interests in the Operating Partnership for Common Stock on a one-for-one basis or, at the option of the Company, an equivalent amount of cash. "REIT" shall mean real estate investment trust, as defined in section 856 of the Code. "Related Party Tenant" shall mean a tenant of WREIT or the Operating Partnership in which WREIT owns 10% or more of the ownership interests, taking into account both direct ownership and constructive ownership. "Relief Act" shall mean the Soldiers' and Sailors' Civil Relief Act of 1940, as amended. "REMIC" shall mean real estate mortgage investment conduit, as defined in section 860D of the Code. "REMIC Residual Interest" shall mean a class of Mortgage-Backed Securities that is designated as the residual interest in one or more REMICs. "Rent" shall mean rent received by the Company from tenants of Real Property owned by the Company. "REO Property" shall mean real property acquired by a mortgage lender at foreclosure (or by deed in lieu of foreclosure). "Representatives" shall mean Friedman, Billings, Ramsey & Co., Inc., Prudential Securities Incorporated and Black & Company, Inc. "Residential Mortgage-Backed Securities" shall mean Mortgage-Backed Securities backed by one- to four-family residential mortgage loans. "Residential Mortgage Loans" shall mean mortgage loans secured by residential properties. "Residential Properties" shall mean residential real properties. "Retained Securities" shall mean securities issued by affiliates of WFSG which were backed by loans that were previously held in the portfolio of WFSG or its affiliates and for which WCC is continuing to act as a servicer. "RICO" shall mean the Racketeer Influenced and Corrupt Organizations laws, 18 U.S.C.A. Section 1961, et seq. "Right of First Refusal" shall mean the right of first refusal granted by the Manager and WFSG with respect to the Primary Investments whereby WFSG and its subsidiaries will not invest in any particular Primary Investment unless a majority of the Independent Directors have determined that the Company should not invest in such asset. The Right of First Refusal does not apply to Mortgage-Backed Securities where the mortgage loans collaterizing such Mortgage-Backed Securities are owned by WFSG or one of its subsidiaries. "Securities Act" shall mean the Securities Act of 1933, as amended. "Service" shall mean the Internal Revenue Service. "Servicers" shall mean WCC and the European Servicer. "Services Agreement" shall mean an agreement entered into among WRSC, WRSG and WREIT whereby WFSG will provide assistance performing certain managerial and administrative services for WREIT. "Servicing Agreements" shall mean the loan servicing agreements which the Company shall enter into with the Servicers. "Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the purported transfer of which would result in a violation of the Ownership Limitation, result in the stock of WREIT being held by fewer than 123 100 persons, result in WREIT being "closely held," or cause WREIT to own 10% or more of the ownership interests in a tenant of the Company's Real Property. "SmallCap" shall mean Small Cap Investors, LLC, an Oregon limited liability company. "Special Servicing" shall mean servicing of defaulted mortgage loans, including oversight and management of the resolution of such mortgage loans by modification, foreclosure, deed in lieu of foreclosure or otherwise. "Sub IO" shall mean an IO with characteristics of a subordinated Mortgage- Backed Security. "Subordinated Interests" shall mean classes of Mortgage-Backed Securities that are subordinated in right of payments of principal and interest to more senior classes. "Sub-Performing Mortgage Loans" shall mean with respect to loans, a loan that is two or more, but not more than 12, payments delinquent that had a ratio of the outstanding principal balance of such loan to its appraised value of 90% or less, except for those loans which the Company otherwise believes cannot be brought current and with respect to property, a property that is more than two months, but less than 12 months, delinquent in payment. "TMP" shall mean taxable mortgage pool. "Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. "Title V" shall mean Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980. "Trading Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Treasury Regulations" shall mean the income tax regulations promulgated under the Code. "Trust" shall mean a trust created in the event of an impermissible transfer of shares of Common Stock. "Trustee" shall mean a trustee of the Trust. "UBTI" shall mean unrelated business taxable income. "UBTI Percentage" shall mean the gross income derived by the Company from an unrelated trade or business divided by the gross income of the Company for the year in which the dividends are paid. "UCC" shall mean the Uniform Commercial Code. "Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc., Prudential Securities Incorporated and Black & Company and each of the underwriters for whom Friedman, Billings, Ramsey & Co., Inc., Prudential Securities Incorporated and Black & Company, Inc. are acting as representatives. "Underwriting Agreement" shall mean the agreement pursuant to which the Underwriters will underwrite the Common Stock. "United Kingdom Non-Performing Loans" shall mean the pool of non-performing loans in the United Kingdom that the Company will acquire as an Initial Investment and will hold as a Mortgagee in Possession. 124 "United Kingdom Performing and Sub-Performing Loans" shall mean the pool of performing and sub-performing loans in the United Kingdom that the Company will acquire as an Initial Investment. "Units" shall mean units of partnership interest in the Operating Partnership. "U.S. Commercial Investments" shall mean distressed and performing commercial and multi-family mortgage loans and commercial and multi-family real properties in the United States. "WCC" shall mean Wilshire Credit Corporation. "Wilshire Properties 1" shall mean Wilshire Properties 1 Inc. "Wilshire Properties 2" shall mean Wilshire Properties 2 Inc. "WREIT" shall mean Wilshire Real Estate Investment Trust Inc. "WRSC" shall mean Wilshire Realty Services Corporation. "WFSG" shall mean Wilshire Financial Services Group Inc. 125 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Wilshire Real Estate Investment Trust Inc. We have audited the accompanying balance sheet of Wilshire Real Estate Investment Trust Inc. (the "Company") as of February 28, 1998. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Wilshire Real Estate Investment Trust Inc. as of February 28, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California March 27, 1998 F-1 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. BALANCE SHEET AS OF FEBRUARY 28, 1998 ASSETS Cash.................................................................... $2,000 ====== LIABILITIES AND STOCKHOLDER'S EQUITY Stockholder's Equity Common Stock, par value $0.01 per share; 1,000 shares authorized; 100 shares issued and outstanding........................................ $ 1 Additional paid-in-capital............................................ 1,999 ------ Total Stockholder's Equity.......................................... $2,000 ======
See accompanying notes to this balance sheet. F-2 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. NOTES TO BALANCE SHEET FEBRUARY 28, 1998 1. THE COMPANY Wilshire Real Estate Investment Trust Inc. (the "Company" or "WREIT"), a Maryland corporation organized on October 24, 1997 by Wilshire Financial Services Group Inc ("WFSG"), will elect to be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended. The Company will be managed by Wilshire Realty Services Corporation (the "Manager" or "WRSC"), a wholly-owned subsidiary of WFSG. The Company intends to invest primarily in the following: (i) commercial and multi-family mortgage loans that are delinquent in payments and commercial and multi-family real properties in the United States ("U.S. Commercial Investments"); (ii) subordinated interests in mortgage-backed securities ("Mortgage-Backed Securities"), primarily non-investment grade residential Mortgage-Backed Securities (other than Mortgage-Backed Securities backed by mortgage loans and/or real properties previously owned by WFSG or its affiliates); and (iii) international mortgage loans and real properties ("International Investments," and together with U.S. Commercial Investments and Mortgage-Backed Securities, the "Primary Investments"). The Company's sole activity through February 28, 1998, consisted of the organization and start-up of the Company. Accordingly, no statement of operation is presented. 2. ORGANIZATION The Company will file a Registration Statement on Form S-11 with the Securities and Exchange Commission with respect to a proposed public offering (the "Offering"). In connection with the proposed public offering, the Company will engage in the following transactions: (1) WREIT, a Maryland corporation taxable as a REIT, will issue certain of its common stock to WFSG and the remaining shares of its common stock to public investors. (2) WREIT will contribute, as a general partner and as a limited partner, all of the net proceeds of the Offering to the Operating Partnership. The Operating Partnership will issue GP Units and LP Units to WREIT for the contribution of such net proceeds. Small Cap Investors LLC, an Oregon limited liability company ("Small Cap") will purchase LP Units. The Company, through the Operating Partnership, will acquire all of the Initial Investments from WFSG, Wilshire Properties 1 Inc. ("Wilshire Properties 1") and Wilshire Properties 2 Inc. ("Wilshire Properties 2") and will originate or acquire any future Primary Investments or Other Real Estate Related Assets. In the future, the Operating Partnership may seek to acquire additional assets and issue Units in payment of some or all of the purchase price therefor. (3) The Operating Partnership will assign to Wilshire Credit Corporation ("WCC") any special servicing rights and obligations (other than the right to direct foreclosure) received in connection with the acquisition of Mortgage- Backed Securities covering U.S. assets. WCC is currently owned by the principal shareholders of WFSG. WCC and the European Servicer will provide loan servicing and real property management services to the Company. (4) WFSG incorporated and capitalized WRSC. (5) WRSC will enter into a Management Agreement with WREIT and the Operating Partnership, pursuant to which WRSC will formulate operating strategies and provide certain managerial and administrative functions for WREIT and the Operating Partnership, subject to the supervision of WREIT's Board of Directors. WRSC, WFSG and WREIT will also enter into a Services Agreement where WFSG will provide to WRSC assistance performing certain managerial and administrative services for WREIT. F-3 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. NOTES TO BALANCE SHEET--(CONTINUED) (6) Messrs. Wiederhorn and Mendelsohn are the sole stockholders of Wilshire Properties 1, Wilshire Properties 2, and WCC, the controlling stockholders of WFSG and control trusts and a partnership which are sole members of Small Cap. WFSG is the sole stockholder of WRSC and Messrs. Wiederhorn and Mendelsohn are officers and directors of WFSG and WRSC. 3. MANAGEMENT AGREEMENT Pursuant to the Management Agreement, WRSC, subject to the supervision of WREIT's Board of Directors, will formulate operating strategies for the Company, arrange for the acquisition of assets by the Company, arrange for various types of financing for the Company, including repurchase agreements, secured term loans, warehouse lines of credit, mortgage loans and the issuance of mortgage-backed securities, monitor the performance of the Company's assets and provide certain administrative and managerial services in connection with the operation of the Company. For performing these services, WRSC will receive compensation, fees and other benefits (including reimbursement of reasonable out-of-pocket expenses). 4. INITIAL INVESTMENTS At the Closing of this Offering (the "Closing"), the Company, using a portion of the cash from the Offering, through the Operating Partnership, will acquire from WFSG or its affiliates (i) U.S. Commercial Investments, (ii) Mortgage-Backed Securities, and (iii) International Investments in the United Kingdom. Certain of the U.S. Commercial Investments will be acquired from Wilshire Properties 1 and Wilshire Properties 2. Wilshire Properties 1, organized on January 26, 1993, and Wilshire Properties 2, organized on November 7, 1994, were established to hold certain real estate investments of the principal shareholders of WFSG, who also own all of the outstanding shares of both entities. WFSG has granted the Company an option to purchase for up to approximately $110.0 million all or a portion of WFSG's 50% interest in two portfolios of International Investments in France. The Company is currently evaluating the suitability of such investments under U.S. tax and French law. In the future, the Company may purchase assets from WFSG and its affiliates, subject to the approval of Independent Directors of WREIT. 5. FEDERAL INCOME TAXES The Company intends to make an election to be taxed as a REIT under Section 856 through 860 of the Internal Revenue Code for its first taxable year ending after the Offering. As a REIT, the Company generally will not be subject to federal income tax if it distributes at least 95% of its taxable income for each tax year to its stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local income taxes and to federal income tax and excise tax on its undistributed income. 6. OFFERING COSTS In connection with the Offering, affiliates have or will incur legal, accounting and related costs which will be reimbursed by the Company only upon the consummation of the Offering. These costs would then be deducted from the gross proceeds of the Offering. F-4 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. NOTES TO BALANCE SHEET--(CONTINUED) 7. CONFLICTS OF INTEREST The Company will be subject to various conflicts of interest arising from its relationship with WFSG and its affiliates. WFSG will own certain of the outstanding shares of Common Stock of WREIT after the Closing. All of the officers of the Company are also officers of both the Manager and WFSG. Messrs. Wiederhorn and Mendelsohn are principal stockholders and directors of WFSG, and directors of the Manager. Messrs. Wiederhorn and Mendelsohn control trusts and a partnership which are the sole members of Small Cap which will purchase certain Units of the Operating Partnership. Neither the Company nor the Manager will have any employees and will rely on WFSG for all of their staffing needs. With a view toward protecting the interests of the Company's stockholders, the Charter of the Company provides that a majority of the Board of Directors must be unaffiliated with WFSG. The Company will contract with WFSG and its subsidiaries to purchase the Initial Investments at the Closing. WFSG will realize a gain as a result of the purchase of such assets. However, since WFSG will retain an economic interest in the Company, WFSG will not recognize the total amount of this gain for financial reporting purposes. The Operating Partnership also will acquire from two affiliates of WFSG, Wilshire Properties 1 and Wilshire Properties 2, all of the outstanding shares of which are owned by Messrs. Wiederhorn and Mendelsohn, certain U.S. commercial real property. The Independent Directors approved the purchase of the Initial Investments. Their decision was based solely on information provided by WFSG and without the benefit of independent financial advisors. Approximately 22.1% of the Initial Investments are Mortgage-Backed Securities issued by affiliates of WFSG and backed by loans that were previously held in the portfolio of an affiliate of WFSG. The assets being purchased from WFSG, Wilshire Properties 1 and Wilshire Properties 2 are being acquired at their estimated fair market value. The Manager, a wholly owned subsidiary of WFSG, will manage the Company and provide extensive advice on the Company's operating policies and strategies. The Manager is responsible for monitoring the performance of the Servicers, while the Manager and the Servicers are under the common control of Messrs. Wiederhorn and Mendelsohn. The Manager may also cause the Company to engage in future transactions with WFSG and its affiliates, subject to the approval of the Independent Directors. The Independent Directors, however, will rely primarily on information supplied by the Manager in reaching their determinations. In addition, the Company, the Manager and WFSG have common officers and directors. Accordingly, WFSG and the Manager will have a significant amount of influence over the affairs of the Company. The Management Agreement does not limit or restrict the right of WFSG or any of its officers, directors, employees or affiliates from engaging in any business, subject to the Right of First Refusal with respect to the Primary Investments granted to the Company, or rendering services of any kind to any other person, including the purchase of or rendering advice to others purchasing real property assets that meet the Company's policies and criteria. In addition, the Manager will be entitled to receive incentive compensation for its services which could result in the Manager recommending riskier or more speculative investments. Pursuant to the Management Agreement and the Services Agreement, WFSG and its subsidiaries have granted the Company a Right of First Refusal with respect to the Primary Investments. WFSG expects to continue to purchase real property assets in the future, and has no obligation to make investment opportunities available to the Company except with respect to Primary Investments. Moreover, pursuant to the Management Agreement and the Services Agreement, WFSG and its subsidiaries have no obligation to offer mortgage- backed securities to the Company if the mortgage loans collateralizing such mortgage-backed securities were owned by WFSG or one of its affiliates. As a consequence, the opportunity for the Company to invest in Other Real Estate F-5 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. NOTES TO BALANCE SHEET--(CONTINUED) Related Assets will be limited if such investment opportunities would be attractive to WFSG or one of its subsidiaries. WFSG and its subsidaries will not invest in any Primary Investments unless a majority of the Independent Directors have decided that the Company should not invest in such asset. In deciding whether to invest in such an asset, the Independent Directors may consider, among other factors, whether the asset is well-suited for the Company and whether the Company is financially able to take advantage of the investment opportunity based primarily on information provided by the Manager. From time to time, mortgage lenders offer for sale large pools of real property assets containing assets which WFSG has granted a Right of First Refusal to the Company pursuant to a competitive bidding process. In such a case, WFSG may choose an unaffiliated entity with which to submit a joint bid for the pool, as long as WFSG takes title only to the real property assets as to which a right of first refusal has not been granted. In the alternative WFSG may, but is not required to, invite the Company to submit a joint bid for such a pool. If the Company and WFSG are successful bidders on such a pool, in general the Company would take title to the real property assets as to which a right of first refusal has been granted. The Company may, but does not currently intend to, participate in mortgage loans as a co-participant with WFSG or its affiliates. 8. STOCK OPTIONS The Company intends to adopt a non-qualified stock option plan (the "Option Plan"), which provides for options to purchase shares of Common Stock. Before closing, the Company intends to grant to WRSC, the Independent Directors and other members of the Board of Directors who are not employees of the Company or identified as Independent Directors the options under the Option Plan, representing the right to acquire shares of Common Stock, at an exercise price per share equal to the initial offering price of the Common Stock. F-6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SE- CURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO- LICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO- LICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- SUMMARY TABLE OF CONTENTS ----------------
PAGE ---- Prospectus Summary........................................................ 1 Organization and Relationships............................................ 12 Risk Factors.............................................................. 13 Operating Policies and Objectives......................................... 27 Management of Operations.................................................. 41 Compensation and Fees to WFSG and Affiliates.............................. 50 Servicing Arrangements.................................................... 51 The Company............................................................... 51 Distribution Policy....................................................... 54 Yield Considerations Related to the Company's Investments................. 54 Initial Investments....................................................... 58 Capitalization............................................................ 74 Management's Discussion and Analysis of Liquidity and Capital Resources... 74 Description of Capital Stock.............................................. 75 Certain Provisions of Maryland Law and of WREIT's Charter and Bylaws...... 78 Common Stock Available for Future Sale.................................... 81 Operating Partnership Agreement........................................... 82 Federal Income Tax Consequences........................................... 85 ERISA Considerations...................................................... 102 Certain Legal Aspects of Mortgage Loans and Real Property Investments..... 105 Use of Proceeds........................................................... 114 Underwriting.............................................................. 115 Legal Matters............................................................. 117 Experts................................................................... 117 Additional Information.................................................... 117 Glossary of Terms......................................................... 118 Financial Statements...................................................... F-1
UNTIL , 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU- RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE- LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 10,000,000 SHARES [LOGO OF WILSHIRE REAL ESTATE INVESTMENT TRUST INC.] Real Estate Investment Trust Inc. COMMON STOCK ---------------- PROSPECTUS ---------------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. PRUDENTIAL SECURITIES INCORPORATED BLACK & COMPANY, INC. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of the fees and expenses (other than sales commissions) payable by the Registrant in connection with the issuance and distribution of the Common Stock. SEC Registration Fee.......................................... $ 111,515 Blue Sky Fees and Expenses.................................... 7,500 NASD Filing Fee............................................... 30,500 The NASDAQ Stock Market Filing Fee............................ 95,000 Printing and Mailing Fees..................................... 400,000 Counsel Fees and Expenses..................................... 1,100,000 Accounting Fees and Expenses.................................. 150,000 Miscellaneous................................................. 105,485 ---------- Total....................................................... $2,000,000 ==========
ITEM 32. SALES TO SPECIAL PARTIES Not Applicable. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES Not Applicable. ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS WREIT's Charter limits the liability of its directors and officers to WREIT and its stockholders to the fullest extent permitted from time to time by Maryland law. Maryland law presently permits the liability of directors and officers to a corporation or its stockholders for money damages to be limited, except (i) to the extent that it is proved that the director or officer actually received an improper benefit or profit in money property or services for the amount of the benefit or profit in money, property or services actually received, or (ii) if a judgment or other final adjudication is entered in a proceeding based on a finding that the director's or officer's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. This provision does not limit the ability of WREIT or its stockholders to obtain other relief, such as an injunction or rescission. The Charter and Bylaws require WREIT to indemnify and hold harmless and, without requiring a determination of the ultimate entitlement to indemnification, pay reasonable expenses in advance of the final disposition of any proceeding to its present and former directors and officers and certain other parties to the fullest extent permitted from time to time by Maryland law. The Maryland General Corporation Law ("MGCL") permits a corporation to indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses incurred by them in connection with any proceeding to which they may be made a party by reason of their service to or at the request of the corporation, unless it is established that (i) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and (x) was committed in bad faith or (y) was the result of active and deliberate dishonesty, (ii) the indemnified party actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding. Indemnification is limited to court ordered reimbursement for expenses; however, if the proceeding is one by or in the right of the corporation, and the director or officer was adjudged to be liable to the corporation or if the proceeding is one charging improper personal benefit to the director or officer and the director or officer was adjudged to be liable on the basis that personal benefit was improperly received. The termination of any proceeding by conviction, or upon a plea of II-1 nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttal presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. Maryland law requires a corporation (unless its charter provides otherwise, which WREIT's Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. It is the position of the Securities and Exchange Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and is unenforceable pursuant to Section 14 of the Securities Act. The Registrant will carry an insurance policy providing directors' and officers' liability insurance for any liability its directors or officers or the directors or officers of any of its subsidiaries may incur in their capacities as such. The Registrant will indemnify Wilshire Realty Services Corporation, a Delaware corporation (the "Manager" or "WRSC"), and its officers and directors from any action or claim brought or asserted by any party by reason of any allegation that WRSC or one or more of its officers or directors otherwise is accountable or liable for the debts or obligations of the Registrant or its affiliates. In addition, WRSC and its officers and directors will not be liable to the Registrant, and the Registrant will indemnify WRSC and its officers and directors for acts performed pursuant to the Management Agreement, filed as Exhibit 10.1 hereto, except for claims arising from acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. The form of Underwriting Agreement filed as an exhibit to this registration statement provides for the reciprocal indemnifications by the Underwriters of Registrant, and its directors, officers and controlling persons, and by the Registrant of the Underwriters, and their respective directors, officers and controlling persons, against certain liabilities under the Securities Act. ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED Not Applicable. ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS (a) Index to Financial Statements. Report of Independent Public Accountants................................. F-1 Balance Sheet as of February 28, 1998.................................... F-2 Notes to Balance Sheet................................................... F-3
(b) Exhibits. 1.1 Form of Underwriting Agreement. 3.1 Amended & Restated Charter of the Registrant. 3.2 Bylaws of the Registrant. 4.1 Common Stock Certificate Specimen. 5.1 Opinion of Piper & Marbury L.L.P. 8.1 Opinion of Proskauer Rose LLP as to Tax Matters. 10.1 Form of Management Agreement. 10.2 Form of Partnership Agreement of Wilshire Real Estate Partnership L.P. 10.3 Form of Stock Option Plan. 10.4 Form of Real Estate Asset Servicing Agreement. 10.5 Form of Acquisition Agreements. 10.6 Form of Option Agreement from Wilshire Servicing Compagnie S.A. to WREIT for certain International Investments. 10.7 Form of Services Agreement.
II-2 10.8 Form of Registration Rights Agreement. 23.1 Consent of Proskauer Rose LLP (included in Exhibit 8.1). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.1). 23.4 Consent of John C. Condas. 24.1 Power of Attorney (included on Signature Page). 27.1** Financial Data Schedule.
- -------- ** previously filed ITEM 37. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues. The undersigned Registrant hereby undertakes to provide to the Underwriters as the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) The registrant undertakes to provide stockholders at least on an annual basis a statement of any transactions with WFSG or its affiliates, and of fees, commissions, compensation and other benefits paid, or accrued to WFSG or its affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed. (4) The registrant undertakes to provide to the stockholders financial statements in a Form 10-K or an annual report. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Amendment No. 3 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Portland, Oregon, on the 30th day of March, 1998. Wilshire Real Estate Investment Trust Inc.,a Maryland corporation (Registrant) /s/ Lawrence A. Mendelsohn By ___________________________________ LAWRENCE A. MENDELSOHN PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to this Registration Statement has been signed by the following persons on the 30th day of March, 1998, in the capacities indicated. SIGNATURE TITLE /s/ Andrew A. Wiederhorn* Chairman of the Board of - ------------------------------------ Directors, Chief Executive ANDREW A. WIEDERHORN Officer, Secretary, Treasurer and Director /s/ Lawrence A. Mendelsohn Director and President - ------------------------------------ LAWRENCE A. MENDELSOHN /s/ Chris Tassos* Executive Vice President and - ------------------------------------ Chief Financial Officer CHRIS TASSOS (Principal Accounting Officer) /s/ David C. Egelhoff* Director - ------------------------------------ DAVID C. EGELHOFF /s/ Steven Kapiloff* Director - ------------------------------------ STEVEN KAPILOFF /s/ Jordan D. Schnitzer Director - ------------------------------------ JORDAN D. SCHNITZER *By: /s/ Lawrence A. Mendelsohn - ------------------------------------ LAWRENCE A. MENDELSOHN Attorney-in-Fact II-4 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT Exhibit 1.1 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. 10,000,000 Shares of Common Stock UNDERWRITING AGREEMENT March __, 1998 FRIEDMAN, BILLINGS, RAMSEY & CO., INC. PRUDENTIAL SECURITIES INCORPORATED BLACK & COMPANY, INC. as Representatives of the several Underwriters c/o Friedman, Billings, Ramsey & Co., Inc. 1001 19th Street North Arlington, Virginia 22209 Dear Sirs: Wilshire Real Estate Investment Trust Inc. (the "Company"), Wilshire Real Estate Partnership L.P. (the "Operating Partnership") and Wilshire Financial Services Group Inc. ("WFSG") each confirms its agreement (and in the case of WFSG only as to Sections 9 and 10 hereof) with Friedman, Billings, Ramsey & Co., Inc., Prudential Securities Incorporated and Black & Company, Inc. and each of the other Underwriters listed in Schedule I hereto (collectively, the "Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc., Prudential Securities Incorporated and Black & Company, Inc. are acting as Representatives (in such capacity, the "Representatives"), with respect to (i) the sale by the Company, and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $0.0001 per share, of the Company ("Common Stock"), totaling 10,000,000, set forth in Schedule I hereto and (ii) the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 1(b) hereof to purchase all or any part of 1,500,000 additional shares of Common Stock to cover over-allotments, if any. The 10,000,000 shares of Common Stock (the "Initial Shares") to be purchased by the Underwriters and all or any part of the 1,500,000 shares of Common Stock subject to the option described in Section 1(b) hereof that the Underwriters elect to purchase (the "Option Shares") are hereinafter called, collectively, the "Shares." The Company acknowledges that at its request, the Underwriters have reserved up to 200,000 of the Initial Shares for sale to directors, officers and employees of WFSG and its subsidiaries and members of their immediate families at the initial public offering price of the Shares net of any underwriting discounts or commissions. 1 The Company has filed with the Securities and Exchange Commission (the "Commission"), a registration statement on Form S-11 (No. 333-39035) and a related preliminary prospectus for the registration of the Shares under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations thereunder (the "Securities Act Regulations"). The Company has prepared and filed such amendments thereto, if any, and such amended preliminary prospectuses, if any, as may have been required to the date hereof, and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. The registration statement has been declared effective under the Securities Act by the Commission. The registration statement as amended at the time it became effective (including all information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) of the Securities Act Regulations) is hereinafter called the "Registration Statement," except that, if the Company files a post-effective amendment to such registration statement that becomes effective prior to the Closing Time (as defined below), "Registration Statement" shall refer to such registration statement as so amended. Any registration statement filed by the Company pursuant to Rule 462(b) of the Securities Act Regulations is hereinafter called the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the 462(b) Registration Statement. Each prospectus included in the registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Underwriters pursuant to Rule 424(a) of the Securities Act Regulations is hereinafter called the "Preliminary Prospectus." The term "Prospectus" means the final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Securities Act Regulations. The Company understands that the Underwriters propose to make a public offering of the Shares at the initial public offering price (or the initial public offering price net any underwriting discounts or commissions for certain purchasers described above) set forth in the Prospectus as soon as the Representatives deem advisable after this Agreement has been executed and delivered. The Company and the Underwriters agree as follows: 1. Sale and Purchase: ----------------- (a) Initial Shares. Upon the basis of the warranties and representations and other terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally and not jointly, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at the purchase price per share of $____, that number of Initial Shares set forth opposite such Underwriter's name in Schedule I, plus any additional number of Initial Shares that such Underwriter may become obligated to purchase pursuant to the provisions of Section 8 hereof, subject to such adjustments among the Underwriters as the Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional shares. The Underwriters may from time to time increase or decrease the public offering price of the Initial Shares after the initial public offering to such extent as the Underwriters may determine in accordance with applicable law. 2 (b) Option Shares. In addition, upon the basis of the warranties and representations and other terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase from the Company up to an aggregate of 1,500,000 Option Shares of Common Stock at the purchase price per share set forth in paragraph (a) above plus any additional number of Option Shares that such Underwriter may become obligated to purchase pursuant to the provisions of Section 8 hereof. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Shares upon notice by the Representatives to the Company setting forth the number of Option Shares as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Shares. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than seven full business days nor earlier than two full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined, unless otherwise agreed by the Representatives and the Company. If the option is exercised as to all or any portion of the Option Shares, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Shares then being purchased which the number of Initial Shares set forth in Schedule I opposite the name of such Underwriter bears to the total number of Initial Shares, subject in each case to such adjustments as the Representatives in their discretion shall make to eliminate any sales or purchases of fractional shares. 2. Payment and Delivery: -------------------- (a) Initial Shares. Payment of the purchase price for the Initial Shares shall be made to the Company by wire transfer or certified or official bank check payable in federal (same-day) funds at the office of Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Irvine, California 92614 (unless another place shall be agreed upon by the Representatives and the Company) against delivery of the certificates for the Initial Shares to the Representatives for the respective accounts of the Underwriters. Unless postponed pursuant to Section 8, such payment and delivery shall be made at 10:00 a.m., New York City time, on the third (fourth, if this Agreement is executed and delivered after 4:30 p.m. (New York City time) on the date hereof) business day after the date hereof; provided, however, that if the Company has not made available to the Representatives copies of the Prospectus by not later than 10:00 a.m. (New York City time) on the second business day following execution and delivery of this Agreement, the Representatives may, in their sole discretion, postpone such payment and delivery until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives; provided further, however, that the Underwriters shall cooperate with the Company to meet such deadline for delivery of copies of the Prospectus. The time at which such payment and delivery are actually made is hereinafter sometimes called the "Closing Time." Unless the Representatives elect by notice to the Company and the Depository Trust Corporation at least two full business days prior to the Closing Time to take delivery of the Initial Shares by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives, certificates for the Initial Shares shall be delivered to the Representatives in definitive form registered in such 3 names and in such denominations as the Representatives shall specify. For the purpose of expediting the checking of the certificates for the Initial Shares by the Representatives, the Company agrees to make such certificates available to the Representatives for such purpose at least one full business day preceding the Closing Time. (b) Option Shares. In addition, payment of the purchase price for the Option Shares shall be made to the Company by wire transfer or certified or official bank check payable in federal (same-day) funds at the office of Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Irvine, California 92614 (unless another place shall be agreed upon by the Representatives and the Company) against delivery of the certificates for the Option Shares to the Representatives for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 a.m., New York City time, on each Date of Delivery. Unless the Representatives elect by notice to the Company and the Depository Trust Corporation at least two full business days prior to the Closing Time to take delivery of the Option Shares by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives, certificates for the Option Shares shall be delivered to the Representatives in definitive form registered in such names and in such denominations as the Representatives shall specify. For the purpose of expediting the checking of the certificates for the Option Shares by the Representatives, the Company agrees to make such certificates available to the Representatives for such purpose at least one full business day preceding the applicable Date of Delivery. 3. Representations and Warranties of the Company: The Company and the --------------------------------------------- Operating Partnership jointly and severally represent and warrant to the Underwriters as of the date hereof, the Closing Time and each Date of Delivery, that: (a) each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the Securities Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are threatened by the Commission; any request on the part of the Commission for additional information has been complied with; and the Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. (b) the Company and the transactions contemplated by this Agreement meet the requirements and conditions for using a registration statement on Form S-11 under the Securities Act set forth in the General Instructions to Form S-11; the Preliminary Prospectus and the Registration Statement comply and the Prospectus and any further amendments or supplements thereto will, when they become effective or are filed with the Commission, as the case may be, comply in all material respects with the requirements of the Securities Act and the Securities Act Regulations and, in each case present, or will present, fairly the information required to be shown; the Registration Statement did not, and any amendment thereto will not, in each case as of the applicable effective date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; the each of the Preliminary Prospectuses did not, as of its date, contain an untrue statement of material fact or omit to state a material fact necessary in order to make the 4 statements therein, in light of the circumstances under which they were made, not misleading; and the Prospectus and any amendment or supplement thereto will not, as of its date, the date of the filing of the Prospectus with the Commission pursuant to Rule 424(b), at Closing Time and on each Date of Delivery (if any), contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statement in or omission from the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the Representatives expressly for use in the Registration Statement or the Prospectus (that information being limited to that described in the last sentence of the first paragraph of Section 9(b) hereof); provided further, however, that this representation and warranty insofar as it applies to the Preliminary Prospectuses shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) to the extent that any omission or alleged untrue statement was corrected in the Prospectus. (c) each Preliminary Prospectus in paper format was and the Prospectus in paper format delivered to the Underwriters for use in connection with this offering will be identical to the electronic submission thereof transmitted to the Commission pursuant to Regulation S-T of the Securities Act Regulations, except to the extent permitted by such Regulation S-T. (d) the Company is a corporation duly organized and validly existing and in good standing under the laws of the State of Maryland, with full corporate power and authority to own, lease or operate its respective properties and conduct its business as described in the Registration Statement and the Prospectus, and to execute and deliver this Agreement, the management agreement (the "Management Agreement"), to be entered into at or prior to the Closing Time between the Company and Wilshire Realty Services Corporation (the "Manager"), in substantially the form filed as an exhibit to the Registration Statement, the services agreement (the "Services Agreement"), to be entered into at or prior to the Closing Time among the Company (as to certain provisions only), WFSG and the Manager, in substantially the form filed as an exhibit to the Registration Statement, the servicing agreement to be entered into at or prior to the Closing Time between the Company and Wilshire Credit Corporation ("WCC"), (the "WCC Servicing Agreement"), in substantially the form filed as an exhibit to the Registration Statement, the servicing agreement to be entered into at or prior to the Closing Time between the Company and Wilshire Servicing Company UK Limited ("Wilshire UK"), in substantially the form filed as an exhibit to the Registration Statement (the "European Servicing Agreement," and, together with the WCC Servicing Agreement, the "Servicing Agreements"), in substantially the form filed as an exhibit to the Registration Statement, the agreement of limited partnership (the "Partnership Agreement"), to be entered into at or prior to the Closing Time between the Company and Small Cap Investors, LLC ("Small Cap"), in substantially the form filed as an exhibit to the Registration Statement, the [four] agreements for the acquisition of the Initial Investments, as defined in the Prospectus, entered into at or prior to Closing Time among the Company, the Operating Partnership and either Wilshire Properties 1 Inc. ("Wilshire 1"), Wilshire Properties 2 Inc. ("Wilshire 2"), or Wilshire Funding Corporation, WMFC 1997-1 Inc., and [Wilshire Funding Company UK Limited] (together, the "Selling WFSG Entities"), as the 5 case may be (collectively, the "Acquisition Agreements"), and the other agreements described in the Prospectus and listed on Schedule II attached hereto (the "Other Transaction Documents") and to consummate the transactions described in each such agreement. The Manager has been duly organized and is validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease or operate its properties and conduct its business as described in the Registration Statement and the Prospectus and to execute and deliver the Management Agreement and the Services Agreement and to consummate the transactions described in each such agreement. The Operating Partnership has been duly formed and is validly existing as a limited partnership in good standing under the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") with full partnership power and authority to own, lease or operate its properties and conduct its business as described in the Registration Statement and the Prospectus and to execute and deliver this Agreement, the Management Agreement, and the Acquisition Agreements in substantially the form filed as exhibits to the Registration Statement and to consummate the transactions described in each such agreement. The Operating Partnership is the only subsidiary of the Company required to be identified in the Registration Statement. (e) the authorized and outstanding capital stock of the Company was as of January 31, 1998, as set forth in the Prospectus under the column entitled "Actual" under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus. The Initial Shares and the Option Shares, if any, have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable; and no preemptive right, co- sale right, registration right, right of first refusal or other similar right of shareholders exists with respect to any of the Initial Shares or Option Shares or the issuance and sale thereof, other than provided for in the Registration Rights Agreement filed as an exhibit to the Registration Statement. All units of the Operating Partnership ("Units") to be issued in connection with the transactions contemplated in the Registration Statement, including, without limitation, the Units to be issued to the Company, have been duly authorized for issuance by the Operating Partnership to prospective holders thereof and, when issued and delivered by the Operating Partnership against payment therefor, will be validly issued and fully paid and nonassessable (except as provided under the Delaware Act). Immediately after the Closing Time and assuming no exercise of the Underwriters' over-allotment option, 10,001,875 Units (9,901,875 Units of limited partner interest ("LP Units") and 100,000 units of general partner interest ("GP Units") will be issued and outstanding. Assuming the Underwriters' over-allotment option is not exercised, the Company will be the holder of 9,900,000 LP Units, will be the sole general partner of the Operating Partnership and will be the holder of 100,000 GP Units representing 1% of the outstanding Units of the Operating Partnership. Immediately after the Closing Time, Small Cap will be the holder of 1,875 Units. The Units have been and will be offered and sold at the Closing Time in compliance with all applicable laws, including, without limitation, federal and state securities laws. The terms of the Units are accurately described in all material respects in the Registration Statement and the Prospectus. Except as disclosed in the Registration Statement and the Prospectus and the 6 financial statements of the Company and the related notes thereto included in the Registration Statement and the Prospectus, neither the Company nor the Operating Partnership has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or its Units, as the case may be, or any such options, rights, convertible securities or obligations. (f) the Company, the Operating Partnership and the Manager are duly qualified or licensed by and in good standing in each jurisdiction in which they conduct their respective businesses or own or lease property and in which such qualification is necessary and in which the failure, individually or in the aggregate, to be so licensed or qualified could have a material adverse effect on the operations, business, prospects or condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be; and each of the Company, the Operating Partnership and the Manager is in compliance in all material respects with the laws, rules and regulations enacted or promulgated by such jurisdictions, except where the failure to comply would not have a material adverse effect on the operations, business, prospects or condition (financial or otherwise) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be. (g) except as disclosed in the Prospectus, the Operating Partnership is not currently prohibited, directly or indirectly, from paying any dividends or distributions to the Company to the extent permitted by applicable law, from making any other distribution on the Operating Partnership's Units, from repaying to the Company any loans or advances to the Operating Partnership from the Company or from transferring any of the property or assets of the Operating Partnership to the Company. (h) none of the Company, the Operating Partnership or the Manager is in breach of, or in default under (nor has any event occurred that with notice, lapse of time, or both would constitute a breach of, or default under), its respective articles of incorporation, by-laws, certificate of limited partnership, partnership agreement or other constituent documents or in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company, the Operating Partnership or the Manager is a party or by which it is bound, except for such breaches or defaults as would not have a material adverse effect on the operations, business, prospects or condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be; and the issuance, sale and delivery by the Company of the Shares, execution, delivery and performance of this Agreement, the Management Agreement, the Services Agreement, the Servicing Agreements, the Partnership Agreement, the Acquisition Agreements and the Other Transaction Documents by the Company, the Operating Partnership and the Manager, as the case may be, and consummation of the transactions contemplated hereby and thereby will not conflict with, or result in any breach of or constitute a default under (nor constitute any event which with notice, lapse of time, or both would constitute a breach of, or default under), (i) any provision of the articles of incorporation, by-laws, certificate of limited partnership, partnership agreement or 7 other constituent documents of the Company, the Operating Partnership or the Manager, or (ii) any provision of any license, indenture, mortgage, deed of trust, bank loan or credit agreement or other agreement or instrument to which the Company, the Operating Partnership or the Manager is a party or by which the Company or the Operating Partnership or any of their respective properties may be bound or affected, or (iii) under any federal, state or local law, regulation or rule or any decree, judgment or order applicable to the Company, the Operating Partnership or the Manager, except, in the case of clauses (i), (ii) and (iii), for such breaches or defaults which would not have a material adverse effect on the operations, business, prospects or condition (financial and other), of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be. (i) this Agreement has been duly authorized, executed and delivered by the Company, the Operating Partnership and WFSG and is a legal, valid and binding agreement of the Company, the Operating Partnership and WFSG enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, and except to the extent that the enforceability of the indemnification provisions of Section 9 hereof may be limited by federal or state securities laws or public policy considerations in other federal or state laws. The Management Agreement has been duly authorized by the Company, the Operating Partnership and the Manager and at the Closing Time will have been duly executed and delivered by the Company, the Operating Partnership and the Manager and will constitute a valid and binding agreement of the Company, the Operating Partnership and the Manager, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered at law or in equity. The Services Agreement has been duly authorized by the Company, WFSG and the Manager and at the Closing Time will have been duly executed and delivered by the Company, WFSG and the Manager and will constitute a valid and binding agreement of the Company enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity whether considered at law or in equity. The WCC Servicing Agreement has been duly authorized by the Company and WCC and at the Closing Time will have been duly executed and delivered by the Company and WCC and will constitute a valid and binding agreement of the Company and WCC enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered at law or in equity. The European Servicing Agreement has been duly authorized by the Company and Wilshire UK, and at the Closing Time will have been duly executed and delivered by the Company and Wilshire UK, and will constitute a valid and binding agreement of the Company and Wilshire UK, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered at law or in equity. The Partnership Agreement has been duly authorized by the Company and Small Cap and at Closing Time will have been duly executed and delivered by the Company and Small Cap and will constitute a valid and binding agreement of the Company and Small Cap, enforceable in 8 accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered at law or in equity. Each of the Acquisition Agreements has been duly authorized by the Company, the Operating Partnership and the other party or parties thereto and at the Closing Time will have been duly executed and delivered by the Company, the Operating Partnership and the other party or parties thereto and will constitute a valid and binding agreement of the Company, the Operating Partnership and the party or parties thereto, enforceable in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered at law or in equity. The Other Transaction Documents have been duly authorized by the Company, WFSG and/or the Manager, as the case may be, and at Closing Time will have been duly executed and delivered by the Company, WFSG and/or the Manager, as the case may be, and will constitute a valid and binding agreement of the Company, WFSG and/or the Manager, as the case may be, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered at law or in equity. (j) no approval, authorization, consent or order of or filing with any federal, state or local governmental or regulatory commission, board, body, authority or agency is required in connection with (i) the execution, delivery and performance by the Company of this Agreement, the Management Agreement, the Services Agreement, the Servicing Agreements, the Partnership Agreement, the Acquisition Agreements and the Other Transaction Documents to which it is a party, or the consummation of the transactions contemplated hereby and thereby, (ii) the execution, delivery and performance by the Operating Partnership of this Agreement and the Acquisition Agreements or the consummation of the transactions contemplated hereby and thereby, (iii) the execution, delivery and performance by WFSG of this Agreement, the Services Agreement and the Other Transaction Documents to which it is a party or the consummation of the transactions contemplated hereby and thereby, (iv) the execution, delivery and performance by the Manager of the Management Agreement, the Services Agreement and the Other Transaction Documents to which it is a party or the consummation of the transaction contemplated hereby or thereby, or (v) the sale of the Shares as contemplated hereby other than (x) such as have been obtained, or will be obtained at the Closing Time or the relevant Date of Delivery, as the case may be, under the Securities Act and registration of the Shares under the Exchange Act, (y) such approvals as have been obtained in connection with the approval of the inclusion of the Shares on the Nasdaq National Market, and (z) any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters. (k) Arthur Andersen LLP, whose report on the balance sheet of the Company is included in the Registration Statement and the Prospectus, are and at the time of their report were, independent public accountants as required by the Securities Act and the Securities Act Regulations. 9 (l) each of the Company, the Operating Partnership and the Manager has all necessary licenses, authorizations, consents and approvals and has made all necessary filings required under any federal, state or local law, regulation or rule, and has obtained all necessary authorizations, consents and approvals from other persons, required in order to conduct its respective businesses as described in the Registration Statement and Prospectus, except to the extent that any failure to have any such licenses, authorizations, consents or approvals, to make any such filings or to obtain any such authorizations, consents or approvals would not, alone or in the aggregate, have a material adverse effect on the operations, business or condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be. None of the Company, the Operating Partnership, or the Manager is in violation of, or in default under, any such license, authorization, consent or approval or any federal, state or local law, regulation or rule or any decree, order or judgment applicable to the Company, the Operating Partnership or the Manager, the effect of which could be material and adverse to the operations, business, prospects or condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be. (m) all legal or governmental proceedings, contracts or documents of a character required to be summarized or described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so summarized, described or filed as required. (n) there are no actions, suits, proceedings, inquiries or investigations pending or, to the knowledge of the Company or the Operating Partnership, threatened against the Company or the Operating Partnership, or any of their respective properties, at law or in equity, or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which reasonably could be expected to result in a judgment, decree or order having a material adverse effect on the operations, business, prospects or condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or which could adversely affect the consummation of transactions contemplated by this Agreement in any material respect. (o) the balance sheet of the Company, including the notes thereto, included in the Registration Statement and the Prospectus presents fairly the financial position of the Company as of the date thereof and has been prepared in conformity with U.S. generally accepted accounting principles applied on a consistent basis. (p) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may be otherwise stated in the Registration Statement or Prospectus, there has not been (i) any material and unfavorable change, financial or otherwise, in the operations, business, prospects or condition (financial and other) of the Company and the Operating Partnership, taken as a whole, (ii) any transaction, other than in the ordinary course of business, which is material to the Company and the Operating Partnership, taken as a whole, entered into by the Company or the Operating Partnership, (iii) any obligation, contingent or otherwise, directly or indirectly incurred by the Company or the Operating Partnership, other than in the ordinary course of business, which is material to the Company and 10 the Operating Partnership, taken as a whole or (iv) any dividend or distribution of any kind declared, paid or made with respect to the capital stock of the Company. (q) (i) upon consummation of the transactions contemplated by the Prospectus and Registration Statement, the Operating Partnership will have, good and marketable title [(in the case of any real property, in fee simple)] to the Initial Investments and good and marketable title to any improvements thereon and all other assets that are required for the effective operation of any real property being acquired as an Initial Investment ("Property") in the manner in which they currently are operated; (ii) all liens, charges, encumbrances, claims, or restrictions on or affecting any of the Initial Investments or the assets of the Company or the Operating Partnership which are required to be disclosed in the Prospectus are disclosed therein; (iii) no tenant of any of the Properties being acquired from Wilshire 1 or Wilshire 2 pursuant to an Acquisition Agreement is in default under any of the leases pursuant to which the Operating Partnership, as lessor, will lease its Property (and none of the Company or the Operating Partnership knows of any event which, but for the passage of time or the giving of notice, or both, would constitute a default under any of such leases) other than such defaults that would not have a material adverse effect on the operations, business, prospects or condition (financial or other) of the Company and the Operating Partnership, taken as a whole; (iv) any real property and buildings held under lease by the Company and the Operating Partnership are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and the Operating Partnership, in each case except as described in or contemplated by the Prospectus; (v) no person has an option or right of first refusal to purchase all or part of any Initial Investment or any interest therein; (vi) each of the Properties will comply with all applicable codes, laws and regulations (including, without limitation, building and zoning codes, laws and regulations and laws relating to access to the Properties), except if and to the extent disclosed in the Prospectus and except for such failures to comply that would not individually or in the aggregate result in a material adverse effect on the operations, business, prospects or condition (financial or other) of the Company and the Operating Partnership, taken as a whole; and (vii) neither the Company nor the Operating Partnership has knowledge of any pending or threatened condemnation proceedings, zoning change, or other similar proceeding or action that will in any manner affect the size of, use of, improvements on, construction on or access to the Properties, except such proceedings or actions that would not have a material adverse effect on the operations, business, prospects or condition (financial or other) of the Company and Operating Partnership, taken as a whole. (r) each of the Company and the Operating Partnership carry, or are covered by, insurance (issued by insurers of recognized financial responsibility to the best knowledge of the Company and the Operating Partnership) in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of the Initial Investments held or contemplated in the Prospectus to be held by them upon the consummation of the transactions contemplated by the Prospectus and Registration Statement and as is customary for companies engaged in similar businesses in similar industries, all of which insurance is in full force and effect. 11 (s) except as disclosed in the Prospectus: (i) each Property, including, without limitation, the Environment (as defined below) associated with such Property, is free of any Hazardous Substance (as defined below) in violation of any Environmental Law (as defined below) applicable to such Property; (ii) none of the Company or the Operating Partnership has caused or suffered to occur any Release (as defined below) of any Hazardous Substance into the Environment on, in, under or from any Property in violation of any Environmental Law applicable to such Property, and no condition exists on, in, under or, to the knowledge of the Company, the Operating Partnership or WFSG, adjacent to any Property that could result in the incurrence of material liabilities or any material violations of any Environmental Law applicable to such Property, give rise to the imposition of any Lien (as defined below) under any Environmental Law, or cause or constitute a health, safety or environmental hazard to any property, person or entity; (iii) none of the Company, the Operating Partnership, or WFSG is engaged in or intends to engage in any manufacturing or any other similar operations at the Properties that (1) require the use, handling, transportation, storage, treatment or disposal of any Hazardous Substance (other than cleaning solvents and similar materials and other than insecticides and herbicides that are used in the ordinary course of operating the Properties and in compliance with all applicable Environmental Laws) or (2) require permits or are otherwise regulated pursuant to any Environmental Law; (iv) neither the Company nor the Operating Partnership has received any notice of a claim under or pursuant to any Environmental Law applicable to a Property or under common law pertaining to Hazardous Substances on or originating from any Property; (v) neither the Company nor the Operating Partnership has received any notice from any Governmental Authority (as defined below) claiming any violation of any Environmental Law applicable to a Property that is uncured or unremediated as of the date hereof; (vi) no Property is included or, to the knowledge of the Company, proposed for inclusion on the National Priorities List issued pursuant to CERCLA (as defined below) by the United States Environmental Protection Agency (the "EPA") or on the Comprehensive Environmental Response, Compensation, and Liability Information System database maintained by the EPA, and has not otherwise been identified by the EPA as a potential CERCLA removal, remedial or response site or included or, to the knowledge of the Company, proposed for inclusion on, any similar list of potentially contaminated sites pursuant to any other applicable Environmental Law nor has the Company or the Operating Partnership received any written notice from the EPA or any other Governmental Authority proposing the inclusion of any Property on such list; and (vii) there are no underground storage tanks located on or in any Property which have not been disclosed to the Representatives; except in each case that would not have a material adverse effect on the operations, business, prospects or condition (financial or other) of the Company and the Operating Partnership, taken as a whole. As used herein: "Hazardous Substance" shall include, without limitation, any hazardous substance, hazardous waste, toxic or dangerous substance, pollutant, solid waste or similarly designated materials, including, without limitation, oil, petroleum or any petroleum-derived substance or waste, asbestos or asbestos-containing materials, PCBs, pesticides, explosives, radioactive materials, dioxins, urea formaldehyde insulation or any constituent of any such substance, pollutant or waste, including any such substance, pollutant or waste identified or regulated under any Environmental Law (including, without limitation, materials listed in the 12 United States Department of Transportation Optional Hazardous Material Table, 49 C.F.R. Section 172.101, as heretofore amended, or in the EPA's List of Hazardous Substances and Reportable Quantities, 40 C.F.R. Part 302, as heretofore amended); "Environment" shall mean any surface water, drinking water, ground water, land surface, subsurface strata, river sediment, buildings, structures, and ambient, workplace and indoor air; "Environmental Law" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901, et seq.), the Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.), the Clean Water Act, as amended (33 U.S.C. Section 1251, et seq.), the Toxic Substances Control Act, as amended (15 U.S.C. Section 2601, et seq.), the Occupational Safety and Health Act of 1970, as amended (29 U.S.C. Section 651, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801, et seq.), and all other federal, state and local laws, ordinances, regulations, rules, orders, decisions and permits relating to the protection of the environment or of human health from environmental effects; "Governmental Authority" shall mean any federal, state or local governmental office, agency or authority having the duty or authority to promulgate, implement or enforce any Environmental Law; "Lien" shall mean, with respect to any Property, any mortgage, deed of trust, pledge, security interest, lien, encumbrance, penalty, fine, charge, assessment, judgment or other liability in, on or affecting such Property; and "Release" shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, emanating or disposing of any Hazardous Substance into the Environment, including, without limitation, the abandonment or discard of barrels, containers, tanks (including, without limitation, underground storage tanks) or other receptacles containing or previously containing any Hazardous Substance or any release, emission, discharge or similar term, as those terms are defined or used in any Environmental Law. (t) the Company and the Operating Partnership (1) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of occupational health and safety and all Environmental Laws, (2) have received all permits, licenses or other approvals required of them under applicable federal and state occupational safety and health laws and regulations and Environmental Laws to conduct their respective businesses and (3) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the operations, business, prospects or condition (financial or other) of the Company and Operating Partnership, taken as a whole. (u) there are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the operations, business, 13 prospects or condition (financial or other) of the Company and Operating Partnership, taken as a whole. (v) neither the purchase of the loans that are Initial Investments, nor the execution and delivery of, or performance by the borrowers thereunder of, any mortgage, deed of trust, deed, indenture, note, loan or credit agreement or any other agreement or instrument in connection therewith, has resulted in or, with notice and an opportunity to cure, would result in a breach of or default under any mortgage, deed of trust, indenture, note, loan or credit agreement or any other agreement or instrument relating to any mortgage or other loan that may have priority over any such Initial Investment with respect to the assets of the borrower thereunder and that is in existence at the time the Company or the Operating Partnership purchases any such Initial Investment that would singly or in the aggregate, have a material adverse effect on the operations, business, prospects or condition (financial or other) of the Company and Operating Partnership, taken as a whole. (w) to the knowledge of the Company or the Operating Partnership, there are no statutes or regulations applicable to the Company or the Operating Partnership or certificates, permits or other authorizations from governmental regulatory officials or bodies required to be obtained or maintained by the Company or the Operating Partnership of a character required to be disclosed in the Registration Statement or the Prospectus which have not been so disclosed and properly described therein. (x) neither of the Company nor the Operating Partnership is, and upon the sale of the Shares as herein contemplated, will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); the Company's use of proceeds as contemplated in the Prospectus, including, without limitation, the acquisition of the Initial Investments by the Operating Partnership, will not cause the Company or the Operating Partnership to become an "investment company" subject to registration under the Investment Company Act. (y) neither the Company nor the Operating Partnership, to the knowledge of the Company or the Operating Partnership, or any person acting on their behalf has (i) used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds, (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iv) made any other unlawful bribe, rebate, payoff, influence payment or kickback. (z) each of the Company and the Operating Partnership, and each of their respective officers, directors and controlling persons has not taken, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. 14 (aa) neither the Company nor any of its affiliates (i) is required to register as a "broker" or "dealer" in accordance with the provisions of the Securities Exchange Act of 1934 or the rules and regulations thereunder, or (ii) directly, or indirectly through one or more intermediaries, controls or has any other association with (within the meaning of Article 1 of the By-Laws of the National Association of Securities Dealers, Inc. (the "NASD")) any member firm of the NASD, other than Wilshire Securities Corporation. (bb) the Company has not relied upon the Representatives or legal counsel for the Representatives for any legal, tax or accounting advice in connection with the offering and sale of the Shares. (cc) each of the Independent Directors named in the Registration Statement and Prospectus has not within the last two years (i) been employed by WFSG or any of its Affiliates (as defined in the Prospectus), (ii) been an officer or director of WFSG or any of its Affiliates, (iii) or whose business or employer within the last two years has not performed services for WFSG or any of its Affiliates that annually exceeded the lesser of (a) the dollar amount provided in Item 404(a) of Regulation S-K or (b) 10% of the gross revenue of the entity that provided such services, or (iv) had any material business or professional relationship with WFSG or any of its Affiliates. (dd) the Guidelines (as defined in the Prospectus) and the acquisition of the Initial Investments have been approved by the Independent Directors. (ee) except as otherwise disclosed in the Prospectus, there are no material outstanding loans or advances or material guarantees of indebtedness by the Company or the Operating Partnership to or for the benefit of any of the officers or directors of the Company, the Operating Partnership, WFSG or any of its Affiliates or any of the members of the families of any of them. (ff) in connection with the offering of the Shares, the Company has not offered its Common Stock or any other securities convertible into or exchangeable or exercisable for Common Stock in a manner in violation of the Securities Act or the Securities Act Regulations; the Company has not distributed and will not distribute any Prospectus or other offering material in connection with the offer and sale of the Shares, except as contemplated herein. (gg) there are no persons with registration or other similar rights to have any equity securities of the Company registered under the Securities Act. 4. Certain Covenants of the Company: Each of the Company and the -------------------------------- Operating Partnership, jointly and severally, hereby agrees with each Underwriter as follows: (a) to prepare the Prospectus in a form approved by the Representatives and to file such Prospectus with the Commission pursuant to Rule 424(b) of the Securities Act Regulations not later than 10:00 a.m. (New York City time), on the second business day following the execution and delivery of this Agreement and to furnish promptly to the Underwriters as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall 15 have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may reasonably request for the purposes contemplated by the Securities Act Regulations. (b) to advise the Representatives promptly and (if requested by the Representatives) to confirm such advice in writing, when the Company learns that the Registration Statement has become effective and when the Company learns that any post-effective amendment thereto becomes effective under the Securities Act Regulations. (c) to advise the Representatives promptly, and (if requested by the Representatives) to confirm such advice in writing, of (i) any request by the Commission for amendments or supplements to the Registration Statement or Prospectus or for additional information with respect thereto, or (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes and, if the Commission or any other government agency or authority should issue any such order, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible; to advise the Representatives promptly of any proposal to amend or supplement the Registration Statement or Prospectus and to file no such amendment or supplement to which the Representatives shall reasonably object in writing. (d) for a period of five years from the date of this Agreement, to furnish to any Underwriter on written request, (i) copies of all annual, quarterly, current and other reports or notices, definitive proxy materials and other documents furnished to holders the Common Stock or filed by the Company with the Commission, and (ii) such other information of a public nature (and generally available to holders of the Common Stock) regarding the Company as the Representatives or such Underwriter may reasonably request in writing. (e) to advise the Underwriters promptly of the happening of any event known to the Company within the time during which a Prospectus relating to the Shares is required to be delivered under the Securities Act Regulations which, in the judgment of the Company, would require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, and, during such time, at the Company's expense, to prepare and furnish to the Underwriters promptly such amendments or supplements to the Prospectus as may be necessary to reflect any such change and to furnish to the Representatives a copy of such proposed amendment or supplement before filing any such amendment or supplement with the Commission. (f) to furnish promptly to the Representatives a signed copy of the Registration Statement, as initially filed with the Commission and of each amendment thereto (including all exhibits) and such number of conformed copies of the foregoing as the Representatives may reasonably request. 16 (g) to use the net proceeds from the sale of the Shares in the manner described under the caption "Use of Proceeds" in the Prospectus. (h) to make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the Securities Act Regulations) covering a period of 12 months beginning not later than the first day of the first fiscal quarter of the Company beginning after the "effective date" (as defined in such Rule 158) of the Registration Statement. (i) to use its best efforts to effect and maintain inclusion of the Shares in the Nasdaq National Market and to file with The Nasdaq Stock Market Inc. all documents and notices required of companies having securities included in the Nasdaq National Market. (j) except as described in the Prospectus, the Company shall refrain during a period of 180 days from the date of the Prospectus, without the prior written consent of Friedman, Billings, Ramsey & Co., Inc., from (i) offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option for the sale of, or otherwise disposing of or transferring, directly or indirectly, any shares of Common Stock or any securities convertible into or exchangeable for Common Stock, or filing any registration statement under the Securities Act with respect to any of the foregoing, and (ii) entering into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or securities convertible into or exchangeable for Common Stock, in cash or otherwise. The foregoing sentence shall not apply to (a) the Shares to be sold hereunder or (b) any shares of Common Stock issued or options to purchase common Stock granted pursuant to the Company's 1998 Employee Stock Plan filed as an exhibit to the Registration Statement. (k) from and after the Closing Time of this Offering, each of the Company and the Operating Partnership shall have in place and maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences, and (v) the Company is complying with the real estate investment trust (a "REIT") requirements of the Internal Revenue Code of 1986, as amended (the "Code"). (l) the Company will qualify to be taxed as a REIT under the Code, and the Company will conduct its operations in a manner that will enable the Company to continue to meet the requirements for qualification and taxation as a REIT under the Code. 17 (m) the Company and the Operating Partnership will conduct their affairs in such a manner so as to ensure that neither the Company nor the Operating Partnership will be an "investment company" or an entity "controlled" by an investment company within the meaning of the Investment Company Act. (n) the Company shall not, and shall use its best efforts to cause its officers, directors and subsidiaries not to, (i) take, directly or indirectly prior to termination of the underwriting syndicate contemplated by this Agreement, as to which Friedman, Billings, Ramsey & Co., Inc. will notify the Company orally and in writing that the syndicate is broken, any action designed to stabilize or manipulate the price of any security of the Company, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of the Shares or (iii) pay or agree to pay to any person any compensation for soliciting any order to purchase any other securities of the Company prior to termination of the underwriting syndicate. (o) the Company will not offer its Common Stock or any other securities convertible into or exchangeable or exercisable for Common Stock in a manner which will result in the integration of the Shares with such other offering. 5. Payment of Expenses ------------------- (a) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated (except if the Representatives are unable to complete the offering contemplated hereby due to the Representatives' willful misconduct or bad faith), including all expenses, out-of-pocket fees and taxes in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (ii) the preparation, issuance and delivery of the certificates for the Shares to the Underwriters, including any stock or other transfer taxes or duties payable upon the sale of the Shares to the Underwriters, (iii) the word processing and/or printing of this Agreement, the agreement among underwriters, any dealer agreements and any blue sky surveys, and the reproduction and/or printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (iv) the qualification of the Shares for offering and sale under state securities and blue sky laws, including filing fees and disbursements of counsel for the Underwriters relating thereto, (v) any filing for review of the underwriting terms of the offering of the Shares by the NASD, (vi) the fees and expenses of any transfer agent or registrar for the Shares, (vii) the fees and expenses incurred in connection with the inclusion of the Shares in the Nasdaq National Market and (viii) the performance of the Company's other obligations hereunder. Upon the Representatives' request, the Company will provide funds in advance for filing fees. (b) In addition to discounts and commissions received in connection with the purchase of the Shares, the Company agrees to reimburse the Underwriters for all of their reasonable and documented out-of-pocket expenses relating to the transactions contemplated 18 hereby, whether or not the transactions are contemplated hereunder are consummated or this Agreement is terminated, including, but not limited to, costs such as printing, facsimile, courier service, direct computer expenses, accommodations, travel and the fees, expenses and disbursements of the Representatives' outside legal counsel and any other advisors, accountants, appraisers, etc., and costs in connection with making road show presentations with respect to the offering of the Shares. 6. Conditions of the Underwriters' Obligations: ------------------------------------------- The obligations of the Underwriters hereunder are subject to (i) the accuracy of the representations and warranties of the Company and the Operating Partnership herein contained in all material respects, as of the date hereof, the Closing Time and each Date of Delivery; (ii) the accuracy of the statements of the Company's officers made in any certificate pursuant to the provisions hereof in all material respects, as of the date of such certificate, (iii) the performance by the Company and the Operating Partnership of all of its covenants and other obligations hereunder in all material respects, and (iv) the following further conditions: (a) No amendment or supplement to the Registration Statement or Prospectus shall have been filed to which the Representatives shall have objected in writing. (b) At the Closing Time, the Shares shall have been approved for inclusion on the Nasdaq National Market. (c) At the Closing Time, the NASD shall not have raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements hereunder. (d) At the Closing Time and prior to each Date of Delivery, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the Securities Act or proceedings therefor initiated or threatened by the Commission nor shall any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus have been issued by the Commission, and no suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes, shall have occurred; and the Registration Statement and all amendments thereto, or modifications thereof, if any, and the Prospectus and all amendments or supplements thereto, or modifications thereof, if any, shall not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. (e) At the Closing Time, the Company and the Manager shall have executed and delivered the Management Agreement, WFSG, the Manager and the Company shall have executed and delivered the Services Agreement, the Company and WCC shall have executed and delivered the WCC Servicing Agreement, the Company and Wilshire UK shall have executed and delivered the European Servicing Agreement, the Company and Small Cap shall have executed and delivered the Partnership Agreement, each of the Company and the Operating Partnership and the other party or parties thereto shall have executed and delivered the 19 Acquisition Agreements and the Company, WFSG and/or the Manager, as the case may be, shall have executed and delivered the Other Transaction Documents each (including the Management Agreement, the Servicing Agreements, the Partnership Agreement, the Acquisition Agreements, and certain of the Other Transaction Documents) in substantially the form filed as an exhibit to the Registration Statement. (f) At the Closing Time, the Representatives shall have received: (i) the opinion, dated as of the Closing Time, of Proskauer Rose LLP, counsel for the Company, in form and substance reasonably satisfactory to counsel for the Underwriters, to the effect that: (A) the Operating Partnership has been duly formed and is validly existing as a limited partnership in good standing under the Delaware Act, with full partnership power and authority to own its properties and conduct its business as described in the Registration Statement and the Prospectus, to execute and deliver this Agreement, the Management Agreement and the Acquisition Agreements and to consummate the transactions described in each such agreement. (B) WFSG is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to conduct its business as described in the Registration Statement and Prospectus, to execute and deliver this Agreement, the Services Agreement and the Other Transaction Documents to which it is a party and to consummate the transactions described in each such agreement. (C) the Manager is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to conduct its business as described in the Registration Statement and the Prospectus, to execute and deliver the Management Agreement, the Services Agreement and the Other Transaction Documents to which it is a party and to consummate the transactions described in each such agreement. All of the issued and outstanding capital stock of the Manager is held of record and, to the knowledge of such counsel, beneficially, by WFSG. (D) the Company, the Operating Partnership and the Manager are duly qualified or licensed by and in good standing in each jurisdiction in which they conduct their respective businesses or own or lease property and in such jurisdictions as counsel to the Underwriters shall reasonably request, and in which the failure, individually or in the aggregate, to be so licensed or qualified could have a material adverse effect on the operations, business, prospects or condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be; and, to the best of such counsel's knowledge, each of the Company, the Operating Partnership and the Manager is in compliance with the laws, orders, rules, regulations and directives issued or administered by such jurisdictions, except where the failure to so comply would 20 not have a material adverse effect on the operations, business, prospects and condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be. (E) except as disclosed in the Prospectus, the Operating Partnership is not prohibited or restricted by its certificate of limited partnership or partnership agreement, or, to the knowledge of such counsel, otherwise, directly or indirectly, from paying dividends to the Company, or from making any other distribution with respect to the Operating Partnership's interests or from paying the Company, any loans or advances to the Operating Partnership from the Company, or from transferring any such Operating Partnership's property or assets to the Company. (F) the outstanding interests or the outstanding shares of capital stock, as the case may be, of the Operating Partnership and the Manager, have been duly and validly authorized and will be validly issued and fully paid and non-assessable (except as provided under the General Corporation Law of the State of Delaware and the Delaware Act); immediately following the Closing, all of the authorized and validly issued interests in the Operating Partnership will be directly held of record and, to the knowledge of such counsel, owned beneficially by the Company or Small Cap; except as disclosed in the Prospectus, there are no authorized and validly issued (1) securities or obligations of the Company or the Operating Partnership convertible into or exchangeable for any shares of capital stock of the Company or interests in the Operating Partnership or (2) warrants, rights or options to subscribe for or purchase from the Company or the Operating Partnership any such shares of beneficial interest, capital stock, interests or any such convertible or exchangeable securities or obligations; except as set forth in the Prospectus or contemplated by this Agreement, there are no outstanding obligations of the Company or the Operating Partnership to issue any shares of capital stock or interests, any such convertible or exchangeable securities or obligation, or any such rights or options. (G) the issuance and sale of the Shares by the Company are not subject to preemptive or other similar rights arising under any agreement known to such counsel to which the Company is a party or, to such counsel's knowledge, otherwise. (H) this Agreement has been duly authorized, executed and delivered by the Operating Partnership and WFSG. (I) the Management Agreement has been duly authorized, executed and delivered by the Manager and constitutes the valid and binding agreement of each of the Company and the Manager, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered in a proceeding at law or in equity; such counsel may assume due authorization, execution and delivery of the Management Agreement by the Company. 21 (J) the Services Agreement has been duly authorized, executed and delivered by WFSG and the Manager and constitutes the valid and binding agreement of each of the Company, WFSG and the Manager, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered in a proceeding at law or in equity; such counsel may assume due authorization, execution and delivery of the Services Agreement by the Company. (K) the WCC Servicing Agreement constitutes the valid and binding agreement of the Company and WCC, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered in a proceeding at law or in equity; such counsel may assume due authorization, execution and delivery of the WCC Servicing Agreement by the Company and WCC. (L) the European Servicing Agreement constitutes the valid and binding agreement of the Company and Wilshire UK, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered in a proceeding at law or in equity; such counsel may assume due authorization, execution and delivery of the European Servicing Agreement by the Company and Wilshire UK. (M) The Partnership Agreement constitutes the valid and binding agreement of the Company and Small Cap, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered in a proceeding at law or in equity; such counsel may assume due authorization, execution and delivery of the Partnership Agreement by the Company and Small Cap. (N) each of the Acquisition Agreements has been duly authorized, executed and delivered by the Operating Partnership. (O) each of the Other Transaction Documents to which WFSG and/or the Manager is a party has been duly authorized, executed and delivered by WFSG and/or the Manager, as the case may be, and each of the Other Transaction Documents constitutes the valid and binding agreement of the Company, WFSG and/or the Manager, as the case may be, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered in a proceeding at law or in equity; such counsel may assume the due authorization, execution and delivery of the Other Transaction Documents to which the Company is a party by the Company. 22 (P) the Registration Statement is effective under the Securities Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued under the Securities Act or proceedings therefor initiated or threatened by the Commission. (Q) the Registration Statement and the Prospectus, as of their respective effective or issue dates, comply as to form in all material respects with the requirements of the Securities Act and the Securities Act Regulations; it being understood, however, that no opinion need be rendered with respect to the financial statements, schedules and other financial and statistical data included in the Registration Statement or the Prospectus or state securities or blue sky laws. (R) to such counsel's knowledge, no authorization, approval or consent of any court or governmental authority or agency is required that has not been obtained in connection with the execution, delivery and performance of the Management Agreement, the Servicing Agreements, the Partnership Agreement, the Acquisition Agreements or the Other Transaction Documents or the consummation by the Company, the Operating Partnership, WFSG or the Manager, as the case may be, of the transactions contemplated hereby and thereby, the sale and delivery of Shares by the Company as contemplated hereby other than such as have been obtained or made under the Securities Act; it being understood, however, that no opinion need be rendered with respect to state securities or blue sky laws or approval of underwriting terms by the NASD. (S) the execution, delivery and performance of this Agreement by the Company, the Operating Partnership and WFSG, the execution, delivery and performance of the Management Agreement by the Company and the Manager, the execution, delivery and performance of the Services Agreement by WFSG, the Manager and the Company, the execution, delivery and performance of the WCC Servicing Agreement by the Company, the execution, delivery and performance of the UK Servicing Agreement by the Company, the execution and delivery of the Partnership Agreement by the Company, the execution and delivery of any of the Acquisition Agreements by the Operating Partnership and the Company, and the execution and delivery of the Other Transaction Documents by the Company, WFSG and/or the Manager, and the consummation of the transactions contemplated herein and therein, and compliance by the Company, the Operating Partnership, the Manager or WFSG, with its obligations hereunder and thereunder will not conflict with or constitute a breach of, or default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, the Operating Partnership, the Manager or WFSG, pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument known to such counsel to which the Company, the Operating Partnership, the Manager or WFSG, is a party or by which either of them may be bound or to which any of the property or assets of the Company, the Operating Partnership, the Manager or WFSG, is subject, nor will such action result in violation of the provisions of the charter or bylaws of the Manager or WFSG, the provisions of the certificate of limited partnership or partnership 23 agreement of the Operating Partnership, or any law, administrative regulation or court decree known to such counsel. (T) to such counsel's knowledge, except as disclosed on the Registration Statement and the Prospectus, none of the Company, the Operating Partnership or the Manager is in material breach of, or in material default under (nor has any event occurred which with notice, lapse of time, or both would constitute a material breach of, or material default under) its respective charter, bylaws, certificate of limited partnership or partnership agreement, as the case may be, or in the performance or observation of any obligation, agreement, covenant, or condition contained in any license, indenture, mortgage, deed of trust, loan or credit agreement or any other agreement or instrument known to such counsel to which the Company, the Operating Partnership or the Manager is a party or by which any of them or their respective properties may be bound or affected, except such breaches or defaults which would not have a material adverse effect on the assets, operations, business, prospects or condition (financial or otherwise) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be; such counsel may assume that the Company is not in material breach of, or in material default under (nor has any event occurred which with notice, lapse of time, or both would constitute a material breach of, or material default under) its charter and bylaws. (U) the statements under the captions "Risk Factors" (excluding any statements that describe Maryland law), "Distribution Policy," "Common Stock Available for Future Sale," "Operating Partnership Agreement," "Federal Income Tax Consequences" and "ERISA Considerations" in the Registration Statement and Prospectus, insofar as such statements describe legal documents or statutes, rules or regulations, constitute fair summaries thereof. (V) to such counsel's knowledge, there are no actions, suits or proceedings, inquiries, or investigations pending or threatened against the Company or Operating Partnership or any of their respective officers and directors or to which the properties, assets or rights of any such entity are subject, at law or in equity, before or by any federal, state, local or foreign government or regulatory commission, board, body, authority, arbitral panel or agency that are required to be described in the Prospectus but are not so described. (W) to such counsel's knowledge, there are no contracts or documents of a character that are required to be filed as exhibits to the Registration Statement or to be described or summarized in the Prospectus which have not been so filed, summarized or described. (X) neither the Company nor the Operating Partnership is now nor after the sale of the Shares to be sold hereunder and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds," will be, an "investment company", or an entity "controlled" by an "investment company" as such 24 terms are defined in the Investment Company Act of 1940, as amended. Section 3(c)(5)(c) of the Investment Company Act provides an exception from the definition of "investment company" for "any person . . . who is primarily engaged in . . . purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." Rules and regulations of the Commission and staff no-action letters provide that a person is "primarily engaged" if at least 55% of its assets consist of "mortgages and other liens and interests in real estate" and at least 25% of its total assets are invested in real estate-related interests. The Company's acquisition, either directly or through wholly-owned subsidiaries, of real property that is located inside or outside the United States or leased to a third-party, will qualify as an "interest in real estate" as will the acquisition or origination of the entire interest in a mortgage loan secured by real property or the entire interest in a pool of such mortgages loans. The Company's acquisition, either directly or through wholly-owned subsidiaries, of various subordinated interests or other classes of mortgage-backed securities, will not qualify for the 55% test (unless the Company has a substantial interest and the unilateral right to direct foreclosure actions with respect to the mortgage loans underlying the mortgage-backed securities), but will qualify for the 25% test. (Y) the form of certificate evidencing the Common Stock filed as an exhibit to the Registration Statement complies with all applicable statutory law and all requirements of the Nasdaq National Market. Proskauer Rose LLP is permitted to state that such counsel expresses no opinion as to the laws of any jurisdiction other than the States of New York and California, the General Corporation Law of the State of Delaware, the Delaware Act and Federal law. The opinion of Proskauer Rose, LLP described in this Section 6(f)(i) shall state that it is being rendered to the Underwriters at the request of the Company. In addition to giving the opinions set forth in Section 6(f)(i), Proskauer Rose LLP shall deliver a separate letter containing a statement to the effect that nothing has come to their attention that would lead them to believe that the Registration Statement (excluding the financial statements, schedules and other financial and statistical data included therein, as to which such counsel need make no statement), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (excluding the financial statements, schedules and other financial and statistical data included therein, as to which such counsel need make no statement), at such time or at the Closing Time, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ii) the opinion, dated as of the Closing Time, Stoel Rives LLP, local counsel for the Company, in form and substance reasonably satisfactory to counsel for the Underwriters, to the effect that: 25 (A) Wilshire Funding Corporation is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to conduct its business as described in the Registration Statement and Prospectus, to execute and deliver the Acquisition Agreement to which it is a party and to consummate the transactions described in such agreement. All of the issued and outstanding capital stock of Wilshire Funding Corporation is held of record and, to the knowledge of such counsel, beneficially, by WFSG. (B) WMFC 1997-1 Inc. is a corporation duly incorporated, validly existing and in good standing with the State of Delaware with full corporate power and authority to conduct its business as described in the Registration Statement and Prospectus, to execute and deliver the Acquisition Agreement to which it is a party and to consummate the transactions described in such agreement. All of the issued and outstanding capital stock of WMFC 1997-1 Inc. is held of record and, to the knowledge of such counsel, beneficially, by Wilshire Funding Corporation. (C) Small Cap is a limited liability company duly organized, validly existing [and in good standing] under the laws of the State of Oregon with full power and authority to conduct its business as described in the Registration Statement and Prospectus, to execute and deliver the Partnership Agreement and to consummate the transactions described in such agreement. All of the issued and outstanding membership interests of Small Cap are owned by Tiffany and Andrew Wiederhorn, as Trustees of Tiffany and Andrew Wiederhorn Revocable Trust and the Mendelsohn Family Limited Partnership. (D) Wilshire 1 is a corporation duly incorporated, validly existing [and in good standing] under the laws of the State of Oregon with full corporate power and authority to conduct its business as described in the Registration Statement and Prospectus, to execute and deliver the Acquisition Agreement to which it is a party and to consummate the transactions described in such agreement. All of the issued and outstanding capital stock of Wilshire 1 is held of record and, to the knowledge of such counsel, beneficially, by Andrew A. Wiederhorn and Lawrence A. Mendelsohn. (E) Wilshire 2 is a corporation duly incorporated, validly existing [and in good standing] under the laws of the State of Oregon with full corporate power and authority to conduct its business as described in the Registration Statement and Prospectus, and to execute and deliver the Acquisition Agreement to which it is a party and to consummate the transactions described in such agreement. All of the issued and outstanding capital stock of Wilshire 2 is held of record and, to the knowledge of such counsel, beneficially, by Andrew A. Wiederhorn and Lawrence A. Mendelsohn. (F) the Company, the Operating Partnership and the Manager are duly qualified [and in good standing] to do business as foreign corporations or limited partnerships, as the case may be, in Oregon; and, to the best of such counsel's knowledge, each of the Company, the Operating Partnership and the Manager is in compliance with 26 the laws, orders, rules, regulations and directives issued or administered by Oregon, except where the failure to so comply would not have a material adverse effect on the operations, business, prospects and condition (financial and other) of the Company and the Operating Partnership, taken as a whole, or the Manager, as the case may be; (G) all real property and buildings to be held under lease by the Company or the Operating Partnership that will be acquired from Wilshire 1 and Wilshire 2 pursuant to the Acquisition Agreements will be held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company or the Operating Partnership; and neither the purchase of all loans that are Initial Investments nor the execution of, or performance by the borrowers thereunder of any mortgage, deed of trust, indenture, note, loan, or credit agreement or any other agreement or instrument in connection therewith, has resulted in or, with notice and an opportunity to cure, would result in a breach of or default under any mortgage, deed of trust, indenture, note, loan or credit agreement or any other agreement or instrument relating to any mortgage or other loan (collectively, "Senior Indebtedness") that may have priority over such Initial Investment with respect to the assets of the borrower thereunder and that is in existence at the time the Company or the Operating Partnership purchases any such Initial Investment; no party to any mortgage, deed of trust, indenture, note, loan or credit agreement or any other agreement or instrument relating to any Senior Indebtedness of which such counsel has knowledge has the right to limit, hinder, delay or otherwise interfere with the exercise of any remedies that the Company or the Operating Partnership may have under any mortgage, deed of trust, indenture, note loan or credit agreement or any other agreement or instrument relating to any of the Initial Investments, including, without limitation, the possession of a deed-in-lieu of foreclosure and a power of attorney granting the right to record any such deed-in-lieu of foreclosure by the Company or the Operating Partnership pursuant to any documents evidencing such Initial Investments. (H) the WCC Servicing Agreement has been duly authorized, executed and delivered by WCC. (I) the Partnership Agreement has been duly authorized, executed and delivered by Small Cap. (J) each of the Acquisition Agreements has been duly authorized, executed and delivered by either (i) each of the Selling WFSG Entities, (ii) Wilshire 1 or (iii) Wilshire 2, as the case may be, and constitutes a valid and enforceable binding agreement of the Company, the Operating Partnership and of either (i) each of the Selling WFSG Entities, (ii) Wilshire 1 or (iii) Wilshire 2, as the case may be, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity, whether considered in a proceeding at law or in equity; such counsel may assume due authorization, execution and delivery of the Acquisition 27 Agreements by the Company and the Operating Partnership; each of the instruments of conveyance being used to transfer each of the Initial Investments (other than real property) to the Operating Partnership from the transferor thereunder pursuant to the Acquisition Agreements is in form and substance sufficient and effective to convey all right, title and interest of such transferor to such Initial Investments to the Operating Partnership. (K) the execution, delivery and performance of the WCC Servicing Agreement by WCC, the execution, delivery and performance of the Partnership Agreement by Small Cap, the execution and delivery of each of the Acquisition Agreements by the Company and either the Selling Wilshire Entities, Wilshire 1 or Wilshire 2, and the consummation of the transactions contemplated herein and therein and compliance by WCC, Small Cap, the Selling Wilshire Entities, Wilshire 1 or Wilshire 2 with its obligations hereunder and thereunder will not conflict with or constitute a breach of, or default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of WCC, Small Cap, the Selling Wilshire Entities, Wilshire 1 or Wilshire 2 pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument known to such counsel to which WCC, Small Cap, the Selling Wilshire Entities, Wilshire 1 or Wilshire 2 is a party or by which either of them may be bound or to which any of the property or assets of WCC, Small Cap, the Selling Wilshire Entities, Wilshire 1 or Wilshire 2 is subject, nor will such action result in violation of the provisions of the charter or bylaws of WCC, Small Cap, the Selling WFSG Entities, Wilshire 1 or Wilshire 2, the provisions of the certificate or organization or the limited liability company agreement of Small Cap, or any law, administrative regulation or court decree known to such counsel; Stoel Rives LLP is permitted to state that such counsel expresses no opinion as to the laws of any jurisdiction other than the states of Oregon, Nevada, Delaware and Federal law. The opinion of Stoel Rives, LLP as described in this Section 6(f)(ii) shall state that it is being rendered to the Underwriters at the request of the Company. (iii) the opinion, dated as of the Closing Time, of Piper & Marbury LLP, Maryland counsel to the Company, in form and substance reasonably satisfactory to counsel for the Underwriters, to the effect that: (A) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland, with full corporate power and authority to own its properties and conduct its business as described in the Registration Statement and the Prospectus, to execute and deliver this Agreement, the Management Agreement, the Services Agreement, the Servicing Agreements, the Partnership Agreement, the Acquisition Agreements and the Other Transaction Documents and to consummate the transactions described in each such agreement. (B) the Company has authorized and outstanding capital stock as set forth in the Prospectus under "Capitalization" (except for subsequent issuances, if any, 28 pursuant to transactions referred to in the Prospectus including, without limitation, granting of stock options); the Initial Shares and the Option Shares (if any) of the Company have been duly and validly authorized and will be validly issued and fully paid and non-assessable; (C) the Shares have been duly and validly authorized by all necessary corporate action and, when issued and delivered pursuant to this Agreement against payment of the consideration therefor, the Shares will be validly issued, fully paid and nonassessable. (D) the issuance and sale of the Shares by the Company are not subject to preemptive or other similar rights arising by operation of law, under the articles of incorporation or by-laws of the Company or under any agreement known to such counsel to which the Company is a party or, to such counsel's knowledge, otherwise. (E) this Agreement has been duly authorized, executed and delivered by the Company. (F) the Management Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company. (G) the Services Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company. (H) the WCC Servicing Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company. (I) the European Servicing Agreement has been duly authorized, executed and delivered by the Company. (I) the Partnership Agreement has been duly authorized, executed and delivered by the Company. (J) each of the Acquisition Agreements has been duly authorized, executed and delivered by the Company. (K) each of the Other Transaction Documents to which the Company is a party has been duly authorized, executed and delivered by the Company. (L) the execution, delivery and performance of each of this Agreement, the Management Agreement, the Services Agreement, the WCC Servicing Agreement, the UK Servicing Agreement, the Partnership Agreement, the Acquisition Agreements and the Other Transaction Documents (to which the Company is a party) by the 29 Company, and the consummation of the transactions contemplated herein and therein and compliance by the Company, with its obligations hereunder and thereunder will not result in violation of the provisions of the charter or bylaws of the Company, or any law, administrative regulation or court decree known to such counsel. (M) to such counsel's knowledge, except as disclosed on the Registration Statement and the Prospectus, the Company is not in material breach of, or in material default under (nor has any event occurred which with notice, lapse of time, or both would constitute a material breach of, or material default under) its charter or bylaws. (N) the statements under the captions "Risk Factors" (insofar as such statements describe matters of Maryland law) "Description of Capital Stock," and "Certain Provisions of Maryland Law and of WREIT's Charter and Bylaws," in the Registration Statement and Prospectus, insofar as such statements describe legal documents or statutes, rules or regulations, constitute fair summaries thereof. Piper & Marbury LLP, Maryland counsel to the Company, is permitted to state that such counsel expresses no opinion as to laws of any jurisdiction other than the State of Maryland and Federal law. The opinion of Piper & Marbury LLP described in this Section 6(f)(iii) shall state that it is being rendered to the Underwriters at the request of the Company. (iv) a letter, dated as of the Closing Time, of Proskauer Rose LLP, addressed to the Representatives stating that such Representatives are entitled to rely on the opinion filed with the Registration Statement as Exhibit 8.1, in form and substance satisfactory to Friedman, Billings, Ramsey & Co., Inc. (v) the opinion, dated as of the Closing Time, of Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, with respect to such matters as the Underwriters may request. (g) At the Closing Time, the Representatives shall have received a certificate of the Chief Executive Officer and the President of the Company, dated as of the Closing Time, to the effect that the representations and warranties in Section 3 are true and correct with the same force and effect as though made at the date of such certificate, subject to any exceptions that, in the reasonable judgment of the Representatives, are not material. (h) All Initial Investments shall be acquired pursuant to the Acquisition Agreements in form and substance satisfactory to Friedman, Billings, Ramsey & Co., Inc. (i) At the Closing Time or the relevant Date of Delivery, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the operations, business, prospects or condition, financial and other, of the Company and the Operating Partnership, taken as a whole; and no transaction which is material and unfavorable to the Company shall have been entered into by the 30 Company or the Operating Partnership, the effect of which, in the reasonable opinion of the Representatives, is so material and adverse as to make it impractical or inadvisable to proceed with the public offering or delivery of the Shares being delivered at the Closing Time or Date of Delivery. (j) At the time of execution and delivery of this Agreement, the Representatives shall have received from Arthur Andersen LLP a letter dated such date, in form and substance satisfactory to the Representatives, to the effect that (i) they are independent accountants with respect to the Company within the meaning of the Securities Act and the Securities Act Regulations; (ii) it is their opinion that the balance sheet of the Company included in the Registration Statement and the Prospectus and covered by their opinion therein complies in form in all material respects with the applicable accounting requirements of the Securities Act and the Securities Act Regulations; (iii) based upon limited procedures set forth in detail in such letter, nothing came to their attention that caused them to believe that, at a specified date not more than five days prior to the date of this Agreement, there has been any change in the assets, liabilities or stockholders' equity of the Company, as compared with the amounts shown in the balance sheet included in the Registration Statement and the Prospectus; and (iv) in addition to the audit referred to in their opinion and the limited procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information included in the Registration Statement and the Prospectus and specified by the Representatives, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Company identified in such letter. (k) At the Closing Time, the Representatives shall have received from Arthur Andersen LLP a letter dated as of the Closing Time to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (k) of this Section, except that the "specified date" referred to shall be a date not more than five days prior to the Closing Time. (l) At the time of execution and delivery of this Agreement, the Company shall have received from each of Andrew A. Wiederhorn and Lawrence A. Mendelsohn a written agreement (a "Lock-up Agreement") to the effect that such person will not, for a period of 180 days from the date of the Prospectus, offer to sell, contract to sell, or otherwise sell, dispose of, loan, or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into exercisable for or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or any affiliate or with respect to which such person has or hereafter acquires the power of Disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) with respect to up to 85% of such Securities in connection with pledges to secure obligations for borrowed money, or (iii) with the prior written consent of the Representatives; and copies of such Lock-up Agreements shall have been provided to the Representatives. (m) At the time of execution and delivery of this Agreement, the Company shall have received a Lock-Up Agreement to the effect that WFSG will refrain during a period of two years 31 from the date of the Prospectus, without the prior written consent of the Representatives, from (i) offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option for the sale of, or otherwise disposing of or transferring, directly or indirectly, any shares of Common Stock or any securities convertible into or exchangeable for Common Stock, or filing any registration statement under the Securities Act with respect to any of the foregoing , and (ii) entering into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or securities convertible into or exchangeable for Common Stock, in cash or otherwise, provided that the Manager continues to serve as the manager of the Company pursuant to the Management Agreement during such period. (n) In the event the Underwriters exercise their option to purchase all or any portion of the Option Shares, the representations and warranties of the Company and the Operating Partnership contained herein and the statements in any certificates furnished by the Company hereunder shall be true and correct as of each Date of Delivery, and the Representatives shall have received: (i) a certificate, dated such Date of Delivery, of the Chief Executive Officer and the President of the Company, in their capacities as such, confirming that the certificate delivered at Closing Time pursuant to subsection (g) of this Section remains true and correct as of such Date of Delivery; subject to any exceptions that, in the reasonable judgment of the Representatives, are not material. (ii) the opinions of Proskauer Rose LLP, Stoel Rives LLP and Piper & Marbury LLP, the separate letter of Proskauer Rose LLP referenced in subsection (f)(i), and the reliance letter of Proskauer Rose LLP referenced in subsection (f)(iv), in form and substance reasonably satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Shares and otherwise substantially to the same effect as the opinions and letters required or permitted by subsections (f)(i), (f)(ii), (f)(iii) and (f)(iv) of this Section. (iii) the opinion of Gibson, Dunn & Crutcher LLP, dated such Date of Delivery, relating to the Option Securities and otherwise to the same effect as the opinion required by subsection (f)(v) of this Section. (iv) a letter from Arthur Andersen LLP, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially the same in scope and substance as the letter furnished to the Representatives pursuant to subsection (i) of this Section, except that the "specified date" in the letter furnished pursuant to this subsection (n)(iv) shall be a date not more than five days prior to such Date of Delivery. (o) The Company shall have furnished counsel for the Underwriters with such documents and (as they relate to Delaware, New York, Maryland, Oregon and Federal law) 32 opinions as they may reasonably request for the purpose of enabling them to pass upon the issuance and sale of the Shares as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained as of the Closing Time or any Date of Delivery. (p) The Company, the Operating Partnership and the Manager shall have furnished to the Representatives such other documents, certificates and opinions as to (i) the accuracy and completeness of any statement in the Registration Statement and the Prospectus or any amendment or supplement thereto, (ii) the representations, warranties and the statements of the Company contained herein and in the Management Agreement, and the (iii) performance by the Company, the Operating Partnership, WFSG and the Manager of its covenants contained herein or therein, as of the Closing Time or any Date of Delivery as the Underwriters may reasonably request. (q) Each of the Selling WFSG Entities, Wilshire 1 and Wilshire 2 shall have furnished to the Underwriters such documents and certificates as to any representations, warranties and covenants of the Selling WFSG Entities, Wilshire 1 or Wilshire 2, as the case may be, contained in the Acquisition Agreements and the performance by the Selling WFSG Entities, Wilshire 1 or Wilshire 2, as the case may be, of any covenants therein and the fulfillment of any conditions contained therein as the Underwriter's may reasonably request. 7. Termination: ----------- (a) If the sale to the Underwriters of the Shares, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement or if such sale is not carried out because the Company is unable to comply with any of the terms of the Agreement, then the Company shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 5 and 9 hereof) and the Underwriters shall be under no obligation or liability to the Company under this Agreement (except to the extent provided under Sections 5 and 9 hereunder) or to one another hereunder. (b) The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of the Representatives, at any time prior to the Closing Time or any Date of Delivery, if trading in securities on the New York Stock Exchange shall have been suspended (including automatic halts in trading pursuant to market decline triggers other than those in which solely program trading is temporarily halted) or minimum prices or other material limitation in trading in securities generally shall have been established on the New York Stock Exchange or Nasdaq National Market, or if a banking moratorium shall have been declared either by the United States or New York state or authorities, or if the United States shall have declared war in accordance with its constitutional processes or there shall have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on the financial markets of the United States as, in the judgment of the Representatives, make it impractical or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus. 33 (c) If the Representatives elect to terminate this Agreement as provided in this Section 7, the Company and the Underwriters shall be notified promptly by telephone, promptly confirmed by facsimile. 8. Increase in Underwriters' Commitments: ------------------------------------- If any Underwriter shall default at Closing Time or on a Date of Delivery in its obligation to take up and pay for the Shares to be purchased by it under this Agreement on such date (the "Defaulted Shares"), then: (a) if the total number of Defaulted Shares does not exceed 10% of the total number of Shares to be purchased by such Underwriter on such date, each non-defaulting Underwriter shall take up and pay for (in addition to the number of Shares which it is obligated to purchase on such date pursuant to this Agreement) the portion of the total number of Shares agreed to be purchased by the defaulting Underwriter on such date in the proportion that its underwriting obligations hereunder bears to the underwriting obligations of all non- defaulting Underwriters. (b) if the total number of Defaulted Shares exceeds 10% of the total number of Shares to be purchased by such Underwriter on such date, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. Without relieving any defaulting Underwriter from its obligations hereunder, the Company agrees with the non-defaulting Underwriters that it will not sell any Shares hereunder on such date unless all of the Shares to be purchased on such date are purchased on such date by the Underwriters (or by substituted Underwriters selected by the Representatives with the approval of the Company or selected by the Company with the approval of the Representatives). If a new Underwriter or Underwriters are substituted for a defaulting Underwriter in accordance with the foregoing provision, the Company or the non- defaulting Underwriters shall have the right to postpone the Closing Time or the relevant Date of Delivery for a period not exceeding five business days in order that any necessary changes in the Registration Statement and Prospectus and other documents may be effected. The term "Underwriter" as used in this Agreement shall refer to and include any Underwriter substituted under this Section 8 with the like effect as if such substituted Underwriter had originally been named in this Agreement. 9. Indemnification and Contribution. -------------------------------- (a) Each of the Company, the Operating Partnership and WFSG agrees jointly and severally, to indemnify, defend and hold harmless each Underwriter and any person who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or controlling person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, 34 liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in such Registration Statement or necessary to make the statements made in the Registration Statement not misleading or arises out of or is based on an omission or alleged omission to state a material fact required to be stated in the Prospectus or necessary to make the statements therein, in light of circumstances under which they were made, not misleading, except insofar as any such loss, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by the Underwriters through the Representatives to the Company expressly for use in such Registration Statement or such Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in either such Registration Statement or Prospectus or necessary to make such information not misleading, provided, however, that the indemnity agreement contained in this subsection (a) with respect to any Preliminary Prospectus or the Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) with respect to any person asserting any such loss, expense, liability or claim which is the subject thereof if any subsequent Preliminary Prospectus or the Prospectus corrected any such alleged untrue statement or omission and if such Underwriter failed to send or give a copy of such subsequent Preliminary Prospectus or the Prospectus, as the case may be, to such person at or prior to the written confirmation of the sale of Shares to such person, unless such failure resulted from non-compliance by the Company with Section 4(e). The obligations of WFSG under this Agreement shall terminate at Closing Time. If any action is brought against an Underwriter or controlling person in respect of which indemnity may be sought against the Company, the Operating Partnership or WFSG pursuant to the preceding paragraph, such Underwriter shall promptly notify the Company, the Operating Partnership or WFSG, as the case may be, in writing of the institution of such action and the indemnifying party shall assume the defense of such action, including the employment of counsel and payment of expenses. Such Underwriter or controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action or the indemnifying party shall not have employed counsel to have charge of the defense of such action within a reasonable time or such indemnified party or parties shall have reasonably concluded (based on the advice of counsel) that there may be defenses available to it or them which are different from or additional to those available to the indemnifying party and which counsel to the indemnified party believes may present a conflict of interest for one counsel to represent both the indemnified party and indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such reasonable fees and expenses shall be 35 borne by the indemnifying party and paid as incurred (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel for the Underwriters or controlling persons in any one action or series of related actions in the same jurisdiction representing the indemnified parties who are parties to such action). Anything in this paragraph to the contrary notwithstanding, the indemnifying party shall not be liable for any settlement of any such claim or action effected without the written consent of the indemnifying party. (b) Each Underwriter agrees, severally and not jointly, to indemnify, defend and hold harmless the Company and the Operating Partnership, directors and officers of the Company, and any person who controls the Company and the Operating Partnership within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Company and the Operating Partnership or any such person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by such Underwriter through the Representatives to the Company expressly for use in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated either in such Registration Statement or Prospectus or necessary to make such information not misleading. The statements set forth in the last paragraph on the cover page and under the caption "Underwriting" in the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by or on behalf of any Underwriter through the Representatives to the Company for purposes of this Section 9. If any action is brought against the Company, any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Company or such person shall promptly notify the Representatives in writing of the institution of such action and the Representatives, on behalf of the Underwriters, shall assume the defense of such action, including the employment of counsel and payment of expenses. The Company or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company or such person unless the employment of such counsel shall have been authorized in writing by the Representatives in connection with the defense of such action or the Representatives shall not have employed counsel to have charge of the defense of such action within a reasonable time or such indemnified party or parties shall have reasonably concluded (based on the advice of counsel) that there may be defenses available to it or them which are different from or additional to those available to the Underwriters and which counsel to the indemnified party believes may present a conflict of interest for one counsel to represent both the indemnified party and indemnifying party (in which case the Representatives shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, 36 that the Underwriters shall not be liable for the expenses of more than one separate counsel in any one action or series of related actions in the same jurisdiction representing the indemnified parties who are parties to such action). Anything in this paragraph to the contrary notwithstanding, no Underwriter shall be liable for any settlement of any such claim or action effected without the written consent of such Underwriter. (c) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsections (a) and (b) of this Section 9 in respect of any losses, expenses, liabilities or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Operating Partnership or WFSG on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Operating Partnership or WFSG on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Operating Partnership or WFSG on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company, the Operating Partnership or WFSG bear to the underwriting discounts and commissions received by the Underwriters. The relative fault of the Company, the Operating Partnership or WFSG on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company, the Operating Partnership, WFSG or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any claim or action. (d) The Company, the Operating Partnership, WFSG and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in subsection (c) above. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such 37 fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. 10. Survival. The indemnity and contribution agreements contained in -------- Section 9 and the covenants, warranties and representations of the Company and the Operating Partnership contained in Sections 3, 4 and 5 of this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter, or any person who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or on behalf of the Company, the Operating Partnership, WFSG, directors and officers of the Company or WFSG or any person who controls the Company, the Operating Partnership or WFSG within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and shall survive the sale and delivery of the Shares. The indemnity and contribution agreements contained in Section 9 and the covenants and agreements contained in Section 5 of this Agreement shall survive any termination of this Agreement. The Company, the Operating Partnership, WFSG and each Underwriter agree promptly to notify the others of the commencement of any litigation or proceeding against it and, in the case of the Company or WFSG, against any of the officers and directors of the Company or WFSG, in connection with the sale and delivery of the Shares, or in connection with the Registration Statement or Prospectus. 11. Notices: ------- Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by telegram and, if to the Underwriters, shall be sufficient in all respects if delivered or sent to Friedman, Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington, Virginia 22209, Attention: Syndicate Department; and if to the Company, the Operating Partnership or WFSG, shall be sufficient in all respects if delivered to the Company, the Operating Partnership, or WFSG at the offices of the Company at 1776 SW Madison Street, Portland, Oregon 97205, Attention: Lawrence A. Mendelsohn. 12. Governing Law: This Agreement shall be governed by, and construed in ------------- accordance with, the internal laws of the State of New York as applied to contracts made and performed entirely within the State of New York, excluding (to the greatest extent permissible by law) any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York. The Company, the Operating Partnership and WFSG hereby irrevocably submit to the exclusive jurisdiction of any State of New York court or any federal court sitting in the City of New York, New York in respect of any suit, action or proceeding related to this Agreement or any of the matters contemplated hereby, irrevocably waives any defense of lack of personal jurisdiction and irrevocably agrees that all claims in respect of any suit, action or proceeding may be heard and determined in any such court. The Company, the Operating Partnership and WFSG irrevocably waive, to the fullest extent they may effectively do so under applicable law, any objection that they may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 38 13. Headings: -------- The section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 14. Parties in Interest: ------------------- The Agreement herein set forth has been and is made solely for the benefit of the Underwriters, the Company, the Operating Partnership, WFSG and the controlling persons, directors and officers referred to in Section 9 hereof, and their respective successors, assigns, executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement. 15. Counterparts: ------------ This Agreement may be signed by the parties in counterparts which together shall constitute one and the same agreement among the parties. If the foregoing correctly sets forth the understanding among the Company, the Operating Partnership, WFSG and the Underwriters, please so indicate in the space provided below for the purpose, whereupon this letter shall constitute a binding agreement among the Company, the Operating Partnership, WFSG and the Underwriters. 39 Very truly yours, WILSHIRE REAL ESTATE INVESTMENT TRUST INC. By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- WILSHIRE REAL ESTATE PARTNERSHIP L.P. By: Wilshire Real Estate Investment Trust Inc., its general partner By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- WILSHIRE FINANCIAL SERVICES GROUP INC. By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- 40 Accepted and agreed to as of the date first above written: FRIEDMAN, BILLINGS, RAMSEY & CO., INC. PRUDENTIAL SECURITIES INCORPORATED BLACK & COMPANY, INC. By: FRIEDMAN, BILLINGS, RAMSEY & CO., INC., for itself and on behalf of the Representatives and Underwriters named on Schedule I hereto. By: -------------------------------------------- James Neuhauser Managing Director 41 SCHEDULE I Schedule of Underwriters
Number of Initial Underwriter Shares to be Purchased - ----------- ---------------------- Friedman, Billings, Ramsey & Co., Inc. Prudential Securities Incorporated Black & Company, Inc. Total...................................... ======================
1 SCHEDULE II Other Transaction Documents Lock-Up Agreements 1998 Employee Stock Plan Option Agreement from WFSG to the Operating Partnership for certain International Investments Registration Rights Agreement 1 EX-3.1 3 AMENDED AND RESTATED ART. OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF WILSHIRE REAL ESTATE INVESTMENT TRUST INC. (A Stock Corporation) Wilshire Real Estate Investment Trust Inc., a Maryland corporation (which is hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland (the "SDAT") that: FIRST: The name of the Corporation is "Wilshire Real Estate Investment Trust Inc." The Corporation desires to amend and restate its charter as currently in effect. The Articles of Incorporation of the Corporation were originally filed with the SDAT on October 24, 1997. SECOND: Pursuant to Section 2-609 of the Maryland General Corporation Law (the "MGCL"), these Articles of Amendment and Restatement restate and further amend the provisions of the Articles of Incorporation of the Corporation. THIRD: The text of the Articles of Incorporation of the Corporation is hereby amended and restated in its entirety as follows: I. The name of the corporation (which is hereinafter called the "Corporation") is: WILSHIRE REAL ESTATE INVESTMENT TRUST INC. II. The purpose for which this Corporation is formed is to transact any and all lawful act or activity for which corporations may be organized under the General Laws of the State of Maryland now or hereafter in force. III. The total number of shares of stock of all classes which the Corporation has authority to issue is 225,000,000 shares of capital stock (par value $.0001 per share), of which 200,000,000 shares are initially classified as "Common Stock" and 25,000,000 shares are initially classified "Preferred Stock." The aggregate par value of all authorized shares of stock having par value is $22,500. This amendment increases the aggregate par value of all shares of stock of all classes from $10 to $22,500. The Board of Directors may classify and reclassify any unissued shares of capital stock by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of such shares of capital stock. No holder of any stock or any other securities of the Corporation, whether now or hereafter authorized, shall have any preemptive right to subscribe for or purchase any stock or any other securities of the Corporation, including, without limitation: (i) any shares of any class of the Corporation; (ii) any warrants, rights, or options to purchase any such shares; or (iii) any securities or obligations convertible into any such shares or into warrants, rights, or options to purchase any such shares. The Board of Directors is hereby empowered to authorize the issuance from time to time of shares of its stock of any class, whether now or hereafter authorized, or securities convertible into shares of its stock of any class or classes, whether now or hereafter authorized, for such consideration as may be deemed advisable by the Board of Directors and without any action by the stockholders. Also, the Preferred Stock may be issued from time to time by the Board of Directors of the Corporation, in such series and with such preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or other provisions as may be fixed by the Board of Directors without any action by the stockholders. IV. The present address of the principal office of the Corporation in this State is 11 East Chase Street, Suite 9E, Baltimore, Maryland 21202. V. The name and address of the resident agent of the Corporation in this State are CSC-Lawyers Incorporating Service Company, 11 East Chase Street, Suite 9E, Baltimore, Maryland 21202. Said resident agent is a Maryland corporation. VI. A. The number of directors of the Corporation shall be five (5), which number may be increased or decreased pursuant to the Bylaws of the Corporation; provided that in no case 2 shall the Board of Directors consist of less than three (3) or more than nine (9) members unless otherwise determined from time to time by resolution adopted by the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors; provided further that in any case the number of directors of the Corporation shall never be less than the minimum number permitted by the General Laws of the State of Maryland now or hereafter in force. Any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of capital stock of the Corporation generally in the election of directors which are cast on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. A director need not be a stockholder. At each annual meeting of the stockholders, the stockholders shall elect directors to serve a one (1) year term and until successors are elected and qualify. B. The following Persons are the initial directors of the Corporation, to serve until their successors are elected at the 1999 annual meeting of the stockholders and qualified: Andrew Wiederhorn, Lawrence Mendelsohn, David Egelhoff, and Steven Kapiloff. C. Notwithstanding anything herein to the contrary, at all times (except during a period not to exceed sixty (60) days following the death, resignation, incapacity, or removal from office of a director prior to expiration of the director's term of office), a majority of the Board of Directors shall be "Independent Directors." "Independent Director" shall mean a director who, within the last two years, has not (i) been employed by WFSG or any of its Affiliates, (ii) been an officer or director of WFSG or any of its Affiliates, (iii) or whose business or employer within the last two years has not performed services for WFSG or any of its Affiliates that annually exceeded the lesser of (a) the dollar amount provided in Item 404(a) of Regulation S-K or (b) 10% of the gross revenue of the entity that provided such services, or (iv) had any material business or professional relationship with WFSG or any of its Affiliates. "WFSG" shall mean Wilshire Financial Services Group Inc., a Delaware corporation. "Affiliate" shall mean (i) any person directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other person, (ii) any person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other person, (iii) any person directly or indirectly controlling, controlled by, or under common control with such other person, (iv) any executive officer, director, trustee or general partner of such other person, and (v) any legal entity for which such person acts as an executive officer, director, trustee or general partner. The term "person" means and includes any natural person, corporation, partnership, association, limited liability company or any other legal entity. An indirect relationship shall include circumstances in which a person's spouse, children, parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been associated with a person. D. To the extent permitted by applicable law, and subject to such approval of the Independent Directors and such other conditions, if any, as may be required by any applicable 3 law or other applicable rule or regulation, the Board of Directors may engage a manager to advise the Board of Directors and be responsible for directing the day-to-day affairs of the Corporation (a "Manager") pursuant to a written agreement (a "Management Agreement"). The approval of any Management Agreement and the renewal or termination thereof shall require the affirmative vote of a majority of the Independent Directors. E. A majority of the Independent Directors shall approve general guidelines ("Guidelines") for the Corporation's investments, borrowings and operations, and the Independent Directors shall conduct a quarterly review of all transactions engaged in by the Corporation. The Independent Directors shall approve any transactions with WFSG or any Affiliate of WFSG, in advance, to insure compliance with the Guidelines. F. Notwithstanding any other provisions of the Charter or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law, the Charter or the Bylaws of the Corporation), the provisions of this Article VI shall not be amended, altered, changed, or repealed, and no provision inconsistent with this Article VI shall be adopted, without the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors and by the affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of capital stock of the Corporation generally in the election of directors which are cast on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. VII. A. The Corporation shall indemnify (A) its directors and officers, whether serving the Corporation or, at its request, any other entity, to the full extent required or permitted by the General Laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by law and (B) other employees and agents to such extent as shall be authorized by the Board of Directors of the Corporation or the Corporation's Bylaws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve, and amend from time to time such bylaws, resolutions, or contracts, implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal. B. To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of this Corporation shall be personally liable to the Corporation or its stockholders for money damages. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate the limitation on liability 4 provided to directors and officers hereunder with respect to any act or omission occurring prior to such amendment or repeal. VIII. The Corporation shall seek to elect and maintain its status as a real estate investment trust ("REIT") under Section 856 under the Internal Revenue Code of 1986, as amended from time to time (the "Code"). It shall be the duty of the Board of Directors to ensure that the Corporation satisfies the requirements for qualification as a REIT under the Code, including, but not limited to, the ownership of its outstanding stock, the nature of its assets, the sources of its income, and the amount and timing of its distributions to its stockholders. The Board of Directors shall take no action to disqualify the Corporation as a REIT or to otherwise revoke the Corporation's election to be taxed as a REIT without the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors and by the affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of the capital stock of the Corporation on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. IX. A. Restrictions on Transfer. 1. Definitions. The following terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of shares of Equity Stock by a Person who would be treated as an owner of such shares of Equity Stock either directly or indirectly through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative meanings. "Beneficiary" shall mean, with respect to any Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the Corporation as the beneficiary or beneficiaries of such Trust, in accordance with the provisions of Section (B)(1) of Article IX hereof. "Board of Directors" shall mean the Board of Directors of the Corporation. "Closing Price" on any date shall mean the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market, or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the shares of Equity Stock are not quoted by any such organization, the average 5 of the closing bid and asked prices as furnished by a professional market maker making a market in the shares of Equity Stock selected by the Board of Directors. "Constructive Ownership" shall mean ownership of shares of Equity Stock by a Person who would be treated as an owner of such shares of Equity Stock either directly or indirectly through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns," and "Constructively Owned" shall have correlative meanings. "Disqualified Person" means (A) the United States, any State or political subdivision thereof, any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, (B) any organization (other than a cooperative described in Section 521 of the Code) which is exempt from tax unless such organization is subject to the tax imposed by Section 511 of the Code, and (C) any organization described in Section 1381(a)(2)(c) of the Code. "Equity Stock" shall mean Preferred Stock and Common Stock of the Corporation. The term "Equity Stock" shall include all shares of Preferred Stock and Common Stock of the Corporation that are held as Shares-in-Trust in accordance with the provisions of Section (B) of Article IX hereof. "Initial Public Offering" means the sale of shares of Common Stock pursuant to the Corporation's first effective registration statement for such shares of Common Stock filed under the Securities Act of 1933, as amended. "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause any Person to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, including, but not limited to, the granting of any option or entering into any agreement for the sale, transfer, or other disposition of shares of Equity Stock or the sale, transfer, assignment, or other disposition of any securities or rights convertible into or exchangeable for shares of Equity Stock. "Operating Partnership" shall mean Wilshire Real Estate Partnership L.P., a Delaware limited partnership. "Operating Partnership Agreement" shall mean the agreement of limited partnership governing the Operating Partnership. "Ownership Limit" shall mean the restriction on ownership (or deemed ownership by virtue of the attribution provisions of the Code) of more than 9.8% of the 6 number of shares or value (whichever is more restrictive) of the outstanding Common Stock by any Person other than Wilshire Financial Services Group Inc., a Delaware corporation ("WFSG"), or twenty percent (20%) of the number of shares or value (whichever is more restrictive) of Common Stock by WFSG (provided that the Board of Directors has obtained representations and undertakings from WFSG in form and substance satisfactory to the Board of Directors in its sole discretion as it may deem necessary or advisable in order to determine that WFSG's Beneficial Ownership or Constructive Ownership will not impair the Corporation's status as a REIT and provided further that WFSG agrees that any actual or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Section (A)(2) of Article IX hereof) will result in the transfer of such Equity Stock to a Trustee in his capacity as trustee of a Trust in accordance with Section (A)(3) of Article IX hereof) or 9.8% of the number of shares or value (whichever is more restrictive) of the outstanding Preferred Stock (or such other number or value of Preferred Stock as the Board of Directors may determine in fixing the terms of the Preferred Stock). In determining the Ownership Limit, the number and value of Common Stock and/or Preferred Stock of the Corporation shall be determined by the Board in good faith, which determination shall be conclusive for all purposes hereof. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section (B)(5) of Article IX hereof. "Person" shall mean an individual, corporation, limited liability company, partnership, estate, trust, a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company, or other entity and also includes a "group" as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Prohibited Owner" shall mean, with respect to any purported Transfer or Non-Transfer Event, any Person who, but for the provisions of Section (A)(3) of Article IX hereof, would be the actual owner (within the meaning of Treasury Regulation (S) 1.857-8(b)) of shares of Equity Stock. "Redemption Rights" shall mean the rights granted under the Operating Partnership Agreement to the limited partners to redeem, under certain circumstances, their limited partnership interests for shares of Common Stock (or cash at the option of the Corporation). "Restriction Termination Date" shall mean the first day after the date of the Initial Public Offering on which (A)(i) the Board of Directors determines that it is no longer in the best interests of the Corporation to retain the restrictions on transfer and ownership contained in Article IX and (ii) such restrictions are no longer required for the Corporation to qualify as a REIT; or (B)(i) the Board of Directors determines that it is no longer in the best 7 interests of the Corporation to qualify, or to continue to qualify, as a REIT, and (ii) pursuant to Article VIII, there is an affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. "Shares-in-Trust" shall mean any shares of Equity Stock designated Shares-in-Trust pursuant to Section (A)(3) of Article IX hereof. "Tenant" shall mean any Person (other than an individual) from whom the Corporation derives (or is deemed to derive for purposes of applying Section 856 of the Code to the Corporation), directly or indirectly, gross income. "Tenant Interest" shall mean an interest, expressed as a percentage, of the total combined voting power or total number of shares of all classes of stock of a Tenant that is a corporation, or an interest, expressed as a percentage, of the assets or net profits (within the meaning of Section 856(d)(2)(B) of the Code) of a Tenant that is not a corporation. "Trading Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Transfer" shall mean any sale, transfer, gift, assignment, devise, or other disposition of shares of Equity Stock, whether voluntary or involuntary, whether of record, constructively or beneficially, and whether by operation of law or otherwise. "Trust" shall mean any separate trust created pursuant to Section (A)(3) of Article IX hereof and administered in accordance with the terms of Section (B) of Article IX hereof, for the exclusive benefit of any Beneficiary. "Trustee" shall mean any Person or entity unaffiliated with both the Corporation and any Prohibited Owner, such Trustee to be designated by the Corporation to act as trustee of any Trust, or any successor trustee thereof. 2. Restriction on Transfers. a. Except as provided in Section (A)(7) of Article IX hereof, from the date of the Initial Public Offering and prior to the Restriction Termination Date, (i) no Person shall Beneficially Own or Constructively Own outstanding shares of Equity Stock in excess of the Ownership Limit and (ii) any Transfer that, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Equity Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would be otherwise Beneficially Owned or Constructively Owned by such Person 8 in excess of the Ownership Limit, and the intended transferee shall acquire no rights in such excess shares of Equity Stock. b. Except as provided in Section (A)(7) of Article IX hereof, from the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in shares of Equity Stock being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of that number of shares which would be otherwise beneficially owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee shall acquire no rights in such shares of Equity Stock. c. From the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would cause the Corporation to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights in such shares of Equity Stock. d. From the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would cause the Corporation to Constructively Own a Tenant Interest of ten percent (10%) or more shall be void ab initio as to the Transfer of that number of shares of Equity Stock which would cause the Corporation to Constructively Own a Tenant Interest of ten percent (10%) or more and the intended transferee shall acquire no rights in such excess shares of Equity Stock. e. From the date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would result in shares of Equity Stock being Beneficially Owned by a Disqualified Person shall be void ab initio as to the Transfer of that number of shares which would be otherwise Beneficially Owned by the transferee, and the intended transferee shall acquire no rights in such shares of Equity Stock. f. It is expressly intended that the restrictions on ownership and Transfer described in this Section (A)(2) of Article IX shall apply to the Redemption Rights. Notwithstanding any of the provisions of the Operating Partnership Agreement to the contrary, a partner of the Operating Partnership shall not be entitled to effect an exchange of an interest in the Operating Partnership for Common Stock if the Beneficial Ownership or Constructive Ownership of Common Stock would be prohibited under the provisions of this Article IX. 3. Transfer to Trust. a. If, notwithstanding the other provisions contained in this Section (A) of Article IX, at any time after the Initial Public Offering and prior to the 9 Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, then, (i) except as otherwise provided in Section (A)(7) of Article IX hereof, the purported transferee shall acquire no right or interest (or, in the case of a Non-Transfer Event, the actual owner (within the meaning of Treasury Regulation (S) 1.857- 8(b)) of the shares of Equity Stock Beneficially Owned or, Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of shares of Equity Stock which would cause such Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, (ii) such number of shares of Equity Stock in excess of the Ownership Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section (B) of Article IX hereof, transferred automatically and by operation of law to a Trustee in his capacity as trustee of a Trust to be held in accordance with that Section (B) of Article IX, and (iii) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee. Such transfer to a Trustee and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. b. If, notwithstanding the other provisions contained in this Section (A) of Article IX (after application of paragraph (a) above), at any time after the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the shares of Equity Stock being Beneficially Owned by fewer than 100 Persons (determined without reference to any rules of attribution), (ii) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, or (iii) cause the corporation to Constructively Own a Tenant Interest of ten percent (10%) or more, or (iv) result in the shares of Equity Stock being Beneficially Owned by a Disqualified Person, then (x) the purported transferee shall not acquire any right or interest (or, in the case of a Non-Transfer Event, the Person who, but for the provisions of this Section (A)(3), would be the actual owner (within the meaning of Treasury Regulation (S) 1.857-8(b)) of the shares of Equity Stock with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of shares of Equity Stock, the ownership of which by such purported transferee or purported actual owner would (A) result in the shares of Equity Stock being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (B) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, (C) cause the Corporation to Constructively Own a Tenant Interest of ten percent (10%) or more or (D) result in the shares of Equity Stock being Beneficially Owned by a Disqualified Person, (y) such number of shares of Equity Stock (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section (B) of Article IX hereof, transferred automatically and by operation of law to a Trustee in his capacity as trustee of a Trust to be held in accordance with that Section (B) of Article IX, and (z) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration 10 in the name of the Trustee. Such transfer to a Trustee in his capacity as trustee of a Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. 4. Remedies for Breach. If the Corporation, or its designees, shall at any time determine in good faith that a Transfer or Non-Transfer Event has taken place that, if effective, would result in a violation of Section (A)(2) of Article IX hereof or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any shares of Equity Stock in violation of Section (A)(2) of Article IX hereof, the Corporation shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition of Beneficial Ownership or Constructive Ownership, including, but not limited to, causing the Corporation to redeem shares of Equity Stock, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or acquisition. 5. Notice of Restricted Transfer. Any Person who acquires or attempts to acquire Beneficial Ownership or Constructive Ownership of shares of Equity Stock in violation of Section (A)(2) of Article IX hereof, or any Person who owned shares of Equity Stock that were transferred to a Trustee in his capacity as trustee of a Trust pursuant to the provisions of Section (A)(3) of Article IX hereto, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on the Corporation's status as a REIT. 6. Owners Required To Provide Information. From the date of the Initial Public Offering and prior to the Restriction Termination Date: a. Every Beneficial Owner or Constructive Owner of more than five percent (5%), or such lower percentages as required pursuant to regulations under the Code, of the outstanding shares of all classes of capital stock of the Corporation shall, within thirty (30) days after January 1 of each year, provide to the Corporation a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of shares of Equity Stock Beneficially Owned or Constructively Owned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership or Constructive Ownership on the Corporation's status as a REIT and to ensure compliance with the restrictions on ownership set forth in this Article IX. b. Each Person (including the stockholder of record) who is holding shares of Equity Stock for a Beneficial Owner or Constructive Owner shall provide to the Corporation a written statement or affidavit stating such information as the Corporation may 11 request in order to determine the Corporation's status as a REIT and to ensure compliance with the Ownership Limit. 7. Exceptions. a. The provisions of Section (A)(2) of Article IX hereof shall not apply to the acquisition of shares of Equity Stock by an underwriter that participates in a public offering of such shares or securities convertible into such shares for a period of ninety (90) days following the purchase by such underwriter of such shares provided that the restrictions contained in Section (A)(2) of Article IX hereof will not be violated following the distribution by such underwriter of such shares. b. The Board of Directors, in its sole discretion, may exempt a Person from the restrictions set forth in Section (A)(2) of this Article IX if: (i) the Board of Directors obtains such representations and undertakings from such Person as are deemed by the Board of Directors to be reasonably necessary to ascertain that no individual's Beneficial Ownership of shares of Equity Stock will violate the restrictions set forth in Section (A)(2) of this Article IX or that any such violation will not cause the Corporation to fail to qualify as a REIT under the Code, and such Person agrees that any actual or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Section (A)(2) of this Article IX) will result in the transfer of such Equity Stock to a Trustee in his capacity as trustee of a Trust in accordance with Section (A)(3) of this Article IX; or (ii) such Person does not own, and represents that it will not own, actually or Constructively, a Tenant Interest that would cause the Corporation to own, actually or Constructively, a Tenant Interest of more than 9.8%, the Corporation obtains such other representations and undertakings from such Person (or any other Person who could be treated as Constructively Owning the Equity Shares actually or Constructively Owned by such Person) as are deemed by the Board of Directors to be reasonably necessary to ascertain this fact and such Person agrees that any actual or attempted violation of such representations or undertakings will result in the transfer of such Equity Stock to a Trustee in his capacity as trustee of a Trust in accordance with Section (A)(3) of this Article IX. Notwithstanding the foregoing, the inability of a Person to make the certification described in this paragraph shall not prevent the Board of Directors, in its sole discretion, from exempting such Person from the restrictions set forth in Section (A)(2) of this Article IX if the Board of Directors determines that the resulting application of Section 856(d)(2)(B) of the Code would affect the characterization of less than 0.5% of the gross income (as such term is used in Section 856(c)(2) of the Code) of the Corporation in any taxable year. 12 c. Prior to granting any exception pursuant to Section (A)(7)(b)(i) or (ii) of this Article IX, the Board of Directors may require a ruling from the IRS, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Corporation's status as a REIT or otherwise would not affect the Corporation's status as a REIT. B. Shares-in-Trust. 1. Trust. Any shares of Equity Stock transferred to a Trustee in his capacity as trustee of a Trust and designated Shares-in-Trust pursuant to Section (A)(3) of Article IX hereof shall be held for the exclusive benefit of the Beneficiary. The Corporation shall name a Beneficiary (such that the shares of Equity Stock held in the Trust would not violate the restrictions set forth in Section (A)(2) of Article IX hereof) for each Trust within five (5) days after discovery of the existence thereof. Any transfer to a Trust, and subsequent designation of shares of Equity Stock as Shares-in-Trust, pursuant to Section (A)(3) of Article IX hereof shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Trust. Shares-in-Trust shall remain issued and outstanding shares of Equity Stock of the Corporation and shall be entitled to the same rights and privileges on identical terms and conditions as are all other issued and outstanding shares of Equity Stock of the same class and series. When transferred to a Permitted Transferee in accordance with the provisions of Section (B)(5) of Article IX hereof, such Shares-in-Trust shall cease to be designated as Shares-in-Trust. 2. Dividend Rights. The Trust, as record holder of Shares-in-Trust, shall be entitled to receive all dividends and distributions as may be declared by the Board of Directors on such shares of Equity Stock and shall hold such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall be required to repay to the Trust the amount of any dividends or distributions received by it that (i) are attributable to any shares of Equity Stock designated Shares-in-Trust and (ii) the record date of which was on or after the date that such shares became Shares-in-Trust. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Equity Stock Beneficially Owned or Constructively Owned by the Person who, but for the provisions of Section (A)(3) of Article IX hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable following the Corporation's receipt or withholding thereof, shall pay over to the Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. 3. Rights upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of, or any distribution of the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled to receive, ratably with each other holder of 13 shares of Equity Stock of the same class or series, that portion of the assets of the Corporation which is available for distribution to the holders of such class and series of shares of Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or distribution; provided, however, that the Prohibited Owner shall not be entitled to receive amounts pursuant to this Section (B)(3) of Article IX in excess of, in the case of a purported Transfer in which the Prohibited Owner paid fair market value for shares of Equity Stock and which Transfer resulted in the transfer of the shares to the Trustee in his capacity as trustee of a Trust, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock and, in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not pay fair market value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to a Trustee in his capacity as trustee of a Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be distributed to the Beneficiary. 4. Voting Rights. The Trustee shall be entitled to vote all Shares- in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity Stock prior to the discovery by the Corporation that the shares of Equity Stock are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such Shares-in-Trust and the Prohibited Owner shall be deemed to have given, as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event that results in the transfer to the Trust of shares of Equity Stock under Section (A)(3) of Article IX hereof, an irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in which the Trustee, in its sole and absolute discretion, desires. 5. Designation of Permitted Transferee. The Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any or all Shares-in-Trust. In an orderly fashion so as not to materially adversely affect the Market Price of the Shares-in-Trust, the Trustee shall either sell the Shares-in-Trust using the facilities of a national stock exchange on which the class and series of such Shares-in-Trust are then actively traded, if any, or designate any Person as Permitted Transferee, provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire such Shares-in-Trust without such acquisition resulting in a transfer to a Trustee in his capacity as trustee of the Trust and the redesignation of such shares of Equity Stock so acquired as Shares-in-Trust under Section (A)(3) of Article IX hereof. Upon the sale of Shares-in-Trust by the Trustee of a Permitted Transferee in accordance with the provisions of this Section (B)(5) of Article IX, the Trustee shall (i) if such sale was to a Permitted Transferee, cause to be transferred to the Permitted Transferee that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) if such sale was to a Permitted Transferee, cause to be recorded on the books of the Corporation that the Permitted Transferee is the holder of record of such number of shares of Equity Stock, (iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the Beneficiary any and all amounts held with respect to the Shares-in-Trust 14 after making that payment to the Prohibited Owner pursuant to Section (B)(6) of Article IX hereof. 6. Compensation to Record Holder of Shares of Equity Stock that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery of the Shares-in-Trust and subsequent sale of such Shares-in-Trust in accordance with Section (B)(5) of Article IX hereof or following the acceptance of the offer to purchase such shares in accordance with Section (B)(7) of Article IX hereof) to receive from the Trustee following the sale or other disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a purported Transfer in which the Prohibited Owner paid fair market value for shares of Equity Stock and which Transfer resulted in the transfer of the shares to the Trust, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not pay fair market value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer, and (ii) the price per share received by the Trustee from the sale or other disposition of such Shares-in-Trust in accordance with Section (B)(5) of Article IX hereof. Any amounts received by the Trustee in respect of such Shares-in-Trust and in excess of such amounts to be paid the Prohibited Owner pursuant to this Section (B)(6) shall be distributed to the Beneficiary in accordance with the provisions of Section (B)(5) of Article IX hereof. Each Beneficiary and Prohibited Owner waive any and all claims that the may have against the Trustee and the Trust arising out of the disposition of Shares-in- Trust, except for claims arising to or out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section (B), by such Trustee or the Corporation. 7. Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non- Transfer Event) and (ii) the Market Price on the date the Corporation or its designee accepts such offer. The Corporation shall have the right to accept such offer for a period of ninety (90) days after the later of (i) the date of the Non-Transfer Event or purported Transfer which resulted in such Shares-in- Trust and (ii) the date the Corporation determines in good faith that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Corporation does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section (A)(5) of Article IX hereof. C. Remedies Not Limited. Nothing contained in this Article IX shall limit the authority of the Corporation to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders by preservation of the Corporation's status as a REIT and to ensure compliance with the restrictions set forth in this Article IX. 15 D. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article IX, including any definition contained in Section (A)(1) of Article IX hereof, the Board of Directors shall have the power to determine the application of the provisions of this Article IX with respect to any situation based on the facts known to it. E. Legend. Each certificate for shares of Equity Stock or securities convertible into Equity Stock shall bear the following legend: "The securities represented by this certificate are subject to restrictions on transfer and ownership for the purpose of the Corporation's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person other than WFSG may (i) Beneficially Own or Constructively Own in excess of 9.8% of the number of shares or value (whichever is more restrictive) of the outstanding Common Stock or 9.8% of the number of shares or value (whichever is more restrictive) of the outstanding Preferred Stock (or such other number or value of Preferred Stock as the Board may determine in fixing the terms of the Preferred Stock), (ii) Beneficially Own shares of Equity Stock that would result in the shares of Equity Stock being Beneficially Owned by fewer than 100 Persons (determined without reference to any rules of attribution), (iii) Beneficially Own shares of Equity Stock that would result in the Corporation being "closely held" under Section 856(h) of the Code, (iv) Constructively Own shares of Equity Stock that would cause the Corporation to Constructively Own a Tenant Interest of 10% or more or (v) Beneficially Owned shares of Equity Stock that would result in the shares of Equity Stock being Beneficially Owned by (A) the United States, any international organization, or any agency or instrumentality of any of the foregoing, (B) any organization (other than a cooperative described in Section 521 of the Code) which is exempt from tax unless such organization is subject to the tax imposed by Section 511 of the Code, and (C) any organization described in Section 1381(a)(2)(c) of the Code. Any Person who attempts to Beneficially Own or Constructively Own shares of Equity Stock in excess of the above limitations must immediately notify the Corporation in writing. Furthermore, upon the occurrence of certain events, attempted transfers in violation of the restrictions described above may be void ab initio. If the restrictions above are violated, the shares of Equity Stock represented hereby will be transferred automatically and by operation of law to a Trustee for the benefit of one or more 16 Beneficiaries and shall be designated Shares-in-Trust and the Prohibited Owner shall acquire no rights or interest in such shares of Equity Stock. All capitalized terms in this legend have the meanings defined in the Corporation's Amended and Restated Articles of Incorporation, as the same may be further amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be sent without charge to each stockholder who so requests." F. Exchange of OP Units. So long as the Corporation remains the sole stockholder of the general partner of the Operating Partnership, the Board of Directors of the Corporation is hereby expressly vested with authority (subject to the restrictions on ownership, transfer and redemption set forth in this Article IX) to issue, and shall issue to the extent provided in the Operating Partnership Agreement, Common Stock in exchange for the units into which partnership interests of the Operating Partnership are divided (the "OP Units"), and as the same may be adjusted, as provided in the Partnership Agreement. G. Reservation of Shares. The Board of Directors is hereby required to reserve and authorize for issuance a sufficient number of authorized but unissued shares of Common Stock to permit the issuance of Common Stock in exchange for OP Units that may be exchanged for or converted into Common Stock as provided in the Operating Partnership Agreement. H. Severability. If any provision of this Article IX or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. I. Removal of Restrictions. The restrictions on transfer contained in this Article IX shall not be removed until the Restriction Termination Date. J. Notwithstanding any other provisions of the Charter or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law, the Charter or the Bylaws of the Corporation), the provisions of this Article IX shall not be amended, altered, changed, or repealed, and no provision inconsistent with this Article IX shall be adopted, without the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors and by the affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of capital stock of the Corporation on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. 17 X. A. The following provisions are hereby adopted for the purpose of defining, limiting, and regulating the powers of the Corporation and of the directors and stockholders: 1. The Board of Directors of the Corporation shall, consistent with applicable law, have power in its sole discretion to determine from time to time in accordance with sound practice or other reasonable valuation methods what constitutes annual or other net profits, earnings, surplus, or net assets in excess of capital; to fix and vary from time to time the amount to be reserved as working capital, or determine that retained earnings or surplus shall remain in the hands of the Corporation; to set apart out of any funds of the Corporation such reserve or reserves in such amount or amounts and for such proper purpose or purposes as it shall determine and to abolish any such reserve or any part thereof; to distribute and pay distributions or dividends in stock, cash, or other securities or property, out of surplus or any other funds or amounts legally available therefor, as such times and to the stockholders of record on such dates as it may, from time to time, determine; and to determine whether and to what extent and at what times and places and under what conditions and regulations the books, accounts, and documents of the Corporation, or any of them, shall be open to the inspection of stockholders, except as otherwise provided by statute or by the Bylaws, and, except as so provided, no stockholder shall have any right to inspect any book, account, or document of the Corporation unless authorized so to do by resolution of the Board of Directors. 2. Notwithstanding any provision of law requiring the authorization of any action by a greater proportion than a majority of the total number of shares of all classes of capital stock or of the total number of shares of any class of capital stock, such action shall be valid and effective if authorized by the affirmative vote of the holders of a majority of the total number of shares of all classes outstanding and entitled to vote thereon, except as otherwise provided in the Charter. 3. Except as otherwise specifically set forth in Articles VI, VIII and IX, the Corporation reserves the right from time to time to make any amendments of its Charter which may now or hereafter be authorized by law, including any amendments changing the terms or contract rights, as expressly set forth in its Charter, of any of its outstanding stock by classification, reclassification, or otherwise. B. The enumeration and definition of particular powers of the Board of Directors included in the foregoing shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other Article of the Charter of the Corporation, or construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under the General Laws of the State of Maryland now or hereafter in force. 18 XI. The duration of the Corporation shall be perpetual. FOURTH: Each member of the Board of Directors has signed a written consent pursuant to Section 2-408 of the MGCL, in which consent these Amended and Restated Articles of Incorporation of the Corporation (these "Articles") were set forth, declared to be advisable and directed to be submitted to the sole stockholder of the Corporation for consideration and approval. FIFTH: The sole stockholder of the Corporation adopted and approved these Articles by written consent pursuant to Section 2-505 of the MGCL. SIXTH: As of immediately before the effectiveness of these Articles, the total number of shares of stock of all classes which the Corporation had authority to issue was One Thousand (1,000) shares of capital stock, of which One Thousand (1,000) shares are classified as "Common Stock", par value $0.01 per share. Subsequent to the filing of these Articles, the total amount of the authorized capital stock of the Corporation shall be Two Hundred Twenty-Five Million (225,000,000) shares of capital stock, of which Two Hundred Million (200,000,000) shares are initially classified as Common Stock, par value $0.0001 per share, and Twenty-Five Million (25,000,000) shares are initially classified as Preferred Stock, par value $0.0001 per share. The aggregate par value of all shares having par value which the Corporation is authorized to issue is Twenty-Two Thousand Five Hundred ($22,500). These Articles increased the aggregate par value of all classes of capital stock of the Corporation from $10 to $22,500. A description of each class of capital stock of the Corporation, including preferences and other rights, voting powers, restriction, limitations as to dividends and qualifications, appears in Article III of the Articles set forth above. IN WITNESS WHEREOF, Wilshire Real Estate Investment Trust Inc. has cause these Amended and Restated Articles of Incorporation to be signed in its name and on its behalf by its President and attested by its Secretary this 17 day of March, 1998. ATTEST: WILSHIRE REAL ESTATE INVESTMENT TRUST /s/ Andrew Wiederhorn By: /s/ Chris Tassos - --------------------- ----------------------------(SEAL) Andrew Wiederhorn, Secretary Chris Tassos, Executive Vice President 19 THE UNDERSIGNED, the Executive Vice President of Wilshire Real Estate Investment Trust Inc. (the "Corporation"), who executed on behalf of the Corporation the foregoing Amended and Restated Articles of Incorporation, of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Amended and Restated Articles of Incorporation to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. Dated: March 17, 1998 By: /s/ Chris Tassos ---------------------------------------(SEAL) Chris Tassos, Executive Vice President 20 EX-3.2 4 BYLAWS OF THE REGISTRANT Exhibit 3.2 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. BY-LAWS ARTICLE I. STOCKHOLDERS SECTION 1.01. Annual Meeting. The Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, either at 10:00 a.m. on the second Monday of June in each year if not a legal holiday, or at such other time on such other day falling on or before the 30th day thereafter as shall be set by the Board of Directors. Except as the Charter or statute provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts. SECTION 1.02. Special Meeting. At any time in the interval between annual meetings, a special meeting of the stockholders may be called by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting or in writing (addressed to the Secretary of the Corporation) with or without a meeting. Special meetings of the stockholders shall be called by the Secretary at the request of stockholders only on the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting. A request for a special meeting shall state the purpose of the meeting and the matters proposed to be acted on at it. The Secretary shall inform the stockholders who make the request of the reasonably estimated costs of preparing and mailing a notice of the meeting and, on payment of these costs to the Corporation, shall notify each stockholder entitled to notice of the meeting. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of stockholders held in the preceding 12 months. SECTION 1.03. Place of Meetings. Meetings of stockholders shall be at such place in the United States as is set from time to time by the Board of Directors. SECTION 1.04. Notice of Meetings; Waiver of Notice. Not less than ten nor more than 90 days before each stockholders' meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice shall state the time and place of the meeting and, if the meeting is a special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him or her, left at his or her residence or usual place of business, or mailed to him or her at his or her address as it appears on the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he or she before or after the meeting signs a waiver of the notice which is filed with the records of stockholders' meetings, or is present at the meeting in person or by proxy. SECTION 1.05. Quorum; Voting. Unless any statute or the Charter provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the vote entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director. SECTION 1.06. Adjournments. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time without further notice by a majority vote of the stockholders present in person or by proxy to a date not more than 120 days after the original record date. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. SECTION 1.07. General Right to Vote; Proxies. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. In all elections for directors, each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock the stockholder owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a facsimile, telegram, cablegram, datagram, or other means of electronic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission. Unless a proxy provides otherwise, it is not valid more than 11 months after its date. A proxy is revocable by a stockholder at any time without condition or qualification unless the proxy states that it is irrevocable and the proxy is coupled with an interest. A proxy may be made irrevocable for so long as it is coupled with an interest. The interest with which a proxy may be coupled includes an interest in the stock to be voted under the proxy or another general interest in the Corporation or its assets or liabilities. 2 SECTION 1.08. List of Stockholders. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Secretary, shall be furnished by the Secretary. SECTION 1.09. Conduct of Business and Voting. At all meetings of stockholders, unless the voting is conducted by inspectors, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies, the acceptance or rejection of votes and procedures for the conduct of business not otherwise specified by these By-Laws, the Charter or law, shall be decided or determined by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10% in number of votes entitled to be cast, or if ordered by the chairman, the vote upon any election or questions shall be taken by ballot and, upon like demand or order, the voting shall be conducted by two inspectors, in which event the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided, by such inspectors. Unless so demanded or ordered, no vote need be by ballot and voting need not be conducted by inspectors. The stockholders at any meeting may choose an inspector or inspectors to act at such meeting, and in default of such election the chairman of the meeting may appoint an inspector or inspectors. No candidate for election as a director at a meeting shall serve as an inspector thereat. SECTION 1.10. Informal Action by Stockholders. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if there is filed with the records of stockholders meetings an unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. SECTION 1.11. Meeting by Conference Telephone. Stockholders may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. SECTION 1.12. Proper Business for Annual Stockholders' Meeting. Nominations for the election of directors and proposals for any new business to be taken up at any annual meeting of stockholders may be made by the Board of Directors of the Corporation or by any stockholder of the Corporation entitled to vote generally in the election of directors. To be properly brought before the annual meeting, business must be either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder who is entitled to vote at the meeting. In addition to any other applicable requirements contained in the Charter, these By-Laws, or under law, for business to be properly brought before an 3 annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed by first class United States mail, postage prepaid, and received at the principal executive office of the Corporation not less than 50 days nor more than 75 days prior to the annual meeting; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth (i) one or more matters appropriate for stockholder action that the stockholder proposes to bring before the meeting, (ii) a brief description of the matters desired to be brought before the meeting and the reasons for conducting such business at the meeting, (iii) the name and record address of the stockholder, (iv) the class and number of shares of the Corporation that the stockholder owns or is entitled to vote and (v) any material interest of the stockholder in such matters. In addition, if such notice is given by a stockholder with respect to nominations for the election of directors such notice shall also set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director, if elected, and (v) as to the stockholder giving such notice, his name and address as they appear on the Corporation's books and the class and number of shares of the Corporation which are beneficially owned by such stockholder. In addition, the stockholder making such nomination shall promptly provide any other information reasonably requested by the Corporation. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedure set forth in this Section 1.12; provided, however, that nothing in this Section 1.12 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The Chairman of the Board, or the President in the absence of the Chairman of the Board, shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the provisions of this Section 1.12 and if the Chairman of the Board, or the President in the absence of the Chairman of the Board, should so determine, shall so declare to the meeting any such business not properly brought before the meeting shall not be transacted. SECTION 1.13. Proper Business for Special Stockholders' Meeting. Only business specified in the notice of a special meeting (or any supplement thereto) given by or at the direction of the Board of Directors may be brought before such meeting. Nominations of persons for election to the Board of Directors must be either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before a meeting by or at the direction of the Board of 4 Directors, or (iii) provided that the Board of Directors has determined that directors shall be elected at the meeting, otherwise properly brought before the meeting by a stockholder who is entitled to vote at the meeting. In addition to any other applicable requirements contained in the Charter, these By-Laws, or under law, for nominations to be properly brought before a special meeting by a stockholder, the stockholder must gave given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed by first class United States mail, postage prepaid, and received at the principal executive office of the Corporation not less than 50 days nor more than 75 days prior to the special meeting; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the special meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth all of the information required and set forth in Section 1.12 above. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the special meeting except in accordance with the procedure set forth in this Section 1.13. The Chairman of the Board, or the President in the absence of the Chairman of the Board, shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the provisions of this Section 1.13 and if the Chairman of the Board, or the President in the absence of the Chairman of the Board, should so determine, shall so declare to the meeting any such business not properly brought before the meeting shall not be transacted. ARTICLE II. BOARD OF DIRECTORS SECTION 2.01. Function of Directors. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or By-Laws. SECTION 2.02. Number of Directors. The number of directors of the Corporation shall not be fewer than the minimum required by Maryland law nor more than nine. Within this range, the initial number shall be the number of directors provided in the Charter until changed as herein provided. Unless statute or the Charter provides otherwise, a majority of the entire Board of Directors may alter the number of directors set by the Charter to not exceeding 25 nor less than the minimum number then permitted herein, but the action may not affect the tenure of any director. At all times subsequent to the sale of stock of the Corporation pursuant to a Registration Statement filed under the Securities Act of 1933, as amended, a majority of the Board of Directors shall be "Independent Directors" (as defined in the Charter). 5 SECTION 2.03. Election and Tenure of Directors. Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, at such annual meeting, the stockholders shall elect directors to hold office until the next annual meeting and until their successors are elected and qualify. SECTION 2.04. Vacancy on Board. Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, the stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A director elected by the stockholders to fill a vacancy which results from the removal of a director serves for the balance of the term of the removed director. Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, a majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors, and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his or her successor is elected and qualifies. Notwithstanding any provision of this Section 2.05, any vacancy on the Board of Directors among the Independent Directors not filled by the stockholders shall be filled by a vote of the majority of the Board or Directors (or the remaining directors if less than a quorum) and shall require the vote of a majority of the remaining Independent Directors. SECTION 2.05. Regular Meetings. After each meeting of stockholders at which directors shall have been elected, the Board of Directors shall meet as soon as practicable for the purpose of organization and the transaction of other business. In the event that no other time and place are specified by resolution of the Board, the President or the Chairman, with notice in accordance with Section 2.08, the Board of Directors shall meet immediately following the close of, and at the place of, such stockholders' meeting. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. SECTION 2.06. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting, or in writing with or without a meeting. A special meeting of the Board of Directors shall be held on such date and at any place as may be designated from time to time by the Board of Directors. In the absence of designation such meeting shall be held at such place as may be designated in the call. SECTION 2.07. Notice of Meeting. Except as provided in Section 2.06, the Secretary shall give notice to each director of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him or her, left at his or her residence or usual place of business, or sent by telegraph, facsimile transmission or telephone, at least 24 hours before 6 the time of the meeting or, in the alternative by mail to his or her address as it shall appear on the records of the Corporation, at least 72 hours before the time of the meeting. Unless these By-Laws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, regular or special, may adjourn from time to time to reconvene at the same time or some other place, and no notice need be given of any such adjourned meeting other than by announcement. SECTION 2.08. Quorum; Action by Directors. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present by majority vote and without notice other than by announcement may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Unless statute or the Charter or By-Laws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is action of the Board of Directors. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the Board and filed with the minutes of proceedings of the Board. SECTION 2.09. Meeting by Conference Telephone. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. SECTION 2.10. Compensation. Members of the Board of Directors who are Independent Directors shall each receive $12,000 annually as compensation for their services as such or on committees of the Board of Directors. If more than four meetings of the Board of Directors or committee thereof are held in a given year, then each Independent Director shall receive $1,000 for attending each such additional meeting in person and $100 per hour for attending each such meeting telephonically. Each Independent Director shall be reimbursed for costs and expenses incurred by such Independent Director in attending any meeting of the Board of Directors. Members of the Board of Directors who are not Independent Directors shall not receive additional compensation for their services as such or on committees of the Board of Directors. SECTION 2.11. Investment Policies and Restrictions. The investment policies of the Corporation and the restrictions thereon shall be established from time to time by the Board of 7 Directors, including a majority of the Independent Directors; provided, however, that the investment policies of the Corporation and the limitations thereon shall be at all times in compliance with the restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as it may be amended from time to time. The Independent Directors shall review the investment policies of the Corporation at least annually to determine that the policies then being followed by the Corporation are in the best interests of its stockholders. Each such determination and the basis therefor shall be set forth in the minutes of the Board of Directors. Subject to the provisions of the Charter and the Bylaws, the Board of Directors, including a majority of the Independent Directors, may amend, revise or terminate any policy or policies as it shall deem appropriate in its sole discretion. SECTION 2.12. Management Agreements. To the extent permitted by applicable law and subject to such conditions, if any, as may be required by applicable law or other applicable rule or regulation, the Board of Directors may engage a manager to advise the Board of Directors and be responsible for directing the day-to-day business affairs of the Corporation ("Manager") pursuant to a written agreement or agreements ("Management Agreement"). The approval of any such Management Agreement and the renewal or termination thereof shall require the affirmative vote of the majority of the Independent Directors. The Board of Directors shall evaluate the performance of the Manager before entering into or renewing any Management Agreement. The minutes of the meetings with respect to such evaluation shall reflect the criteria used by the Board of Directors in making such evaluation. Upon any termination of the Management Agreement described in the initial registration statement of this Corporation's initial public offering of securities, the Board of Directors shall determine that any successor Manager possesses sufficient qualifications (a) to perform the management function for the Corporation and (b) to justify the compensation provided for in its contract with the Corporation. Each extension of the contract for the services of a Manager entered into by the Board of Directors shall have a term of no more than two years. In determining whether to enter into or renew any Management Agreement, the Independent Directors shall consider the following factors and all other factors that they may deem relevant and their findings on each of such factors shall be recorded in the minutes of the Board of Directors: (a) The size of management fee in relation to the size and profitability of the investment portfolio of the Corporation; (b) The success of the Manager in generating opportunities that meet the investment objectives of the Corporation; (c) The quality and extent of service and advice furnished by the Manager to the Corporation; 8 (d) The rates charged to other corporations similar to the Corporation and to other investors by advisers performing similar services; and (e) Additional revenues realized by the Manager and its Affiliates through their relationship with the Corporation, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the Corporation or by others with whom the Corporation does business. SECTION 2.13. Related Party Transactions. In addition to any other requirements imposed by the Charter, these By-Laws or applicable law, a majority of the Independent Directors shall approve general guidelines ("Guidelines") for the Corporation's investments, borrowings and operations, and the Independent Directors shall conduct a quarterly review of all transactions with WFSG or any Affiliate of WFSG, in advance, to insure compliance with the Guidelines. "WFSG" shall mean Wilshire Financial Services Group Inc., a Delaware corporation. SECTION 2.14. Management by Directors. To the extent permitted by applicable law and subject to such conditions, if any, as may be required by applicable law or other applicable rule or regulation, the Board of Directors may elect to engage a Manager to advise the Board of Directors and be responsible for directing the day-to-day business affairs of the Corporation; provided that if management is delegated to a Manager the directors shall devote so much of their time to the Corporation's affairs as is necessary or required for the effective conduct and operation of the Corporation's business. ARTICLE III. COMMITTEES SECTION 3.01. Committees. The Board of Directors may appoint from among its members an Executive Committee, an Audit Committee, a Compensation Committee, and other committees composed of one or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to declare dividends or distributions on stock, elect directors, issue stock other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend these By-Laws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock providing for or establishing a method or procedure for determining the maximum number of shares to be issued, a committee of the Board, in accordance with that general authorization or any stock option or other plan or program adopted by the Board of Directors, may authorize or fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. 9 SECTION 3.02. Committee Procedure. Each committee may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 2.10. SECTION 3.03. Emergency. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation by its directors and officers as contemplated by the Charter and these By-Laws, any two or more available members of the then incumbent Executive Committee shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Corporation in accordance with the provisions of Section 3.01. In the event of the unavailability, at such time, of a minimum of two members of the then incumbent Executive Committee, the available directors shall elect an Executive Committee consisting of any two members of the Board of Directors, whether or not they be officers of the Corporation, which two members shall constitute the Executive Committee for the full conduct and management of the affairs of the Corporation in accordance with the foregoing provisions of this Section. This Section shall be subject to implementation by resolution of the Board of Directors passed from time to time for that purpose, and any provisions of these By-Laws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Executive Committee acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs and business under all the other provisions of these By-Laws. SECTION 3.04. Audit Committee. The principal functions of the Audit Committee, if one shall be formed, shall include making recommendations to the Board of Directors regarding the annual selection of independent public accountants, reviewing the proposed scope of each annual audit and reviewing the recommendations of the independent public accountants as a result of their audit of the Corporation's financial Statements. In general, the Audit Committee shall perform such duties as are customarily performed by an audit committee of a corporation and shall perform such other duties and have such other powers as are from time to time assigned to it by the Board of Directors. SECTION 3.05. Compensation Committee. The principal functions of the Compensation Committee, if one shall be formed, shall include establishing the compensation of officers of the Corporation and establishing and administering the Corporation's compensation programs. In general, the Compensation Committee shall perform such duties as 10 are customarily performed by a compensation committee of a corporation and shall perform such other duties and have such other powers as are from time to time assigned to it by the Board of Directors. ARTICLE IV. OFFICERS SECTION 4.01. Executive and Other Officers. The Corporation shall have a President, a Secretary, and a Treasurer. It may also have a Chairman of the Board. The Board of Directors shall designate who shall serve as chief executive officer, who shall have general supervision of the business and affairs of the Corporation, and may designate a chief operating officer, who shall have supervision of the operations of the Corporation. In the absence of any designation the Chairman of the Board, if there be one, shall serve as chief executive officer and the President shall serve as chief operating officer. In the absence of the Chairman of the Board, or if there be none, the President shall be the chief executive officer. The same person may hold both offices. The Corporation may also have one or more Vice-Presidents, assistant officers, and subordinate officers as may be established by the Board of Directors. A person may hold more than one office in the Corporation except that no person may serve concurrently as both President and Vice-President of the Corporation. The Chairman of the Board shall be a director, and the other officers may be directors. SECTION 4.02. Chairman of the Board. The Chairman of the Board, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present. Unless otherwise specified by the Board of Directors, he or she shall be the chief executive officer of the Corporation. In general, he or she shall perform such duties as are customarily performed by the chief executive officer of a corporation and may perform any duties of the President and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors. SECTION 4.03. President. Unless otherwise provided by resolution of the Board of Directors, the President, in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present. Unless otherwise specified by the Board of Directors, the President shall be the chief operating officer of the Corporation and perform the duties customarily performed by chief operating officers. He or she may execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other officer or agent of the Corporation. In general, he or she shall perform such other duties customarily performed by a president of a corporation and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors or the chief executive officer of the Corporation. 11 SECTION 4.04. Vice-Presidents. The Vice-President or Vice-Presidents, at the request of the chief executive officer or the President, or in the President's absence or during his or her inability to act, shall perform the duties and exercise the functions of the President, and when so acting shall have the powers of the President. If there be more than one Vice-President, the Board of Directors may determine which one or more of the Vice-Presidents shall perform any of such duties or exercise any of such functions, or if such determination is not made by the Board of Directors, the chief executive officer, or the President may make such determination; otherwise any of the Vice-Presidents may perform any of such duties or exercise any of such functions. Each Vice-President shall perform such other duties and have such other powers, and have such additional descriptive designations in their titles (if any), as are from time to time assigned to them by the Board of Directors, the chief executive officer, or the President. SECTION 4.05. Secretary. The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committees, in books provided for the purpose; he or she shall see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; he or she shall be custodian of the records of the Corporation; he or she may witness any document on behalf of the Corporation, the execution of which is duly authorized, see that the corporate seal is affixed where such document is required or desired to be under its seal, and, when so affixed, may attest the same. In general, he or she shall perform such other duties customarily performed by a secretary of a corporation, and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors, the chief executive officer, or the President. SECTION 4.06. Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he or she shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation. In general, he or she shall perform such other duties customarily performed by a treasurer of a corporation, and shall perform such other duties and have such other powers as are from time to time assigned to him or her by the Board of Directors, the chief executive officer, or the President. SECTION 4.07. Assistant and Subordinate Officers. The assistant and subordinate officers of the Corporation are all officers below the office of Vice-President, Secretary, or Treasurer. The assistant or subordinate officers shall have such duties as are from time to time assigned to them by the board of Directors, the chief executive officer, or the President. SECTION 4.08. Election, Tenure and Removal of Officers. The Board of Directors shall elect the officers of the Corporation. The Board of Directors may from time to time authorize any committee or officer to appoint assistant and subordinate officers. Election or 12 appointment of an officer, employee or agent shall not of itself create contractual rights. All officers shall be appointed to hold their offices, respectively, during the pleasure of the Board. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may remove an officer at any time. The removal of an officer does not prejudice any of his or her contract rights. The Board of Directors (or, as to any assistant or subordinate officer, any committee or officer authorized by the Board) may fill a vacancy which occurs in any office of the unexpired portion of the term. SECTION 4.09. Compensation. The Board of Directors shall have power to fix the salaries and other compensation and remuneration, of whatever kind, of all officers of the Corporation. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation. The Board of Directors may authorize any committee or officer, upon whom the power of appointing assistant and subordinate officers may have been conferred, to fix the salaries, compensation and remuneration of such assistant and subordinate officers. ARTICLE V. DIVISIONAL TITLES SECTION 5.01. Conferring Divisional Titles. The Board of Directors may from time to time confer upon any employee of a division of the Corporation the title of President, Vice President, Treasurer or Controller of such division or any other title or titles deemed appropriate, or may authorize the Chairman of the Board or the President to do so. Any such titles so conferred may be discontinued and withdrawn at any time by the Board of Directors, or by the Chairman of the Board or the President if so authorized by the Board of Directors. Any employee of a division designated by such a divisional title shall have the powers and duties with respect to such division as shall be prescribed by the Board of Directors, the Chairman of the Board or the President. SECTION 5.02. Effect of Divisional Titles. The conferring of divisional titles shall not create an office of the Corporation under Article IV unless specifically designated as such by the Board of Directors; but any person who is an officer of the Corporation may also have a divisional title. ARTICLE VI. STOCK SECTION 6.01. Certificates for Stock. The Board of Directors may determine to issue certificated or uncertificated shares of capital stock and other securities of the 13 Corporation. For certificated stock, each stockholder is entitled to certificates which represent and certify the shares of stock he or she holds in the Corporation. Each stock certificate shall include on its face the name of the Corporation, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall also include on its face or back (a) a statement of any restrictions on transferability and (b) a statement which provides in substance that the Corporation will furnish to any stockholder on request and without charge a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue, of the differences in the relative rights and preferences between the shares of each series of a preferred or special class in series which the Corporation is authorized to issue, to the extent they have been set, and of the authority of the Board of Directors to set the relative rights and preferences of subsequent series of a preferred or special class of stock and any restrictions on transferability. Such request may be made to the Secretary or to its transfer agent. Upon the issuance of uncertificated shares of capital stock, the Corporation shall send the stockholder a written statement of the same information required above on the certificate and by the Maryland Uniform Commercial Code - Investment Securities. It shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a Vice-President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. A certificate may not be issued until the stock represented by it is fully paid. SECTION 6.02. Transfers. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of transfer agent and registrar may be combined. SECTION 6.03. Record Dates or Closing of Transfer Books. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be prior to the close of business on the day the record date is fixed nor, subject to Section 1.06, more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least ten days before the date of the meeting. 14 SECTION 6.04. Stock Ledger. The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, or, if none, at the principal office in the State of Maryland or the principal executive offices of the Corporation. SECTION 6.05. Certification of Beneficial Owners. The Board of Directors may adopt by resolution a procedure by which a stockholder of the Corporation may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may certify; the purpose for which the certification may be made; the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board considers necessary or desirable. On receipt of a certification which complies with the procedure adopted by the Board in accordance with this Section, the person specified in the certification is, for the purpose set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification. SECTION 6.06. Lost Stock Certificates. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may require the owner of the certificate to give bond, with sufficient surety, to indemnify the Corporation against any loss or claim arising as a result of the issuance of a new certificate. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises. SECTION 6.07. Exemption from Control Share Acquisition Statute. The provisions of Sections 3-701 to 3-709 of the Corporations and Associations Article of the Annotated Code of Maryland shall not apply to any share of the capital stock of the Corporation. Such shares of capital stock are exempted from such Sections to the fullest extent permitted by Maryland law. 15 ARTICLE VII. FINANCE SECTION 7.01. Checks, Drafts, Etc. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall, unless otherwise provided by resolution of the Board of Directors, be signed by the Chairman of the Board, the President, a Vice- President or an Assistant Vice-President and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. SECTION 7.02. Annual Statement of Affairs. The President or chief accounting officer shall prepare annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. The statement of affairs shall be submitted at the annual meeting of the stockholders and, within 20 days after the meeting, placed on file at the Corporation's principal office. SECTION 7.03. Fiscal Year. The fiscal year of the Corporation shall be the 12 calendar months period ending December 31st in each year, unless otherwise provided by the Board of Directors. SECTION 7.04. Dividends. If declared by the Board of Directors at any meeting thereof, the Corporation may pay dividends on its shares in cash, property, or in shares of the capital stock of the Corporation, unless such dividend is contrary to law or to a restriction contained in the Charter. ARTICLE VIII. INDEMNIFICATION SECTION 8.01. Procedure. Any indemnification, or payment of expenses in advance of the final disposition of any proceeding, shall be made promptly, and in any event within 60 days, upon the written request of the director or officer entitled to seek indemnification (the "Indemnified Party"). The right to indemnification and advances hereunder shall be enforceable by the Indemnified Party in any court of competent jurisdiction, if (i) the Corporation denies such request, in whole or in part, or (ii) no disposition thereof is made within 60 days. The Indemnified Party's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be reimbursed by the Corporation. It shall be a defense to any action for advance of expenses that (a) a determination has been made that the facts then known to those making the determination would preclude indemnification or (b) the Corporation has not received both (i) an undertaking as required by law to repay such advances in the event it shall 16 ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the Indemnified Party of such Indemnified Party's good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met. SECTION 8.02. Exclusivity, Etc. The indemnification and advance of expenses provided by the Charter and these By-Laws shall not be deemed exclusive of any other rights to which a person seeking indemnification or advance of expenses may be entitled under any law (common or statutory), or any agreement, vote of stockholders or disinterested directors or other provision that is consistent with law, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, shall continue in respect of all events occurring while a person was a director or officer after such person has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. The Corporation shall not be liable for any payment under this By-Law in connection with a claim made by a director or officer to the extent such director or officer has otherwise actually received payment under insurance policy, agreement, vote or otherwise, of the amounts otherwise indemnifiable hereunder. All rights to indemnification and advance of expenses under the Charter of the Corporation and hereunder shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this By-Law is in effect. Nothing herein shall prevent the amendment of this By-Law, provided that no such amendment shall diminish the rights of any person hereunder with respect to events occurring or claims made before its adoption or as to claims made after its adoption in respect of events occurring before its adoption. Any repeal or modification of this By-Law shall not in any way diminish any rights to indemnification or advance of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this By-Law or any provision hereof is in force. SECTION 8.03. Severability; Definitions. The invalidity or unenforceability of any provision of this Article VIII shall not affect the validity or enforceability of any other provision hereof. The phrase "this By- Law" in this Article VIII means this Article VIII in its entirety. ARTICLE IX. SUNDRY PROVISIONS SECTION 9.01. Books and Records. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of the Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written 17 form but may be maintained in the form of a reproduction. The original or certified copy of these By-Laws shall be kept at the principal office of the Corporation. SECTION 9.02. Corporate Seal. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "(seal)" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation. SECTION 9.03. Bonds. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his or her duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. SECTION 9.04. Voting Stock in Other Corporations. Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the President, a Vice-President, or a proxy appointed by either of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. SECTION 9.05. Mail. Any notice or other document which is required by these By-Laws to be mailed shall be deposited in the United States mails, postage prepaid. SECTION 9.06. Execution of Documents. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer. SECTION 9.07. Amendments. These By-Laws may be repealed, altered, amended or rescinded (a) by the stockholders of the Corporation (voting together for this purpose as a single class) by the affirmative vote of not less than two- thirds (2/3) of all the votes entitled to be cast by the outstanding shares of capital stock of the Corporation generally in the election of directors which are cast on the matter at any meeting of the stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting) or (b) by affirmative vote of not less than a majority of the Board of Directors (including a majority of the Independent Directors) at a meeting held in accordance with the provisions of these By-Laws. SECTION 9.08. Certain Rights of Directors, Officers, Employees and Agents. The directors shall have no responsibility to devote their full time to the affairs of the Corporation. Any director or officer, employee or agent of the Corporation, in his or her personal capacity 18 or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to or in addition to those of or relating to the Corporation. 19 EX-4.1 5 COMMON STOCK CERTIFICATE SPECIMEN EXHIBIT 4.1 INCORPORATED UNDER THE LAWS OF THE MARYLAND NUMBER -0- -0- SHARES WILSHIRE REAL ESTATE INVESTMENT TRUST INC. COMMON STOCK --SPECIMEN-- This Certifies that ___________________________________________ is the owner of --ZERO-- _____________________________________________________ Shares of Common Stock of WILSHIRE REAL ESTATE INVESTMENT TRUST INC. transferable only on the Books of the Corporation by the holder hereof in person or by duly authorized Attorney on surrender of this Certificate properly endorsed. IN WITNESS WHEREOF the duly authorized officers of this Corporation have hereunto subscribed their names and caused the corporate Seal to be hereto affixed at__________________________________________________________________ this _______________________ day of __________________________ A.D. 19______ __________________________________ ______________________________________ Chief Executive Officer Secretary Shares $0.0001 Each. EX-5.1 6 OPINION OF PIPER & MARBURY LLP EXHIBIT 5.1 PIPER & MARBURY L.L.P. CHARLES CENTER SOUTH 36 SOUTH CHARLES STREET Baltimore, Maryland 21201-3018 410-539-2530 FAX: 410-539-0489 January 26, 1998 Wilshire Real Estate Investment Trust Inc. 1776 SW Madison Street Portland, Oregon 97025 Re: Registration Statement on Form S-11 ----------------------------------- Ladies and Gentlemen: We have acted as Maryland counsel to Wilshire Real Estate Investment Trust Inc., a Maryland corporation and a self-administered and self-managed equity real estate investment trust (the "Company"), in connection with the issuance and sale by the Company of up to 11,500,000 shares of common stock of the Company (the "Common Stock"), $.0001 par value per share (the "Shares"), pursuant to a Registration Statement on Form S-11 (No. 333-39035), filed by the Company with the Securities and Exchange Commission (the "Commission") on October 30, 1997 (together with any pre-effective and any post-effective amendments, the "Registration Statement"), including the prospectus included therein at the time the Registration Statement is declared effective by the Commission (the "Prospectus"). In this capacity, we have reviewed the Charter documents and By-laws of the Company, and the Registration Statement and the Prospectus. In addition, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such other documents, corporate records, certificates of public officials and other instruments as we have deemed necessary for the purpose of rendering this opinion. In such examination, we have assumed, without independent investigation, the genuineness of all signatures, the legal capacity of all individuals who have executed any of the aforesaid documents, the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies (and the authenticity of the originals of such copies), that there has been no substantial change in the final documents from documents Piper & Marbury L.L.P. Wilshire Real Estate Investment Trust Inc. January 26, 1998 Page 2 submitted to us as drafts and that all public records reviewed are accurate and complete. As to factual matters, we have relied upon the above-referenced certificates of officers of the Company and have not independently verified the matters stated therein. This opinion is also based upon the assumption that the Registration Statement has become effective under the Act. Based upon the foregoing, and limited in all respects to applicable Maryland law, we are of the opinion and advise you that the Shares have been duly authorized for issuance by all necessary corporate action on the part of the Company and, upon payment of the consideration specified in the Registration Statement and the Prospectus relating thereto, the issuance and delivery of the Shares in accordance with the terms therefor and the countersigning of the certificate or certificates representing the Shares by a duly authorized officer of the registrar for the Company's Common Stock, the Shares will be validly issued, fully paid and nonassessable. The opinions expressed herein: (i) are limited to the matters set forth herein, and no other opinion should be inferred beyond the matters expressly stated; (ii) are subject to the qualification that we express no opinion as to the laws of any jurisdiction other than the laws of the State of Maryland; and (iii) concern only the effect of the laws (excluding the principles of conflict of laws) of the State of Maryland as currently in effect. We assume no obligation to supplement this opinion if any applicable laws change after the date hereof or if we become aware of any facts that might change the opinion expressed herein after the date hereof. In addition, the opinions expressed herein are for the benefit of the persons to whom this opinion is addressed and, without our prior written consent, may not be quoted in whole or in part or otherwise referred to in any legal opinion, document, or other report, and may not be furnished to any person or entity, except that Proskauer Rose LLP is authorized to rely on this opinion in rendering any opinion to the Company which is to be filed as an exhibit to the Registration Statement. In addition, we hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to our firm in the Registration Statement and the Prospectus relating thereto. Very truly yours, /s/ Piper & Marbury L.L.P. Piper & Marbury L.L.P. EX-8.1 7 OPINION OF PROSKAUER ROSE LLP AS TO TAX MATTERS [PROSKAUER ROSE LLP LETTERHEAD] EXHIBIT 8.1 March 27, 1998 Wilshire Real Estate Investment Trust Inc. c/o Wilshire Financial Services Group Inc. 1776 SW Madison Street Portland, Oregon 97205 Ladies and Gentlemen: We have acted as counsel to Wilshire Real Estate Investment Trust Inc., a Maryland corporation (the "Company"), with respect to certain tax matters in connection with the sale by the Company of Common Stock (the "Stock") as described in the Registration Statement on Form S-11, Registration No. 333- 39035, dated March 13, 1998 (the "Registration Statement"). In connection with the sale of Stock, we have been asked to provide an opinion regarding the discussion in the prospectus forming a part of the Registration Statement (the "Prospectus") under the heading "Federal Income Tax Consequences" and regarding the classification of the Company as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code")./1/ The opinions set forth in this letter are based on relevant provisions of the Code, Treasury Regulations issued thereunder (including Proposed and Temporary Regulations), and interpretations of the foregoing as expressed in court decisions, administrative determinations, and the legislative history as of the date hereof. These provisions and interpretations are subject to change, which may or may not be retroactive in effect, that might result in modifications of our opinions. In rendering our opinions, we have made such factual and legal examinations and inquiries, including an examination of such statutes, regulations, records, certificates and other documents _______________ /1/ All section references herein are to the Code. Wilshire Real Estate Investment Trust Inc. March 27, 1998 Page 2 as we have considered necessary or appropriate, including the following: (1) the Registration Statement (including exhibits thereto); (2) the Amended and Restated Articles of Incorporation of the Company; (3) the form of Limited Partnership Agreement of Wilshire Real Estate Partnership L.P. (the "Operating Partnership"); and (4) the form of Management Agreement, made between the Operating Partnership, the Company and Wilshire Realty Services Corporation (the "Manager"). The opinions set forth in this letter also are based on certain written representations made by the Company and the Operating Partnership in a letter to us dated March 27, 1998 (collectively, these written representations and the documents described in the immediately preceding sentence are referred to herein as the "Transaction Documents"). In our review, we have assumed, with your consent, that all of the factual representations and statements set forth in the Transaction Documents are true and correct, and all of the obligations imposed by any such documents on the parties thereto have been and will be performed or satisfied in accordance with their terms. Moreover, we have assumed that the Company and the Operating Partnership each will be operated in the manner described in the relevant Transaction Documents. We also have assumed the genuineness of all signatures, the proper execution of all documents, the authenticity of all documents submitted to us as originals, the conformity to originals of documents submitted to us as copies, and the authenticity of the originals from which any copies were made. With respect to matters of Maryland law, we have relied upon the opinion of Piper & Marbury, L.L.P., counsel for the Company, dated February 26, 1998, that the Company is a validly organized and duly incorporated corporation under the laws of the State of Maryland. Based upon, and subject to the foregoing and the discussion below, we are of the opinion that: (i) commencing with the Company's taxable year ending on December 31, 1998, the Company will qualify to be taxed as a REIT pursuant to sections 856 through 860 of the Code and the Company's organization and proposed method of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code; and (ii) the information in the Prospectus under the caption "Federal Income Tax Consequences," to the extent it constitutes matters of law, summaries of legal matters or legal conclusions, has been reviewed by us and is accurate in all material respects. Wilshire Real Estate Investment Trust, Inc. March 27, 1998 Page 3 The Company's qualification and taxation as a REIT will depend upon the Company's ability to meet on a continuing basis, through actual annual operating and other results, the various requirements under the Code as described in the Registration Statement with regard to, among other things, the sources of its gross income, the composition of its assets, the level of its distributions to stockholders, and the diversity of its stock ownership. Proskauer Rose LLP will not review the Company's compliance with these requirements on a continuing basis. Accordingly, no assurance can be given that the actual results of the operations of the Company, the Operating Partnership, the sources of their income, the nature of their assets, the level of the Company's distributions to stockholders and the diversity of its stock ownership for any given taxable year will satisfy the requirements under the Code for the Company's qualification and taxation as a REIT. This opinion is rendered to you in connection with the sale of the Stock and may not be used by you for any other purpose or relied upon by any other person without our prior written consent. We consent to the use of our name under the captions "Federal Income Tax Consequences" and "Legal Matters" in the Prospectus and to the use of these opinions for filing as exhibit 8.1 to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or the rules and regulations of the Securities and Exchange Commission thereunder. Sincerely yours, /s/ PROSKAUER ROSE LLP PROSKAUER ROSE LLP Wilshire Real Estate Investment Trust Inc. c/o Wilshire Financial Services Group Inc. 1776 SW Madison Street Portland, Oregon 97205 March 27, 1998 Proskauer Rose LLP 1585 Broadway New York, New York 10036 Ladies and Gentlemen: In connection with the Registration Statement filed on Form S-11 and the Prospectus that forms a part thereof, relating to the proposed initial public offering ("IPO") of 11,500,000 shares of Common Stock, par value $0.0001 per share of Wilshire Real Estate Investment Trust Inc. (the "Company"), as amended as of the date hereof (File No. 333-39035) (the Prospectus and the Registration Statement together, the "Registration Statement"), we have requested your legal opinion as to the classification of the Company as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code")./1/ In connection with your opinion, we hereby make the representations to you set forth below, which representations we understand will be relied upon by you in rendering such opinion. 1. The factual statements and representations set forth in the Registration Statement were, when made, and remain all true and correct. 2. The Company will operate in accordance with its organizational documents, the applicable state law under which it is organized, and its proposed method of operation as described in the Registration Statement and in this letter. 3. Wilshire Real Estate Partnership L.P. (the "Operating Partnership") will operate in accordance with Delaware law, the Wilshire Real Estate Partnership L.P. Limited Partnership Agreement, as in effect on the date hereof (the "Limited Partnership Agreement") and the statements and representations made in the Registration Statement and in this letter. - -------------------- /1/ All section references herein are to the Code. Proskauer Rose LLP March 27, 1998 Page 2 4. The Operating Partnership was formed and will be operated with a profit motive. As general partner, the Company acts for its own account and not as an agent or dummy of the limited partners of the Operating Partnership. The Company will operate the Operating Partnership consistently with the requirements for qualification as a REIT. 5. The Company's taxable year for federal income tax purposes is the calendar year. The Company will make, on a timely basis, the election specified in Section 856(c) to be a REIT, effective for its taxable year ending December 31, 1998. The Company has no intention of revoking this REIT election. 6. The Company will: (i) observe all corporate and other formalities regarding the separate existence and activities of the Company; (ii) maintain its own bank accounts; (iii) pay (or cause to be paid) dividends from its own bank account; and (iv) maintain and periodically provide to holders of Common Stock separate financial statements for the Company. 7. For its taxable year ending December 31, 1998, and each taxable year thereafter, the Company expects that, and will take all measures within its control to ensure that, at no time during the last half of any taxable year will more than 50 percent in value of the Company's outstanding stock be owned, directly or indirectly (applying the constructive ownership rules of Section 856(h)), by or for five or fewer individuals. 8. At all times commencing with the completion of the initial sale of the Company's Common Stock to the public pursuant to the IPO, and each taxable year thereafter commencing with its taxable year ending December 31, 1999, the Company expects that, and will take all measures within its control to ensure that, the beneficial ownership of the Company at all times will be held by 100 or more persons. 9. The Company will comply with the record keeping requirements prescribed by Section 857(f) and by Treasury Regulation Section 1.857-8 that must be satisfied in order to qualify as a REIT under the Code. 10. The Company will be managed at all times by a board of directors, and the beneficial ownership in the Company will be evidenced by transferable certificates of beneficial interest ("Stock"). With the exception of the restrictions imposed on the transfer of Stock under the Company's Amended and Restated Articles of Incorporation ("Charter") as amended as of the date hereof, there are no restrictions on the transfer of Stock. Proskauer Rose LLP March 27, 1998 Page 3 11. The Company will distribute to its stockholders, pro rata with no preference to any share of such class of stock as compared with other such shares, with respect to each taxable year, amounts equal in the aggregate to at least: (i) 95 percent of its "real estate investment trust taxable income," determined without regard to the deduction for dividends paid (as defined in Section 561) and by excluding any net capital gain (within the meaning of Section 857(a)(1)(A)); plus (ii) 95 percent of the excess of any "net income from foreclosure property" over the tax imposed by Section 857(b)(4)(A) of the Code on such net income, if any; minus (iii) any "excess noncash income," as such terms in quotations are defined in Sections 857(b)(2), 857(b)(4)(B) and 857(e) respectively, during the taxable year involved or during the period thereafter as prescribed by Section 858. 12. When the assets, liabilities, items of income, gain, loss, deduction and credit of the Company are aggregated with the assets, liabilities and such items of any "Qualified REIT Subsidiary" (within the meaning of Section 856(i)) and the Company's allocable share (determined in accordance with its proportionate capital interest) of the assets, liabilities and such items of the Operating Partnership: (i) In each taxable year commencing with the Company's taxable year ending December 31, 1998, at least ninety-five percent (95%) of the gross income of the Company (excluding gross income from "Prohibited Transactions" (as defined in Section 857(b)(6)(B)(iii)) is expected to be derived from: (i) dividends; (ii) interest; (iii) "Rents from Real Property" (as defined in Section 856(d)); (iv) gain from the sale or other disposition of stock, securities or real property (including "Interests in Real Property" as defined in Section 856(c)(5)(c) and interests in mortgages on real property), but excluding gain on real property which is "Section 1221(1) Property" (i.e., property described in Section 1221(1) that is not "Foreclosure Property" (as defined herein); (v) abatements and refunds of taxes on real property; (vi) income and gain derived from Foreclosure Property; (vii) amounts (other than amounts, the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (a) to make loans secured by mortgages on real property or on Interests in Real Property, or (b) to purchase or lease real property (including Interests in Real Property and interests in mortgages on real property); and Proskauer Rose LLP March 27, 1998 Page 4 (viii) gain from the sale or other disposition of a Real Estate Asset (as defined in Section 856(c)(5)(B)) which is not a Prohibited Transaction; (ii) In each taxable year commencing with the Company's taxable year ending December 31, 1998, at least seventy-five percent (75%) of the gross income of the Company (excluding gross income from Prohibited Transactions) is expected to be derived from: (i) rents from real property; (ii) interest on obligations secured by mortgages on real property or on Interests in Real Property; (iii) gain from the sale or disposition of real property (including Interests in Real Property and interests in mortgages on real property), but excluding gain from real property which is Section 1221(1) Property; (iv) dividends or other distributions on, and gain (other than gain from Prohibited Transactions) from the sale or other disposition of, transferable shares or beneficial certificates in other reties; (v) abatements and refunds of taxes on real property; (vi) income and gain derived from Foreclosure Property; (vii) amounts (other than amounts, the determination of which depends in whole or in part on the income of profits of any person) received or accrued as consideration for entering into agreements (a) to make loans secured by mortgages on real property or on Interests in Real Property, or (b) to purchase or lease real property (including Interests in Real Property and interests in mortgages on real property); (viii) gain from the sale or other disposition of a Real Estate Asset which is not a Prohibited Transaction; and (ix) "Qualified Temporary Investment Income" (as defined in Section 856(c)(5)(D)). 13. At the close of each quarter of each taxable year commencing with the Company's taxable year ending December 31, 1998: (i) at least seventy- five percent (75%) of the value of the combined total assets of the Company is expected to be represented by Real Estate Assets, cash and cash items (including receivables), and U.S. Government securities; (ii) not more than twenty-five percent (25%) of the value of the Company's total assets have been and will continue to be represented by securities other than securities described in clause (i) above; and (iii) with respect to those assets described in clause (ii) above, the value of any one issuer's securities owned by the Company will not exceed, and has not exceeded, five percent (5%) of the value of the Company's total assets and the Company has not owned, and will not own, more than ten percent (10%) of any one issuer's outstanding voting securities. For purposes of the certifications in this paragraph 13, (i) the assets of the Company include (a) the assets owned by any Qualified REIT Subsidiary; and (b) the Company's allocable share (based on the Company's proportionate capital interest) of the assets owned by the Operating Partnership; and (ii) the Company's direct or indirect ownership of the stock of any Qualified REIT Subsidiary and the interests in the Operating Partnership shall be disregarded. Proskauer Rose LLP March 27, 1998 Page 5 14. The Company may acquire or originate mortgage loans secured only by real property at a time when the fair market value of such real property may be less than the principal amount of the loan. In making its own REIT qualification calculations, the Company will assume that the apportionment rules of Treasury Regulation Section 1.856-5(c) apply where such loans are secured solely by real property. 15. Interest income received or accrued by the Company may be based in part on a borrower's profits or net income, which generally will disqualify the income from the loan for purposes of both the 75% and the 95% gross income tests described in paragraphs 12(i) and 12(ii) herein. The amount of such recharacterized interest, together with the amount of the Company's other income that is not included for purposes of determining compliance with the 75% gross income test, will not result in a violation of that test. 16. "Foreclosure property" is defined as any real property (including interests in real property) and any personal property incident to such real property (i) that is acquired by a REIT as the result of such REIT having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness owed to the REIT that such property secured, (ii) for which the related loan was entered into or acquired by the REIT both (A) at a time when the REIT did not intend to evict or foreclose, and (B) at a time when the REIT did not know or have reason to know that default would occur, and (iii) for which such REIT makes a proper election to treat such property as foreclosure property. In general, property ceases to be foreclosure property three years after the date the REIT acquired such property, subject to certain exceptions. If the Company or the Operating Partnership acquires property that satisfies requirements (i) and (ii) above, the Company will properly make the foreclosure property election unless the failure to make the election will not jeopardize the Company's status as a REIT. 17. The Company and the Operating Partnership will attempt to comply with the terms of the safe-harbor provisions of the Code contained in Section 857(b)(6)(C), prescribing when asset sales will not be characterized as Prohibited Transactions. 18. The Company may receive or accrue income above that is not qualifying income for purposes of the 75% and 95% gross income tests described in paragraphs 12(i) and 12(ii) herein. For example, certain fees for services rendered by the Operating Partnership will not be qualifying income for purposes of the gross income tests. It is not anticipated that the Operating Partnership will receive a significant amount of such fees. The Company Proskauer Rose LLP March 27, 1998 Page 6 will monitor the amount of such income produced by assets owned by the Company and the Operating Partnership and will manage such assets in order to comply at all times with these two gross income tests. 19. The Company will not structure its ownership of mortgage-backed securities, including any non-REMIC collateralized mortgage obligations, in a manner that would result in the creation of a "taxable mortgage pool" (as defined in Section 7701(i)). 20. The Company will monitor the status of the assets that it and the Operating Partnership acquire for purposes of the various asset tests and will manage its portfolio in order to comply at all times with such tests. 21. As President of the Company, which is the sole general partner of the Operating Partnership, and as General Partner of the Operating Partnership, it is (my/our) responsibility to have knowledge of the matters described in the above representations. WILSHIRE REAL ESTATE INVESTMENT TRUST INC. /s/ Lawrence A. Mendelsohn Lawrence A. Mendelsohn, President WILSHIRE REAL ESTATE PARTNERSHIP L.P. By: Wilshire Real Estate Investment Trust Inc., a Maryland Corporation, its General Partner /s/ Lawrence A. Mendelsohn Lawrence A. Mendelsohn, President [PROSKAUER ROSE LLP LETTERHEAD] March 27, 1998 Wilshire Real Estate Investment Trust Inc. c/o Wilshire Financial Services Group Inc. 1776 SW Madison Street Portland, Oregon 97205 Re: Registration on Form S-11 under the Securities Act of 1933 ---------------------------------------------------------- Ladies and Gentlemen: We have acted as counsel to Wilshire Real Estate Investment Trust Inc., a Maryland corporation (the "Company"), with respect to certain tax matters in connection with the sale by the Company of Common Stock (the "Stock") as described in the Registration Statement on Form S-11, Registration No. 333- 39035, dated March 13, 1998 (the "Registration Statement"). In connection with the sale of Stock, we have participated in the preparation of a registration statement on Form S-11 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with regard to, pursuant to the sale of Stock, the material federal income tax consequences that may be relevant to a prospective holder of Stock. We have examined the (1) the Registration Statement (including exhibits thereto); (2) the Amended and Restated Articles of Incorporation of the Company; (3) the form of Limited Partnership Agreement of Wilshire Real Estate Partnership L.P. (the "Operating Partnership"); (4) the form of Management Agreement made between the Operating Partnership, the Company and Wilshire Realty Services Corporation (the "Manager"); and (5) such other documents and corporate records as we have deemed necessary or appropriate for purposes of this opinion (collectively, the "Transaction Documents"). In addition, we have assumed: (i) the sale of Stock will occur in the manner contemplated in the Registration Statement; (ii) the Company and the Operating Partnership each will be operated in the manner described in the relevant Transaction Documents; and (iii) the statements concerning the sale of Stock set forth in the Registration Statement are accurate and complete. March 27, 1998 Page 2 Based upon the foregoing, it is our opinion that the description of the federal income tax consequences to prospective holders of Stock contained in the Registration Statement under the caption "Federal Income Tax Consequences" correctly sets forth the material U.S. federal income tax consequences for such holders. We consent to the use of our name under the captions "Federal Income Tax Consequences" and "Legal Matters" in the Prospectus and to the use of this opinion for filing as exhibit 8.1 to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or the rules and regulations of the Securities and Exchange Commission thereunder. Sincerely yours, /s/ PROSKAUER ROSE LLP PROSKAUER ROSE LLP EX-10.1 8 FORM OF MANAGEMENT AGREEMENT EXHIBIT 10.1 FORM OF MANAGEMENT AGREEMENT THIS AGREEMENT, dated as of April ___, 1998 by and between WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation ("WREIT" and, together with its subsidiaries and partnerships, and as the General Partner of Wilshire Real Estate Partnership, L.P., a Delaware limited partnership (the "Company"), and WILSHIRE REALTY SERVICES CORPORATION, a Delaware corporation (the "Manager"); WITNESSETH: ___________ WHEREAS, the Company intends to invest, through a subsidiary partnership, in U.S. Commercial Investments, Mortgage-Backed Securities, International Investments and Other Real Estate Related Assets ("Investments") and expects to qualify for the tax benefits accorded by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Company desires to retain the Manager to acquire, sell and otherwise manage the Investments of the Company and to perform administrative services for the Company in the manner and on the terms set forth herein; NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Definitions. ----------- Except as the context otherwise requires, capitalized terms used but not defined herein shall have the respective meanings assigned them in the WREIT preliminary prospectus dated March 13, 1998. In addition, the following terms have the meanings assigned them: (a) "Agreement" means this Management Agreement, as amended from time to time. (b) "Closing Date" means the date of closing of the Company's initial public offering of common stock. (c) "Governing Instruments" means, in the case of a corporation, the articles of incorporation and bylaws, in the case of a partnership, the certificate of partnership or similar document and partnership agreement and, in the case of a limited liability company, the certificate of formation and operating agreement. (d) "International Investments" means international performing, sub- performing and non-performing mortgage loans and real properties. (e) "Mortgage-Backed Securities" means interests in mortgage-backed securities. (f) "Subsidiary" means any subsidiary of the Company and any partnership or limited liability company, a general partner or managing member which is the Company or a subsidiary of the Company. (g) "U.S. Commercial Investments" means non-performing, sub-performing and performing commercial and multi-family mortgage loans and commercial and multi- family real properties in the United States. SECTION 2. Duties of the Manager. --------------------- (a) The Manager at all times will be subject to the supervision of the Company's Board of Directors and will have only such functions and authority as the Company may delegate to it. The Manager will be responsible for the day-to- day operations of the Company and will perform (or cause to be performed) such services and activities relating to the assets and operations of the Company as the Manager deems to be appropriate, including: (i) serving as the Company's consultant with respect to formulation of investment criteria and preparation of policy guidelines by the Board of Directors. A copy of the initial policy guidelines is attached hereto as Exhibit A (such guidelines as are in effect from time to time, the "Guidelines"); (ii) representing the Company in connection with the purchase and commitment to purchase assets, the sale and commitment to sell assets, and the maintenance and administration of its portfolio of assets; (iii) furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; (iv) monitoring and providing to the Board of Directors on an ongoing basis price information and other data obtained from certain nationally recognized dealers that maintain markets in assets identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; (v) providing executive and administrative personnel, office space and office services required in rendering services to the Company; (vi) except for servicing operations to be conducted by Wilshire Credit Corporation ("WCC") and certain European affiliates of the Manager (the "European Servicers") pursuant to certain servicing agreements dated the date hereof with the Company (the "Servicing Agreements"), administering the day-to- day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the Board of Directors, including the collection of revenues (other than servicing) and the payment of the Company's debts and obligations and maintenance of appropriate computer services to perform such administrative functions; (vii) communicating on behalf of the Company with the holders of any equity or debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies or trading markets and to maintain effective relations with such holders; -2- (viii) to the extent not otherwise subject to the Servicing Agreements executed by the Company, designating a servicer for mortgage loans sold to the Company by originators that have elected not to service such loans and arranging for the monitoring and administering of such servicers; (ix) advising the Company in connection with policy decisions to be made by the Board of Directors and in connection with the Company's borrowings and leverage; (x) engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT and with the Guidelines; (xi) upon request by, or in accordance with the directions of, the Board of Directors, investing or reinvesting any money of the Company; and (xii) advising the Company regarding the maintenance of its status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Code and Treasury Regulations thereunder. (b) Real Estate Asset Portfolio Management. The Manager will perform -------------------------------------- portfolio management services on behalf of the Company and the Operating Partnership with respect to the Company's Investments. Such services will include, but not be limited to, consulting with the Company on purchase and sale opportunities, collection of information and submission of reports pertaining to the Company's assets, interest rates, and general economic conditions, periodic review and evaluation of the performance of the Company's portfolio of assets, acting as liaison between the Company and banking, mortgage banking, investment banking and other parties with respect to the purchase, financing and disposition of assets, and other customary functions related to real estate portfolio management. The Manager may enter into subcontracts with other parties, including its Affiliates, to provide any such services to the Company. (c) Monitoring Special Servicing. To the extent not otherwise subject to ---------------------------- the Servicing Agreements executed by the Company, the Manager will perform monitoring services on behalf of the Company with respect to the Company's Special Servicing rights. Such monitoring services will include, but not be limited to, the following activities: negotiating Special Servicing agreements; serving as the Company's consultant with respect to the Special Servicing of mortgage loans; collection of information and submission of reports pertaining to the mortgage loans and to moneys remitted to the Manager or the Company by the Servicers; acting as a liaison between the servicers of the mortgage loans and the Company and working with servicers to the extent necessary to improve their servicing performance; with respect to mortgage loans for which the Company is Special Servicer, periodic review and evaluation of the performance of each servicer to determine its compliance with the terms and conditions of the related servicing agreement. The parties acknowledge that the Company intends to grant any Special Servicing rights obtained by it (other than the right to foreclose) to the servicers under the Servicing Agreements. (d) Monitoring of Primary Servicing. The Manager will monitor and ------------------------------- administer the servicing of the Company's assets. Such monitoring and administrative services will include, but not be limited to, the following activities: serving as the Company's consultant with respect to the servicing of loans; collection of information pertaining to the mortgage loans and to moneys remitted to the Manager or the Company by servicers; periodic review and evaluation of the performance of each servicer to determine its compliance with the terms and conditions of the servicing agreement; -3- and acting as a liaison between servicers and the Company; review of and recommendations as to fire losses, easement problems and condemnation, delinquency and foreclosure procedures with regard to mortgage loans; review of servicers' delinquency, foreclosures and other reports on mortgage loans; supervising claims filed under any mortgage insurance policies; and enforcing the obligation of any servicer to repurchase mortgage loans with respect thereto. (e) Commercially Reasonable Efforts. The Manager agrees to use -------------------------------- commercially reasonable efforts at all times in performing services for the Company hereunder. SECTION 3. Additional Activities of Manager. Nothing herein shall prevent -------------------------------- the Manager or any of its Affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in, or advisory service to others investing in, any type of real estate investment (including investments which constitute Primary Investments for the Company); provided, however, that the Manager and its subsidiaries will grant a right of first refusal with respect to the Company's Primary Investments on the terms and conditions set forth below. Directors, officers, employees and agents of the Manager or Affiliates of the Manager may serve as directors, officers, employees, agents, nominees or signatories for the Company or any Subsidiary, to the extent permitted by their Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to the Company's Governing Instruments. When executing documents or otherwise acting in such capacities for the Company, such persons shall use their respective titles in the Company. SECTION 4. Right of First Refusal. So long as this Agreement remains in ---------------------- full force and effect, the Manager and its subsidiaries do hereby grant a right of first refusal ("Right of First Refusal") to the Company with respect to real estate investments which constitute Primary Investments for the Company; provided, however, that neither the Manager nor any Affiliate of the Manager is required to provide such Right of First Refusal with respect to Primary Investments that consist of mortgage-backed securities where the mortgage loans collateralizing such mortgage-backed securities were previously owned by the Manager or an Affiliate of the Manager until they were so securitized. In addition, the foregoing Right of First Refusal does not apply to the acquisition of real property by the Manager or an Affiliate in connection with foreclosure (or deed in lieu of foreclosure) on property securing a mortgage loan owned by the Manager or an Affiliate of the Manager. With respect to acquisitions of pools of assets consisting of both Primary Investments and Other Real Estate Related Assets, the Right of First Refusal will only apply to the Primary Investments contained in such pool and it is expressly agreed that the Manager or one of its Affiliates may acquire the non-Primary Assets contained in such pool. Further, from time to time, mortgage lenders or others offer for sale large pools of mortgage loans and real properties pursuant to a competitive bidding process. In such a case, the Manager or its Affiliates may choose an unaffiliated entity with which to submit a joint bid for the pool, as long as the Manager or its Affiliates takes title only to assets as to which it has not given the Company the Right to First Refusal. The parties acknowledge and agree that the Manager and its Affiliates have no obligation to reveal to the Company or its Subsidiaries any business opportunities involving non-Primary Investments and Other Real Estate Related Assets. The Manager agrees that it will not invest in any Primary Assets for its own account or that of one of its Affiliates unless a majority of the Independent Directors of the Company have decided that the Company should not invest in such asset. The Company agrees that it and such Independent Directors shall use their commercially reasonable efforts to make any such decision in sufficient time -4- to allow the Manager or one of its affiliates to bid on and acquire such asset if the Company determines not to invest in such asset. The parties agree that because the market in which the Company expects to purchase assets is characterized by rapid evolution of products and services, and, thus, there may in the future be relationships between the Company, the Manager, and its Affiliates in addition to those described herein, the Company may change its policies in connection with any of the foregoing (including the definition of Primary Investments) with the approval of the majority of the Independent Directors. Except for the acquisition of the Initial Investments (which have already been approved by the Independent Director, the Manager agrees that any Primary Investments or Other Real Estate Related Assets to be acquired by the Company (or one of its Subsidiaries) from the Manager (or one of its Affiliates) shall require the approval of a majority of the Independent Directors of the Company. SECTION 5. Commitments. In order to meet the investment requirements of ----------- the Company, as determined by the Board of Directors from time to time, the Manager agrees at the direction of the Board of Directors to issue on behalf of the Company commitments on such terms as are established by the Board of Directors, including a majority of the Independent Directors, for the purchase of Investments. SECTION 6. Bank Accounts. At the direction of the Board of Directors, the ------------- Manager may establish and maintain one or more bank accounts in the name of the Company or any Subsidiary, and may collect and deposit into any such account or accounts, and disburse funds from any such account or accounts, under such terms and conditions as the Board of Directors may approve; and the Manager shall from time to time render appropriate accountings of such collections and payments to the Board of Directors and, upon request, to the auditors of the Company or any Subsidiary. SECTION 7. Records; Confidentiality. The Manager shall maintain ------------------------ appropriate books of accounts and records relating to services performed hereunder, and such books of account and records shall be accessible for inspection by representatives of the Company or any Subsidiary at any time during normal business hours. The Manager shall keep confidential any and all information obtained in connection with the services rendered hereunder and shall not disclose any such information to nonaffiliated third parties except with the prior written consent of the Board of Directors. SECTION 8. Obligations of Manager. ---------------------- (a) The Manager shall require each seller or transferor of Investments to the Company to make such representations and warranties regarding such Investments as may, in the judgment of the Manager, be necessary and appropriate. In addition, the Manager shall take such other action as it deems necessary or appropriate with regard to the protection of the Company's Investments and other assets. (b) The Manager shall refrain from any action that would adversely affect the status of the Company as a real estate investment trust or exempt from regulations under the Investment Company Act or that, in its sole judgment made in good faith, would violate any law, rule or regulation of any governmental body or agency having jurisdiction over the Company or any Subsidiary or that would -5- otherwise not be permitted by the Company's or Subsidiary's Governing Instruments. If the Manager is ordered to take any such action by the Board of Directors, the Manager shall promptly notify the Board of Directors of the Manager's judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments. Notwithstanding the foregoing, the Manager, its directors, officers, stockholders and employees shall not be liable to the Company, any Subsidiary, the Independent Directors, or the Company's or a Subsidiary's stockholders or partners for any act or omission by the Manager, its directors, officers, stockholders or employees except as provided in Section 11 of this Agreement. (c) Absent written direction from the Board of Directors, the Manager shall use reasonable efforts to comply with the Guidelines, as they may be revised from time to time. SECTION 9. Compensation. ------------ (a) For each calendar quarter (or portion thereof) commencing with the calendar quarter ending June 30, 1998, the Company shall pay to the Manager, for services rendered under this Agreement, a base management fee calculated as a percentage of the Average Invested Assets of the Company for such calendar quarter (pro rated based on the number of days elapsed during any partial calendar quarter) and equal to 1% per annum of the first $1.0 billion of Average Invested Assets, 0.75% of the next $500.0 million of Average Invested Assets, and 0.50% per annum of the Average Invested Assets above $1.5 billion. The term "Average Invested Assets" for any period means the average of the aggregate book value of the assets of the Company, including the assets of all of its direct and indirect subsidiaries, before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period. The Manager will not receive any management fee for the period prior to the sale of the shares of Common Stock offered pursuant to the Company's initial public offering. The base management fee is intended to compensate the Manager for its costs in providing management services to the Company. (b) The Company shall pay to the Manager incentive compensation for each calendar quarter, commencing in the calendar quarter ending June 30, 1998, in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds from Operations (before the incentive fee) of the Company per share of Common Stock (based on the weighted average number of shares outstanding) (b) plus gains (or minus losses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share at the initial public offering and the prices per share at any secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus five percent per annum multiplied by (B) the weighted average number of shares of Common Stock outstanding during such period. "Funds from Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), on the date hereof means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. As used in calculating the Manager's compensation, the term "Ten Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten Year U.S. Treasury Rate cannot be calculated as provided -6- above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. (c) The Manager shall compute the compensation payable under Sections 8(a) and 8(b) of this Agreement within 45 days after the end of each quarter. A copy of the computations made by the Manager to calculate its compensation shall thereafter promptly be delivered to the Board of Directors and, upon such delivery, payment of the compensation earned under Sections 8(a) and 8(b) of this Agreement shown therein shall be due and payable within 60 days after the end of such fiscal quarter. (d) The Manager may charge the Company for any out-of-pocket expenses that the Manager incurs in connection with any due diligence on assets considered for purchase by the Company. Moreover, the Manager shall document the time spent by the Manager's employees in performing such due diligence and shall be entitled to reimbursement for the allocable portion of such employees' salaries and benefits, which shall be reimbursed quarterly. SECTION 10. [RESERVED] SECTION 11. [RESERVED] SECTION 12. Limits of Manager Responsibility. The Manager assumes no -------------------------------- responsibility under this Agreement other than to render the services called for hereunder in good faith and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager, including as set forth in Section 7(b) of this Agreement. The Manager, its directors, officers, stockholders and employees will not be liable to the Company, any Subsidiary, the directors or the Company's or any Subsidiary's stockholders or partners for any acts or omissions by the Manager, its directors, officers, stockholders or employees under or in connection with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. The Company or any Subsidiary shall reimburse, indemnify and hold harmless the Manager, its stockholders, directors, officers and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, (including attorneys' fees) in respect of or arising from any acts or omissions of the Manager, its stockholders, affiliates, directors, officers and employees made in good faith in the performance of the Manager's duties under this Agreement and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties. SECTION 13. No Joint Venture. The Company and the Manager are not ---------------- partners or joint venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. SECTION 14. Term; Termination. This Agreement shall commence on the ----------------- Closing Date and shall continue in force until the second anniversary of the Closing Date, and thereafter, will automatically renew for successive one-year periods unless either party delivers a notice of termination at least 120 days prior to the end of the then current term. -7- Notwithstanding any other provision to the contrary, this Agreement after the second anniversary of the Closing Date, or any extension hereof may be terminated by the Company, or the Company may decline to extend the term of this Agreement as provided above, upon 60 days' written notice, without cause by majority vote of the Independent Directors or by vote of the holders of a majority of the outstanding shares of the Company's common stock; provided that a termination fee, equal to the sum of the base management fee and incentive management fee earned during the twelve months preceding such termination, will be due (and will be in addition to the base management fee and incentive management fee paid or payable during such period). If this Agreement is terminated pursuant to this Section 13, such termination shall be without any further liability or obligation of either party to the other, except as provided in Section 16 of this Agreement. If this Agreement is terminated pursuant to this Section 13, the unvested Options granted to the Manager and directors and executive officers of the Manager pursuant to Section 8(c) shall continue to vest in the manner described in Section 8(c) and in the Company's Stock Option Plan. SECTION 15. Assignments. ----------- (a) Except as set forth in Section 14(b) of this Agreement, this Agreement shall terminate automatically in the event of its assignment, in whole or in part, by the Manager, unless such assignment is consented to in writing by the Company with the consent of a majority of the Independent Directors. Any such assignment shall bind the assignee hereunder in the same manner as the Manager is bound. In addition, the assignee shall execute and deliver to the Company a counterpart of this Agreement naming such assignee as manager. The Management Agreement shall be void upon (i) the sale of all or substantially all of the assets of the Manager, or (ii) the recapitalization, restructuring, merger, consolidation, combination or sale of the stock of the Manager as a result of which WFSG or a direct or indirect subsidiary of WFSG is not the holder of securities representing the majority of the outstanding capital stock entitled to vote in an election of the director of the Manager. This Agreement shall not be assigned by the Company without the prior written consent of the Manager, except in the case of assignment by the Company to another real estate investment trust or other organization which is a successor (by merger, consolidation or purchase of assets) to the Company, in which case such successor organization shall be bound hereunder and by the terms of such assignment in the same manner as the Company is bound hereunder. (b) Notwithstanding any provision of this Agreement, the Manager may subcontract any or all of its responsibilities under Section 2 of this Agreement to any of its Affiliates, which Affiliate shall be approved by the Company's Board of Directors if such Affiliate is not a direct or indirect subsidiary of WFSG, and the Company hereby consents to any such assignment and subcontracting provided, however, that no such arrangement between the Manager and any Affiliate of the Manager shall relieve the Manager of its duties or obligations hereunder. SECTION 16. Termination by the Company for Cause. At the option of the ------------------------------------ Company, this Agreement, or any extension hereof, shall be and become terminated for cause immediately upon 60 days' written notice of termination from a majority of the Independent Directors to the Manager, without payment of any termination fee, if any of the following events shall occur: -8- (a) if the Manager shall breach any provision of this Agreement in any material respect and, after notice of such material breach, shall not cure such violation within 30 days of such notice; or (b) there is entered an order for relief or similar decree or order with respect to the Manager by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager (i) ceases, or admits in writing its inability, to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days. (c) If any of the events specified in Section 15(b) of this Agreement shall occur, the Manager shall give prompt written notice thereof to the Board of Directors upon the happening of such event. SECTION 17. Action Upon Termination. From and after the effective date of ----------------------- termination of this Agreement, pursuant to Sections 13, 14, or 15 of this Agreement, the Manager shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination and, if terminated pursuant to Section 13, the applicable termination fee. Upon such termination, the Manager shall forthwith: (a) pay over to the Company or a Subsidiary all money collected and held for the account of the Company or a Subsidiary pursuant to this Agreement; (b) deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or a Subsidiary; and (c) deliver to the Board of Directors all property and documents of the Company or any Subsidiary then in the custody of the Manager. (d) if the Company terminates this Management Agreement, the Manager may require the Company, at the Company's expense, to register for public resale shares of Common Stock acquired -9- by the Manager or its affiliates within two (2) years of the termination of the Management Agreement. SECTION 18. Release of Money or Other Property Upon Written Request. The ------------------------------------------------------- Manager agrees that any money or other property of the Company or any Subsidiary held by the Manager under this Agreement shall be held by the Manager as custodian for the Company or any Subsidiary, and the Manager's records shall be appropriately marked clearly to reflect the ownership of such money or other property by the Company or such Subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any Subsidiary any money or other property then held by the Manager for the account of the Company or any Subsidiary under this Agreement, the Manager shall release such money or other property to the Company or any Subsidiary within a reasonable period of time, but in no event later than 60 days following such request. The Manager shall not be liable to the Company, any Subsidiary, the directors, or the Company's or a Subsidiary's stockholders or partners for any acts performed or omissions to act by the Company or any Subsidiary in connection with the money or other property released to the Company or any Subsidiary in accordance with this Section. The Company and any Subsidiary shall indemnify the Manager, its directors, officers, stockholders and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager's release of such money or other property to the Company or any Subsidiary in accordance with the terms of this Section 19 of this Agreement. Indemnification pursuant to this provision shall be in addition to any right of the Manager to indemnification under Section 11 of this Agreement. SECTION 19. Representations and Warranties. ------------------------------ (a) The Company and the Operating Partnership hereby represents and warrants to the Manager as follows: (i) The Company is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. The Company does not do business under any fictitious business name. (ii) The Company has the corporate power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required hereunder when executed and -10- delivered hereunder will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. (iii) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the Governing Instruments of, or any securities issued by the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. (b) The Manager hereby represents and warrants to the Company and the Operating Partnership as follows: (i) The Manager is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. (ii) The Manager has the corporate power and authority to execute, deliver and perform this Agreement and all obligations required hereunder and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required hereunder. No consent of any other person including, without limitation, partners and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required hereunder. This Agreement has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized agent of the Manager, and this Agreement constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. (iii) The execution, delivery and performance of this Agreement and the documents or instruments required hereunder, will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the Governing Agreements of, or any securities issued by the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole, and will not result in, -11- or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 20. Notices. Unless expressly provided otherwise herein, all ------- notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (a) If to the REIT: Wilshire Real Estate Investment Trust Inc. 1776 SW Madison St. Portland, Oregon 97205 Attention: President with a copy given in the manner prescribed above, to: James M. Waddington, Esq. Proskauer Rose LLP 1585 Broadway New York, New York 10036 (b) If to the Manager: Wilshire Realty Services Corporation 1776 SW Madison St. Portland, Oregon 97205 Attention: President with a copy given in the manner prescribed above, to: James M. Waddington, Esq. Proskauer Rose LLP 1585 Broadway New York, New York 10036 Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 21 for the giving of notice. SECTION 21. Binding Nature of Agreement; Successors and Assigns. This --------------------------------------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns as provided herein. -12- SECTION 22. Entire Agreement. This Agreement contains the entire ---------------- agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. SECTION 23. Controlling Law. This Agreement and all questions relating to --------------- its validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of New York, without reference to its choice of law principles. SECTION 24. Schedules and Exhibits. All Schedules and Exhibits referred ---------------------- to herein or attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. SECTION 25. Indulgences, Not Waivers. Neither the failure nor any delay ------------------------ on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. SECTION 26. Costs and Expenses. Each party hereto shall bear its own ------------------ costs and expenses (including the fees and disbursements of counsel and accountants) incurred in connection with the negotiations and preparation of and the closing under this Agreement, and all matters incident thereto. SECTION 27. Titles Not to Affect Interpretation. The titles of paragraphs ----------------------------------- and subparagraphs contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. SECTION 28. Execution in Counterparts. This Agreement may be executed in ------------------------- any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. SECTION 29. Provisions Separable. The provisions of this Agreement are -------------------- independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. SECTION 30. Gender. Words used herein regardless of the number and gender ------ specifically 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 requires. -13- SECTION 31. Computation of Interest. Interest will be computed on the ----------------------- basis of a 360-day year consisting of twelve months of thirty days each. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation and the General Partner of Wilshire Real Estate Partnership L.P. By: __________________________________________ Its: _________________________________________ WILSHIRE REALTY SERVICES CORPORATION, a Delaware corporation By: __________________________________________ Its: _________________________________________ -14- Exhibit A WILSHIRE REAL ESTATE INVESTMENT TRUST INC. Form of Guidelines ------------------ The following guidelines set forth certain parameters for the operations of Wilshire Real Estate Investment Trust Inc. (the "Company"): 1. Geographical: Without in any way limiting the ability of the Company ------------ and its advisors to invest in specific assets and once the Company is fully invested, the Company and its advisors will seek, in making investments in real estate assets or real estate related assets, to avoid the concentration of assets in geographic regions. For purposes hereof, unless the Company or its advisors (after reviewing the potential risks to the Company and return on an investment) determine otherwise, "concentration of assets" means more than 50% of the Company's assets being invested in any one geographic region (e.g. a state in the United States or the South-Eastern region of the United Kingdom). 2. Portfolio Composition: Without in any way limiting the ability of the --------------------- Company and its advisors to invest in specific assets and once the Company is fully invested, the Company and its advisors will seek, in making investments in real estate assets or real estate related assets, to maintain a portfolio composition which will generally further the aims of the Company, such as maintaining its status as a real estate investment trust and generating current income and long term gains. 3. Legal and Tax Matters: In making investments in real estate assets or --------------------- real estate related assets, the Company and its advisors will at all times use their respective best efforts to invest in a manner that will enable the Company to satisfy the requirements for being classified as a real estate investment trust for federal tax purposes, to avoid any federal income or excise tax liability imposed by the Internal Revenue Code (the "Code"), and to ensure that neither the Operating Partnership nor any portion thereof will be classified as a "publicly traded partnership" for purposes of section 7704 of the Code or otherwise as an association taxable as a corporation. 4. Transactions with Affiliates: In purchasing investments in real estate ---------------------------- assets or real estate related assets from Affiliates, the Company and its advisors will comply (to the extent provided therein) with the provisions of the Management Agreement between Wilshire Realty Services Corporation and the Company requiring approval of the Independent Directors. Dated: April ___, 1998 -15- EX-10.2 9 PARTNERSHIP AGREEMENT OF WILSHIRE REAL ESTATE Exhibit 10.2 WILSHIRE REAL ESTATE PARTNERSHIP L.P. LIMITED PARTNERSHIP AGREEMENT TABLE OF CONTENTS Page ---- ARTICLE I - FORMATION..................................................... 1 Section 1.1 Name..................................................... 1 Section 1.2 Place of Business; Registered Agent...................... 1 Section 1.3 Term..................................................... 1 Section 1.4 Application of the Act................................... 1 ARTICLE II - INTERPRETIVE PROVISIONS...................................... 2 Section 2.1 Certain Definitions...................................... 2 Section 2.2 Rules of Construction.................................... 10 ARTICLE III - BUSINESS PURPOSE............................................ 11 Section 3.1 Business................................................. 11 Section 3.2 Authorized Activities.................................... 11 ARTICLE IV - CAPITAL CONTRIBUTIONS........................................ 11 Section 4.1 Initial Capital Contributions............................ 11 Section 4.2 Additional Partnership Units............................. 12 Section 4.3 No Third Party Beneficiaries............................. 13 Section 4.4 Return of Capital Account; Interest...................... 13 Section 4.5 Preemptive Rights........................................ 13 Section 4.6 REIT Share Purchases..................................... 13 Section 4.7 Limited Liability........................................ 13 ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS................................. 14 Section 5.1 General.................................................. 14 Section 5.2 Distributions of Net Cash Flow........................... 14 Section 5.3 Distributions of Capital Proceeds........................ 14 Section 5.4 Amounts Withheld......................................... 14 ARTICLE VI - PARTNERSHIP MANAGEMENT....................................... 14 Section 6.1 Management and Control of Partnership Business........... 14 Section 6.2 No Management by Limited Partners; Limitation of Liability............................................... 15 Section 6.3 Limitations on Partners.................................. 16 Section 6.4 Business with Affiliates................................. 16 Section 6.5 Compensation; Reimbursement of Expenses.................. 16 Section 6.6 Liability for Acts and Omissions......................... 17 i Page ---- ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS................... 17 Section 7.1 Books and Records........................................ 17 Section 7.2 Annual Audit and Accounting.............................. 18 Section 7.3 Partnership Funds........................................ 18 Section 7.4 Reports and Notices...................................... 18 Section 7.5 Notification of Changes in Conversion Multiple........... 18 Section 7.6 Tax Matters.............................................. 18 Section 7.7 Withholding.............................................. 19 ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS............... 20 Section 8.1 Transfer by General Partner.............................. 20 Section 8.2 Obligations of a Prior General Partner................... 20 Section 8.3 Additional or Successor General Partner.................. 20 Section 8.4 Restrictions on Transfer and Withdrawal by Limited Partner................................................. 20 Section 8.5 Substituted Limited Partner.............................. 21 Section 8.6 Timing and Effect of Transfers........................... 22 Section 8.7 Additional Limited Partners.............................. 22 Section 8.8 Amendment of Agreement and Certificate................... 22 ARTICLE IX - REDEMPTION................................................... 23 Section 9.1 Right of Redemption...................................... 23 Section 9.2 Timing of Redemption..................................... 23 Section 9.3 Redemption Price......................................... 23 Section 9.4 Assumption of Redemption Obligation...................... 24 Section 9.5 Further Assurances....................................... 24 Section 9.6 Effect of Redemption..................................... 24 ARTICLE X - DISSOLUTION AND LIQUIDATION................................... 24 Section 10.1 Term and Dissolution.................................... 24 Section 10.2 Liquidation of Partnership Assets....................... 25 Section 10.3 Time for Winding Up..................................... 26 ARTICLE XI - AMENDMENTS AND MEETINGS...................................... 26 Section 11.1 Amendment Procedure..................................... 26 Section 11.2 Meetings and Voting..................................... 27 ARTICLE XII - MISCELLANEOUS PROVISIONS..................................... 27 Section 12.1 Title to Property....................................... 27 Section 12.2 Other Activities of Limited Partners.................... 27 Section 12.3 Power of Attorney....................................... 28 Section 12.4 Further Assurances...................................... 29 ii Section 12.5 Titles and Captions...................................... 29 Section 12.6 Applicable Law........................................... 29 Section 12.7 Binding Agreement........................................ 29 Section 12.8 Waiver of Partition...................................... 29 Section 12.9 Counterparts and Effectiveness........................... 29 Section 12.10 Survival of Representations............................. 30 Section 12.11 Entire Agreement........................................ 30 Section 12.12 Securities Law Provisions............................... 30 Section 12.13 Remedies Not Exclusive.................................. 30 EXHIBITS Exhibit 1 - Schedule of Partners Exhibit 2 - Redemption Notice Exhibit 3 - Allocation Provisions Exhibit 4 - Form of Unit Certificate iii WILSHIRE REAL ESTATE PARTNERSHIP L.P. LIMITED PARTNERSHIP AGREEMENT THIS LIMITED PARTNERSHIP AGREEMENT (the "Agreement") of Wilshire Real Estate Partnership L.P. (the "Partnership") is made this day of _______, 1998, by and among WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation, as General Partner and WILSHIRE REAL ESTATE INVESTMENT TRUST, INC., a Maryland Corporation and SMALL CAP INVESTMENTS, LLC, an Oregon limited liability company, as Limited Partners, together with any Persons who or which become Partners in the Partnership in accordance with the terms hereof. NOW, THEREFORE, in consideration of the promises and mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I - FORMATION Section 1.1 Name. The name of the Partnership is WILSHIRE REAL ---------------- ESTATE PARTNERSHIP L.P. Section 1.2 Place of Business; Registered Agent. The principal ------------------------------------------------ office of the Partnership is located at 1776 SW Madison Street, Portland, Oregon 97205 which office may be changed to such other place as the General Partner may from time to time designate. The registered agent for the Partnership in the State of Delaware is Corporation Service Company whose address is 1013 Centre Road, Wilmington, Delaware 19805. Section 1.3 Term. The Partnership shall terminate on December 31, ----------------- 2050 unless sooner terminated as provided in this Agreement or by operation of law. Section 1.4 Application of the Act. The Partnership is a limited ----------------------------------- partnership subject to the provisions of the Act and the terms and conditions set forth in this Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. No Partner has any interest in any Partnership property, and the Partnership Interest of each Partner shall be personal property for all purposes. 1 ARTICLE II - INTERPRETIVE PROVISIONS Section 2.1 Certain Definitions. The following terms have the ------------------------------- definitions hereinafter indicated whenever used in this Agreement with initial capital letters. In addition, certain terms are defined in Exhibit 3 hereto. Act: The Delaware Revised Uniform Limited Partnership Act, as it --- may be amended from time to time, and any successor to such statute. Additional Limited Partner: A person admitted to the Partnership as -------------------------- an Additional Limited Partner in accordance with Section 8.7 hereof and who is shown as such on the books and records of the Partnership. Affiliate: With respect to any referenced Person, (i) such Person or --------- a member of his immediate family; (ii) any Person who directly or indirectly owns, controls or holds the power to vote ten percent (10%) or more of the outstanding voting securities of the Person in question; (iii) any Person ten percent (10%) or more of whose outstanding securities are directly or indirectly owned, controlled by, or held with power to vote by the Person in question; (iv) any Person directly or indirectly controlling, controlled by, or under direct common control with the Person in question; (v) if the Person in question is a corporation, any executive officer or director of such Person or of any corporation directly or indirectly controlling such Person; and (vi) if the Person in question is a partnership, any general partner of such partnership or any Limited Partner owning or controlling ten percent (10%) or more of either the capital or profits interest in such partnership. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. Agreement: This Limited Partnership Agreement and all Exhibits --------- attached hereto, as the same may he amended or restated and in effect from time to time. Assignee: Any Person to whom one or more Partnership Units have been -------- Transferred as permitted under this Agreement, but who has not become a Substituted Limited Partner in accordance with the provisions hereof and who shall have the rights set forth in Section 8.5(B). Associate: Either (i) a corporation, partnership or organization --------- (other than Seller or Investor) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner, if the Associate is a corporation, of 10% or more of any class of equity securities (by vote or value, whichever is more restrictive) of such Associate, and if the Associate is a partnership or organization, of 10% or more in the assets or net profits of the Associate, in both cases pursuant to Section 856(d)(2)(B) of the Code; (ii) any trust or estate which such Person has a beneficial interest of 10% or more in the assets or net profits of such trust or estate pursuant to Section 856(d)(2)(B) of the Code; and (iii) any relative or spouse of such Person who has the same residence as such Person. 2 Bankrupt(cy): Either (i) a referenced Person's making an assignment ------------ for the benefit of creditors; (ii) the filing by a referenced Person of a voluntary petition in bankruptcy; (iii) a referenced Person's being adjudged insolvent or having entered against him an order for relief in any bankruptcy or insolvency proceeding; (iv) the filing by a referenced Person of an answer seeking any reorganization, composition, readjustment, liquidation, dissolution or similar relief under any law or regulation; (v) the filing by a referenced Person of an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of reorganization, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation; or (vi) a referenced Person's seeking, consenting to or acquiescing in the appointment of a trustee, receiver or liquidator for all or substantially all of his property (or court appointment of such trustee, receiver or liquidator). Capital Account: The account maintained by the Partnership for each --------------- Partner described in Exhibit 3 hereto. Capital Contribution: With respect to each Partner, the total amount -------------------- of cash or cash equivalents, or the Gross Asset Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to the terms of this Agreement, including the Capital Contribution made by a predecessor holder(s) of the Interest of such Partner. Capital Proceeds: The net proceeds received by the Partnership (less ---------------- the amount determined by the General Partner as necessary or desired to reinvest in new Partnership Assets) from, or attributable to, (i) any financing obtained by the Partnership after payment of the then-outstanding principal balance and accrued but unpaid interest on liabilities of the Partnership then payable pursuant to the terms thereof from the proceeds of such financing; (ii) the sale or condemnation (other than a temporary taking) of all or substantially all of any Property Interest or the Partnership's interest therein after payment of the then-outstanding principal balance and accrued but unpaid interest on liabilities of the Partnership then payable pursuant to the terms thereof; (iii) the receipt of any proceeds from a policy of title or fire and extended coverage insurance; and (iv) any reserves previously set aside from Capital Proceeds or Capital Contributions which are deemed available for distribution by the General Partner. Cash Payment: The payment to a Redeeming Party of a cash amount ------------ determined by multiplying (i) the number of Partnership Units tendered for redemption by such Redeeming Party pursuant to a validly proffered Redemption Notice by (ii) the Unit Value on the date the Redemption Notice is received by the General Partner by (iii) the Conversion Multiple. Certificate: The Partnership's Certificate of Limited Partnership ----------- filed in the office of the Delaware Secretary of State, as amended from time to time, as required by the terms of this Agreement and the Act. Code: The Internal Revenue Code of 1986, as amended from time to ---- time. 3 Consent: Either the written consent of a Person or the affirmative ------- vote of such Person at a meeting duly called and held pursuant to this Agreement, as the case may be, to do the act or thing for which the consent is required or solicited, or the act of granting such consent, as the context may require. Except as expressly provided otherwise in this Agreement, reference to a requirement for the "Consent" of a Partner shall require the commercially reasonable judgment of such Partner in light of the facts and circumstances, rather than the unfettered discretionary decision of such Partner. Contributed Property: Each property or other asset (excluding cash) -------------------- contributed or deemed contributed to the Partnership (whether as a result of a Code Section 708 termination or otherwise). Contribution Agreement(s): The Contribution Agreement by and among ------------------------- the Partnership, the General Partner and a Property Interest Owner, pursuant to which, among other things, such Property Interest Owner agrees to contribute a Property Interest and such other assets owned by such Property Interest Owner and specified in such agreement to the Partnership in consideration for Partnership Units. Conversion Multiple: The factor applied for converting Partnership ------------------- Units to REIT Shares, which shall initially be 1.0; provided, however, in the event that WREIT (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Multiple shall be adjusted by multiplying the Conversion Multiple by a fraction, the numerator of which shall be the number of REIT Shares issued and outstanding on the record date (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the Record Date for such dividend, distribution, subdivision or combination. In addition, [while Section 6(c) hereof provides that the General Partner shall not directly or indirectly enter into or conduct any business other than in connection with the business of the Partnership and the Ownership of its Partnership Interests therein, if an event were to occur that would significantly affect the economic relationship between a Partnership Unit and a REIT share, the conversion multiple shall also be appropriately adjusted.] Any such adjustment to the conversion multiple shall be determined by the Board of Directors of the General Partner whose determination as to whether an adjustment is necessary and the amount of such adjustment shall be conclusive absent manifest error. Any adjustment to the Conversion Multiple shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Depreciation: As defined in Exhibit 3 to this Agreement. ------------ Fiscal Year: The calendar year or such other twelve (12)-month period ----------- designated by the General Partner. 4 General Partner: Wilshire Real Estate Investment Trust Inc., its --------------- respective successors who or which become Successor General Partner(s) in accordance with the terms of this Agreement. General Partner Interest: A Partnership Interest held by the General ------------------------ Partner that is a general partnership interest. A General Partner Interest may be expressed as a number of Partnership Units. Gross Asset Value: With respect to any asset, the asset's adjusted ----------------- basis for federal income tax purposes, except as follows: (A) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the fair market value of such asset, as agreed to by the contributing Partner and the Partnership and set forth in the Contribution Agreement. (B) The Gross Asset Values of all Partnership Assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, as of the following times: (1) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (2) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership Assets as consideration for an interest in the Partnership; and (3) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (1) and (2) above shall be made only if the General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership. (C) The Gross Asset Value of any Partnership Asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and (D) The Gross Asset Values of Partnership Assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section (C) of Exhibit 3 hereto; provided, however, that Gross Asset Values shall not be adjusted pursuant to this clause (D) to the extent the General Partner determines that an adjustment pursuant to clause (B) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this clause (D). If the Gross Asset Value of an asset has been determined or adjusted pursuant to clauses (A), (B), or (D) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Partnership profits and losses. 5 Gross Receipts: With respect to any Fiscal Year or other accounting -------------- period designated by the General Partner, the sum of all cash receipts of the Partnership, including without limitation, all cash receipts earned from interest and other sums paid with respect to Loans, the rental of commercial space within the Property Interests and from other business operations of the Partnership but excluding tenant security deposits until applied to rent or other charges, but excluding Capital Proceeds and Capital Contributions. Involuntary Withdrawal: As to any (i) individual, such individual's ---------------------- death, incapacity or adjudication of incompetence; (ii) corporation, its dissolution or revocation of its charter (unless such revocation is promptly corrected upon notice thereof); (iii) partnership or limited liability company, the dissolution and commencement of winding up of its affairs; (iv) trust, the termination of the trust (but not the substitution of trustees); (v) estate, the distribution by the fiduciary of the estate's complete interest in the Partnership; and (vi) Partner, the Bankruptcy of such Partner. IPO: IPO means the first sale of REIT Shares by WREIT pursuant to --- WREIT's first effective registration statement for such REIT Shares filed under the Securities Act of 1933, as amended. IRS: The Internal Revenue Service, an agency of the United States --- government. Limited Partner(s): The Limited Partners and any Person subsequently ------------------ admitted to the Partnership as a Limited Partner. Loans: Mortgages, mortgage-backed securities, or other debt ----- financings owned by the Partnership. Net Capital Contributions: As to any Partner on any day, the ------------------------- Partner's Capital Contributions adjusted as follows: (A) Increased by the amount of any Partnership liabilities which, in connection with distributions pursuant to Sections 5.3 and 10.2(A)(3), are assumed by such Partner or are secured by any Partnership Asset distributed to such Partner, and (B) Reduced by the amount of cash and the Gross Asset Value of any Partnership Asset distributed to such Partner pursuant to Sections 5.3 and 10.2(A)(3) and the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any property contributed by such Partner to the Partnership. In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Net Capital Contribution of the transferor to the extent it relates to the transferred interest in the Partnership. 6 Net Cash Flow: Gross Receipts and any other funds deemed available ------------- for distribution by the General Partner, including any amounts previously set aside as reserves or escrows, less Operating and Capital Expenses. Notice: A writing containing the information required by this ------ Agreement to be communicated to a Person and personally delivered to such Person or sent by recognized air courier capable of giving receipt therefor, freight prepaid, to such Person at the last known address of such Person as shown on the books of the Partnership, the date of personal delivery or of the air courier's receipt, as the case may be, being deemed the date of such Notice; provided, however, that any written communication containing such information actually received by a Person shall constitute Notice for all purposes of this Agreement. Facsimile transmission promptly confirmed by original communication delivered as herein provided shall be an acceptable means of notice, with the date of receipt of the facsimile being deemed the date of Notice. Any Partner may change its address or the address to which copies of Notices should be sent by Notice to the other Partners. Operating and Capital Expenses: All expenditures payable by the ------------------------------ Partnership including, without limitation (i) any and all operating expenses, management expenses, taxes and insurance; (ii) principal and interest due on Partnership obligations; (iii) capital expenditures (including loans); (iv) reimbursement to Partners for advances, if any, pursuant to this Agreement; and (v) reserves deemed reasonably necessary by the General Partner. Partners: The General Partner and the Limited Partners as a -------- collective group. The term "Partner" shall mean a General Partner or a Limited Partner. Such terms shall be deemed to include such other Persons who become Partners pursuant to the terms of this Agreement. Partnership: The Delaware limited partnership referred to herein as ----------- Wilshire Real Estate Partnership L.P. as such partnership may from time to time be constituted. Partnership Assets: At any particular time, any assets or property ------------------ (tangible or intangible, choate or inchoate, fixed or contingent) held or owned by the Partnership. Partnership Interest or Interest: As to any Partner, such Partner's -------------------------------- ownership interest in the Partnership, representing a Capital Contribution by either a Limited Partner or a General Partner and including such Partner's right to distributions under this Agreement, and any other rights or benefits which such Partner has in the Partnership, together with any and all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Units. Partnership Unit: A fractional, undivided share of the Partnership ---------------- Interests of all Partners issued pursuant to Section 4.1 hereof. As of the date of this Agreement, the aggregate number of Partnership Units outstanding is 10,001,875. The ownership of Partnership Units may 7 be evidenced by the form of non-transferable, non-negotiable certificate for Partnership Units substantially in the form attached as Exhibit 4. Percentage Interest: As to any Partner, the percentage in the ------------------- Partnership as initially shown opposite the name of such Partner on Exhibit 1 attached hereto, as determined by dividing the Partnership Units then owned by such Partner by the total number of Partnership Units then outstanding, as the same may be adjusted from time to time to reflect the issuance and redemption of Partnership Units in accordance with this Agreement. Person: An individual, or a trust, estate, partnership, association, ------ company or corporation, as such terms are defined in Code Section 7701. Property Interest: Any real estate property, mortgage-backed security ----------------- or loan owned by any Property Interest Owner and contributed to the Partnership pursuant to the Contribution Agreement for such Property Interest. Property Interest Owner(s): Any Person which owns a Property Interest -------------------------- that is being contributed to the Partnership. Record Date: The date established by the General Partner for ----------- distribution of Net Cash Flow pursuant to Section 5.2 hereof, which record date shall be the same as the record date established by WREIT for a distribution to its shareholders of some or all of its portion of such distribution. Redeeming Party: A Limited Partner or Assignee (other than the --------------- General Partner) who tenders Partnership Units for redemption pursuant to a Redemption Notice. Redemption Date: The date for redemption of Partnership Units as set --------------- forth in Section 9.2. Redemption Effective Date: The first date on which a Redeeming Party ------------------------- may elect to redeem Partnership Units, which date shall be twelve (12) months following the date of this Agreement or twelve (12) months after the contribution of a Property Interest pursuant to a Contribution Agreement. Redemption Notice: A Notice to the General Partner by a Redeeming ----------------- Party, substantially in the form attached as Exhibit 2, pursuant to which the Redeeming Party requests the redemption of Partnership Units in accordance with Article IX. Redemption Obligation: The obligation of the Partnership to redeem --------------------- the Partnership Units as set forth in Section 9.1(A). Redemption Restriction: A restriction on the ability of the ---------------------- Partnership to redeem the Partnership Units if, in the opinion of counsel for the General Partner, such exchange would 8 more likely than not (i) affect the Redemption Rights (defined herein), (ii) adversely affect the Limited Partners' rights to receive cash distributions, (iii) alter the Operating Partnership's allocations of income or loss, or (iv) impose on the Limited Partners any obligations to make additional contributions to the capital of the Operating Partnership. REIT Share: A share of common stock representing an ownership ---------- interest in WREIT. REIT Share Rights: Rights to acquire additional REIT Shares issued to ----------------- all holders of REIT Shares, whether in the form of rights, options, warrants or convertible or exchangeable securities, to the extent the same have been issued without additional consideration after the initial acquisition of such REIT Shares. Share Payment: The payment to a Redeeming Party of a number of REIT ------------- Shares determined by multiplying (i) the number of Partnership Units tendered for redemption by such Redeeming Party pursuant to a validly proffered Redemption Notice by (ii) the Conversion Multiple. In the event WREIT grants any REIT Share Rights prior to such conversion and such rights were scheduled to expire after such time, any Share Payment shall include for the Redeeming Party his ratable share of such REIT Share Rights. Subsidiary: With respect to any Person, any corporation or other ---------- entity of which a majority of (i) the voting power of the voting equity securities, or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person. Substituted Limited Partner: That Person or those Persons admitted to --------------------------- the Partnership as substitute Limited Partner(s) in accordance with the provisions of this Agreement. A Substituted Limited Partner, upon his admission as such, shall succeed to the rights, privileges and liabilities of his predecessor in interest as a Limited Partner. Successor General Partner: Any Person who is admitted to the ------------------------- Partnership as substitute General Partner pursuant to this Agreement. A Successor General Partner, upon its admission as such, shall succeed to the rights, privileges and liabilities of its predecessor in interest as a General Partner in accordance with the provisions of the Act. Tax Matters Partner: The General Partner, or such other Partner who ------------------- becomes Tax Matters Partner pursuant to the terms of this Agreement. Transfer: With respect to any Partnership Unit(s), a transaction in -------- which a Partner purports to assign his Partnership Interest to another Person and includes any sale, assignment, gift, pledge, mortgage, exchange, hypothecation, encumbrance or other disposition by law or otherwise; provided, however, the surrender of any Partnership Interest pursuant to Article IX hereof shall not constitute a "transfer" for purposes hereof. Any purported Transfer not made in accordance with the terms of this Agreement shall have no legal effect and shall be null and void ab initio. 9 Unit Value: With respect to any Partnership Unit, the average of the ---------- daily market price for a REIT Share for the ten (10) consecutive trading days immediately preceding the date of receipt of a Redemption Notice by the General Partner. If the REIT Shares are traded on a securities exchange or the NASDAQ National Market System, the market price for each such trading day shall be the closing price on such day or, if no sales take place on such day, the average of the closing bid and asked prices on such day. If the REIT Shares are not traded on a securities exchange or the NASDAQ National Market System, the market price for each such trading day shall be determined by the General Partner, subject to the consent of the Board of Directors of WREIT, using any reasonable method of valuation. If a Share Payment would include any REIT Share Rights, the value of such REIT Share Rights shall be determined by the General Partner using any reasonable method of valuation, taking into account the Unit Value determined hereunder and the factors used to make such determination and the value of such REIT Share Rights shall be included in the Unit Value. Wilshire Realty Services Corporation: a corporation providing ------------------------------------ management services to WREIT or any successor management company selected by the General Partner from time to time. WREIT: Wilshire Real Estate Investment Trust Inc., a Maryland ----- corporation, and General Partner and owner of a majority of the Units issued to the Limited Partners. WREIT intends to qualify for its first taxable year following the IPO, and thereafter, as a real estate investment trust as defined under Code Section 856. Section 2.2 Rules of Construction. The following rules of --------------------------------- construction shall apply to this Agreement: (A) All section headings in this Agreement are for the convenience of reference only and are not intended to qualify the meaning of any section. (B) All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders, the singular shall include the plural, and vice versa, as the context may require. (C) Each provision of this Agreement shall be considered severable from the rest, and if any provision of this Agreement or its application to any Person or circumstances shall be held invalid and contrary to any existing or future law or unenforceable to any extent, the remainder of this Agreement and the application of any other provision to any Person or circumstances shall not be affected thereby and shall be interpreted and enforced to the greatest extent permitted by law so as to give effect to the original intent of the parties hereto. (D) Unless otherwise specifically and expressly limited in the context, any reference herein to a decision, determination, act, action, exercise of a right, power or privilege, or other procedure by the General Partner shall mean and refer to the decision, determination, act, action, exercise or other procedure by the General Partner in its sole and absolute discretion; 10 provided, however, that any transaction between the Partnership and an Affiliate or Associate of the General Partner shall require consent of the Board of Directors of WREIT unless such transaction is required under this Agreement. Notwithstanding the foregoing, such discretion shall reflect the commercially reasonable judgment of the General Partner in light of the facts and circumstances, rather than the unfettered discretionary decision of the General Partner. 11 ARTICLE III - BUSINESS PURPOSE Section 3.1 Business. The business of the Partnership shall be (i) to -------------------- provide mortgage or other financing to borrowers owning real estate; (ii) to acquire, own, develop, operate and, if and when appropriate, sell, real estate and interests, both direct and indirect, in real estate; (iii) to conduct any business that may be lawfully conducted by a limited partnership pursuant to the Act; (iv) to enter into any partnership, joint venture or other relationship to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing; (v) to make loans or other financial accommodations; (vi) to do any of the foregoing with respect to any Affiliate or Subsidiary; and (vii) to do anything necessary or incidental to the foregoing; provided, however, that following the IPO such business shall be limited so as to permit WREIT to elect and maintain its status as a real estate investment trust (unless WREIT elects to no longer qualify as a real estate investment trust). Section 3.2 Authorized Activities. In carrying out the purposes of --------------------------------- the Partnership, but subject to all other provisions of this Agreement, the Partnership is authorized to engage in any kind of lawful activity, and perform and carry out contracts of any kind, necessary or advisable in connection with the accomplishment of the purposes and business of the Partnership described herein and for the protection and benefit of the Partnership; provided that the General Partner shall use its best efforts to prevent the Partnership from taking, or refraining from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of WREIT to qualify and continue to qualify as a real estate investment trust under the Code; (ii) could subject WREIT, the General Partner or the Limited Partners to additional taxes under Code Section 857 or 4981; (iii) ensure that the Partnership will not be classified as a "publicly traded partnership" for purposes of Code Section 7704; or (iv) could violate any law or regulation of any governmental body or agency having jurisdiction over WREIT, the General Partner, the Limited Partners or their securities. Section 3.3 Representations and Warranties by the Parties. --------------------------------------------------------- (A) Each Partner that is an individual represents and warrants to each other Partner that (i) the consummation of the transactions contemplated by this Agreement to be performed by such Partner will not result in a breach or violation of, or a default under, any agreement by which such Partner or any of such Partner's Property Interest is or are bound, or any statute, regulation, order or other law to which such Partner is subject, (ii) such Partner is not a "foreign person" within the meaning of Section 1445(f) of the Code, (iii) such Partner does not own, directly or constructively (determined in accordance with Section 856(d)(5) of the Code), (a) two percent (2%) or more of the total number of shares of all classes of stock, of any corporation from which the General Partner or the Partner, directly or indirectly, derives or is deemed to derive gross income for income tax purposes (any such corporation or other entity from which the General Partner, or the Partner, directly or indirectly, derives or is deemed to derive such gross income hereinafter a "Tenant") or (b) an interest of two percent (2%) or more in enforceable against, such partner in accordance with its terms. 12 (B) Each Partner that is not an individual represents and warrants to each other Partner that (i) all transactions contemplated by this Agreement to be performed by it have been duly authorized by all necessary action, including without limitation, that of its general partner(s), committee(s), trustee(s), beneficiaries, directors and/or shareholder(s), as the case may be, as required (ii) the consummation of such transactions shall not result in a breach or violation of, or a default under, its partnership agreement, trust agreement, charter or by-laws, as the case may be, any agreement by which such Partner or any of such Partner's properties or any of its partners, beneficiaries, trustees or shareholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, trustees, beneficiaries or shareholders, as the case may be, is or are subject, (iii) such Partner is not a "foreign person" within the meaning of Section 1445(f) of the Code, (iv) such Partner does not own, directly or constructively (determined in accordance with Section 856(d)(5) of the Code), (a) two percent (2%) or more of the total combined voting power of all classes of stock entitled to vote, or two percent (2%) or more of the total number of shares of all classes of stock, of any Tenant or (b) an interest of two percent (2%) or more in the assets or net profits of any Tenant and (v) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms. (C) Each Partner represents and warrants that it is an "accredited investor" as defined in Rule 501 promulgated under the Securities Act. Each Partner represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has sufficiently high net worth that it does not anticipate a need for the funds it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment. (D) The representations and warranties contained in Section 3.4(a), 3.4(b) and 3.4(c) hereof shall survive the execution and delivery of this Agreement by each Partner and the dissolution, liquidation and termination of the Partnership. (E) Each Partner hereby acknowledges that no representations as to potential profit, distributions, cash flows, funds from operations or yield, if any, in respect of the Partnership or the General Partner have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, which may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied. 13 ARTICLE IV - CAPITAL CONTRIBUTIONS Section 4.1 Initial Capital Contributions. ----------------------------------------- (A) Simultaneously with the execution of this Agreement, the General Partner and the Limited Partners shall contribute the consideration set forth on Exhibit 1. Exhibit 1 sets forth the initial number of Partnership Units owned by each Partner and the Percentage Interest of each Partner, which Percentage Interest shall be adjusted from time to time by the General Partner to reflect the issuance of additional Partnership Units, the redemption of Partnership Units, additional Capital Contributions and similar events having an effect on a Partner's Percentage Interest. Except as set forth in Section 4.2 (regarding issuance of additional Partnership Units) or Section 7.6 (regarding withholding obligations), no Partner shall be required under any circumstances to contribute to the capital of the Partnership any amount beyond that sum required pursuant to this Article IV. (B) A number of Partnership Units held by the General Partner equal to one percent (1%) of all outstanding Partnership Units shall be deemed to be the General Partnership Interest. Anything in the foregoing Section 4.1(A) or elsewhere in this Agreement notwithstanding, the Partnership Units held by the General Partner shall, at all times, be deemed to be general partnership units and shall constitute the General Partner Interest. Section 4.2 Additional Partnership Units. ---------------------------------------- (A) The General Partner shall be authorized to issue additional limited partnership interests in the form of Partnership Units for any Partnership purpose, at any time or from time to time, to any Partner or other Person (other than the General Partner, except in accordance with Section 4.2(B) below). (B) The Partnership also may from time to time issue to WREIT and/or the General Partner additional Partnership Units or other Partnership Interests in such classes and having such designations, preferences and relative rights (including preferences and rights senior to the existing Limited Partners' Partnership Interests) as shall be determined by the General Partner in accordance with the Act and governing law. Such units may be issued for less than fair market value if WREIT has concluded that such issuance is in the best interest of WREIT and the Partnership. The General Partner and WREIT must contribute the net proceeds or any future offerings of WREIT shares as additional capital to the Partnership in exchange for additional units. Except as provided in Article IX of this Agreement, any such issuance of Partnership Units or Partnership Interests to WREIT or the General Partner shall be conditioned upon (i) the undertaking by WREIT of a related issuance of REIT Shares or other shares of capital stock of WREIT (with such shares having designations, rights and preferences such that the economic rights of the holders of such shares are substantially similar to the rights of the additional Partnership Interests issued to WREIT or the General Partner) and WREIT and/or the General Partner's making a Capital Contribution in an amount equal to the net proceeds raised in the issuance of such shares, or (ii) the issuance by WREIT of REIT Shares under any stock 14 option or bonus plan and WREIT and/or the General Partner's making a Capital Contribution in an amount equal to the exercise price of the option exercised by any employee pursuant to such stock option or other bonus plan. In connection with the issuance of shares by WREIT which are substantially similar to new issuances of Partnership Units, the General Partner is authorized to modify or amend the distributions or allocations hereunder solely to the extent necessary to give effect to the designations, preferences and other rights pertaining to such Partnership Interests. (C) Except in accordance with Article IX of this Agreement, WREIT shall not issue any (i) additional REIT Shares or other capital stock of WREIT, (ii) rights, options or warrants containing the right to subscribe for or purchase REIT Shares, or (iii) securities convertible or exchangeable into REIT Shares (collectively, "Additional REIT Securities") other than to all holders of REIT Shares, pro rata, unless (x) the Partnership issues to WREIT and/or the General Partner (i) Partnership Interests (having such terms as correspond to the terms of such REIT Shares or other shares of capital stock, (ii) rights, options or warrants containing the right to subscribe for or purchase Partnership Interests or (iii) securities convertible or exchangeable into Partnership Interests such that WREIT and/or the General Partner receives an economic interest in the Partnership substantially similar to the economic interest in WREIT represented by the Additional REIT Securities; and (y) WREIT and/or the General Partner contributes the net proceeds from the issuance of the Additional REIT Securities and from the exercise of any rights contained in any Additional REIT Securities to the Partnership. Section 4.3 No Third Party Beneficiaries. The foregoing provisions of ---------------------------------------- this Article IV are not intended to be for the benefit of any creditor of the Partnership or other Person to whom any debts, liabilities or obligations are owed by (or who otherwise has any claim against) the Partnership or any of the Partners (but only to the extent of its right to require the Partnership to comply with Sections 4.1, 4.2 and 4.6), and no such creditor or other Person shall obtain any right under any such foregoing provision against the Partnership or any of the Partners by reason of any debt, liability or obligation (or otherwise). Section 4.4 Return of Capital Account; Interest. Except as otherwise ----------------------------------------------- specifically provided in this Agreement, (i) no Partner shall have any right to withdraw or reduce its Capital Contributions or Capital Account, or to demand and receive property other than cash from the Partnership in return for its Capital Contributions or Capital Account; (ii) no Partner shall have any priority over any other Partners as to the return of its Capital Contributions or Capital Account; (iii) any return of Capital Contributions or Capital Accounts to the Partners shall be solely from the Partnership Assets, and no Partner shall be personally liable for any such return; and (iv) no interest shall be paid by the Partnership on Capital Contributions or on balances in Partners' Capital Accounts. Section 4.5 Preemptive Rights. No Person shall have any preemptive or ----------------------------- similar rights with respect to the issuance or sale of additional Partnership Units. Section 4.6 REIT Share Purchases. If WREIT acquires additional REIT -------------------------------- Shares, the Partnership shall purchase from WREIT that number of Partnership Units determined by 15 dividing the Conversion Multiple to the number of REIT Shares purchased by WREIT at the Conversion Multiple and on the same terms that WREIT purchased such REIT Shares. Section 4.7 Limited Liability. Except as expressly provided in this ----------------------------- Agreement, no Limited Partner (in its capacity as a Limited Partner) shall be personally liable for losses, costs, expenses, liabilities or obligations of the Partnership in excess of its Capital Contribution required under this Article IV. The foregoing shall not affect any liability a Limited Partner may incur if such Limited Partner undertakes additional obligations to the Partnership, the Partners or to third parties in a capacity other than as a Limited Partner. ARTICLE V - ALLOCATIONS AND DISTRIBUTIONS Section 5.1 General. The profits of the Partnership shall be shared, ------------------- and the losses of the Partnership shall be borne, by the Partners as provided in Exhibit 3 hereto. Section 5.2 Distributions of Net Cash Flow. Distributions of Net Cash ------------------------------------------ Flow shall be made to the Partners of record on the Record Date established by the General Partner for the distribution, without regard to the length of time the record holder has been such. Distributions shall be made within 45 days of the end of each calendar quarter (or, at the election of the General Partner on a more frequent basis) in such amounts as may be determined by the General Partner in its sole discretion. Except as otherwise provided herein, Net Cash Flow will be distributed to the Partners, pro rata in accordance with their respective Percentage Interests, and the General Partner will use its best efforts to cause the Partnership to make distributions of Net Cash Flow which are sufficient to enable WREIT to (i) maintain its status as a real estate investment trust under Code Section 856, (ii) avoid the imposition of any tax under Code Section 857, and (iii) avoid the imposition of any excise tax under Code Section 4981. Section 5.3 Distributions of Capital Proceeds. Capital Proceeds will --------------------------------------------- be distributed to the Partners pro rata in accordance with their respective Percentage Interests. Section 5.4 Amounts Withheld. All amounts withheld pursuant to the ---------------------------- Code or any provision of state, local or foreign tax law and Section 7.6 of this Agreement with respect to any allocation, payment or distribution to the Partnership, any General Partner, Limited Partners or Assignees shall, unless otherwise determined by the General Partner, be treated as amounts distributed to such General Partner, any Limited Partner or any Assignee pursuant to Section 5.3 of this Agreement. The General Partner is authorized to withhold from distributions, or with respect to allocations, to the General Partner, any Limited Partners and any Assignee and to pay over to any federal, state, local or foreign government and shall allocate any such amounts to the General Partner, Limited Partner and Assignee with respect to which such amount was withheld. 16 ARTICLE VI - PARTNERSHIP MANAGEMENT Section 6.1 Management and Control of Partnership Business. ---------------------------------------------------------- (A) Except as otherwise expressly provided or limited by the provisions of this Agreement, the General Partner shall have full, exclusive and complete discretion to manage the business and affairs of the Partnership, to make all decisions affecting the business and affairs of the Partnership, and to take all such action as it deems necessary or appropriate to accomplish the purposes of the Partnership as set forth herein. If there shall be more than one (1) General Partner, the vote or determination of the General Partner owning the largest Percentage Interest shall control. Except as set forth in this Agreement, the Limited Partners shall not have any authority, right or power to bind the Partnership, or to manage, or to participate in the management of the business and affairs of the Partnership in any manner whatsoever. Such management shall in every respect be the full and complete responsibility of the General Partner alone as herein provided. Notwithstanding anything contrary in this Agreement, the General Partner may not be removed by the Limited Partners with or without cause. (B) In carrying out the purposes of the Partnership, the General Partner shall be authorized to take all actions it deems necessary and appropriate to carry on the business of the Partnership. Each of the Limited Partners, by execution hereof, agrees that the General Partner is authorized to execute, deliver and perform any agreement and/or transaction on behalf of the Partnership. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the General Partner's direct and indirect shareholders collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation other than Sections 3.2(ii) and 5.2, the tax consequences to Limited Partners, Assignees or substituted Limited Partners) in deciding whether to cause the Partnership to take (or decline to take) any actions which the General Partner has undertaken in good faith on behalf of the Partnership, and that the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions. (C) The General Partner in its capacity as such shall not directly or indirectly enter into or conduct any business other than in connection with the business of the Partnership and the ownership of its Partnership Interests therein. The General Partner and its Affiliates may acquire Limited Partner Interests as provided in Section 4.2(B). Upon acquisition of any Limited Partner Interest, any Affiliate of the General Partner shall have all the rights of a Limited Partner. Section 6.2 No Management by Limited Partners; Limitation of ------------------------------------------------------------ Liability. - --------- (A) Except as otherwise expressly provided in this Agreement, the Limited Partners, in their capacity as limited partners, shall not take part in the day-to-day management, operation or control of the business and affairs of the Partnership or have any right, power or authority to act for or on behalf of or to bind the Partnership or transact any business in the name 17 of the Partnership. The Limited Partners shall have no rights other than those specifically provided herein or granted by law where consistent with a valid provision hereof, and any of the approvals rendered or withheld by the Limited Partners pursuant to this Agreement shall be deemed as consultation or advice to the General Partner in connection with the business of the Partnership and in accordance with the Act, and shall not be deemed as participation by the Limited Partners in the business of the Partnership and are not intended to create any inference that the Limited Partners should be classified as general partners under the Act. (B) The Limited Partners shall have no liability under this Agreement except to the extent expressly provided herein (including with respect to withholding under Section 7.6) or under the Act. (C) The General Partner shall not take any action which would subject a Limited Partner (in its capacity as Limited Partner) to liability as a general partner. Section 6.3 Limitations on Partners. No Partner or Affiliate of a ----------------------------------- Partner shall have any authority to perform (i) any act in violation of any applicable law or any regulation under such law; or (ii) any act without Consent or ratification which is required to be Consented to or ratified pursuant to this Agreement. No action shall be taken by a Partner if it would cause the Partnership to be treated as an association taxable as a corporation for federal income tax purposes. Section 6.4 Business with Affiliates. ------------------------------------ (A) Subject to Section 2.2(D), the General Partner, in its discretion, may cause the Partnership to transact business with WREIT, a Partner or their Affiliates or Subsidiaries for goods or services reasonably required in the conduct of the Partnership's business. (B) In furtherance of Section 6.4(A), the Partnership may lend or contribute to its Subsidiaries on terms and conditions established by the General Partner. In the case of any amount borrowed by the General Partner from a financial institution or other lender to be made available to the Partnership, the loan by the General Partner to the Partnership will be on substantially the same terms and conditions as are applicable to the General Partner's borrowing of such funds. (C) The Partners acknowledge that the WRSC may conduct the day-to-day management, operation and leasing of the Property Interests, or with respect to properties underlying loans owned by the Partnership, subject to the terms of the property management agreement ("Management Agreement") that may be entered into between WREIT and the Management Company with respect to Property Interests. (D) Notwithstanding anything in this Agreement to the contrary, upon request by WREIT, the General Partner shall cause the Partnership to loan WREIT such amount that, 18 when added to the distributions to which WREIT and the General Partner are otherwise entitled hereunder, is reasonably determined by WREIT to be necessary to enable WREIT to qualify for taxation as a "real estate investment trust" as defined in the Code. Any such loan shall bear interest at the rate of ___, shall be prepayable at any time without penalty, and shall be due and payable no later than the __ anniversary thereof. Nothing in this Section 6.4(D) shall be construed to require the Partnership to make a loan to any Partner other than WREIT. Section 6.5 Compensation; Reimbursement of Expenses. In consideration --------------------------------------------------- for the General Partner's services to the Partnership in its capacity as General Partner, and for WREIT's agreements hereunder the Partnership shall pay on behalf of or reimburse to WREIT or the General Partner (i) all expenses of WREIT incurred in connection with the management of the business and affairs of the Partnership, including all executive compensation of employees of the Partnership or WREIT; and (ii) all general, operating or administrative and other expenses incurred by WREIT (including amounts payable to WRSC under the Management Agreement). Except as otherwise set forth in this Agreement, WREIT shall be fully and entirely reimbursed by the Partnership for any and all direct and indirect costs and expenses incurred in connection with (a) the organization and continuation of the Partnership, (b) the preparation and filing of any periodic reports by WREIT, the Partnership or the General Partner, (c) compliance by WREIT, the Partnership and the General Partner with laws, rules and regulations promulgated by any regulatory body and (d) all other general, operating or administrative costs of WREIT incurred in the ordinary course of its business on behalf of the Partnership. In addition, WREIT shall be reimbursed for all expenses incurred by WREIT in connection with (i) the initial offering and registration of REIT Shares by WREIT, and (ii) any other issuance of additional Partnership Interests or REIT Shares. With respect to any such reimbursement, WREIT or the General Partner, as the case may be, shall present the Partnership with such invoices or allocations as are necessary to substantiate such costs and expenses. Section 6.6 Liability for Acts and Omissions. -------------------------------------------- (A) Neither WREIT, the General Partner, nor its officers, directors, employees and agents (together, the "Indemnified Parties"), shall be liable, responsible or accountable in damages or otherwise to the Partnership or any of the Partners for any act or omission performed or omitted in good faith on behalf of the Partnership which the Indemnified Party reasonably believed to be within the scope of the authority granted by this Agreement and in the best interests of the Partnership, provided such act or omission is in good faith and with such care as an ordinarily prudent person in a like position would use under similar circumstances. The Indemnified Parties shall nevertheless be liable, responsible or accountable for actual fraud, gross negligence or intentional misconduct. (B) The Partnership shall indemnify and make advances for expenses to the Indemnified Parties to the fullest extent permitted under Section 17-108 of the Act (to the extent of available assets, but without the requirement that any Partner make additional Capital Contributions for this purpose) against any loss or damage incurred by the General Partner by 19 reason of any act or omission performed or omitted by it or any Indemnified Party which is consistent with the first sentence of Section 6.6(A) above. (C) WREIT shall indemnify and hold harmless the Partnership and the Partners against any damage or loss incurred by the Partnership or Partners by reason of its fraud, gross negligence or intentional misconduct with respect to the Partnership or the Property Interests. ARTICLE VII - ADMINISTRATIVE, FINANCIAL AND TAX MATTERS Section 7.1 Books and Records. The General Partner shall maintain at ----------------------------- the principal office of the Partnership full and accurate books of the Partnership showing all receipts and expenditures, assets and liabilities, profits and losses, names and current addresses of Partners, and all other records necessary for recording the Partnership's business and affairs. All Partners and their duly authorized representatives shall have the right to inspect and copy any or all of the Partnership's books and records, including books and records necessary to enable a Partner to defend any tax audit or related proceeding, during reasonable hours upon three (3) business days Notice to the General Partner. The Limited Partners shall have, upon written demand and at such Limited Partner's expense, the right to receive true and complete information regarding Partnership matters to the extent required under (and subject to the limitations of) Delaware law. Section 7.2 Annual Audit and Accounting. The books and records of the --------------------------------------- Partnership shall be kept for financial and tax reporting purposes on the accrual basis of accounting in accordance with generally accepted accounting principles ("GAAP"). The accounts of the Partnership shall be reviewed or compiled annually by a nationally recognized accounting firm of independent public accountants selected by the General Partner (the "Independent Accountants"). Section 7.3 Partnership Funds. The General Partner shall have ----------------------------- responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in its direct or indirect possession or control. All funds of the Partnership not otherwise invested shall be deposited in one or more accounts maintained in such banking institutions or otherwise invested as the General Partner shall determine, and withdrawals shall be made only in the regular course of Partnership business on such signatures as the General Partner may, from time to time, determine. Section 7.4 Reports and Notices. The General Partner shall provide ------------------------------- all Partners with the following reports no later than the dates indicated or as soon thereafter as circumstances permit: 20 (A) By March 31 of each year, IRS Form 1065 and Schedule K-1, or similar forms as may be required by the IRS, stating each Partner's allocable share of income, gain, loss, deduction or credit for the prior Fiscal Year; (B) Within ninety (90) days after the end of each of the first three (3) fiscal quarters, as of the last day of the fiscal quarter, a report containing unaudited financial statements of the Partnership, or of WREIT if such statements are prepared solely on a consolidated basis with WREIT, and such other information as may be legally required or determined to be appropriate by WREIT; and (C) Within one hundred twenty (120) days after the end of each Fiscal Year, as of the close of the Fiscal Year, an annual report containing the financial statements of the Partnership, or of WREIT if such statements are prepared solely on a consolidated basis with WREIT, presented in accordance with GAAP by the Independent Accountants. Section 7.5 Notification of Changes in Conversion Multiple. The ---------------------------------------------------------- Partnership shall notify each Limited Partner in writing of any changes made to the Conversion Multiple within ten (10) business days of the date such change becomes effective. Section 7.6 Tax Matters. ----------------------- (A) The General Partner shall be designated the Tax Matters Partner of the Partnership for federal income tax matters pursuant to Code Section 6223(c)(3). The Tax Matters Partner is authorized and required to represent the Partnership (at the expense of the Partnership) in connection with all examinations of the affairs of the Partnership by any federal, state or local tax authorities, including any resulting administrative and judicial proceedings, and to expend funds of the Partnership for professional services and costs associated therewith. The Tax Matters Partner shall deliver to the Limited Partners within ten (10) business days of the receipt thereof a copy of any notice or other communication with respect to the Partnership received from the IRS (or other governmental tax authority), or any court, in each case with respect to any administrative or judicial proceeding involving the Partnership. The Partners agree to cooperate with each other in connection with the conduct of all proceedings pursuant to this Section 7.6(A). (B) The Tax Matters Partner shall receive no compensation for its services in such capacity. If the Partnership incurs any costs related to any tax audit, declaration of any tax deficiency or any administrative proceeding or litigation involving any Partnership tax matter, such amount shall be an expense of the Partnership and the Tax Matters Partner shall be entitled to full reimbursement therefor. (C) The General Partner shall cause to be prepared all federal, state and local income tax returns required of the Partnership at the Partnership's expense. 21 (D) Except as set forth herein, the General Partner shall determine whether to make (and, if necessary, revoke) any tax election available to the Partnership under the Code or any state tax law; provided however, upon the request of any Partner the General Partner shall make the election under Code Section 754 and the Treasury Regulation promulgated thereunder. The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership in accordance with the provisions of Code Section 709. Section 7.7 Withholding. Each Partner hereby authorizes the ----------------------- Partnership to withhold from or pay to any taxing authority on behalf of such Partner any tax that the General Partner determines the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Partner. Any amount paid to any taxing authority which does not constitute a reduction in the amount otherwise distributable to such Partner pursuant to Section 5.4 shall be treated as a loan from the Partnership to such Partner, which loan shall bear interest at the "prime rate" as published from time to time in The Wall Street Journal plus two (2) percentage points, and shall be repaid within ten (10) business days after request for repayment from the General Partner. The obligation to repay any such loan shall be secured by such Partner's Partnership Interest and each Partner hereby grants the Partnership a security interest in his Partnership Interest for the purposes set forth in this Section 7.7, this Section 7.7 intending to serve as a security agreement for purposes of the Uniform Commercial Code. Each Partner agrees to take such reasonable actions as the General Partner may request to perfect the security interest granted hereby. In the event any Partner fails to repay any deemed loan pursuant to this Section 7.7, the Partnership shall be entitled to avail itself of any rights and remedies it may have. Furthermore, upon the expiration of ten (10) business days after demand for payment, the General Partner shall have the right to make the payment to the Partnership on behalf of the defaulting Partner and thereupon be subrogated to the rights of the Partnership with respect to such defaulting Partner. ARTICLE VIII - TRANSFER OF INTERESTS; ADMISSION OF PARTNERS Section 8.1 Transfer by General Partner. Subject to Section 8.3 --------------------------------------- below, the General Partner may not voluntarily withdraw or Transfer all or any portion of its General Partner Interest, except that, subject to compliance with subsections (A) and (B) of Section 8.3, the General Partner may, without consent of the Limited Partners other than WREIT, transfer its General Partner Interest to WREIT. Section 8.2 Obligations of a Prior General Partner. Upon an -------------------------------------------------- Involuntary Withdrawal of the General Partner and the subsequent Transfer of the General Partner Interest, such General Partner shall (i) remain liable for all obligations and liabilities (other than Partnership liabilities payable solely from Partnership Assets) incurred by it as General Partner before the effective date of such event, and (ii) pay all costs associated with the admission of its Successor General Partner. However, such General Partner who withdraws shall be free of and held harmless by the Partnership against any obligation or liability incurred on account of the 22 activities of the Partnership from and after the effective date of such event, except as provided in this Agreement. Section 8.3 Additional or Successor General Partner. A successor to --------------------------------------------------- all of a General Partner's Interest who is proposed to be admitted to the Partnership as a Successor General Partner shall be admitted as the General Partner, effective upon the Transfer, with the Consent of the General Partner, or if there is no remaining General Partner, with the Consent of a majority in interest of the remaining Partners (measured by the relative number of Partnership Units owned by each). Any such additional or successor general partner shall carry on the business of the Partnership without dissolution. In addition, the following conditions must be satisfied: (A) The Person shall have accepted and agreed to be bound by all the terms and provisions of this Agreement, by executing a counterpart thereof and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner; and (B) An amendment to this Agreement evidencing the admission of such Person as a General Partner shall have been executed by all General Partners and an amendment to the Certificate shall have been filed for recordation as required by the Act. Section 8.4 Restrictions on Transfer and Withdrawal by Limited -------------------------------------------------------------- Partner. - ------- (A) Subject to the provisions of Section 8.4(D), no Limited Partner may Transfer all or any portion of his Partnership Interest without first obtaining the Consent of the General Partner, which Consent may be granted or withheld in the sole and absolute discretion of the General Partner. Any such purported transfer undertaken without such Consent shall be considered to be null and void ab initio and shall not be given effect. (B) No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer of all of his Partnership Units pursuant to this Article VIII or pursuant to a redemption of all of his Partnership Units pursuant to Article IX of this Agreement. Upon the permitted Transfer or redemption of all of a Limited Partner's Partnership Units, such Limited Partner shall cease to be a Limited Partner. (C) Upon the Involuntary Withdrawal of any Limited Partner (which shall under no circumstance cause the dissolution of the Partnership), the executor, administrator, trustee, guardian, receiver or conservator of such Limited Partner's estate shall succeed to those rights of the Limited Partner prior to such Involuntary Withdrawal for the purpose of settling the affairs of the Limited Partner subject to the Involuntarily Withdrawal. Any Transfer of Partnership Units, including Transfers by operation of law, shall be effective only upon receiving Consent or the General Partner. 23 (D) A Limited Partner may Transfer, with the Consent of the General Partner, all or a portion of his Partnership Units to (a) a parent or parents, spouse, natural or adopted descendant or descendants, spouse of such a descendant, or brother or sister; (b) a corporation controlled by a Person or Persons named in (a) above; or (c) if the Limited Partner is an entity, its beneficial owners; and the General Partner shall grant its Consent to any Transfer pursuant to this Section 8.4(D) unless such Transfer, in the reasonable judgment of the General Partner, would cause (or have the potential to cause) WREIT to (i) have more than fifty percent (50%) in value of its outstanding stock owned, directly or indirectly, by or for not more than five (5) Persons; (ii) have its outstanding stock held by less than 100 persons (determined without reference to rules of attribution); (iii) be deemed to be "closely held' within the meaning of Code Section 856(h); or (iv) own, actually or constructively, 10% or more of the ownership interests in a tenant of WREIT, in which case the General Partner shall have the absolute right to refuse to permit such Transfer, and any purported Transfer in violation of this Section 8.4(D) shall be null and void ab initio. (E) No Transfer of any Limited Partner's Partnership Units shall be made if such Transfer would (i) in the opinion of Partnership counsel, cause the Partnership be treated as an association taxable as a corporation (rather than a partnership) for federal income tax purposes; (ii) be effected through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Code Section 7704; (iii) in the opinion of Partnership counsel, violate the provisions of applicable securities laws; or (iv) violate the terms of (or result in a default or acceleration under) any law, rule, regulation, agreement or commitment binding on the Partnership. Section 8.5 Substituted Limited Partner. --------------------------------------- (A) No transferee shall become a Limited Partner in place of his assignor unless and until the following conditions have been satisfied: (1) The assignor and transferee file a Notice or other evidence of Transfer and such other information reasonably required by the General Partner, including without limitation, names, addresses and telephone numbers of the assignor and transferee; (2) The transferee executes, adopts and acknowledges this Agreement, or a counterpart hereto, and such other documents as may be reasonably requested by the General Partner, including without limitation, all documents necessary to comply with applicable tax and/or securities rules and regulations; (3) The assignor or transferee pays all costs and fees incurred or charged by the Partnership to effect the Transfer and substitution; and 24 (4) The assignor or transferee obtains the written Consent of the General Partner, which may be given or withheld in its sole and absolute discretion. (B) If a transferee of a Limited Partner does not become a Limited Partner pursuant to Section 8.5(A), such transferee shall be an Assignee and shall not have any rights to require any information on account of the Partnership's business, to inspect the Partnership's books, to participate in the management or operation of the Partnership, or to vote or otherwise take part in the affairs of the Partnership (such Partnership Units being deemed to have been voted in the same proportion as all other Partnership Units held by Limited Partners have been voted). Such Assignee shall be entitled, however, to all the rights of an assignee of a limited partnership interest under the Act. Any Assignee wishing to Transfer the Partnership Units acquired shall be subject to the restrictions set forth in this Article VIII. Section 8.6 Timing and Effect of Transfers. Unless the General ------------------------------------------ Partner agrees otherwise, Transfers under this Article VIII may only be made as of the first day of a fiscal quarter of the Partnership. Upon any Transfer of a Partnership Interest in accordance with this Article VIII or redemption of a Partnership Interest in accordance with Article IX of this Agreement, the Partnership shall allocate all items of profit and loss between the transferor Partner and the transferee Partner in accordance with Code Section 706(d). The transferor Partner shall have the right to receive all distributions as to which the Record Date precedes the date of Transfer and the transferee Partner shall have the right to receive all distributions thereafter. Section 8.7 Additional Limited Partners. Other than in accordance --------------------------------------- with the transactions specified in the Contribution Agreement, after the initial execution of this Agreement and the admission to the Partnership of the Limited Partners, any Person making a Capital Contribution to the Partnership in accordance herewith shall be admitted as an Additional Limited Partner only (i) with the Consent of the General Partner, and (ii) upon execution, adoption and acknowledgment of this Agreement, or a counterpart hereto, and such other documents as may be reasonably requested by the General Partner, including without limitation, the power of attorney required under Section 12.3. Upon satisfaction of the foregoing requirements, such Person shall be admitted as an Additional Limited Partner effective on the date upon which the name of such Person is recorded on the books of the Partnership. Section 8.8 Amendment of Agreement and Certificate. Upon any -------------------------------------------------- admission of a Person as a Partner to the Partnership, the General Partner shall take all necessary steps to amend this Agreement to reflect such admission, including amending Exhibit 1 to reflect the name, address, number of Partnership Units and percentage interest of such Substituted Limited Partner, and, if required by the Act, to cause to be filed an amendment to the Certificate. 25 ARTICLE IX - REDEMPTION Section 9.1 Right of Redemption. ------------------------------- (A) Subject to any restriction on WREIT (including, but not limited to those set forth in its charter), the laws governing WREIT or otherwise (a "Redemption Restriction"), beginning on the Redemption Effective Date, during the four 30-day periods immediately following the filing with the Securities and Exchange Commission by WREIT of its annual report on Form 10-K or quarterly reports on Form 10-Q or during such periods as the Partnership may otherwise determine, each Redeeming Party shall have the right to cause the Partnership to redeem all or a portion of the Partnership Units held by such Redeeming Party by providing the General Partner with a Redemption Notice. A Limited Partner may not invoke its rights under this Article IX with respect to fewer than 100 Partnership Units or an integral multiple thereof or, if such Limited Partner holds fewer than 100 Partnership Units, all of the Partnership Units held by such Limited Partner. Upon the General Partner's receipt of a Redemption Notice from a Redeeming Party, the Partnership shall be obligated (subject to the existence of any Redemption Restriction) to redeem the Partnership Units from such Redeeming Party (the "Redemption Obligation"). (B) Upon receipt of a Redemption Notice from a Redeeming Party, the General Partner shall either (i) cause the Partnership to redeem the Partnership Units tendered in the Redemption Notice, (ii) assume the Redemption Obligation, as set forth in Section 9.4, or (iii) provide written Notice to the Redeeming Party of any Redemption Restriction. Section 9.2 Timing of Redemption. The Redemption Obligation (or the -------------------------------- obligation to provide Notice of a Redemption Restriction if one exists) shall mature on the date which is seven (7) business days after the receipt by the General Partner of a Redemption Notice from the Redeeming Party (the "Redemption Date"). Section 9.3 Redemption Price. On or before the Redemption Date, the ---------------------------- Partnership (or the General Partner if it elects pursuant to Section 9.4) shall deliver to the Redeeming Party, in the sole and absolute discretion of the General Partner either (i) a Share Payment or (ii) a Cash Payment. In order to enable the Partnership to effect a redemption by making a Share Payment pursuant to this Section 9.3, the General Partner in its sole and absolute discretion may direct WREIT to issue additional REIT Shares to the Partnership in exchange for the issuance to WREIT and/or the General Partner of Partnership Units determined by applying the Conversion Multiple to the number of REIT Shares issued. Notwithstanding the foregoing provisions of this Article IX, a Redeeming Party shall not receive a Share Payment in satisfaction of its redemption right if, in the opinion of counsel for the General Partner, such exchange would more likely than not (i) affect the Redemption Rights (as defined below), (ii) adversely affect the Limited Partners' rights to receive cash distributions, (iii) alter the Operating Partnership's allocations of income or loss, or (iv) impose on the Limited Partners any obligations to make additional contributions to the capital of the Operating Partnership. WREIT shall at all times reserve and keep available out of its authorized but unissued REIT Shares, solely for the purpose 26 of effecting the exchange of Partnership Units for REIT Shares, such number of REIT shares as shall from time to time be sufficient to effect the conversion of all outstanding Partnership Units, and the exercise or conversion of all other rights to acquire REIT Shares. Section 9.4 Assumption of Redemption Obligation. Upon receipt of a ----------------------------------------------- Redemption Notice, the General Partner, in its sole and absolute discretion, shall have the right to assume the Redemption Obligation of the Partnership. In such case, the General Partner shall be substituted for the Partnership for all purposes of this Article IX, and, upon acquisition of the Partnership Units tendered by the Redeeming Party pursuant to the Redemption Notice shall be treated for all purposes of this Agreement as the owner of such Partnership Units. In such case, the transaction shall be treated for federal income tax purposes by the Partnership, the General Partner and the Redeeming Party as a sale by the Redeeming Party as seller to the General Partner as purchaser. Section 9.5 Further Assurances. Each party to this Agreement agrees ------------------------------ to execute any documents deemed reasonably necessary by the General Partner to evidence the issuance of any Share Payment to a Redeeming Party. Section 9.6 Effect of Redemption. Upon the satisfaction of the -------------------------------- Redemption Obligation by the Partnership or the General Partner, as the case may be, the Redeeming Party shall have no further right to receive any Partnership distributions in respect of the Partnership Units so redeemed. If the Redeeming Party receives a Cash Payment, the Redeeming Party's Units shall be canceled upon receipt of the Cash Payment. If the Redeeming Party receives a Share Payment, the Units will not be canceled, but will be transferred to WREIT. 27 ARTICLE X - DISSOLUTION AND LIQUIDATION Section 10.1 Term and Dissolution. The Partnership commenced as of the --------------------------------- date of filing of the Certificate, and shall continue until December 31, 2050, or until dissolution occurs prior to that date for any one of the following reasons: (A) An Involuntary Withdrawal of a sole remaining General Partner unless, within ninety (90) days after such event of withdrawal, a majority in interest of the remaining Partners (measured by the relative number of Partnership Units owned by each) agree in writing to the continuation of the Partnership and to the appointment of a Successor General Partner; (B) Entry of a decree of judicial dissolution of the Partnership under the Act; or (C) The sale, exchange or other disposition of all or substantially all of the Partnership Assets. (D) Merger, bankruptcy or insolvency of the General Partner. (E) Election to dissolve by a majority of the Limited Partners and the General Partner. Section 10.2 Liquidation of Partnership Assets. ----------------------------------------------- (A) In the event of dissolution pursuant to Section 10.1, the Partnership shall continue solely for purposes of winding up the affairs of, achieving a final termination of and satisfaction of the creditors of the Partnership. The General Partner (or, if there is no General Partner remaining, any Person elected by a majority in interest of the Limited Partners (the "Liquidator")) shall be responsible for oversight of the winding up and dissolution of the Partnership. The Liquidator shall obtain a full accounting of the assets and liabilities of the Partnership, and such Partnership Assets shall be liquidated (including, at the discretion of the Liquidator, in exchange, in whole or in part, for REIT Shares) as promptly as the Liquidator is able to do so without any undue loss in value, with the proceeds therefrom applied and distributed in the following order: (1) First, to the discharge of Partnership debts and liabilities to creditors other than Partners; (2) Second, to the discharge of Partnership debts and liabilities to the Partners; and 28 (3) The balance, if any, to the Partners in accordance with their positive Capital Account balances as determined after giving effect to all Capital Account adjustments for such year. (B) In accordance with Section 10.2(A), the Liquidator shall proceed without any unnecessary delay to sell and otherwise liquidate the Partnership Assets; provided, however, that if the Liquidator shall determine that an immediate sale of part or all of the Partnership Assets would cause undue loss to the Partners, the Liquidator may defer the liquidation except (i) to the extent provided by the Act or (ii) as may be necessary to satisfy the debts and liabilities of the Partnership to Persons other than the Partners. (C) If, in the sole and absolute discretion of the Liquidator, there are Partnership Assets that the Liquidator will not be able to liquidate, or if the liquidation of such assets would result in undue loss to the Partners, the Liquidator may distribute such Partnership Assets to the Partners in kind, in lieu of cash, as tenants-in-common in accordance with the provisions of Section 10.2(A). The foregoing notwithstanding, such in-kind distributions shall only be made if in the Liquidator's good faith judgment that is in the best interest of the Partners. (D) Upon the complete liquidation and distribution of the Partnership Assets, the Partners shall cease to be Partners of the Partnership, and the Liquidator shall execute, acknowledge and cause to be filed all certificates and notices required by law to terminate the Partnership. Upon the dissolution of the Partnership pursuant to Section 10.1, the Liquidator shall cause to be prepared, and shall furnish to each Partner, a statement setting forth the assets and liabilities of the Partnership. Promptly following the complete liquidation and distribution of the Partnership Assets, the Liquidator shall furnish to each Partner a statement showing the manner in which the Partnership Assets were liquidated and distributed. Section 10.3 Time for Winding Up. Anything in this Article X -------------------------------- notwithstanding, a reasonable time shall be allowed for the orderly winding up of the business and affairs of the Partnership and the liquidation of the Partnership Assets in order to minimize any potential for losses as a result of such process. During the period of winding up, this Agreement shall remain in full force and effect and shall govern the rights and relationships of the Partners inter se. ARTICLE XI - AMENDMENTS AND MEETINGS Section 11.1 Amendment Procedure. -------------------------------- (A) Amendments to this Agreement may be proposed by the General Partner. A proposed amendment will be adopted and become effective only if it receives the Consent of a majority in interest of the Limited Partners (measured by the relative number of Partnership Units owned by each); provided, however, no such amendment shall be adopted if it would (i) convert a Limited Partner's Interest in the Partnership into a General Partner Interest; (ii) increase the liability of a Limited Partner under this Agreement; (iii) except as otherwise permitted in this 29 Agreement, alter the Partners' rights to distributions set forth in Article V; (iv) alter or modify any aspect of the Partners' rights with respect to redemption of Partnership Units; (v) cause the early termination of the Partnership (other than pursuant to the terms hereof); or (vi) amend this Section 11.1(A), in each case without the Consent of each Partner adversely affected thereby. In connection with any proposed amendment of this Agreement requiring Consent, the General Partner shall either call a meeting to solicit the vote of the Partners or seek the written vote of the Partners to such amendment. In the case of a request for a written vote, the General Partner shall be authorized to impose such reasonable time limitations for response, but in no event less than ten (10) days, with the failure to respond being deemed a vote consistent with the vote of the General Partner. (B) Subject to the foregoing, amendments may be made to this Agreement by the General Partner, without the Consent of any Limited Partner, to (i) add to the representations, duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein; (ii) cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provision herein or make any other provisions with respect to matters or questions arising hereunder which will not be inconsistent with any other provision hereof; (iii) reflect the admission, substitution, termination or withdrawal of Partners in accordance with this Agreement; (iv) satisfy any requirements, conditions or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or court or contained in federal or state law; (v) to set forth the rights, powers, duties and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.2 hereof; or (vi) to reflect such changes as are reasonably necessary for WREIT to maintain its status as a REIT. The General Partner shall notify the Limited Partners whenever it exercises its authority pursuant to this Section 11.1(B). (C) Within ten (10) days of the making of any proposal to amend this Agreement, the General Partner shall give all Partners Notice of such proposal (along with the text of the proposed amendment and a statement of its purposes). Section 11.2 Meetings and Voting. -------------------------------- (A) Meetings of Partners may be called by the General Partner. The General Partner shall give all Partners Notice of the purpose of such proposed meeting not less than three (3) days nor more than thirty (30) days prior to the date of the meeting. Meetings shall be held at a reasonable time and place selected by the General Partner. Whenever the vote or Consent of Partners is permitted or required hereunder, such vote or Consent shall be requested by the General Partner and may be given by the Partners in the same manner as set forth for a vote with respect to an amendment to this Agreement in Section 11.1(A). (B) Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a Consent setting forth the action to be taken is signed by the Partners owning Percentage Interests required to vote in favor of such action, which Consent may be evidenced in one or more instruments. Consents need not be solicited from any other 30 Partner if the Consent of a sufficient number of Partners has been obtained to take the action for which such solicitation was required. (C) Each Limited Partner may authorize any Person(s) to act for him by proxy on all matters on which a Limited Partner may participate. Every proxy (i) must be signed by the Limited Partner or his attorney-in-fact; (ii) shall expire eleven (11) months from the date thereof unless the proxy provides otherwise; and (iii) shall be revocable at the discretion of the Limited Partner granting such proxy. ARTICLE XII - MISCELLANEOUS PROVISIONS Section 12.1 Title to Property. All property owned by the ------------------------------ Partnership, whether real or personal, tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually, shall have any ownership of such property. The Partnership may hold any of its assets in its own name or in the name of its nominee, which nominee may be one or more individuals, corporations, partnerships, trusts or other entities. Section 12.2 Other Activities of Limited Partners. Except as ------------------------------------------------- expressly provided otherwise in this Agreement or in any other agreement entered into by a Limited Partner or any Affiliate of a Limited Partner and the Partnership, the General Partner or any Subsidiary of the Partnership or the General Partner, any Affiliate of the General Partner, any Limited Partner or any Affiliate of any Limited Partner may engage in, or possess an interest in, other business ventures of every nature and description, independently or with others, including without limitation, real estate business ventures, whether or not such other enterprises shall be in competition with any activities of the Partnership, the General Partner or the Subsidiary, and neither the Partnership, the General Partner, such Subsidiary nor the other Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. Section 12.3 Power of Attorney. ------------------------------ (A) Each Limited Partner hereby irrevocably appoints and empowers the General Partner (which term shall include the Liquidator, in the event of a liquidation, for purposes of this Section 12.3) and each of its authorized officers and attorneys-in-fact with full power of substitution as his true and lawful agent and attorney-in-fact, with full power and authority in his name, place and stead to: (1) Make, execute, acknowledge, publish and file in the appropriate public offices (a) any duly approved amendments to the Certificate pursuant to the Act and to the laws of any state in which such documents are required to be filed; (b) any certificates, instruments or documents as may be required by, or may be appropriate under, the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business; (c) any other instrument which may 31 be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems advisable to file; (d) any documents which may be required to effect the continuation of the Partnership, the admission, withdrawal or substitution of any Partner pursuant to Article VIII of this Agreement, the dissolution and termination of the Partnership pursuant to Article X of this Agreement, or the surrender of any rights or the assumption of any additional responsibilities by the General Partner; (e) any document which may be required to effect an amendment to this Agreement to correct any mistake, omission or inconsistency, or to cure any ambiguity herein, to the extent such amendment is permitted by Section 11.1(B) of this Agreement; and (f) all instruments (including this Agreement and amendments and restatements hereof) relating to the determination of the rights, preferences and privileges of any class or series of Partnership Units issued pursuant to Section 4.2(B) of this Agreement; and (2) Sign, execute, swear to and acknowledge all voting ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole discretion of the General Partner, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement and/or appropriate or necessary, in the sole discretion of the General Partner, to effectuate the terms or intent of this Agreement. (B) Nothing herein contained shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article XI of this Agreement or as may be otherwise expressly provided for in this Agreement. (C) The foregoing grant of authority (i) is a special power of attorney, coupled with an interest, and shall survive the Involuntary Withdrawal of any Partner and shall extend to such Partner's heirs, successors, assigns and personal representatives; (ii) may be exercised by the General Partner for each and every Partner acting as attorney-in-fact for each and every Partner; and (iii) shall survive the Transfer by a Limited Partner of all or any portion of its Partnership Interest and shall be fully binding upon such transferee; except that the power of attorney shall survive such assignment with respect to the assignor Limited Partner for the sole purpose or enabling the General Partner to execute, acknowledge and file any instrument necessary to effect the admission of the transferee as a Substitute Limited Partner. Each Partner hereby agrees to be bound by any representations made by the General Partner, acting in good faith pursuant to such power of attorney. Each Partner shall execute and deliver to the General Partner, within fifteen (15) days after receipt of the General Partner's request therefor, such further designations, powers of attorney and other instruments as the General Partner deems necessary to effectuate this Agreement and the purposes of the Partnership. 32 Section 12.4 Further Assurances. The parties agree to execute and ------------------------------- deliver all such documents, provide all such information and take or refrain from taking any action as may be necessary or desirable to achieve the purposes of this Agreement and the Partnership. Section 12.5 Titles and Captions. All article or section titles or -------------------------------- captions in this Agreement are solely for convenience and shall not be deemed to be part of this Agreement or otherwise define, limit or extend the scope or intent of any provision hereof. Section 12.6 Applicable Law. This Agreement, and the application or --------------------------- interpretation thereof, shall be governed exclusively by its terms and by the laws of the State of Delaware, without regard to its principles of conflicts of laws. In the event of a conflict between any provision of this Agreement and any non-mandatory provision of the Act, the provisions of this Agreement shall control and take precedence. Section 12.7 Binding Agreement. This Agreement shall be binding upon ------------------------------ the parties hereto, their heirs, executors, personal representatives, successors and assigns. Section 12.8 Waiver of Partition. Each of the parties hereto -------------------------------- irrevocably waives during the term of the Partnership any right that it may have to maintain any action for partition with respect to any property of the Partnership. Section 12.9 Counterparts and Effectiveness. This Agreement may be ------------------------------------------- executed in several counterparts, which shall be treated as originals for all purposes, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Any such counterpart shall be admissible into evidence as an original hereof against the Person who executed it. The execution of this Agreement and delivery thereof by facsimile shall be sufficient for all purposes, and shall be binding upon any party who so executes. Section 12.10 Survival of Representations. All representations and ----------------------------------------- warranties herein shall survive the dissolution and final liquidation of the Partnership. Section 12.11 Entire Agreement. This Agreement (and all Exhibits ------------------------------ hereto) contains the entire understanding among the parties hereto and supersedes all prior written or oral agreements among them respecting the within subject matter, unless otherwise provided herein. There are no representations, agreements, arrangements or understandings, oral or written, among the Partners hereto relating to the subject matter of this Agreement which are not fully expressed herein and in said Exhibits. Section 12.12 Securities Law Provisions. The Partnership Units have --------------------------------------- not been registered under the Federal or state securities laws of any state and, therefore, may not be resold unless appropriate Federal and state securities law; as well as the provisions of Article VIII, have been complied with. 33 Section 12.13 Remedies Not Exclusive. Any remedies herein contained ------------------------------------ for breaches of obligations hereunder shall not be deemed to be exclusive and shall not impair the right of any party to exercise any other right or remedy, whether for changes, injunction or otherwise. [SIGNATURES CONTAINED ON FOLLOWING PAGE] 34 IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. General Partner: WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation By:_______________________________________ Name:_____________________________________ Title:____________________________________ Limited Partner: WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation By:_______________________________________ Name:_____________________________________ Title:____________________________________ Limited Partner: SMALL CAP INVESTORS, LLC., an Oregon limited liability company By:_______________________________________ Name:_____________________________________ Title:____________________________________ 35 WILSHIRE REAL ESTATE PARTNERSHIP L.P. EXHIBIT 1 TO LIMITED PARTNERSHIP AGREEMENT Schedule of Partners
Value of Contributed Applicable Name and Address Assets/Cash Number of Units Percentage Interest General Partner: Wilshire Real Estate Investment Trust, Inc. 1776 SW Madison St. Portland, OR 97205 $ 1,468,000 100,000 1.00% ------------ ---------- ------ Limited Partner: Wilshire Real Estate Investment Trust, Inc. 1776 SW Madison St. Portland, OR 97205 $146,800,000 9,900,000 98.90% ------------ ---------- ------- Limited Partner: Small Cap Investors, LLC 1776 SW Madison St. Portland, OR 97205 $ 15,000 1,875 0.10% ------------ ---------- -------
36
- --------------------------------------------------------------------------------- TOTAL $146,815,000 10,001,875 100.00% ============ ========== ======
37 WILSHIRE REAL ESTATE PARTNERSHIP L.P. EXHIBIT 2 TO LIMITED PARTNERSHIP AGREEMENT Redemption Notice The undersigned hereby irrevocably (i) redeems _________________ Partnership Units in Wilshire Real Estate Partnership L.P., a Delaware limited partnership (the "Partnership"), in accordance with the terms and conditions of the Limited Partnership Agreement of the Partnership (the "Partnership Agreement") and the provisions regarding the redemption of Partnership Units contained in Article IX thereof; (ii) surrenders such Partnership Units and all right, title and interest therein and to the Limited Partnership Interest represented thereby; (iii) directs that the Cash Payment or the Share Payment (as determined by the General Partner) deliverable upon exercise of the redemption rights provided by Article IX of the Partnership Agreement be delivered to the address specified below, and if REIT Shares are to be delivered, such REIT Shares be registered or placed in the name(s) and at the addresses) specified below; and (iv) agrees to be bound by the terms and conditions of any registration rights agreement applicable to such REIT Shares. The undersigned hereby certifies that the receipt of Common Shares in exchange for Partnership Units surrendered hereby will not cause the undersigned, or any other person to whom the ownership of the undersigned's Common Shares would be attributed under Section 544 of the United States Internal Revenue Code (the "Code") or Section 318 (as modified by Section 856(d)(5) of the Code), to the Beneficially Own or Constructively Own Common Shares in excess of the Ownership Limit (as such terms are defined in the Articles of Organization as amended of the General Partner). Under penalties of perjury, the undersigned declares that the undersigned is not a "foreign person" as defined in Section 1445(f)(3) of the Code, and that the undersigned's name, address and social security or employer identification number are true and correct. Capitalized terms not otherwise defined herein shall have the same meaning ascribed thereto in the Limited Partnership Agreement. Dated:______________________________________ (Signature of Limited Partner) ______________________________________ (Street Address) ______________________________________ (City) (State) (Zip Code) 38 Signature Guaranteed by: ___________________________________________ Issue REIT Shares to: (name(s))____________________________________ ____________________________________________ Taxpayer Identification Number 39 WILSHIRE REAL ESTATE PARTNERSHIP L.P. EXHIBIT 3 TO LIMITED PARTNERSHIP AGREEMENT Allocation Provisions 1. Definitions. The following terms shall have the ----------- meaning ascribed to them for purposes of this Exhibit 3. Adjusted Capital Account Deficit: With respect to any -------------------------------- Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (A) Credit to such Capital Account any amounts which such Partner is obligated to restore pursuant to any provision of this agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Section 1.704-2(g)(1) and 1.704-2(i)(5); and (B) Debit to such Capital Account the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704- 1(b)(2)(ii)(d) and shall be interpreted consistently therewith. Capital Account: For each Partner, the separate account --------------- established with regard to such Partner on the books of the Partnership, which account shall be credited for (i) the amount of such Partner's Capital Contributions, (ii) such Partner's distributive share of Profits and any items in the nature of income or gain which are specially allocated to such Partner pursuant to Section 2(C) or Section 2(D), and (iii) the amount of any Partnership liabilities assumed by such Partner or which are secured by any asset distributed to such Partner, and which shall be debited for (i) the amount of cash and the Gross Asset Value of any asset distributed to such Partner, (ii) such Partner's distributive share of Losses and any items in the nature of expenses or losses which are specially allocated to such Partner pursuant to Section 2(C) or Section 2(D), and (iii) the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any asset contributed by such Partner to the Partnership. The foregoing definition is intended to comply with Regulations Section 1.704-1(b)(2)(iv). Any transferee of a Partner's Interest transferred in accordance with this Agreement shall succeed to that transferor's Capital Account. In determining the amount of any liability for purposes of the foregoing paragraph and the definition of "Net Capital Contributions" in Article II of this Agreement, there 40 shall be taken into account Code Section 752(c) and any other applicable provisions of the Regulations. Depreciation: For each Fiscal Year or other period, an ------------ amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to the beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period is zero, Depreciation for such year or other period shall be determined with reference to such beginning Gross Asset Value using any reasonable method approved by the General Partner. Nonrecourse Deductions: The meaning set forth in ---------------------- Regulations Sections 1.704-2(b)(1) and (c). The amount of Nonrecourse Deductions for a Fiscal Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during that Fiscal Year over the aggregate amount of any distributions during that Fiscal Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Regulations Section 1.704-2(c). Nonrecourse Liability: The meaning set forth in Regulations --------------------- Section 1.752-1(a)(2). Partner Minimum Gain: An amount, with respect to each -------------------- Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i). Partner Nonrecourse Debt: The meaning set forth in ------------------------ Regulations Section 1.704-2(b)(4). Partner Nonrecourse Deductions: The meaning set forth in ------------------------------ Regulations Section 1.704-2(i). The amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a fiscal year equals the excess, if any, of the net increase, if any, in the amount of Partner Minimum Gain attributable to such Partner Nonrecourse Debt during that fiscal year over the aggregate amount of any distributions during that fiscal year to the Partner that bears the economic risk of loss for such Partner Nonrecourse Debt to the extent such distributions are from the proceeds of such Partner Nonrecourse Debt and are allocable to an increase in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(2). 41 Partnership Minimum Gain: The meaning set forth in ------------------------ Regulations Sections 1.704-2(b)(2) and (d). Profits and Losses: For each Fiscal Year or other ------------------ period, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (A) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss; (B) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss; (C) In the event the Gross Asset Value of any Partnership Asset is adjusted pursuant to Clause (B) or (C) of the definition of Gross Asset Value in Section 2.1 of the Agreement, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (D) Gain or loss resulting from any disposition of Partnership Assets with respect to which gain or loss is recognized for federal income purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (E) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed in accordance with the definition of Depreciation; and (F) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Sections 734(b) or 743(b) of the Code is required pursuant to Regulations Section 1.704- 1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner's Interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the 42 basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses; and (G) Notwithstanding any other provisions of this definition, any items which are specially allocated pursuant to Section 2(C) or Section 2(D) hereof shall not be taken into account in computing Profits or Losses. Regulations: The Income Tax Regulations promulgated under ----------- the Code, as such regulations may be amended from time to time, including corresponding provisions of succeeding regulations. 2. Allocation of Profit and Loss. ----------------------------- (A) After giving effect to the special allocations set forth in Sections 2(B)(1), 2(B)(2) and 2(C) hereof, Profits and Losses in each Fiscal Year shall be allocated to the Partners, pro rata in accordance with their respective Percentage Interests. (B)(1) The Losses allocated pursuant to Section 2(A) hereof shall not exceed the maximum amount of Losses that can be so allocated without causing any Limited Partner to have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the event some but not all of the Limited Partners would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 2(A) hereof but for this Section 2(B), the limitation set forth in this (B) shall be applied on a Limited Partner by Limited Partner basis so as to allocate the maximum permissible Losses to each Limited Partner under Regulations Section 1.704-1(b)(2)(ii)(d). All Losses in excess of the limitations set forth in this Section 2(B) shall be allocated to the General Partner. (2) To the extent Losses are allocated to Partners pursuant to Section 2(B)(1), then Profits shall be allocated to such Partners to the extent and in proportion to such allocated Losses. (C) Special Allocations. The following special allocations shall be made in the following order: (1) Minimum Gain Chargeback. Notwithstanding any other provision of the foregoing Sections 2(A) and (B), if there is a net decrease in Partnership Minimum Gain during any Fiscal Year, then, to the extent required by Regulations Section 1.704-2(f), each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g)(2). The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 43 1.704-2(j). This Section 2(C)(1) is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (2) Partner Minimum Gain Chargeback. Notwithstanding any other provision of Sections 2(A)-(F) hereof except Section 2(C)(1), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Year, then, to the extent required by Regulations Section 1.704-2(i)(4), each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j). This Section 2(C)(2) is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (3) Qualified Income Offset. In the event any Limited Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Sections 1.704- 1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such year) shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 2(C)(3) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Sections 2(A)-(F) hereof have been tentatively made as if this Section 2(C)(3) were not in the Agreement. (4) Gross Income Allocation. In the event any Limited Partner has a deficit Capital Account at the end of any Fiscal Year that is in excess of the sum of (i) the amount such Partner is obligated to restore, and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), such Partner shall be specially allocated items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such year) in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 2(C)(4) shall be made if and only to the extent that such Partner 44 would have a deficit Capital Account in excess of such sum after all other allocations provided for in Sections 2(A)-(F) hereof have been tentatively made as if Section 2(C)(3) and this Section 2(C)(4) were not in the Agreement. (5) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Partners in proportion to their Partnership Interest. (6) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (7) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership Asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Sections 1.704-1(b)(2)(iv)(m)(2) or 1.704- 1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Regulations Section. (D) Curative Allocations. The allocations set forth in Sections 2(B), 2(C)(1), 2(C)(2), 2(C)(3), 2(C)(4), 2(C)(5), 2(C)(6) and 2(C)(7) (the "Regulatory Allocations") are intended to comply with certain requirements ------------------------ of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss or deduction pursuant to this Section 2(D). Therefore, notwithstanding any other provision of this Section 2 (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to Section 2(A). In exercising its discretion under this Section 2(D), the General Partner shall take into account future Regulatory Allocations under Sections 2(C)(1) and 2(C)(2), that although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 2(C)(5) and 2(C)(6) hereof. (E) Other Allocation Rules. 45 (1) For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under Code Section 706 and the Regulations thereunder. (2) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deduction and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Profits and Losses, as the case may be, for the year. (3) The Partners are aware of the income tax consequences of the allocations made by Sections 2(A)-(G) hereof and hereby agree to be bound by the provisions of Sections 2(A)-(G) hereof in reporting their shares of Partnership income and loss for income tax purposes. (4) Solely for purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), the Partners' interests in Partnership profits shall be equal to their Percentages of Partnership Interest. (F) Tax Allocations - Code Section 704(c). (1) In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition in Section 2.1 of the Agreement). (2) In the event the Gross Asset Value of any Partnership Asset is adjusted, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. (3) Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 2(F) are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. (G) Regulatory Compliance. The foregoing provisions of this Section 2 relating to the allocation of Profits, Losses and other items for federal income tax 46 purposes are intended to comply with Treasury Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a manner consistent with such Treasury Regulations. 47 WILSHIRE REAL ESTATE PARTNERSHIP L.P. EXHIBIT 4 TO LIMITED PARTNERSHIP AGREEMENT Form of Unit Certificate NON-NEGOTIABLE NON-TRANSFERABLE, NON-ASSIGNABLE The undersigned hereby acknowledges that Units in WILSHIRE REAL ESTATE LIMITED PARTNERSHIP L.P. (the "Partnership") organized under the Revised Uniform Limited Partnership Act of the State of Delaware, are registered on the records of said Partnership in the amount and in the name set forth below:
Certificate Social Security or Taxpayer Number Name and Address Identification or Number Number of Units - -------------- ---------------- --------------------------- ---------------
This document has been issued solely to evidence that the above number of units stands in the name of such holder of Units, as of the date appearing hereon, in the Partnership's Limited Partnership Agreement (the "Partnership Agreement), pursuant to Article IV of the Partnership Agreement, and does not grant or carry with it any rights to the income, profits or assets of the Partnership, such rights being derived solely from the Partnership Agreement. This document is NON-NEGOTIABLE, NON-TRANSFERABLE and NON-ASSIGNABLE. Assignment of Units can only be accomplished in accordance with the procedure set forth in the Partnership Agreement, and such assignment is subject to certain limitations contained in Articles IV and VIII of the Partnership Agreement, including a provision that the substitution of any assignee of Units as a Limited Partner of the Partnership shall be subject to the consent of the General Partner, which consent may be granted or withheld in its sole and absolute discretion. Subject to Section 9.4 of the Partnership Agreement, beginning one year after the Effective Date, a holder of Units has the right to receive cash or, at the sole and absolute discretion of the General Partner, Common Shares of the General Partner in exchange for Units as provided in Article IX of the Partnership Agreement. Subject to certain limited exemptions, Limited Partners are prohibited from offering, selling, contracting to sell or otherwise disposing of any Units or Common Shares obtained in exchange of Units for a period of one year from the Effective Date without the prior written consent of the Representative. THIS DOCUMENT IS NOT A SECURITY UNDER THE APPLICABLE PROVISIONS OF THE UNIFORM COMMERCIAL CODE, AND NEGOTIATION, TRANSFER 48 OR ASSIGNMENT OF INTEREST CANNOT BE ACCOMPLISHED BY ANY ATTEMPT TO NEGOTIATE, TRANSFER OR ASSIGN THIS DOCUMENT. Copies of the Partnership Agreement may be obtained from the General Partner by contacting WILSHIRE REAL ESTATE LIMITED PARTNERSHIP, L.P., 1776 SW Madison Street, Portland, Oregon 97205, Attention: Secretary. Terms used herein have the meanings ascribed to such terms as in the Partnership Agreement. THE UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED ABSENT REGISTRATION THEREUNDER OR EXEMPTION THEREFROM. [Additional Legends Required by Blue Sky Laws.] ------------------------------------------- Lawrence A. Mendelsohn, President Wilshire Real Estate Investment Trust, Inc. General Partner 49 EX-10.3 10 FORM OF STOCK OPTION PLAN Exhibit 10.3 WILSHIRE REAL ESTATE INVESTMENT TRUST INC. 1998 STOCK OPTION PLAN ARTICLE I. PURPOSE................................................... 1 ARTICLE II. DEFINITIONS............................................... 1 ARTICLE III. ADMINISTRATION............................................ 4 ARTICLE IV. SHARES AND OTHER LIMITATIONS.............................. 7 ARTICLE V. ELIGIBILITY............................................... 9 ARTICLE VI. STOCK OPTIONS............................................. 9 ARTICLE VII. STOCK APPRECIATION RIGHTS................................. 11 ARTICLE VIII. RESTRICTED STOCK.......................................... 13 ARTICLE IX. INDEPENDENT DIRECTOR AND NON-EMPLOYEE DIRECTOR STOCK OPTIONS............................................. 15 ARTICLE X. NON-TRANSFERABILITY....................................... 16 ARTICLE XI. TERMINATION PROVISIONS.................................... 16 ARTICLE XII. CHANGE IN CONTROL......................................... 17 ARTICLE XIII. TERMINATION OR AMENDMENT OF PLAN.......................... 19 ARTICLE XIV. UNFUNDED PLAN............................................. 20 ARTICLE XV. GENERAL PROVISIONS........................................ 20 ARTICLE XVI. EFFECTIVE DATE OF PLAN.................................... 23 ARTICLE XVII. TERM OF PLAN.............................................. 23 ARTICLE XVIII. NAME OF PLAN.............................................. 23 i Wilshire Real Estate Investment Trust Inc. 1998 Stock Option Plan ARTICLE I. PURPOSE The purpose of the Wilshire Real Estate Investment Trust Inc. 1998 Stock Option Plan (the "Plan") is to enhance the profitability and value of Wilshire Real Estate Investment Trust Inc. (the "Company") for the benefit of its stockholders by enabling the Company: (i) to offer stock based incentives and other equity interests to Independent Directors, Non-Employee Directors and/or Managers of the Company thereby attracting, retaining and rewarding such Independent Directors, Non-Employee Directors and Managers and strengthening the mutuality of interests between such individuals and the Company's stockholders and (ii) to make automatic grants of Stock Options to Independent Directors and Non-Employee Directors, thereby attracting, retaining and rewarding such individuals and strengthening the mutuality of interests between such individuals and the Company's stockholders. ARTICLE II. DEFINITIONS For purposes of the Plan, the following terms shall have the following meanings: 2.1. "Affiliate" shall mean: (i) any person directly or indirectly owning, controlling, or holding, with power to vote ten percent (10%) or more of the outstanding voting securities of such other person, (ii) any person ten percent (10%) or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other person, (iii) any person directly or indirectly controlling, controlled by, or under common control with such other person, (iv) any executive officer, director, trustee or general partner of such other person, and (v) any legal entity for which such person acts as an executive officer, director, trustee or general partner. For purposes of this definition, the term "person" means and includes any natural person, corporation, partnership, association, limited liability company or any other legal entity. For purposes of this definition, an indirect relationship shall include circumstances in which a person's spouse, children, parents, siblings or mothers-, fathers-, sisters- or brothers-in- law is or has been associated with a person. 2.2. "Award" shall mean any award under the Plan of any Stock Option, Restricted Stock or Stock Appreciation Right. All Awards shall be confirmed by, and subject to the terms of, a written agreement executed by the Company and the Participant. 2.3. "Board" shall mean the Board of Directors of the Company. 2.4. "Cause" shall mean, with respect to a Participant's Termination of Directorship, an act or failure to act that constitutes "cause" for removal of a director under applicable Maryland law. 2.5. "Change in Control" shall have the meaning set forth in Article XII. 2.6. "Code" shall mean the Internal Revenue Code of 1986, as amended. Any reference to any section of the Code shall also be a reference to any successor provision. 2.7. "Common Stock" shall mean the common stock, par value $0.0001 per share, of the Company. 2.8. "Company" shall mean Wilshire Real Estate Investment Trust Inc., a Maryland corporation, and its successors and assigns. 2.9. "Disability" shall mean a total and permanent disability, as defined in Section 22(e)(3) of the Code. 2.10. "Effective Date" shall mean the effective date of the Plan as defined in Article XV. 2.11. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 2.12. "Fair Market Value" for purposes of the Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, shall mean, as of any date, the last sales price reported for the Common Stock on the applicable date: (i) as reported on the principal national securities exchange on which it is then traded or the Nasdaq Stock Market, Inc., or (ii) if not traded on any such national securities exchange or the Nasdaq Stock Market, Inc., as quoted on an automated quotation system sponsored by the National Association of Securities Dealers. If the Common Stock is not readily tradable on a national securities exchange, the Nasdaq Stock Market, Inc., or any automated quotation system sponsored by the National Association of Securities Dealers, its Fair Market Value shall be set in good faith by the Board. For purposes of the grant of any Stock Option, the applicable date shall be the date on which the Option is granted or, if the sale of the Common Stock shall not have been reported or quoted on such date, on the first day prior thereto on which the sale of the Common Stock was reported or quoted. For purposes of the exercise of any Stock Appreciation Right the applicable date shall be the date a notice of exercise is received by the Board or, if not a day on which the applicable market is open, the next day that it is open. 2 2.13. "Independent Director" shall mean a director who within the last two years, has not (i) been employed by WFSG or any of its Affiliates, (ii) been an officer or director of WFSG or any of its Affiliates, (iii) or whose business or employer within the last two years has not performed services for WFSG or any of its Affiliates that annually exceeded the lesser of (a) the dollar amount provided in Item 404(a) of Regulation S-K or (b) 10% of the gross revenue of the entity that provided such services, or (iv) had any material business or professional relationship with WFSG or any of its Affiliates. 2.14. "Manager" shall mean WRSC, or any other person or entity that the Board determines, in its sole discretion, to be a manager of the Company. 2.15. "Non-Employee Director" shall mean any director of the Company who is neither an employee of the Company nor an Independent Director. 2.16. "Non-Tandem Stock Appreciation Right" shall mean a Stock Appreciation Right entitling the holder to receive an amount in cash or stock equal to the excess of: (i) the Fair Market Value of a share of Common Stock as of the date such right is exercised, over (ii) the aggregate exercise price of such right, otherwise than on surrender of a Stock Option. 2.17. "Participant" shall mean any Independent Director, Non-Employee Director or Manager to whom an Award has been made under the Plan. 2.18. "Reference Stock Option" shall have the meaning set forth in Section 7.2. 2.19. "Restricted Stock" shall mean an award of shares of Common Stock under the Plan to any Independent Director, Non-Employee Director or Manager that is subject to restrictions under Article VIII. 2.20. "Restriction Period" shall have the meaning set forth in Subsection 8.3(a) with respect to Restricted Stock. 2.21. "Rule 16b-3" shall mean Rule 16b-3 under Section 16(b) of the Exchange Act as then in effect or any successor provisions. 2.22. "Stock Appreciation Right" shall mean the right pursuant to an Award granted under Article VII. 2.23. "Stock Option" or "Option" shall mean any Option to purchase shares of Common Stock granted to any Independent Director, Non-Employee Director or Manager pursuant to Article VI or to any Independent Director or Non-Employee Director pursuant to Article IX. 3 2.24. "Tandem Stock Appreciation Right" shall mean a Stock Appreciation Right entitling the holder to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount in cash or stock equal to the excess of: (i) the Fair Market Value, on the date such Stock Option (or such portion thereof) is surrendered, of the Common Stock covered by such Stock Option (or such portion thereof), over (ii) the aggregate exercise price of such Stock Option (or such portion thereof). 2.25. "Termination of Directorship" shall mean, with respect to an Independent Director or Non-Employee Director, that the Independent Director or Non-Employee Director has ceased to be a director of the Company. 2.26. "Termination as a Manager" shall mean, with respect to a Manager, that the Manager has ceased to be a Manager of the Company. 2.27. "Transfer" or "Transferred" shall mean anticipate, alienate, attach, sell, assign, pledge, encumber, charge or otherwise transfer. 2.28. "WFSG" shall mean the Wilshire Financial Services Group Inc. 2.29. "WRSC" shall mean the Wilshire Realty Services Corporation. ARTICLE III. ADMINISTRATION 3.1. The Board. The Plan shall be administered and interpreted by the --------- Board. 3.2. Awards. The Board shall have full authority to grant, pursuant to the ------ terms of the Plan (including Article V hereof), Stock Options, Restricted Stock and Stock Appreciation Rights to any Independent Director, Non-Employee Director or Manager and to otherwise administer the Plan. In particular, the Board shall, except with regard to awards of Stock Options to Independent Directors and Non-Employee Directors pursuant to Article IX, have the authority: (a) to select the Independent Directors, Non-Employee Directors and Managers to whom Stock Options, Restricted Stock and Stock Appreciation Rights may from time to time be granted hereunder; (b) to determine whether and to what extent Stock Options, Restricted Stock and Stock Appreciation Rights are to be granted hereunder to one or more Independent Directors, Non-Employee Directors and Managers; 4 (c) to determine, in accordance with the terms of the Plan, the number of shares of Common Stock to be covered by each such Award granted to an Independent Director, Non-Employee Director or Manager; (d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder to an Independent Director, Non-Employee Director or Manager (including, but not limited to, the exercise or purchase price (if any), any restriction or limitation, any vesting schedule or acceleration thereof, or any forfeiture restrictions or waiver thereof, regarding any Award, and the shares of Common Stock relating thereto, based on such factors, if any, as the Board shall determine, in its sole discretion); (e) to determine whether and under what circumstances a Stock Option may be settled in cash and/or Common Stock under Section 6.3(d)(iii); (f) to determine whether, to what extent and under what circumstances to provide loans (which may be on a recourse basis and shall bear interest at the rate the Board shall provide) to Independent Directors, Non-Employee Directors and Managers in order to purchase shares of Common Stock under the Plan; (g) to determine whether a Stock Appreciation Right shall be a Tandem Stock Appreciation Right or a Non-Tandem Stock Appreciation Right; (h) to modify, extend or renew an Award, subject to Article XIII hereof, provided, however, that if an Award is modified, extended or renewed and thereby deemed to be the issuance of a new Award under the Code or the applicable accounting rules, the exercise price of such Award may continue to be the original exercise price even if less than the Fair Market Value of the Common Stock at the time of such modification, extension or renewal; and (i) to offer to buy out an Award previously granted, based on such terms and conditions as the Board shall establish and communicate to the Participant at the time such offer is made. 3.3. Guidelines. Subject to Article XIII hereof, the Board shall have the ---------- authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan and perform all acts, including the delegation of its administrative responsibilities, as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any agreement relating thereto in the manner and to the extent it shall deem necessary to carry the Plan into effect, but only to the extent any such action would be permitted under the applicable provisions of Rule 16b-3. The Board may adopt special guidelines and provisions for persons who are residing in, or subject to, the taxes of, 5 countries other than the United States to comply with applicable tax and securities laws. To the extent applicable, the Plan is intended to comply with the applicable requirements of Rule 16b-3 and shall be limited, construed and interpreted in a manner so as to comply therewith. 3.4. Decisions Final. Any decision, interpretation or other action made or --------------- taken in good faith by or at the direction of the Company or the Board (or any of its members) arising out of or in connection with the Plan shall be within the absolute discretion of the Company or the Board, as the case may be, and shall be final, binding and conclusive on the Company and all employees and Participants and their respective heirs, executors, administrators, successors and assigns. 3.5. Reliance on Counsel. The Company or the Board may consult with legal ------------------- counsel, who may be counsel for the Company or other counsel, with respect to its obligations or duties hereunder, or with respect to any action or proceeding or any question of law, and shall not be liable with respect to any action taken or omitted by it in good faith pursuant to the advice of such counsel. 3.6. Designation of Consultants/Liability. ------------------------------------ (a) The Board may designate employees of the Company and professional advisors to assist the Board in the administration of the Plan and may grant authority to employees to execute agreements or other documents on behalf of the Board. (b) The Board may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Board in the engagement of any such counsel, consultant or agent shall be paid by the Company. The Board, its members and any person designated pursuant to paragraph (a) above shall not be liable for any action or determination made in good faith with respect to the Plan. To the maximum extent permitted by applicable law, no officer of the Company or member or former member of the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Awards granted under it. To the maximum extent permitted by applicable law and the Certificate of Incorporation and By-Laws of the Company and to the extent not covered by insurance, each officer and member or former member of the Board shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Company) or liability (including any sum paid in settlement of a claim with the approval of the Company), and advanced amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted, arising out of any act or omission to act in connection with the Plan, except to the extent arising out of such officer's, member's or former member's own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the officers, directors or members or former officers, directors or members may have under applicable law or under the Certificate of Incorporation or By- Laws of the Company. Notwithstanding anything else herein, this indemnification will not apply to the actions or 6 determinations made by an individual with regard to Awards granted to him under the Plan. ARTICLE IV. SHARES AND OTHER LIMITATIONS 4.1. Shares. ------ (a) The aggregate number of shares of Common Stock which may be issued under the Plan shall not exceed 3,500,000 shares (of which 500,000 shares are being reserved for Independent and Non-Employee Directors) (subject to any increase or decrease pursuant to Section 4.2), which may be either authorized and unissued Common Stock or Common Stock held in or acquired for the treasury of the Company or both. If any Stock Option or Stock Appreciation Right granted under the Plan expires, terminates or is cancelled for any reason without having been exercised in full, the number of shares of Common Stock underlying the unexercised Stock Option or Stock Appreciation Right shall again be available for the purposes of Awards under the Plan. If any shares of Restricted Stock awarded under the Plan to a Participant are forfeited or repurchased by the Company for any reason, the number of forfeited or repurchased shares of Restricted Stock shall again be available for the purposes of Awards under the Plan. If a Tandem Stock Appreciation Right granted in tandem with an Option is granted under the Plan, such grant shall only apply once against the maximum number of shares of Common Stock which may be issued under the Plan. In determining the number of shares of Common Stock available for Awards, if Common Stock has been exchanged by a Participant as full or partial payment to the Company, or for withholding, in connection with the exercise of an Award or the number shares of Common Stock otherwise deliverable has been reduced for withholding, the number of shares of Common Stock exchanged as payment in connection with the exercise or for withholding or reduced shall again be available under the Plan. Any shares of Common Stock that are issued by the Company for, and any awards that are granted through the assumption of or in substitution for, outstanding awards previously granted by an acquired entity shall not be counted against the shares of Common Stock available for issuance under the Plan. 4.2. Changes. ------- (a) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting Common Stock, the authorization or issuance of additional shares of Common Stock, the 7 dissolution or liquidation of the Company, any sale or transfer of all or part of its assets or business or any other corporate act or proceeding. (b) In the event of any change in the capital structure or business of the Company by reason of any stock dividend or extraordinary dividend, stock split or reverse stock split, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, non- cash distributions with respect to its outstanding Common Stock or capital stock other than Common Stock, reclassification of its capital stock, any sale or transfer of all or part of the Company's assets or business, or any similar change affecting the Company's capital structure or business and the Board determines in good faith that an adjustment is necessary or appropriate under the Plan to prevent substantial dilution or enlargement of the rights granted to, or available for, Participants under the Plan or as otherwise necessary to reflect the change, then the aggregate number and kind of shares which thereafter may be issued under the Plan, the number and kind of shares or other property (including cash) to be issued upon exercise of an outstanding Option or other Award granted under the Plan and the purchase or exercise price thereof shall be appropriately adjusted consistent with such change in such manner as the Board may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, Participants under the Plan or as otherwise necessary to reflect the change, and any such adjustment determined by the Board in good faith shall be binding and conclusive on the Company and all Participants and employees and their respective heirs, executors, administrators, successors and assigns. (c) Fractional shares of Common Stock resulting from any adjustment in an Award pursuant to Section 4.2(a) or (b) shall be aggregated until, and eliminated at, the time of exercise. No fractional shares of Common Stock shall be issued under the Plan. The Board may, in its sole discretion, pay cash in lieu of any fractional shares of Common Stock in settlement of awards under the Plan. Notice of any adjustment shall be given by the Board to each Participant whose Award has been adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan. (d) In the event of a merger or consolidation in which the Company is not the surviving entity or in the event of any transaction that results in the acquisition of all or substantially all of the Company's outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of all or substantially all of the Company's assets (all of the foregoing being referred to as "Acquisition Events"), then the Board may, in its sole discretion, terminate all outstanding Options and Stock Appreciation Rights of Independent Directors, Non-Employee Directors and Managers, effective as of the date of the Acquisition Event, by delivering notice of termination to each such Participant at least twenty (20) days prior to the date of consummation of the Acquisition Event; provided, that during the period from the date on which such notice of termination is delivered to the consummation of the Acquisition Event, each such Participant shall have the right to exercise in full all of his 8 Options and Stock Appreciation Rights that are then outstanding (whether vested or not vested and without regard to any limitations on exercisability otherwise contained in the Option) but contingent on the occurrence of the Acquisition Event, and, provided that, if the Acquisition Event does not take place within a specified period after giving such notice for any reason whatsoever, the notice and exercise shall be null and void. If an Acquisition Event occurs, to the extent the Board does not terminate the outstanding Options and Stock Appreciation Rights pursuant to this Section 4.2(d), then the provisions of Section 4.2(b) shall apply. 4.3. Purchase Price. Notwithstanding any provision of the Plan to the -------------- contrary, if authorized but previously unissued shares of Common Stock are issued under the Plan, such shares shall not be issued for a consideration which is less than as permitted under applicable law. ARTICLE V. ELIGIBILITY 5.1. Discretionary Awards. Independent Directors, Non-Employee Directors -------------------- and Managers of the Company are eligible to be granted Stock Options, Restricted Stock and Stock Appreciation Rights under the Plan. Eligibility under the Plan will be determined by the Board in its sole discretion. 5.2. Automatic Awards. Independent Directors and Non-Employee Directors ---------------- will automatically be granted Stock Options in accordance with Article IX of the Plan. ARTICLE VI. STOCK OPTIONS 6.1. Options. Stock Options granted hereunder shall be non-qualified stock ------- options. 6.2. Grants. The Board shall have the authority to grant any Independent ------ Director, Non-Employee Director or Manager one or more Stock Options under the Plan (with or without Stock Appreciation Rights). 6.3. Terms of Options. Options granted under the Plan shall be subject to ---------------- the following terms and conditions, and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Board shall deem desirable: 9 (a) Exercise Price. The exercise price per share of Common Stock subject to a Stock Option shall be determined by the Board at the time of grant, but shall not be less than 100% of the Fair Market Value of a share of Common Stock at the time of grant. (b) Option Term. The term of each Stock Option shall be fixed by the Board, but no Stock Option shall be exercisable more than ten (10) years after the date the Option is granted. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Board at grant. If the Board provides, in its discretion, that any Stock Option is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Board may waive such limitations on the exercisability at any time at or after grant in whole or in part (including, without limitation, that the Board may waive the installment exercise provisions or accelerate the time at which Options may be exercised), based on such factors, if any, as the Board shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (c) above, Stock Options may be exercised in whole or in part at any time during the Option term, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the exercise price. Common Stock purchased pursuant to the exercise of a Stock Option shall be paid for at the time of exercise as follows: (i) in cash or by check, bank draft or money order payable to the order of Company; (ii) if the Common Stock is traded on a national securities exchange, the Nasdaq Stock Market, Inc., or quoted on a national quotation system sponsored by the National Association of Securities Dealers, through the delivery of irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the purchase price; or (iii) on such other terms and conditions as may be acceptable to the Board (which may include payment in full or part in the form of Common Stock owned by the Participant for a period of at least six (6) months (and for which the Participant has good title free and clear of any liens and encumbrances) based on the Fair Market Value of the Common Stock on the payment date as determined by the Board or the surrender of vested Options owned by the Participant). No shares of Common Stock shall be issued until payment therefor, as provided herein, has been made or provided for. (e) Form, Modification, Extension and Renewal of Options. Subject to the terms and conditions and within the limitations of the Plan, an Option shall be evidenced by such form of Stock Option agreement as is approved by the Board, and the Board may modify, extend or renew outstanding Options granted under the Plan, or accept the surrender of outstanding Options (up to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). 10 (f) Other Terms and Conditions. Options may contain such other provisions, which shall not be inconsistent with any of the foregoing terms of the Plan, as the Board shall deem appropriate. ARTICLE VII. STOCK APPRECIATION RIGHTS 7.1. Stock Appreciation Rights. The Board may, in its sole discretion, ------------------------- grant Stock Appreciation Rights to any Independent Director, Non-Employee Director or Manager. 7.2. Tandem Stock Appreciation Rights. A Tandem Stock Appreciation Right -------------------------------- may be granted in conjunction with all or part of any Stock Option (a "Reference Stock Option") granted under Article VI of the Plan either at or after the time of the grant of such Reference Stock Option. 7.3. Terms and Conditions of Tandem Stock Appreciation Rights. Tandem -------------------------------------------------------- Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Board, including Article X and Article XI and the following: (a) Term. A Tandem Stock Appreciation Right or applicable portion thereof granted with respect to a Reference Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the Reference Stock Option, except that, unless otherwise determined by the Board, in its sole discretion, at the time of grant, a Tandem Stock Appreciation Right granted with respect to less than the full number of shares covered by the Reference Stock Option shall not be reduced until and then only to the extent the exercise or termination of the Reference Stock Option causes the number of shares covered by the Tandem Stock Appreciation Right to exceed the number of shares remaining available and unexercised under the Reference Stock Option. (b) Exercisability. Tandem Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Reference Stock Options to which they relate shall be exercisable in accordance with the provisions of Article VI and this Article VII. (c) Method of Exercise. A Tandem Stock Appreciation Right may be exercised by an optionee by surrendering the applicable portion of the Reference Stock Option. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in this Section 7.3 and the Reference Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Article IV of the Plan on the number of shares of Common Stock to be issued under the Plan. The Stock Options which 11 have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Tandem Stock Appreciation Rights have been exercised. (d) Payment. Upon the exercise of a Tandem Stock Appreciation Right a Participant shall be entitled to receive an amount in cash and/or Common Stock (as chosen by the Board in its sole discretion) equal in value to the excess of the Fair Market Value of one share of Common Stock over the exercise price per share specified in the Reference Stock Option multiplied by the number of shares in respect of which the Tandem Stock Appreciation Right shall have been exercised, with the Board having the right to determine the form of payment. 7.4. Non-Tandem Stock Appreciation Rights. Non-Tandem Stock Appreciation ------------------------------------ Rights may also be granted without reference to any Stock Options granted under Article VI of the Plan. 7.5. Terms and Conditions of Non-Tandem Stock Appreciation Rights. Non- ------------------------------------------------------------ Tandem Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Board, including Article X and Article XI and the following: (a) Term. The term of each Non-Tandem Stock Appreciation Right shall be fixed by the Board, but shall not be greater than ten (10) years after the date the right is granted. (b) Exercisability. Non-Tandem Stock Appreciation Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Board at grant. If the Board provides, in its discretion, that any such right is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Board may waive such limitation on the exercisability at any time at or after grant in whole or in part (including, without limitation, that the Board may waive the installment exercise provisions or accelerate the time at which rights may be exercised), based on such factors, if any, as the Board shall determine, in its sole discretion. (c) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (b) above, Non-Tandem Stock Appreciation Rights may be exercised in whole or in part at any time during its term, by giving written notice of exercise to the Company specifying the number of Non-Tandem Stock Appreciation Rights to be exercised. (d) Payment. Upon the exercise of a Non-Tandem Stock Appreciation Right a Participant shall be entitled to receive, for each right exercised, an amount in cash and/or Common Stock (as chosen by the Board in its sole discretion) equal in value to the excess of the Fair Market Value of one share of Common Stock on the date the right is exercised over the Fair Market Value of one share of Common Stock on the date the right was awarded to the Participant. 12 ARTICLE VIII. RESTRICTED STOCK 8.1. Awards of Restricted Stock. The Board shall have the authority to -------------------------- grant shares of Restricted Stock to any Independent Director, Non-Employee Director or Manager which may be issued either alone or in addition to other Awards granted under the Plan. The Board shall, subject to the provisions of Article V and Section 8.4 below, determine the eligible Independent Directors, Non-Employee Directors and Managers to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient (subject to Section 8.2), the time or times within which such Awards may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the Awards. The Board may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Board may determine, in its sole discretion. 8.2. Awards and Certificates. The prospective Participant selected to ----------------------- receive a Restricted Stock Award shall not have any rights with respect to such Award, unless and until such Participant has delivered a fully executed copy of the agreement evidencing the Award to the Company and has otherwise complied with the applicable terms and conditions of such Award. Further, such Award shall be subject to the following conditions: (a) Purchase Price. The purchase price of Restricted Stock shall be fixed by the Board. Subject to Section 4.3, the purchase price for shares of Restricted Stock may be zero to the extent permitted by applicable law, and, to the extent not so permitted, such purchase price may not be less than par value. (b) Acceptance. Awards of Restricted Stock must be accepted within a period of sixty (60) days (or such shorter period as the Board may specify at grant) after the Award date, by executing a Restricted Stock Award agreement and by paying whatever price (if any) the Board has designated thereunder. (c) Legend. Each Participant receiving a Restricted Stock Award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The anticipation, alienation, attachment, sale, transfer, assignment, pledge, encumbrance or charge of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Wilshire Real Estate Investment Trust Inc. 1998 Stock Option Plan and an Agreement entered into between the registered owner and the 13 Company dated ___________________________. Copies of such Plan and Agreement are on file at the principal office of the Company." (d) Custody. The Board shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the Participant shall have delivered a duly signed stock power, endorsed in blank, relating to the Common Stock covered by such Award. 8.3. Restrictions and Conditions on Restricted Stock Awards. The shares ------------------------------------------------------ of Restricted Stock awarded pursuant to the Plan shall be subject to Article XII and the following restrictions and conditions: (a) Restriction Period; Vesting and Acceleration of Vesting. The Participant shall not be permitted to Transfer shares of Restricted Stock awarded under the Plan during a period set by the Board commencing with the date of such Award (the "Restriction Period"), as set forth in the Award agreement and such Award agreement shall set forth a vesting schedule and any events which would accelerate vesting of the shares of Restricted Stock. Within these limits, based on service, performance and/or such other factors or criteria as the Board may determine in its sole discretion, the Board may provide for the lapse of such restrictions in installments in whole or in part, or may accelerate the vesting of all or any part of any Restricted Stock Award and/or waive the deferral limitations for all or any part of such Award. (b) Rights as Stockholder. Except as provided in this subsection (b) and subsection (a) above, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a holder of shares of Common Stock of the Company including, without limitation, the right to receive any dividends and the right to vote or tender such shares. The Board, in its sole discretion, as determined at the time of Award, may permit or require the payment of dividends to be deferred. (c) Lapse of Restrictions. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant. All legends shall be removed from said certificates at the time of delivery to the Participant. 8.4. Termination of Directorship or Termination as a Manager. Subject to ------------------------------------------------------- the applicable provisions of the Award agreement and the Plan, upon a Participant's Termination of Directorship or Termination as a Manger, as applicable, for any reason during the relevant Restriction Period, all Restricted Stock still subject to restriction will vest or be forfeited in accordance with the terms and conditions established by the Board at grant or thereafter. 14 ARTICLE IX. INDEPENDENT DIRECTOR AND NON-EMPLOYEE DIRECTOR STOCK OPTIONS 9.1. Options. This Article IX shall apply only to Stock Options granted to ------- Independent Directors and Non-Employee Directors pursuant to this Article IX. 9.2. Non-Qualified Stock Options. Stock Options granted hereunder shall be --------------------------- non-qualified stock options. 9.3. Awards. Without further action by the Board or the stockholders of ------ the Company, each Independent Director or Non-Employee Director shall, subject to the terms of the Plan, be granted: (a) Stock Options to purchase 1,500 shares of Common Stock on the last trading date of each calendar quarter of the Company. (b) Stock Options to purchase 5,000 shares of Common Stock on: (i) the date of the closing of the initial public offering of the Common Stock; or (ii) if later, the date on which the Independent Director or Non- Employee Director commences service as an Independent Director or Non- Employee Director. 9.4. Terms of Options. Options granted under this Article shall be subject ---------------- to the following terms and conditions and shall be in such form and contain such additional terms and conditions, not inconsistent with terms of the Plan, as the Board shall deem desirable: (a) Exercise Price. The exercise price per share of Common Stock subject to an Option granted pursuant to Section 9.3(a) shall be equal to one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the time of grant. The exercise price per share of Common Stock subject to an Option granted pursuant to Section 9.3(b)(i) shall be equal to the initial offering price of the Common Stock. The exercise price per share of Common Stock subject to an Option granted pursuant to Section 9.3(b)(ii) shall be equal to the Fair Market Value at the time of grant. (b) Exercisability. Except as otherwise provided herein, one-third (1/3) of the Stock Options granted pursuant to Section 9.3(a) shall vest and become exercisable on each anniversary of the date of grant, provided that the Participant has not incurred a Termination of Directorship prior to the applicable dates. Stock Options granted pursuant to Section 9.3(b) shall be fully vested and exercisable at the time of grant. Notwithstanding the foregoing, Options granted pursuant to this Article IX shall fully vest and become exercisable upon the occurrence of a Charge in Control. (c) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under Article IX, Stock Options may be exercised in whole or in part at any time during the Option term, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in 15 full of the exercise price. Common Stock purchased pursuant to the exercise of a Stock Option shall be paid for at the time of exercise in cash or by check, bank draft or money order payable to the order of Company or by delivery of Common Stock owned by the Participant for a period of at least six (6) months (and for which the Participant has good title free and clear of any liens and encumbrances) or by such other method approved by the Board. No shares of Common Stock shall be issued until payment therefor, as provided herein, has been made or provided for. (d) Term. Except as otherwise provided herein, if not previously exercised each Option shall expire upon the tenth anniversary of the date of the grant thereof. ARTICLE X. NON-TRANSFERABILITY 10.1. Non-Transferability. Except as provided in the last sentence of ------------------- this Section 10.1, no Award shall be Transferred by the Participant otherwise than by will or by the laws of descent and distribution. All Stock Options and Stock Appreciation Rights shall be exercisable, during the Participant's lifetime, only by the Participant. Shares of Restricted Stock under Article VIII may not be Transferred prior to the date on which such shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. No Award shall, except as otherwise specifically provided by law or herein, be Transferred in any manner, and any attempt to Transfer any such Award shall be void, and no such Award shall in any manner be used for the payment of, subject to, or otherwise encumbered by or hypothecated for the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such Award, nor shall it be subject to attachment or legal process for or against such person. Notwithstanding the foregoing, the Board may determine at the time of grant or thereafter, that a Stock Option (other than a Stock Option granted pursuant to Article IX) that is otherwise not transferable pursuant to this Article X is transferable in whole or part and in such circumstances, and under such conditions, as specified by the Board. ARTICLE XI. TERMINATION PROVISIONS 11.1. Termination of Directorship. The following rules apply with regard --------------------------- to Stock Options granted under Article VI and Article IX and Stock Appreciation Rights granted under Article VII upon the Termination of Directorship of a Participant: (a) Termination by Reason of Death or Disability. If a Participant's Termination of Directorship is by reason of death or Disability, any Stock Option or Stock Appreciation Right held by such Participant may be exercised, to the extent exercisable at the 16 Participant's Termination of Directorship, by the Participant or the legal representative of the estate at any time within a period of two (2) years from the date of such Termination of Directorship, but in no event beyond the expiration of the stated term of such Stock Option or Stock Appreciation Right. (b) Otherwise Ceasing to be an Independent Director or Non-Employee Director other than for Cause. Except as otherwise provided herein, upon the Termination of Directorship, on account of resignation, failure to stand for reelection or failure to be reelected or otherwise other than as set forth in (a) above or (c) below, all outstanding Stock Options and Stock Appreciation Rights then exercisable and not exercised by the Participant prior to such Termination of Directorship shall remain exercisable, to the extent exercisable at the Termination of Directorship, at any time within a period of one (1) year from the date of such Termination of Directorship, but in no event beyond the expiration of the stated term of such Stock Option or Stock Appreciation Right. (c) Cause. Upon removal, failure to stand for reelection or failure to be renominated for Cause, or if the Company obtains or discovers information after Termination of Directorship that such Participant had engaged in conduct that would have justified a removal for Cause during such directorship, all outstanding Stock Options and Stock Appreciation Rights of such Participant shall immediately terminate and shall be null and void. (d) Cancellation of Stock Options. No Stock Options or Stock Appreciation Rights that were not exercisable during the period such person serves as an Independent Director or Non-Employee Director shall thereafter become exercisable upon a Termination of Directorship for any reason or no reason whatsoever, and such Stock Options and Stock Appreciation Rights shall terminate and become null and void upon a Termination of Directorship. 11.2. Termination as a Manager. Subject to the applicable provisions of ------------------------ the Award agreement and the Plan, upon a Participant's Termination as a Manager, for any reason, all Stock Options and Stock Appreciation Rights will vest or be forfeited in accordance with the terms and conditions established by the Board at grant or thereafter. ARTICLE XII. CHANGE IN CONTROL 12.1. Benefits. In the event of a Change in Control of the Company (as -------- defined below), except as otherwise provided by the Board upon the grant of an Award (other than an Award granted pursuant to Article IX hereof), Restricted Stock or Stock Appreciation Right or, if no rights of the Participant are reduced, thereafter, the Participant shall be entitled to the following benefits: 17 (a) All outstanding Stock Options and Stock Appreciation Rights granted prior to the Change in Control shall be fully vested and immediately exercisable in their entirety. The Board, in its sole discretion, may provide for the purchase of any such Stock Options and Stock Appreciation Rights by the Company for an amount of cash equal to the excess of the Change in Control Price (as defined below) of the shares of Common Stock covered by such Stock Options and Stock Appreciation Rights, over the aggregate exercise price of such Stock Options and Stock Appreciation Rights. For purposes of this Section 12.1, Change in Control Price shall mean the higher of (i) the highest price per share of Common Stock paid in any transaction related to a Change in Control of the Company, or (ii) the highest Fair Market Value per share of Common Stock at any time during the sixty (60) day period preceding a Change in Control. (b) The restrictions to which any shares of Restricted Stock of such Participant granted prior to the Change in Control are subject shall lapse as if the applicable Restriction Period had ended upon such Change in Control. 12.2. Change in Control. For purposes of the Plan, a "Change in Control" ----------------- shall be deemed to have occurred: (a) upon any person (as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof) excluding the Company or any employee benefit plan sponsored or maintained by the Company (including any trustee of any such plan acting in his capacity as trustee), becoming the beneficial owner (as defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of securities of the Company having at least twenty-five percent (25%) of the total number of votes that may be cast for the election of directors of the Company; (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c), or (d) of this section) or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the two (2) year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (c) upon the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) 18 more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (d) upon the stockholder's of the Company approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. Notwithstanding anything herein to the contrary, the initial public offering of the Common Stock will not constitute a Change in Control. ARTICLE XIII. TERMINATION OR AMENDMENT OF PLAN 13.1. Termination or Amendment. Notwithstanding any other provision of the ------------------------ Plan, the Board may at any time, and from time to time, amend, in whole or in part, any or all of the provisions of the Plan (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in this Article XIII), or suspend or terminate it entirely, retroactively or otherwise; provided, however, that, unless otherwise required by law or specifically provided herein, the rights of a Participant with respect to Awards granted prior to such amendment, suspension or termination, may not be impaired without the consent of such Participant and, provided further, that the Plan may not be amended without the approval of the stockholders of the Company in accordance with the laws of the State of Maryland and the applicable provisions of Rule 16b-3, to: (i) increase the aggregate number of shares of Common Stock that may be issued under the Plan (subject to Section 4.2); (ii) decrease the minimum Option price of any Award; (iii) increase the maximum number of shares of Common Stock that may be issued to any person; (iv) change the class of persons eligible to receive Awards under the Plan; (v) modify the period within which Awards may be granted; (vi) modify the period within which Awards may be exercised; (vii) modify the terms upon which Awards may be exercised; (viii) increase the material benefits accruing to the Participants under the Plan; or (ix) make any other amendment that would require stockholder approval under the rules of any exchange or system on which the Company's securities are then listed or traded. Except with regard to Awards under Article IX, the Board may amend the terms of any Awards theretofore granted, prospectively or retroactively, but, subject to Article IV above or as 19 otherwise specifically provided herein, no such amendment or other action by the Board shall impair the rights of any Option holder without the Option holder's consent. ARTICLE XIV. UNFUNDED PLAN 14.1. Unfunded Status of Plan. The Plan is intended to constitute an ----------------------- "unfunded" plan for incentive and deferred compensation. With respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. ARTICLE XV. GENERAL PROVISIONS 15.1. Legend. The Board may require each person receiving shares of ------ Common Stock pursuant to the exercise of an Award under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares of Common Stock without a view to distribution thereof. In addition to any legend required by the Plan, the certificates for such shares of Common Stock may include any legend which the Board deems appropriate to reflect any restrictions on Transfer. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Board may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or any national securities association system upon whose system the Common Stock is then quoted, any applicable Federal or state securities law, and any applicable corporate law, and the Board may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 15.2. Other Plans. Nothing contained in the Plan shall prevent the Board ----------- from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 15.3. No Right to Serve as an Independent Director, Non-Employee Director -------------------------------------------------------------------- or Manager. Neither the Plan nor the grant or exercise of any Awards hereunder - ---------- shall impose any obligations on the Company to retain any Participant as an Independent Director, Non-Employee Director or as a Manager nor shall it impose on the part of any Participant any obligation to continue to serve as an Independent Director, Non-Employee Director or as a Manager of the Company. 20 15.4. Withholding of Taxes. The Company shall have the right to deduct -------------------- from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. The Board may permit any such withholding obligation with regard to any Participant to be satisfied by reducing the number of shares of Common Stock otherwise deliverable or by delivering shares of Common Stock already owned. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant. 15.5. Listing and Other Conditions. ---------------------------- (a) Unless otherwise determined by the Board, as long as the Common Stock is listed on a national securities exchange or system sponsored by a national securities association, the issue of any shares of Common Stock pursuant to the exercise of an Award shall be conditioned upon such shares being listed on such exchange or system. Notwithstanding the foregoing, the grant of an Award hereunder is not intended to be conditional and the Company shall have no obligation to issue such shares unless and until such shares are so listed; provided, however, that any delay in the issuance of such shares shall be based solely on a reasonable business decision and the right to exercise any Award with respect to such shares shall be suspended until such listing has been effected. (b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to the exercise of an Award is or may in the circumstances be unlawful or result in the imposition of excise taxes on the Company under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act of 1933, as amended, or otherwise with respect to shares of Common Stock or Awards, and the right to exercise any Option shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful or will not result in the imposition of excise taxes on the Company. (c) Upon termination of any period of suspension under this Section 15.5, any Award affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Awards. (d) A Participant shall be required to supply the Company with any certificates, representations and information that the Company requests and otherwise cooperate with the Company in obtaining any listing, registration, qualification, exemption, consent or approval the Company deems necessary or appropriate. 21 (e) If any sale or delivery of shares of Common Stock pursuant to an Award is or may cause the Company to not qualify as a real estate investment trust within the meaning of Sections 856 through 860 of the Code, the Company shall have no obligation to make such sale or delivery until such sale or delivery will no longer cause such disqualification. 15.6. Governing Law. The Plan shall be governed and construed in ------------- accordance with the laws of the State of Maryland (regardless of the law that might otherwise govern under applicable Maryland principles of conflict of laws). 15.7. Construction. Wherever any words are used in the Plan in the ------------ masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. To the extent applicable, the Plan shall be limited, construed and interpreted in a manner so as to comply with the applicable requirements of Rule 16b-3; however, noncompliance with Rule 16b-3 shall have no impact on the effectiveness of an Award under the Plan. 15.8. Other Benefits. No Award granted or exercised under the Plan shall -------------- be deemed compensation for purposes of computing benefits under any retirement plan of the Company nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation. 15.9. Costs. The Company shall bear all expenses included in ----- administering the Plan, including expenses of issuing Common Stock pursuant to the exercise of any Awards hereunder. 15.10. No Right to Same Benefits. The provisions and terms of Awards need ------------------------- not be the same with respect to each Participant, and the Awards granted to individual Participants need not be the same in subsequent years. 15.11. Death/Disability. The Board may in its discretion require the ---------------- transferee of a Participant's Awards to supply it with written notice of the Participant's death or Disability and to supply it with a copy of the will (in the case of the Participant's death) or such other evidence as the Board deems necessary to establish the validity of the Transfer of an Award. The Board may also require the agreement of the transferee to be bound by all of the terms and conditions of the Plan. 15.12. Severability of Provisions. If any provision of the Plan shall be -------------------------- held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included. 15.13. Headings and Captions. The headings and captions herein are --------------------- provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 22 ARTICLE XVI. EFFECTIVE DATE OF PLAN The Plan has been adopted by the Board effective as of March 31, 1998, subject to and conditioned upon the approval of the Plan by the stockholders of the Company in accordance with the laws of the State of Maryland and the requirements of any applicable national securities exchange or automated quotation system. ARTICLE XVII. TERM OF PLAN No Award shall be granted pursuant to the Plan on or after the tenth anniversary of the earlier of the Effective Date or the date of stockholder approval, but such Awards granted prior to such date may extend beyond that date. ARTICLE XVIII. NAME OF PLAN The Plan shall be known as the "Wilshire Real Estate Investment Trust Inc. 1998 Stock Option Plan." 23 EX-10.4 11 FORM OF REAL ESTATE ASSET SERVICING AGREEMENT Exhibit 10.4 FORM OR REAL ESTATE ASSET SERVICING AGREEMENT This LOAN SERVICING AGREEMENT (the "Agreement") is dated April ___, 1998 between Wilshire Credit Corporation, a Nevada corporation (the "Servicer"), and Wilshire Real Estate Investment Trust Inc., a Maryland corporation (the "Company"). RECITALS -------- The Company and certain of its affiliates intend to acquire and/or originate mortgage loans, real estate mortgage backed securities and other real estate related assets in the United States (the "Real Estate Assets") during the term of this Agreement. The Company desires that the Servicer service such loans and the Servicer desires to do the same. The parties hereby agree for good and valuable consideration as follows: 1. Exclusive Servicing of Real Estate Assets. The Servicer shall provide ----------------------------------------- portfolio management services, including billing, portfolio administration and collection services ("Services") for all Real Estate Assets unless the Servicer and the Company agree that specific Real Estate Assets shall not be so serviced ("Excluded Real Estate Assets"). The Company agrees that the Servicer shall not be required to service Real Estate Assets for which the Servicer may not have applicable licenses. The Company agrees that all of its Real Estate Assets and any Affiliate's Real Estate Assets, except for Excluded Real Estate Assets, shall be serviced by the Servicer under this Agreement. The Company or one of its subsidiaries (or any partnership managed by it) shall assign all of its servicing rights (including any Special Servicing Rights as described in the Company's prospectus relating to its initial public offering) with respect to any Real Estate Assets acquired by it to the Servicer; provided, however, with respect to Special Servicing Rights, the Company shall retain the right to direct foreclosure. 2. Manner and Performance of Service. Except as otherwise specifically --------------------------------- provided herein, the Servicer shall be entitled to exercise its sole discretion in servicing the Real Estate Assets. The Servicer shall devote such time and attention as shall be necessary to provide the Company with the Services described herein. The Servicer may service its own loans, real estate and financial assets and render services to any current or future clients, provided that such activities do not interfere with the Servicer's performance of the Services. The Services to be provided by the Servicer include the following: 2.1 The Servicer's Duties in General. The Servicer shall administer -------------------------------- the Real Estate Assets with reasonable care, using that degree of skill and attention that the Servicer exercises with respect to comparable Real Estate Assets that it services for its own account or as a fiduciary for others. The Servicer shall take all necessary actions which the Servicer in good faith determines are commercially reasonable in regard to each Real Estate Asset, which in the case of a loan shall continue until it is collected or the Servicer, in its good faith judgment, determines that it is no longer commercially reasonable to continue to try to collect the outstanding indebtedness on such loan. 2.2 Compliance. The Servicer shall use its best efforts to comply ---------- throughout the term of this Agreement with all requirements of applicable federal, state and local laws and foreign laws and regulations thereunder, including to the extent applicable, any consumer and debt collection protection laws and any other consumer credit, equal opportunity and disclosure laws. 2.3 Collection. The Servicer shall use its reasonable efforts, but ---------- not less than the same efforts it uses with respect to comparable Real Estate Assets that it services for its own account or for others, to collect all payments due and to become due under each of the Real Estate Assets from the party or parties liable thereunder (a "Borrower"). 2.4 Subcontractors. The Servicer may subcontract services, subject -------------- to the approval of Wilshire Realty Services Corporation, a Delaware corporation ("WRSC"), but no such subcontract shall relieve or reduce the Servicer's obligations to perform services as provided in this Agreement. 2.5 Indemnity. The Servicer shall reimburse and indemnify the --------- Company and its successors and assigns for and against, and hold the Company and its successors and assigns harmless from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements, including without limitation reasonable fees and disbursements of counsel, which may be imposed upon, or incurred by the Company in any way relating to or arising out of the Servicer's gross negligence in its performance of its duties hereunder. The Company shall reimburse and indemnify the Servicer and its successors and assigns for and against, and hold the Servicer and its successors and assigns harmless from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements, including without limitation reasonable fees and disbursements of counsel, which may be imposed upon, or incurred by the Servicer in any way relating to or arising out of the Servicer's performance of its duties hereunder, the Real Estate Assets or the servicing thereof prior to the servicing by the Servicer other than arising out of the Servicer's gross negligence. 2.6 Modifications, Adjustable Rate, and Payoffs. In connection with ------------------------------------------- its collection efforts the Servicer may modify or change the interest rate of any loan, and quote to, and accept from, a Borrower a full or partial payoff amount on any loan as full settlement. 2.7 Monthly Accounting Reports. For each month during the term of -------------------------- this Agreement, the Servicer will furnish the Company with a monthly report regarding the Real Estate Assets by the twenty-fifth (25th) day of the following month. The Servicer shall furnish at the Servicer's cost such other information regarding the Servicer, the Real Estate Assets and this Agreement as the Company may from time to time reasonably request, provided, that if the information or data requested by the Company is something the Servicer cannot produce internally from its then existing reporting systems without manual compilation or production, or reprogramming its computer system, the Company shall reimburse the Servicer for its cost for furnishing such information. 3. Term. This Agreement shall commence on the date hereof and shall ---- continue in force for two (2) years, and thereafter, will automatically renew for successive one-year periods -2- unless either party delivers a notice of termination at least 120 days prior to the end of the then current term. Notwithstanding any other provision to the contrary, this Agreement shall be terminated if the Management Agreement, dated April __, 1998, between the Company and WRSC is terminated by either the Company or WRSC. 4. Subservicing Agreements. ----------------------- 4.1 Engagement of Subservicer. The Servicer shall not enter into ------------------------- Subservicing Agreements, permit the subservicing of, or delegate any of its duties to any Subservicers with respect to, all or part of the Real Estate Assets except under the circumstances described in the next sentence or as approved by WRSC. In the event that the Servicer is not permitted to service one or more Real Estate Assets in any jurisdiction pursuant to the laws, ordinances, rules or regulations ("Laws") of such jurisdiction that are applicable to such Real Estate Assets, the Servicer may retain a Subservicer under a Subservicing Agreement for the purpose of performing any servicing of such Real Estate Assets that the Servicer is not permitted by such Laws to perform; provided, however, that (i) such Subservicer shall be retained only for so long as and to the extent that such Laws do not permit the Servicer to perform particular servicing duties, and (ii) the Servicer shall take such actions (including obtaining any necessary licenses or qualifications and paying any necessary fees in connection therewith) as shall be necessary in order for the Servicer to be permitted, as promptly as possible, to service the applicable Real Estate Assets in the applicable jurisdiction directly. Unless otherwise set forth in the related acknowledgment agreement (the "Acknowledgment Agreement"), with respect to each Real Estate Asset, the Servicer by its execution of the related Acknowledgment Agreement shall be deemed to have represented and warranted to the Company that as of the date of such execution there are no Laws enacted or proposed to be enacted applicable to the related Real Estate Assets that would not permit the Servicer to service such Real Estate Assets directly and without the use of a Subservicer. The Servicer shall notify the Company and/or WRSC of each Subservicing Agreement entered into by it pursuant to this Section 4.1 within twenty (20) business days after such Subservicing Agreement is entered into, which notice shall set forth the reasons such Subservicing Agreement is necessary and is permitted under this Section 4.1 and shall attach a copy of such Subservicing Agreement. The Servicer shall also notify the Company and/or WRSC as soon as any Subservicing Agreement is no longer necessary with respect to any Real Estate Assets and shall immediately terminate such Subservicing Agreement as to such Real Estate Assets. Each Subservicing Agreement shall provide that it is terminable at will without payment of a termination fee or penalty. 4.2 Qualification to do Business. Each Subservicer shall be licensed ---------------------------- to transact business and to perform its obligations under its Subservicing Agreement in each jurisdiction required by the Laws applicable to the Real Estate Assets being serviced by such Subservicer. Each Subservicing Agreement will be upon such terms and conditions as are not inconsistent with this Agreement and as the Servicer and the Subservicer have agreed. As part of its servicing activities hereunder, the Servicer shall enforce the obligations of each Subservicer under the related Subservicing Agreement. -3- 4.3 Liability. Notwithstanding any Subservicing Agreement, any of --------- the provisions of this Agreement relating to agreements or arrangements between the Servicer and Subservicer or reference to actions taken through a Subservicer or otherwise, the Servicer shall remain obligated and liable to the Company for the servicing and administering of the Real Estate Assets in accordance with the provisions of this Agreement without diminution of such obligation or liability by virtue of indemnification from a Subservicer and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the Real Estate Assets. 4.4 Indemnity. Any Subservicing Agreement and any other transactions --------- or services relating to the Real Estate Assets involving a Subservicer shall be deemed to be between such Subservicer and Servicer alone, and the Company shall have no obligation, duty or liability with respect to such Subservicer, including, without limitation, any obligation, duty or liability to pay such Subservicer's fees and expenses. For purposes of remittances by the Servicer pursuant to this Agreement, the Servicer shall be deemed to have received a payment on a Mortgage Loan when the applicable Subservicer has received such payment. 4.5 Action of Subservicer. References in this Agreement to actions --------------------- taken or to be taken by the Servicer in servicing the Real Estate Assets include actions taken or to be taken by a Subservicer on behalf of the Servicer to the extent that under applicable Laws the Servicer may not take such actions directly. 5. Maintenance of Insurance and Errors and Omissions and Fidelity -------------------------------------------------------------- Coverage. - -------- 5.1 Insurance Coverage Requirements. The Servicer shall use its best ------------------------------- efforts to cause the Borrower to maintain for each Real Estate Assets all insurance required by the terms of the documents for the amounts set forth therein. If the Borrower fails to maintain such insurance, then the Servicer shall notify the Company and/or WRSC of such failure and cause to be maintained prior to the termination of any existing such policy, or if there is no existing such policy, as promptly as is practicable and as conforms with accepted servicing practices (i) fire and hazard insurance with extended coverage in an amount which is at least equal to the lesser of the current principal balance of such Real Estate Assets and the replacement cost of the improvements which are a part of the related Real Estate Assets and (ii) to the extent that the Real Estate Assets are located in a federally designated special flood hazard area, flood insurance in respect thereof. Such flood insurance shall be in an amount equal to the lesser of (y) the unpaid principal balance of the Real Estate Assets or (z) the maximum amount of such insurance as is available for the Real Estate Assets under the National Flood Insurance Act. After notifying the Company pursuant to the second preceding sentence, the Servicer shall take such action as the Company and/or WRSC reasonably requests with respect to the maintenance of any other forms of insurance which are required to be maintained pursuant to the documents of the Real Estate Assets. Any amounts collected by the Servicer under any such policies (other than amounts to be applied to the restoration or repair of the Real Estate Assets or amounts released to the Borrower in accordance with the terms of the Real Estate Assets) shall be deposited in the escrow accounts. To the extent the Servicer has expended its own funds to pay for insurance premiums under this Subsection 5.1, -4- the cost of such premiums shall be deemed a servicing advance. The Servicer shall promptly notify the Company and/or WRSC if there is a change of an insurance carrier, an increase in the deductible, or a decrease in the scope or amount of coverage, with respect to any insurance policy required to be maintained by a Borrower under the documents for the Real Estate Assets. 5.2 Blanket Policy. In the event that the Servicer shall obtain and -------------- maintain a blanket policy insuring against losses on all of the Real Estate Assets with a qualified insurer, to the extent such policy provides no less coverage in scope and amount with respect to each Real Estate Assets than the insurance required to be maintained by the Servicer pursuant to Section 5.1, the Servicer shall conclusively be deemed to have satisfied its obligations as set forth in Section 5.1, it being understood and agreed that such policy may contain a deductible clause, in which case the Servicer shall, in the event that there shall not have been maintained on any Real Estate Assets a policy complying with Section 5.1 and there shall have been a loss which would have been covered by such policy, deposit in the custodial account the amount not otherwise payable under the blanket policy because of such deductible clause to the extent that any such deductible exceeds the deductible limitation that pertained to the Real Estate Assets, or, in the absence of any such deductible limitation, the deductible limitation which is consistent with accepted servicing practices. Any such deposit by the Servicer shall be made prior to the remittance date upon which the proceeds represented by such deposit are required to be distributed to the Company. In connection with its activities as administrator and servicer of the Real Estate Assets, the Servicer agrees to present, on behalf of itself and the Company, claims under any such blanket policy. 5.3 Master Policy. If the Servicer causes any Real Estate Assets to ------------- be covered by a master single interest insurance policy naming the Servicer on behalf of the Company as the loss payee, which policy is issued by a qualified insurer to the extent such policy provides no less coverage in scope and amount for such Real Estate Assets than the insurance required to be maintained by the Servicer pursuant to Section 5.1, the Servicer shall conclusively be deemed to have satisfied its obligation set forth in Section 5.1. in the event that the Servicer shall cause any Real Estate Assets to be covered by such a master single interest insurance policy, the incremental costs of such insurance applicable to such Real Estate Assets (i.e., other than any minimum or standby premium payable for such policy whether or not any Real Estate Assets is covered thereby) shall be paid by the Servicer as a servicing advance. Such master single interest policy may contain a deductible clause, in which case the Servicer shall, in the event that there shall not have been maintained on the related Real Estate Assets a policy otherwise complying with the provisions of Section 5.1, and there shall have been one or more losses which would have been covered by such a policy had it been maintained, deposit into the custodial account from its own funds the amount not otherwise payable under the master single interest policy because of such deductible clause to the extent that any such deductible exceeds the deductible limitation that pertained to the related Real Estate Assets, or, in the absence of any such deductible limitation, the deductible limitation which is consistent with accepted servicing practices. 5.4 Servicer Bond and Insurance Requirement for Officer and ------------------------------------------------------- Directors. The Servicer shall obtain and maintain at its own expense, and keep in full force and effect throughout the term of this Agreement, a blanket fidelity bond and an errors and omissions insurance policy -5- covering the Servicer's officers and employees acting on behalf of the Servicer in connection with its activities under this Agreement. The amount of such coverage shall meet the servicing requirements of prudent institutional commercial mortgage loan servicers. In the event that any such bond or policy ceases to be in effect, the Servicer shall obtain a comparable replacement bond or policy. Coverage of the Servicer under a policy or bond obtained by an affiliate of the Servicer and providing the coverage required by this Section shall satisfy the requirements of this Section. 6. Annual Statement as to Compliance. The Servicer will deliver to the --------------------------------- Company, on or before December 31 of each year, beginning December 31, 1998, an officer's certificate stating as to each signatory thereof, that (a) a review of the activities of the Servicer during the preceding calendar year (or during the period from the date of execution of this Agreement until the end of the preceding calendar year in the case of the first such certificate) and of performance under this Agreement has been made under such officer's supervision; and (b) to the best of such officer's knowledge, based on such review, the Servicer has fulfilled all of its obligations under this Agreement throughout such period, or if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. 7. Annual Independent Public Accountants' Servicing Report. On or before ------------------------------------------------------- December 31 of each year, beginning December 31, 1998, the Servicer, at its expense, shall cause a firm of independent public accountants that is a member of the American Institute of Certified Public Accountants to furnish a statement to the Company to the effect that such firm has examined certain documents and records relating to the servicing practices of the Servicer for the preceding calendar year (or during the period from the date of execution of this Agreement until the end of the preceding calendar year in the case of the first such certificate) and that, on the basis of such examination conducted substantially in compliance with generally accepted auditing standards and the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, such firm is of the opinion that such servicing during such period has been conducted generally in compliance with this Agreement except for such exceptions that, in the opinion of such firm, generally accepted auditing standards and the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC requires it to report, in which case such exceptions shall be set forth in such statement. 8. Access to Certain Documentation Regarding the Real Estate Assets. ---------------------------------------------------------------- Upon reasonable advance notice, the Servicer will provide reasonable access during its normal business hours at its offices to the Company and/or WRSC, and with the Company's consent, to a savings and loan association, bank or insurance company to certain reports and to information and documentation regarding the Real Estate Assets sufficient to permit the Company, the Office of Thrift Supervision, the FDIC, the supervisory agents and the examiners of any such entity to comply with applicable regulations of the Office of Thrift Supervision or other regulatory authorities with respect to investment in the Real Estate Assets. 9. Fees and Costs. The Company shall pay the Servicer and the Servicer -------------- may retain or disburse from any Real Estate Asset proceeds the following amounts: -6- 9.1 Reimbursement of Costs. All bona fide amounts paid by the ---------------------- Servicer to third parties in connection with this Agreement, including without limitation, stationery suppliers, related printing costs, fees for recordings and filings, mailgrams, repossession agency fees, legal fees, travel, insurance costs, and payments arising out of acts or omissions of third parties (including persons from which the Real Estate Assets are acquired), and the Servicer's standard photocopy charges. 9.2 Service Fee. The Servicer shall be entitled to a fee (the ----------- "Servicer's Service Fee") for servicing Real Estate Assets equal to (a) all interest and other earnings paid or accrued on amounts from time to time on deposit in any accounts in which proceeds of Real Estate Assets are deposited plus (b) a monthly fee equal to an amount negotiated by the parties for each particular Real Estate Assets portfolio, which monthly fee shall be comparable to or below fees charged by other industry participants for servicing comparable loan portfolios. 9.3 Payment. The Servicer may withdraw on a monthly basis from all ------- Real Estate Assets proceeds all escrow payments, costs, and the Servicer's Service Fee. Within twenty-five (25) days after the last day of each calendar month the Servicer shall pay to the Company or the Affiliate owning the Real Estate Assets the net proceeds received in that calendar month. The Company or the applicable Affiliate shall pay the Servicer within fifteen (15) days after billing for any excess fees and costs. The Servicer shall receive any ancillary income, other than any float revenue. 10. Independent Contractor. The Servicer shall provide the Services in ---------------------- the capacity of an independent contractor. Nothing in this Agreement shall be construed as establishing an employment, partnership or joint venture between the Company and the Servicer. 11. Representations of the Company. The Company represents and warrants as ------------------------------ follows: 11.1 The Company has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, with power and authority to own its properties and to conduct its business as such properties are currently owned and such business is currently conducted. 11.2 The Company has the power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery, and performance of this Agreement have been duly authorized by the Company by all necessary action on the part of the Company. 11.3 This Agreement constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditor rights generally. 12. Representations of the Servicer. The Servicer represents and warrants ------------------------------- as follows: -7- 12.1 The Servicer has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, with power and authority to own its properties and to conduct its business as such properties are currently owned and such business is currently conducted and has corporate power, authority and legal right to service the Real Estate Assets as provided in this Agreement. 12.2 The Servicer has the power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery, and performance of this Agreement have been duly authorized by the Servicer by all necessary corporate action on the part of the Servicer. 12.3 This Agreement constitutes a legal, valid and binding obligation of the Servicer enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting enforcement of creditor rights generally. 13. Audits and Examinations. ----------------------- 13.1 The Servicer shall use reasonable efforts to maintain in good order and condition throughout the term of this Agreement all Real Estate Assets files and relevant materials that the Servicer has received regarding the Real Estate Assets. 13.2 The Servicer shall maintain a copy of each Real Estate Assets file at its office or elsewhere within its control, provided, that at the Company's request, the Servicer will deliver copies of such Real Estate Assets to the Company or a designee of the Company. The Servicer shall make available to the Company or its duly authorized representatives, attorneys or auditors the Real Estate Assets files and the related accounts, records and computer systems maintained by the Servicer at such times as the Company shall reasonably request. 13.3 The Servicer shall permit the Company, and its agents to audit the books and records of the Servicer applicable to the Real Estate Assets at the Servicer's business premises during the Servicer's normal business hours upon reasonable prior notice to the Servicer. The Company shall have direct access to the Servicer's management information system for the Real Estate Assets or, if applicable, to any service bureau used by the Servicer for the Real Estate Assets. 14. Substitute Servicer; Limited Arbitration. ---------------------------------------- 14.1 If at any time during the term of this Agreement the Servicer shall breach, or default in the performance of a material obligation of the Servicer undertaken in this Agreement, the Company and the Servicer shall consult for such period of time as the Company may determine is reasonable under the circumstances to determine a mutually acceptable resolution. In the event the Company and the Servicer fail to agree thereon within such period as the Company may specify, then the Company may, by written notice to the Servicer and without -8- limitation of any other right or remedy of the Company, require that the Servicer transfer the Real Estate Assets, and all of the Servicer's servicing and related rights and obligations in and with respect to the Real Estate Assets, to a substitute servicer to be designated by the Company. Such substitute servicer shall thereupon perform, pursuant to a servicing contract acceptable to the Company, all of the Servicer's duties and obligations under this Agreement. Upon the Company's designation of such a substitute servicer, the Servicer shall within a reasonable time and to the extent it holds possession thereof, deliver to such substitute servicer all written evidence and documentation of the Real Estate Assets and the Servicer thereafter shall cooperate and follow all instructions of the Company in all reasonable respects to facilitate such substitute servicer's performance of the Servicer's duties and obligations under this Agreement. The fees and expenses of the substitute servicer shall be paid by the Company. The Servicer, however, shall continue to be entitled to the Servicer's Service Fee with regard to any Real Estate Assets being serviced under this section, net of all servicing fees paid by the Company to the substitute servicer for such Real Estate Assets. 14.2 If the Servicer wishes to contest or dispute the Company's appointment of a substitute servicer, The Servicer shall so notify the Company in writing within thirty (30) days after such appointment, specifying in the notice the Servicer's reasons for doing so. Such controversy or dispute regarding the Company's appointment of a substitute servicer shall be settled by arbitration, by one arbitrator in Portland, Oregon in accordance with the Rules of the American Arbitration Association ("AAA"), subject to the provisions of Section 9.3 and any other applicable provisions of this Agreement. The arbitrator, whether appointed by the parties or pursuant to the Rules of the AAA, shall be impartial and neutral and shall have experience in the management of operations of an institution which performs financing and collection services similar to those to be performed by the Servicer under this Agreement. The decision of the arbitrator shall be final, binding and conclusive upon the parties. The arbitrator shall comply with the privacy restrictions provided in Section 14.7 regarding publication of any award. 14.3 In no event shall the arbitrator have power or authority to add to or detract from the agreements of the parties nor to award punitive or consequential damages. The arbitrator shall be authorized only to render an award regarding a dispute or controversy concerning the Company's appointment of a substitute servicer pursuant to Section 14.1 hereof, including an award of costs and expenses as herein provided, and the arbitrator shall not purport to determine, or issue an award regarding, any other legal or equitable rights or remedies of the parties. 14.4 The arbitration hearing will conclude and the arbitrator's award shall be rendered in writing within 30 days after it commences. The arbitrator will make every effort to enforce this requirement strictly, but may extend the time for the hearing upon a showing that exceptional circumstances require extension to prevent manifest injustice. 14.5 The parties will share equally the expense of deposits and advances required by the AAA but either party may advance such amounts, subject to recovery thereof as an addition or offset to any award. The arbitrator shall award to the prevailing party, as determined by the -9- arbitrator, all costs, fees and expenses related to the arbitration, including reasonable fees and expenses of attorneys, experts and other professionals incurred by the prevailing party. 14.6 In the event of any legal action relating to the arbitration, including any action to stay the arbitration, to vacate, modify or correct any award or otherwise, the prevailing party in such action as determined by the court shall be entitled to recover from the other party its court costs and reasonable fees and expenses of attorneys, experts and other professionals incurred in connection with the action, including such costs, fees and expenses upon appeal. The institution and maintenance of an action for judicial relief, or the pursuit of any provisional, ancillary, or judicial remedy by any party, shall not constitute a waiver of the right of any party, including the plaintiff in such judicial action, to submit the controversy or claim to arbitration pursuant to Section 14.2 hereof. 14.7 The Servicer and the Company acknowledge that the existence, progress and results of any arbitration held under this Agreement, and any arbitral award, are to remain private. Each party agrees not to publish or disclose any information regarding the arbitration or any such award by any means, except as may be required for enforcement of any arbitral award and further agrees to take reasonable care, but in no event less care than it takes to protect its own confidential business information generally, to prevent disclosure and dissemination of such information. 14.8 The award rendered in any arbitration may be enforced in any court of competent jurisdiction. 15. General Provisions. ------------------ 15.1 Written Notices. Notices under this Agreement must be in writing --------------- and mailed, U.S. Mail with first class postage prepaid or overnight mail, or telecopied, to the appropriate address shown above unless the address has been changed by notice given as provided herein at least three (3) business days in advance of the effective date of such change. Notice will be effective three (3) business days after mailing or one business day after telecopy. Wilshire Credit Corporation 1776 SW Madison Street Portland, OR 97207 Telephone No.: (503) 223-5600 Telecopy No.: (503) 223-8399 with a copy to: James M. Waddington, Esq. Proskauer Rose LLP 1585 Broadway New York, NY 10036-8299 Wilshire Real Estate Investment Trust Inc. 1776 SW Madison Street -10- Portland, OR 97207 Telephone No.: (503) 223-5600 Telecopy No.: (503) 223-8399 with a copy to: James M. Waddington, Esq. Proskauer Rose LLP 1585 Broadway New York, NY 10036-8299 Wilshire Realty Services Corp. 1776 SW Madison Street Portland, OR 97207 Telephone No.: (503) 223-5600 Telecopy No.: (503) 223-8399 with a copy to: James M. Waddington, Esq. Proskauer Rose LLP 1585 Broadway New York, NY 10036-8299 15.2 Attorneys' Fees. If any judicial proceeding is initiated by --------------- either of the parties arising out of the subject matter of this Agreement, including without limitation any suit or action arising under state or federal securities laws, trial, appeal, or bankruptcy, the prevailing party in such proceeding will be entitled to recover, in addition to any judgment obtained in such proceeding, reasonable attorneys' fees and court costs incurred. 15.3 Events Beyond the Control of the Parties. Performance by either ---------------------------------------- party hereunder will not be deemed to be in default where the delay or default is due to events beyond its reasonable control, including without limitation war, insurrection, strike, lock-outs, riots, floods, earthquakes, fires, casualties, acts of God, epidemics, quarantine restrictions, governmental restrictions, inability to secure necessary labor or materials, acts of the other party or failure to act of any public or governmental agency or entity. 15.4 Further Assurances. Following the execution of this Agreement, ------------------ the Servicer and the Company, respectively, shall, from time to time at the request of the other, execute and deliver such other documents and instruments, and shall take such other actions, as may be reasonably necessary or appropriate to carry out and perform more effectively the terms and purposes of this Agreement. 15.5 Governing Law. This Agreement will be governed by the laws of ------------- the state of Oregon. Any dispute arising from or in connection with this Agreement, other than as provided in Section 9, shall be resolved in the applicable state or federal court in Portland, Oregon. -11- 15.6 Severability. If any provision herein is deemed unenforceable in ------------ whole or in part, such provision shall be deemed severable solely to the extent of such enforceability without impacting the remainder of this Agreement. 15.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts. Each signed counterpart shall be deemed an original, but all of them together constitute one and the same instrument. 15.8 Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the parties as to its subject matter and supersedes all proposals, oral or written, and all negotiations, conversations or discussions heretofore had between the parties related to the subject matter of this Agreement. Any amendment to this Agreement must be in writing signed by the party to be charged. -12- IN WITNESS WHEREOF, this agreement has been duly signed by the Servicer and on behalf of the Company on the day and year first above written. Wilshire Credit Corporation By:_______________________________________ Its:______________________________________ Wilshire Real Estate Investment Trust Inc. By:_______________________________________ Its:______________________________________ -13- EX-10.5 12 FORM OF ACQUISITION AGREEMENTS EXHIBIT 10.5 ================================================================================ PURCHASE AND SALE AGREEMENT by and among WILSHIRE REAL ESTATE PARTNERSHIP L.P., a Delaware limited partnership and WILSHIRE PROPERTIES 1 INC. an Oregon corporation Dated as of April ___, 1998 ================================================================================ TABLE OF CONTENTS ----------------- RECITALS.................................................................. 1 TERMS OF AGREEMENT........................................................ 1 1. PURCHASE AND SALE AGREEMENT........................................ 1 1.1 Purchase and Sale............................................ 1 1.2 Assumption of Obligations.................................... 1 1.3 Assignment of Certain Rights................................. 1 1.4 Prorations................................................... 2 2. THE PROPERTY....................................................... 2 2.1 Land......................................................... 2 2.2 Buildings and Other Improvements............................. 2 2.3 Tangible Personal Property................................... 2 2.4 Leases....................................................... 2 2.5 Appurtenances................................................ 2 2.6 Intangible Personal Property................................. 2 3. PURCHASE PRICE..................................................... 3 3.1 Purchase Price............................................... 3 4. CLOSING............................................................ 3 4.1 Conditions to Obligations of Purchaser....................... 3 4.2 Conditions to Obligations of Seller.......................... 4 4.3 Time and Place............................................... 5 4.4 Closing Items................................................ 5 4.5 Transfer Taxes and Other Closing Costs....................... 6 4.6 Default and Remedies......................................... 6 a. Remedies................................................. 6 b. Failure to Obtain Consents............................... 6 4.7 Failure of Closing to Occur.................................. 7 5. REPRESENTATIONS AND WARRANTIES......................................... 7 5.1 Representations and Warranties of the Purchaser to the Seller 7 a. Organization............................................. 7 b. Authorization............................................ 7 c. Consents and Approvals................................... 7 d. No Violation............................................. 7 5.2 Representations, Warranties and Indemnities of Seller........ 8 a. Notice from Governmental Agencies........................ 8 b. Defects.................................................. 8 i c. Environmental Matters.................................... 8 d. Service Contracts........................................ 8 6. COVENANTS OF SELLER.................................................... 8 7. FURTHER ASSURANCES..................................................... 9 8. MISCELLANEOUS.......................................................... 9 8.1 Integration.................................................. 9 8.2 No Assignment................................................ 9 8.3 Amendments................................................... 9 8.4 Governing Law................................................ 9 8.5 Notices...................................................... 9 8.6 Waiver....................................................... 10 8.7 Counterparts................................................. 10 8.8 Time of the Essence.......................................... 10 8.9 Expenses..................................................... 10 8.10 Headings..................................................... 10 8.11 Severability................................................. 10 8.12 Statutory Disclosure......................................... 10 EXHIBIT AND SCHEDULE LIST Section First Exhibits Referenced Exhibit A Land Description Recital A Exhibit B Permitted Exceptions Section 4.4 ii EXHIBIT AND SCHEDULE LIST Section First Exhibits Referenced Exhibit A Land Description Recital A Exhibit B Permitted Exceptions Section 4.4 iii PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into as of April __, 1998 by and among Wilshire Real Estate Partnership L.P., a Delaware limited partnership ("Purchaser"), and Wilshire Properties 1 Inc., an Oregon corporation ("Seller"). RECITALS A. Seller is the owner of certain land located in Portland, Oregon as more particularly described in Exhibit A, and the buildings, structures and other improvements situated thereon, together with all tangible personal property, leases, appurtenances and intangible personal property, as more particularly defined in Section 2 (collectively, the "Property"). --------- B. The Property is commonly known as 1776 SW Madison and the Taylor Street Buildings. C. Seller desires to sell the Property to the Purchaser, and Purchaser desires to purchase such Property from the Seller upon the terms and conditions set forth below. NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: TERMS OF AGREEMENT 1. PURCHASE AND SALE AGREEMENT. 1.1 Purchase and Sale. At the Closing (as hereinafter defined) and ----------------- subject to the terms and conditions contained in this Agreement, Seller agrees to sell to Purchaser the Property and Purchaser agrees to purchase from Seller the Property. 1.2 Assumption of Obligations. Except as otherwise expressly provided ------------------------- herein, upon the Closing, Purchaser shall assume the contractual obligations of Seller under all loans, leases, contracts, and other agreements or other obligations of Seller relating to the Property (other than debt that is non recourse to Seller) to the extent such obligations relate to periods commencing after the Closing Date. 1.3 Assignment of Certain Rights. Effective upon the Closing, Seller, ---------------------------- without representation or warranty, hereby assigns to Purchaser all of its rights and interests, if any, including rights to indemnification in favor of Seller, under the agreements pursuant to which Seller or its affiliates initially acquired the Property transferred pursuant to this Agreement. 1.4 Prorations. On the Closing Date (as hereinafter defined), or as ---------- promptly as practicable following the Closing Date, to the extent such matters are not the right or responsibility of a tenant or tenants of the Property, all revenues and all charges that are customarily prorated in transactions of this nature, including accrued rent, overpaid taxes or fees, real and personal property taxes, utilities, interest on mortgage debt encumbering the Property, and other similar periodic charges and operating expenses receivable or payable with respect to the Property shall be ratably prorated between the Purchaser and the Seller effective as of the Closing Date. 2. THE PROPERTY. The Property to be sold and purchased under this Agreement is as follows: 2.1 Land. The Land, as is described in Exhibit A. ---- 2.2 Buildings and Other Improvements. All existing buildings, -------------------------------- structures and other improvements located upon the Land, including, without limitation, maintenance facilities, landscaping improvements, paving, walkways, road improvements, parking facilities, and all other improvements of whatever kind which have previously been made, installed or erected and are now located on any part of the Land (collectively, the "Improvements"). 2.3 Tangible Personal Property. All of Seller's right, title and -------------------------- interest in and to tangible personal property utilized in the operation of the Land and Property, including, without limitation, all of Seller's right, title and interest in the following tangible personal property: equipment, fixtures, and all other tangible personal property of Seller which is used, or which has been acquired for use, in the operation of the Land and Improvements (the "Tangible Personal Property"). 2.4 Leases. All of Seller's right, title and interest in and to the ------ leases and rental agreements, together with any modifications, extensions or renewals thereof, affecting the Property or any part thereof (the "Leases"). 2.5 Appurtenances. All of Seller's right, title and interest in and to ------------- all appurtenances, rights, including reversionary rights, easements, covenants, conditions, servitudes of any kind or nature and privileges belonging to or running with the Land, including, without limitation, all of Seller's right, title and interest in and to any and all land laying in the bed of any street, road, cul-de-sac, alley or access way, open or closed, existing, vacated or proposed, adjoining, adjacent to or contiguous to the Land, all awards for damage to the Land or taking by eminent domain or the change in the grade of any street adjoining the Land, all strips and gores of land adjoining or surrounded by the Land, and all zoning and land use entitlement and development rights pertaining to the Land (the "Appurtenances"). 2.6 Intangible Personal Property. All intangible personal property now ---------------------------- owned by Seller, or in which Seller has any interest on the Closing Date, which is used in, or which has been acquired for use in, the operation of the Land or Property (the "Intangible Property"), including by way of example and not by limitation: 2 a. All of the maintenance, service, advertising and other like contracts and agreements (including equipment leases) with respect to the ownership, use and operation of the Property (the "Service Contracts"); b. All licenses, entitlements, permits, certificates of occupancy and other governmental approvals issued or granted in connection with the Property; c. All trade names, trademarks and logos associated with the use of the Property; and d. All right, title and interest of the Seller in and to all other intangible personal property owned or held by the Seller or with respect to which Seller has any right, title, claim, interest, or estate, in, to, under or with respect to the Property and the other assets of the Seller (including, without limitation, claims and choices in action) relating to the Property. The Intangible Property and the Tangible Personal Property are the "Personal Property". 3. PURCHASE PRICE. 3.1 Purchase Price. The Purchase Price for the Property shall be -------------- $4,400,000, allocated $1,800,000 to 1776 SW Madison and $2,600,000 to the Taylor Street Buildings. The Purchase Price shall be paid as follows: a. Purchaser will pay $886,637 in cash at closing for 1776 SW Madison and $1,424,205 in cash at closing for the Taylor Street Buildings. b. Purchaser shall assume at closing the existing deed of trust on 1776 SW Madison securing a promissory note in favor of Bank of America National Trust & Savings Association with a present unpaid principal balance of approximately $913,363 and the existing deed of trust on the Taylor Street Buildings securing a promissory note in favor of Bank of America National Trust & Savings Association with a present unpaid principal balance of approximately $1,175,795. In the event the unpaid principal balance of the notes shall be more or less than the amount above stated, the difference shall be adjusted in the cash payment due upon the closing date. 4. CLOSING 4.1 Conditions to Obligations of Purchaser. The obligations of the -------------------------------------- Purchaser to effect the transactions contemplated hereby shall be subject to the following additional conditions: a. The representations and warranties of Seller contained in this Agreement shall have been true and correct in all material respects on the date such representations 3 and warranties were made, and shall be true and correct in all material respects on the Closing Date as if made at and as of such date; b. Each of the obligations of Seller to be performed by it under this Agreement shall have been duly performed by it in all material respects on or before the Closing Date; c. Concurrently with the Closing, the Seller shall have executed and delivered, or caused to be delivered, to the Purchaser the documents required to be delivered pursuant to Section 4.4 hereof; d. Seller shall have obtained all necessary consents or approvals of governmental authorities or third parties to the consummation of the transactions contemplated hereby; e. Seller shall not have breached any of its covenants contained herein in any material respect; f. No order, statute, rule, regulation, executive order, injunction, stay, decree or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or governmental or regulatory authority or instrumentality that prohibits the consummation of the transactions contemplated hereby, and no litigation or governmental proceeding seeking such an order shall be pending or threatened; g. There shall not have occurred between the date hereof and the Closing Date any material adverse change in the Property; Any or all of the foregoing conditions may be waived by the Purchaser in its sole and absolute discretion. 4.2 Conditions to Obligations of Seller. The obligations of Seller to ----------------------------------- effect the transactions contemplated hereby shall be subject to the following additional conditions: a. The representations and warranties of the Purchaser contained in this Agreement shall have been true and correct in all material respects on the dates such representations and warranties were made, and shall be true and correct in all material respects on the Closing Date as if made at and as of such date; b. Each of the obligations of the Purchaser to be performed by it under the Agreement shall have been duly performed by it in all material respects on or before the Closing Date; 4 c. Concurrently with the Closing, the Purchaser shall have executed and delivered to the Seller the documents required to be delivered pursuant to Section 4.4 hereof; d. The Purchaser shall have obtained all consents or approvals of governmental authorities or third parties necessary for the consummation of the transactions contemplated hereby which it is required to obtain; e. Purchaser shall not have breached any of its covenants contained herein in any material respect; f. No order, statute, rule, regulation, executive order, injunction, stay, decree or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or governmental or regulatory authority or instrumentality that prohibits the consummation of the transactions contemplated hereby, and no litigation or governmental proceeding seeking such an order shall be pending or threatened; g. There shall not have occurred between the date hereof and the Closing Date any material adverse change in the financial condition of Purchaser. Any or all of the foregoing conditions may be waived by any Seller in its sole and absolute discretion. 4.3 Time and Place. The date, time and place of the transactions -------------- contemplated hereunder shall be at 10 a.m. in the office of First American Title Insurance Company, 200 SW Market Street, Suite 1776, Portland, Oregon 97201-5986 on or before April 6, 1998 or such other place and time as the parties may mutually agree (the "Closing" or "Closing Date"). The transfers described in Section 4 of this Agreement and all closing deliveries shall be deemed concurrent for all purposes. 4.4 Closing Items. At the Closing, the parties shall make, execute, ------------- acknowledge and deliver, or cause to be delivered, the legal documents and other items necessary to carry out the intention of this Agreement and to convey valid and marketable title to the Property from Seller to Purchaser, which documents and other items shall include the following: a. Seller shall deliver duly executed, recordable, special warranty deeds conveying the Property to the Purchaser subject to the permitted exceptions described in attached Exhibit B (the "Deed"). b. Seller and Purchaser shall deliver an assignment and assumption of lessor's interest in lease duly executed by Seller and the Purchaser [, in form and substance satisfactory to Purchaser]. c. Seller shall deliver an assignment of intangible personal property duly executed by Seller [, in form and substance satisfactory to Purchaser]. 5 d. Seller shall deliver a bill of sale duly executed by Seller [, in form and substance satisfactory to Purchaser]. e. Seller shall cause to be issued to the Purchaser owner's policies of title insurance issued as of the Closing Date for the Property, in form acceptable to Purchaser in the amount of $1,800,000 for 1776 SE Madison and $2,600,000 for the Taylor Street Buildings (the "Title Policy"). f. Seller shall deliver possession at the Property of any books and records relating to the Property maintained by or for the Seller, including complete originals of all Leases, documents in tenant files, and Service Contracts. g. Seller shall deliver an affidavit from Seller, stating under penalty of perjury: (i) the Seller's United States Taxpayer Identification Number, (ii) that Seller is not a foreign person pursuant to section 1445(b)(2) of the Code, and (iii) that the transaction contemplated hereby does not require the Purchaser to comply with any withholding or similar requirements under the laws of the state where the Property is located. h. Certificates of Insurance, evidencing insurance maintained for the Properties as required by existing mortgages and loan agreements pertaining to the Property, or as reasonably required by Purchaser. i. Seller shall deliver to Purchaser or its nominee the deposits under the Leases. j. Seller shall deliver possession of any keys to the Property in possession of Seller. k. Each of the parties shall deliver any other documents, instruments, agreements, actions, or items reasonably necessary and appropriate to consummate the transactions contemplated by this Agreement. 4.5 Transfer Taxes and Other Closing Costs. Seller shall pay the -------------------------------------- premium for the standard owner's policies of title insurance. Seller and Purchaser shall each pay one-half of the escrow fees and any transfer tax. Purchaser shall pay the recording fees. 4.6 Default and Remedies. -------------------- a. Remedies. The parties shall, subject to the terms and -------- conditions of this Agreement, each have such rights and remedies as are available at law or in equity with respect to a breach or default by any other party hereunder, except that no party shall be entitled to recover from another consequential damages. 6 b. Failure to Obtain Consents. In the event that Seller shall be -------------------------- unable to obtain any consent required to consummate the transactions contemplated hereunder with respect to the Property, then such failure shall not constitute a default by Seller under this Agreement so long as it used reasonable commercial efforts to obtain such consent. In the event that despite reasonable commercial efforts to obtain said consent, the necessary consents are not obtained prior to 5 days before the Closing Date, the Purchaser shall have the right to terminate this Agreement and upon such termination no party shall have any liability or damages whatsoever to any other party hereunder. 4.7 Failure of Closing to Occur. If, for any reason, the Closing does --------------------------- not occur on or before April 6, 1998 or such later date mutually agreed to in writing, this Agreement will terminate, and except as otherwise provided in this Agreement, any and all rights or obligations hereunder shall cease and no longer be binding on the parties hereto and no party shall thereafter have any liability or obligation hereunder to any other party arising under this Agreement. 5. REPRESENTATIONS AND WARRANTIES. 5.1 Representations and Warranties of the Purchaser to the Seller. The ------------------------------------------------------------- Purchaser hereby represents and warrants to the Seller that: a. Organization. The Purchaser are duly organized, validly ------------ existing and in good standing under the laws of the respective jurisdictions of formation. The Purchaser has all requisite power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary. b. Authorization. The execution, delivery and performance of this ------------- Agreement by the Purchaser has been duly and validly authorized by all necessary action of such party. This Agreement has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, as such enforceability may be limited by bankruptcy or the application of equitable principles. c. Consents and Approvals. No consent, waiver, approval or ---------------------- authorization of any third party is required to be obtained by the Purchaser in connection with its execution, delivery and performance of this Agreement and the transactions contemplated hereby (other than consents to be obtained by Seller pursuant to Section 6.2), except any of the foregoing that shall have been satisfied or waived prior to the Closing Date. d. No Violation. None of the execution, delivery or performance ------------ of this Agreement and the transactions contemplated hereby does or will, with or without the giving of notice, lapse of time, or both, (i) violate, conflict with, result in a breach of, or constitute a default under or give to others any right of acceleration, termination or 7 cancellation of (A) the organizational documents, including articles and bylaws, if any, of the Purchaser; (B) any material agreement, document or instrument to which the Purchaser is a party or by which any of it or any of its property is bound, (C) any term or provision of any judgment, order, writ, injunction, or decree of any governmental or regulatory authority binding on the Purchaser or by which it or any of its assets or properties are bound or subject, or (D) any statute, rule, regulation or law applicable to any of the Purchaser or (ii) result in the creation of any lien upon the Property. 5.2 Representations, Warranties and Indemnities of Seller. Seller ----------------------------------------------------- represents and warrants to and covenant with Purchaser as follows: a. Notice from Governmental Agencies. Seller has not received nor --------------------------------- is Seller aware of any notification from any governmental agency having jurisdiction requiring any work to be done on or affecting the Property in order for it to conform to applicable building codes or other statutes or regulations. b. Defects. Seller hereby warrants that to the best of its ------- knowledge the Property and the improvements thereon do not violate the applicable building or zoning regulations and that it is unaware of any material defect in the Property or the improvements thereon. c. Environmental Matters. Seller has no current actual knowledge --------------------- without further investigation of any hazardous materials on the Property, except those hazardous materials normally and lawfully used in connection with the Property. d. Service Contracts. All Service Contracts were entered into ----------------- in good faith in the ordinary course of business on commercially reasonable terms. 6. COVENANTS OF SELLER 6.1 From the date hereof through the Closing, Seller shall operate and maintain the Property in the ordinary course, consistent with past practice. Seller shall maintain the Property in substantially its present order and condition and make all reasonably necessary repairs and replacements consistent with a reasonably prudent maintenance and repair program followed by owners of similar property in the vicinity of the Property (including the establishment of reasonable budgeted items for repair, maintenance, and capital improvements), and shall deliver the Property on the date of Closing in substantially the same condition it was on the date of the physical inspection performed by the Purchaser, reasonable wear and tear excepted. Without limiting the foregoing, no fixtures, equipment or other Tangible Personal Property shall be removed from the Property unless prior to Closing the same are replaced with similar items of at least equal quality and value. Seller shall not: a. Enter into any material transaction not in the ordinary course of business with respect to the Property; 8 b. Sell or transfer any of the Property, except sales in the ordinary course of business; c. Mortgage, pledge or encumber (or permit to become encumbered) any of the Property, except (x) liens for taxes not due, (y) mechanics' liens being disputed by Seller in good faith and by appropriate proceedings; d. Amend, modify or terminate any material agreements or other instruments relating to the Property; or e. Materially alter the manner of keeping its books, accounts or records pertaining to the Property or the accounting practices therein reflected. 6.2 Seller shall use its best efforts to obtain any approvals, waivers or other consents of third parties required to effect the transactions contemplated by this Agreement. 7. FURTHER ASSURANCES. Each party shall take such other actions and execute such other documents following the Closing as may reasonably be requested in order to effect the transactions contemplated hereby. 8. MISCELLANEOUS. 8.1 Integration. All understandings and agreements heretofore had ----------- among Seller and Purchaser with respect to the purchase and sale of the property by Seller to Purchaser are set forth in this Agreement and the other documents and agreements to be delivered hereunder which fully and completely express the agreements of the parties with respect thereto. 8.2 No Assignment. Neither this Agreement nor any interest hereunder ------------- shall be assigned or transferred by any party hereto without the prior written consent of all other parties hereto. Subject to the foregoing, this Agreement shall inure to the benefit of and shall be binding upon each party hereto and their respective successors and assigns. 8.3 Amendments. This Agreement shall not be modified or amended except ---------- in a written document signed by the parties hereto. 8.4 Governing Law. This Agreement shall be governed and interpreted in ------------- accordance with the laws of the State of Oregon. 8.5 Notices. All notices, requests, demands or other communications ------- required or permitted under this Agreement shall be in writing and delivered either personally, or by certified mail, return receipt requested, postage prepaid, or by overnight courier (such as Federal Express), or by facsimile transmission, addressed as follows: 9 If to the Purchaser: Wilshire Real Estate Partnership, L.P. 1776 SW Madison Street Portland, Oregon 97205 Attention: Lawrence A. Mendelsohn, President If to Seller: 1776 SW Madison Portland, Oregon 97205 Attention: Lawrence A. Mendelsohn, President All notices given in accordance with the terms hereof shall be deemed delivered when delivered personally or otherwise received. Any party hereto may change the address for receiving notices, requests, demands or other communication by notice sent in accordance with the terms of this Section 8.5. 8.6 Waiver. No waiver shall be effective against any party unless it is in ------ a writing signed by that party. 8.7 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.8 Time of the Essence. Time is of the essence of this Agreement. ------------------- 8.9 Expenses. Except as otherwise set forth in writing among the parties, -------- each party shall bear its own expenses, including counsel fees, in the performance of this Agreement. 8.10 Headings. The headings in this Agreement are intended solely for -------- convenience of reference and shall be given no effect in construction or interpretation of this Agreement. 8.11 Severability. The invalidity or unenforceability of any provision of ------------ this Agreement shall not impair the validity or enforceability of any other provision. 8.12 Statutory Disclosure. THE PROPERTY DESCRIBED IN THIS INSTRUMENT MAY NOT -------------------- BE WITHIN A FIRE PROTECTION DISTRICT PROTECTING STRUCTURES. THE PROPERTY IS SUBJECT TO LAND USE LAWS AND REGULATIONS, WHICH, IN FARM OR FOREST ZONES, MAY NOT AUTHORIZE CONSTRUCTION OR SITING OF A RESIDENCE AND WHICH LIMIT LAWSUITS AGAINST FARMING OR FOREST PRACTICES AS DEFINED IN 0RS 30.930 IN ALL ZONES. BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY APPROVED USES AND EXISTENCE OF FIRE PROTECTION FOR STRUCTURES. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. PURCHASER WILSHIRE REAL ESTATE PARTNERSHIP L.P., a Delaware limited partnership By: WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Delaware corporation, sole general partner of Purchaser -------------------------------------------- Lawrence A. Mendelsohn, President SELLER WILSHIRE PROPERTIES 1 INC., an Oregon corporation By: --------------------------------------------- Lawrence A. Mendelsohn, President 11 EXHIBIT A 1776 SW Madison Lots 7, 8, 9, 10 and 11, Block 2, DAVENPORT TRACT, in the City of Portland, County of Multnomah and State of Oregon, EXCEPT that portion of Lots 7 and 8 taken for widening of S.W. 18th Avenue. 12 EXHIBIT A Taylor Street Buildings PARCEL 1: Lots 3 and 4, Block 328, CITY OF PORTLAND, in the City of Portland, County of Multnomah and State of Oregon. PARCEL 2: The East 43 feet of the South 7 feet of Lot 6 and the East 43 feet of Lot 5, Block 328, CITY OF PORTLAND, in the City of Portland, County of Multnomah and State of Oregon. PARCEL 3: Lots 1 and 2, Block 329, CITY OF PORTLAND, in the City of Portland, County of Multnomah and State of Oregon. 13 EXHIBIT B 1776 SW Madison Street 1. City Liens, if any, of the City of Portland. 2. Easement Agreement, including the terms and provisions thereof, Dated: : January 1, 1990 Recorded : March 9, 1990 in Book 2282, page 501 Between : 1776 Madison Building Partnership, an Oregon general partnership and Acres Investment Company, an Oregon general partnership 3. Trust Deed, including the terms and provisions thereof, given to secure an indebtedness of $923,500.00 Dated : October 1, 1996 Recorded : October 31, 1996 as Fee No. 96165492 Grantor : Wilshire Properties 1 Inc., an Oregon corporation Trustee : First American Title Insurance Company Beneficiary : Bank of America National Trust and Savings Association [4. Unrecorded leases or periodic tenancies, if any.] 14 EXHIBIT B Taylor Street Buildings 1. City Liens, if any, of the City of Portland. 2. Conditions and Restrictions contained in Zone Code Variance No. VZ 82-85, Recorded : July 23, 1985 in Book 1838, page 1820 3. Conditions and Restrictions contained in Design Review File No. LUR 92- 00095 DZ, Recorded : April 16, 1992 in Book 2530, page 1852 4. Trust Deed, including the terms and provisions thereof, given to secure an indebtedness of $1,190,000.00 Dated : October 1, 1996 Recorded : October 11, 1996 as Fee No. 96154613 Grantor : Wilshire Properties 1 Inc., an Oregon corporation Trustee : First American Title Insurance Company Beneficiary : Bank of America National Trust and Savings Association [5. Conditions and Restrictions contained in Land Use Review File No. LUR 96-00812 DZ, Recorded : November 27, 1996 as Fee No. 97179669] [6. Unrecorded leases or periodic tenancies, if any.] 15 =============================================================================== PURCHASE AND SALE AGREEMENT by and among WILSHIRE REAL ESTATE PARTNERSHIP L.P., a Delaware limited partnership and WILSHIRE PROPERTIES 2 INC., an Oregon corporation Dated as of April ___, 1998 ================================================================================ TABLE OF CONTENTS ----------------- RECITALS.................................................................... 1 TERMS OF AGREEMENT.......................................................... 1 1. PURCHASE AND SALE AGREEMENT............................................ 1 1.1 Purchase and Sale................................................ 1 1.2 Assumption of Obligations........................................ 1 1.3 Assignment of Certain Rights..................................... 1 1.4 Prorations....................................................... 2 2. THE PROPERTY........................................................... 2 2.1 Land............................................................. 2 2.2 Buildings and Other Improvements................................. 2 2.3 Tangible Personal Property....................................... 2 2.4 Leases........................................................... 2 2.5 Appurtenances.................................................... 2 2.6 Intangible Personal Property..................................... 2 3. PURCHASE PRICE......................................................... 3 3.1 Purchase Price................................................... 3 4. CLOSING................................................................ 3 4.1 Conditions to Obligations of Purchaser........................... 3 4.2 Conditions to Obligations of Seller.............................. 4 4.3 Time and Place................................................... 5 4.4 Closing Items.................................................... 5 4.5 Transfer Taxes and Other Closing Costs........................... 6 4.6 Default and Remedies............................................. 6 a. Remedies...................................................... 6 b. Failure to Obtain Consents.................................... 6 4.7 Failure of Closing to Occur...................................... 7 5. REPRESENTATIONS AND WARRANTIES......................................... 7 5.1 Representations and Warranties of the Purchaser to the Seller.... 7 a. Organization.................................................. 7 b. Authorization................................................. 7 c. Consents and Approvals........................................ 7 d. No Violation.................................................. 7 5.2 Representations, Warranties and Indemnities of Seller............ 8 a. Notice from Governmental Agencies............................. 8 b. Defects....................................................... 8 i c. Environmental Matters......................................... 8 d. Service Contracts............................................. 8 6. COVENANTS OF SELLER.................................................... 8 7. FURTHER ASSURANCES..................................................... 9 8. MISCELLANEOUS.......................................................... 9 8.1 Integration..................................................... 9 8.2 No Assignment................................................... 9 8.3 Amendments...................................................... 9 8.4 Governing Law................................................... 9 8.5 Notices......................................................... 9 8.6 Waiver.......................................................... 10 8.7 Counterparts.................................................... 10 8.8 Time of the Essence............................................. 10 8.9 Expenses........................................................ 10 8.10 Headings........................................................ 10 8.11 Severability.................................................... 10 8.12 Statutory Disclosure............................................ 10 ii EXHIBIT AND SCHEDULE LIST Section First Exhibits Referenced Exhibit A Land Description Recital A Exhibit B Permitted Exceptions Section 4.4 iii PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into as of April __, 1998 by and among Wilshire Real Estate Partnership L.P., a Delaware limited partnership ("Purchaser"), and Wilshire Properties 2 Incorporated, an Oregon corporation ("Seller"). RECITALS A. Seller is the owner of certain land located in Tigard, Oregon and Eugene, Oregon as more particularly described in Exhibit A, and the buildings, structures and other improvements situated thereon, together with all tangible personal property, leases, appurtenances and intangible personal property, as more particularly defined in Section 2 (collectively, the "Property"). --------- B. The Property is commonly known as Tigard Industrial Park and 2855 Prairie Road Buildings. C. Seller desires to sell the Property to the Purchaser, and Purchaser desires to purchase such Property from the Seller upon the terms and conditions set forth below. NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: TERMS OF AGREEMENT 1. PURCHASE AND SALE AGREEMENT. 1.1 Purchase and Sale. At the Closing (as hereinafter defined) and subject ----------------- to the terms and conditions contained in this Agreement, Seller agrees to sell to Purchaser the Property and Purchaser agrees to purchase from Seller the Property. 1.2 Assumption of Obligations. Except as otherwise expressly provided ------------------------- herein, upon the Closing, Purchaser shall assume the contractual obligations of Seller under all loans, leases, contracts, and other agreements or other obligations of Seller relating to the Property (other than debt that is non recourse to Seller) to the extent such obligations relate to periods commencing after the Closing Date. 1.3 Assignment of Certain Rights. Effective upon the Closing, Seller, ---------------------------- without representation or warranty, hereby assigns to Purchaser all of its rights and interests, if any, including rights to indemnification in favor of Seller, under the agreements pursuant to which Seller or its affiliates initially acquired the Property transferred pursuant to this Agreement. 1 1.4 Prorations. On the Closing Date (as hereinafter defined), or as ---------- promptly as practicable following the Closing Date, to the extent such matters are not the right or responsibility of a tenant or tenants of the Property, all revenues and all charges that are customarily prorated in transactions of this nature, including accrued rent, overpaid taxes or fees, real and personal property taxes, utilities, interest on mortgage debt encumbering the Property, and other similar periodic charges and operating expenses receivable or payable with respect to the Property shall be ratably prorated between the Purchaser and the Seller effective as of the Closing Date. 2. THE PROPERTY. The Property to be sold and purchased under this Agreement is as follows: 2.1 Land. The Land, as is described in Exhibit A. ---- 2.2 Buildings and Other Improvements. All existing buildings, structures -------------------------------- and other improvements located upon the Land, including, without limitation, maintenance facilities, landscaping improvements, paving, walkways, road improvements, parking facilities, and all other improvements of whatever kind which have previously been made, installed or erected and are now located on any part of the Land (collectively, the "Improvements"). 2.3 Tangible Personal Property. All of Seller's right, title and interest -------------------------- in and to tangible personal property utilized in the operation of the Land and Property, including, without limitation, all of Seller's right, title and interest in the following tangible personal property: equipment, fixtures, and all other tangible personal property of Seller which is used, or which has been acquired for use, in the operation of the Land and Improvements (the "Tangible Personal Property"). 2.4 Leases. All of Seller's right, title and interest in and to the leases ------ and rental agreements, together with any modifications, extensions or renewals thereof, affecting the Property or any part thereof (the "Leases"). 2.5 Appurtenances. All of Seller's right, title and interest in and to all ------------- appurtenances, rights, including reversionary rights, easements, covenants, conditions, servitudes of any kind or nature and privileges belonging to or running with the Land, including, without limitation, all of Seller's right, title and interest in and to any and all land laying in the bed of any street, road, cul-de-sac, alley or access way, open or closed, existing, vacated or proposed, adjoining, adjacent to or contiguous to the Land, all awards for damage to the Land or taking by eminent domain or the change in the grade of any street adjoining the Land, all strips and gores of land adjoining or surrounded by the Land, and all zoning and land use entitlement and development rights pertaining to the Land (the "Appurtenances"). 2.6 Intangible Personal Property. All intangible personal property now ---------------------------- owned by Seller, or in which Seller has any interest on the Closing Date, which is used in, or which has 2 been acquired for use in, the operation of the Land or Property (the "Intangible Property"), including by way of example and not by limitation: a. All of the maintenance, service, advertising and other like contracts and agreements (including equipment leases) with respect to the ownership, use and operation of the Property (the "Service Contracts"); b. All licenses, entitlements, permits, certificates of occupancy and other governmental approvals issued or granted in connection with the Property; c. All trade names, trademarks and logos associated with the use of the Property; and d. All right, title and interest of the Seller in and to all other intangible personal property owned or held by the Seller or with respect to which Seller has any right, title, claim, interest, or estate, in, to, under or with respect to the Property and the other assets of the Seller (including, without limitation, claims and choices in action) relating to the Property. The Intangible Property and the Tangible Personal Property are the "Personal Property". 3. PURCHASE PRICE. 3.1 Purchase Price. The Purchase Price for the Property shall be -------------- $6,875,000, allocated $4,175,000 to the Tigard Industrial Park and $2,700,000 to 2855 Prairie Road. The Purchase Price shall be paid as follows: a. Purchaser will pay $1,782,242 in cash at closing for the Tigard Industrial Park and $1,592,517.43 in cash at closing for 2855 Prairie Road. b. Purchaser shall assume at closing the existing deed of trust on the Tigard Industrial Park securing a promissory note in favor of Bank of America National Trust & Savings Association with a present unpaid principal balance of approximately $2,392,758 and the existing deed of trust on 2855 Prairie Road securing a promissory note in favor of Standard Insurance Company with a present unpaid principal balance of approximately $1,107,482.57. In the event the unpaid principal balance of the notes shall be more or less than the amount above stated, the difference shall be adjusted in the cash payment due upon the closing date. 4. CLOSING 4.1 Conditions to Obligations of Purchaser. The obligations of the -------------------------------------- Purchaser to effect the transactions contemplated hereby shall be subject to the following additional conditions: 3 a. The representations and warranties of Seller contained in this Agreement shall have been true and correct in all material respects on the date such representations and warranties were made, and shall be true and correct in all material respects on the Closing Date as if made at and as of such date; b. Each of the obligations of Seller to be performed by it under this Agreement shall have been duly performed by it in all material respects on or before the Closing Date; c. Concurrently with the Closing, the Seller shall have executed and delivered, or caused to be delivered, to the Purchaser the documents required to be delivered pursuant to Section 4.4 hereof; d. Seller shall have obtained all necessary consents or approvals of governmental authorities or third parties to the consummation of the transactions contemplated hereby; e. Seller shall not have breached any of its covenants contained herein in any material respect; f. No order, statute, rule, regulation, executive order, injunction, stay, decree or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or governmental or regulatory authority or instrumentality that prohibits the consummation of the transactions contemplated hereby, and no litigation or governmental proceeding seeking such an order shall be pending or threatened; g. There shall not have occurred between the date hereof and the Closing Date any material adverse change in the Property; Any or all of the foregoing conditions may be waived by the Purchaser in its sole and absolute discretion. 4.2 Conditions to Obligations of Seller. The obligations of Seller to ----------------------------------- effect the transactions contemplated hereby shall be subject to the following additional conditions: a. The representations and warranties of the Purchaser contained in this Agreement shall have been true and correct in all material respects on the dates such representations and warranties were made, and shall be true and correct in all material respects on the Closing Date as if made at and as of such date; b. Each of the obligations of the Purchaser to be performed by it under the Agreement shall have been duly performed by it in all material respects on or before the Closing Date; 4 c. Concurrently with the Closing, the Purchaser shall have executed and delivered to the Seller the documents required to be delivered pursuant to Section 4.4 hereof; d. The Purchaser shall have obtained all consents or approvals of governmental authorities or third parties necessary for the consummation of the transactions contemplated hereby which it is required to obtain; e. Purchaser shall not have breached any of its covenants contained herein in any material respect; f. No order, statute, rule, regulation, executive order, injunction, stay, decree or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or governmental or regulatory authority or instrumentality that prohibits the consummation of the transactions contemplated hereby, and no litigation or governmental proceeding seeking such an order shall be pending or threatened; g. There shall not have occurred between the date hereof and the Closing Date any material adverse change in the financial condition of Purchaser. Any or all of the foregoing conditions may be waived by any Seller in its sole and absolute discretion. 4.3 Time and Place. The date, time and place of the transactions -------------- contemplated hereunder shall be at 10 a.m. in the office of First American Title Insurance Company, 200 SW Market Street, Suite 1776, Portland, Oregon 97201-5786 on or before April 6, 1998 or such other place and time as the parties may mutually agree (the "Closing" or "Closing Date"). The transfers described in Section 4 of this Agreement and all closing deliveries shall be deemed concurrent for all purposes. 4.4 Closing Items. At the Closing, the parties shall make, execute, ------------- acknowledge and deliver, or cause to be delivered, the legal documents and other items necessary to carry out the intention of this Agreement and to convey valid and marketable title to the Property from Seller to Purchaser, which documents and other items shall include the following: a. Seller shall deliver duly executed, recordable, special warranty deeds conveying the Property to the Purchaser subject to the permitted exceptions described in attached Exhibit B (the "Deed"). b. Seller and Purchaser shall deliver an assignment and assumption of lessor's interest in lease duly executed by Seller and the Purchaser [in form and substance satisfactory to Purchaser]. c. Seller shall deliver an assignment of intangible personal property duly executed by Seller [in form and substance satisfactory to Purchaser]. 5 d. Seller shall deliver a bill of sale duly executed by Seller [, in form and substance satisfactory to Purchaser]. e. Seller shall cause to be issued to the Purchaser owner's policies of title insurance issued as of the Closing Date for the Property, in form acceptable to Purchaser in the amount of $4,175,000 for the Tigard Industrial Park and $2,700,000 for 2855 Prairie Road (the "Title Policy"). f. Seller shall deliver possession at the Property of any books and records relating to the Property maintained by or for the Seller, including complete originals of all Leases, documents in tenant files, and Service Contracts. g. Seller shall deliver an affidavit from Seller, stating under penalty of perjury: (i) the Seller's United States Taxpayer Identification Number, (ii) that Seller is not a foreign person pursuant to section 1445(b)(2) of the Code, and (iii) that the transaction contemplated hereby does not require the Purchaser to comply with any withholding or similar requirements under the laws of the state where the Property is located. h. Certificates of Insurance, evidencing insurance maintained for the Properties as required by existing mortgages and loan agreements pertaining to the Property, or as reasonably required by Purchaser. i. Seller shall deliver to Purchaser or its nominee the deposits under the Leases. j. Seller shall deliver possession of any keys to the Property in possession of Seller. k. Each of the parties shall deliver any other documents, instruments, agreements, actions, or items reasonably necessary and appropriate to consummate the transactions contemplated by this Agreement. 4.5 Transfer Taxes and Other Closing Costs. Seller shall pay the premium -------------------------------------- for the standard owner's policies of title insurance. Seller and Purchaser shall each pay one-half of the escrow fees and any transfer tax. Purchaser shall pay the recording fees. 4.6 Default and Remedies. -------------------- a. Remedies. The parties shall, subject to the terms and -------- conditions of this Agreement, each have such rights and remedies as are available at law or in equity with respect to a breach or default by any other party hereunder, except that no party shall be entitled to recover from another consequential damages. 6 b. Failure to Obtain Consents. In the event that Seller shall be -------------------------- unable to obtain any consent required to consummate the transactions contemplated hereunder with respect to the Property, then such failure shall not constitute a default by Seller under this Agreement so long as it used reasonable commercial efforts to obtain such consent. In the event that despite reasonable commercial efforts to obtain said consent, the necessary consents are not obtained prior to 5 days before the Closing Date, the Purchaser shall have the right to terminate this Agreement and upon such termination no party shall have any liability or damages whatsoever to any other party hereunder. 4.7 Failure of Closing to Occur. If, for any reason, the Closing does not --------------------------- occur on or before April 6, 1998 or such later date mutually agreed to in writing, this Agreement will terminate, and except as otherwise provided in this Agreement, any and all rights or obligations hereunder shall cease and no longer be binding on the parties hereto and no party shall thereafter have any liability or obligation hereunder to any other party arising under this Agreement. 5. REPRESENTATIONS AND WARRANTIES. 5.1 Representations and Warranties of the Purchaser to the Seller. The ------------------------------------------------------------- Purchaser hereby represents and warrants to the Seller that: a. Organization. The Purchaser are duly organized, validly ------------ existing and in good standing under the laws of the respective jurisdictions of formation. The Purchaser has all requisite power and authority to own, lease or operate its property and to carry on its business as presently conducted and, to the extent required under applicable law, is qualified to do business and is in good standing in each jurisdiction in which the nature of its business or the character of its property make such qualification necessary. b. Authorization. The execution, delivery and performance of this ------------- Agreement by the Purchaser has been duly and validly authorized by all necessary action of such party. This Agreement has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, as such enforceability may be limited by bankruptcy or the application of equitable principles. c. Consents and Approvals. No consent, waiver, approval or ---------------------- authorization of any third party is required to be obtained by the Purchaser in connection with its execution, delivery and performance of this Agreement and the transactions contemplated hereby (other than consents to be obtained by Seller pursuant to Section 6.2), except any of the foregoing that shall have been satisfied or waived prior to the Closing Date. d. No Violation. None of the execution, delivery or performance of ------------ this Agreement and the transactions contemplated hereby does or will, with or without the giving of notice, lapse of time, or both, (i) violate, conflict with, result in a breach of, or constitute a default under or give to others any right of acceleration, termination or 7 cancellation of (A) the organizational documents, including articles and bylaws, if any, of the Purchaser; (B) any material agreement, document or instrument to which the Purchaser is a party or by which any of it or any of its property is bound, (C) any term or provision of any judgment, order, writ, injunction, or decree of any governmental or regulatory authority binding on the Purchaser or by which it or any of its assets or properties are bound or subject, or (D) any statute, rule, regulation or law applicable to any of the Purchaser or (ii) result in the creation of any lien upon the Property. 5.2 Representations, Warranties and Indemnities of Seller. Seller ----------------------------------------------------- represents and warrants to and covenant with Purchaser as follows: a. Notice from Governmental Agencies. Seller has not received nor is --------------------------------- Seller aware of any notification from any governmental agency having jurisdiction requiring any work to be done on or affecting the Property in order for it to conform to applicable building codes or other statutes or regulations. b. Defects. Seller hereby warrants that to the best of its knowledge ------- the Property and the improvements thereon do not violate the applicable building or zoning regulations and that it is unaware of any material defect in the Property or the improvements thereon. c. Environmental Matters. Seller has no current actual knowledge --------------------- without further investigation of any hazardous materials on the Property, except those hazardous materials normally and lawfully used in connection with the Property. d. Service Contracts. All Service Contracts were entered into in ----------------- good faith in the ordinary course of business on commercially reasonable terms. 6. COVENANTS OF SELLER 6.1 From the date hereof through the Closing, Seller shall operate and maintain the Property in the ordinary course, consistent with past practice. Seller shall maintain the Property in substantially its present order and condition and make all reasonably necessary repairs and replacements consistent with a reasonably prudent maintenance and repair program followed by owners of similar property in the vicinity of the Property (including the establishment of reasonable budgeted items for repair, maintenance, and capital improvements), and shall deliver the Property on the date of Closing in substantially the same condition it was on the date of the physical inspection performed by the Purchaser, reasonable wear and tear excepted. Without limiting the foregoing, no fixtures, equipment or other Tangible Personal Property shall be removed from the Property unless prior to Closing the same are replaced with similar items of at least equal quality and value. Seller shall not: a. Enter into any material transaction not in the ordinary course of business with respect to the Property; 8 b. Sell or transfer any of the Property, except sales in the ordinary course of business; c. Mortgage, pledge or encumber (or permit to become encumbered) any of the Property, except (x) liens for taxes not due, (y) mechanics' liens being disputed by Seller in good faith and by appropriate proceedings; d. Amend, modify or terminate any material agreements or other instruments relating to the Property; or e. Materially alter the manner of keeping its books, accounts or records pertaining to the Property or the accounting practices therein reflected. 6.2 Seller shall use its best efforts to obtain any approvals, waivers or other consents of third parties required to effect the transactions contemplated by this Agreement. 7. FURTHER ASSURANCES. Each party shall take such other actions and execute such other documents following the Closing as may reasonably be requested in order to effect the transactions contemplated hereby. 8. MISCELLANEOUS. 8.1 Integration. All understandings and agreements heretofore had among ----------- Seller and Purchaser with respect to the purchase and sale of the property by Seller to Purchaser are set forth in this Agreement and the other documents and agreements to be delivered hereunder which fully and completely express the agreements of the parties with respect thereto. 8.2 No Assignment. Neither this Agreement nor any interest hereunder ------------- shall be assigned or transferred by any party hereto without the prior written consent of all other parties hereto. Subject to the foregoing, this Agreement shall inure to the benefit of and shall be binding upon each party hereto and their respective successors and assigns. 8.3 Amendments. This Agreement shall not be modified or amended except in ---------- a written document signed by the parties hereto. 8.4 Governing Law. This Agreement shall be governed and interpreted in ------------- accordance with the laws of the State of Oregon. 8.5 Notices. All notices, requests, demands or other communications ------- required or permitted under this Agreement shall be in writing and delivered either personally, or by certified mail, return receipt requested, postage prepaid, or by overnight courier (such as Federal Express), or by facsimile transmission, addressed as follows: 9 If to the Purchaser: Wilshire Real Estate Partnership L.P. 1776 SW Madison Street Portland, Oregon 97205 Attention: Lawrence A. Mendelsohn If to Seller: 1776 SW Madison Portland, Oregon 97205 Attention: Lawrence A. Mendelsohn, President All notices given in accordance with the terms hereof shall be deemed delivered when delivered personally or otherwise received. Any party hereto may change the address for receiving notices, requests, demands or other communication by notice sent in accordance with the terms of this Section 8.5. 8.6 Waiver. No waiver shall be effective against any party unless it is in ------ a writing signed by that party. 8.7 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.8 Time of the Essence. Time is of the essence of this Agreement. ------------------- 8.9 Expenses. Except as otherwise set forth in writing among the parties, -------- each party shall bear its own expenses, including counsel fees, in the performance of this Agreement. 8.10 Headings. The headings in this Agreement are intended solely for -------- convenience of reference and shall be given no effect in construction or interpretation of this Agreement. 8.11 Severability. The invalidity or unenforceability of any provision of ------------ this Agreement shall not impair the validity or enforceability of any other provision. 8.12 Statutory Disclosure. THE PROPERTY DESCRIBED IN THIS INSTRUMENT MAY -------------------- NOT BE WITHIN A FIRE PROTECTION DISTRICT PROTECTING STRUCTURES. THE PROPERTY IS SUBJECT TO LAND USE LAWS AND REGULATIONS, WHICH, IN FARM OR FOREST ZONES, MAY NOT AUTHORIZE CONSTRUCTION OR SITING OF A RESIDENCE AND WHICH LIMIT LAWSUITS AGAINST FARMING OR FOREST PRACTICES AS DEFINED IN 0RS 30.930 IN ALL ZONES. BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY APPROVED USES AND EXISTENCE OF FIRE PROTECTION FOR STRUCTURES. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. PURCHASER WILSHIRE REAL ESTATE PARTNERSHIP L.P., a Delaware limited partnership By: WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Delaware corporation, sole general partner of Purchaser ____________________________________________ Lawrence A. Mendelsohn, President SELLER WILSHIRE PROPERTIES 2 INC., an Oregon corporation By: ____________________________________________ Lawrence A. Mendelsohn, President 11 EXHIBIT A 2855 Prairie Road Beginning at a point North 89 (degrees) 38'30" West 2879.14 feet and North 12 (degrees) 36' West 372.04 feet from the Southeast corner of the James Peek Donation Land Claim No. 50 in Township 17 South, Range 4 West of the Willamette Meridian; said point being on the Easterly right of way line of Prairie Road; run thence North 12 (degrees) 36' West 720.87 feet along said Easterly right of way line to the South line of the property described in Deed recorded October 29, 1949, in Book 404, Page 245, Lane County Oregon Deed Records; thence North 89 (degrees) 54'30" East 408.96 feet to the Northwest corner of that tract of land conveyed to the Southern Pacific Company, recorded on Reel No. 214, Reception No. 3699; thence South 20 (degrees) 28' East 755.05 feet along the Westerly line of said Southern Pacific Company property; thence North 89 (degrees) 38'30" West 515.73 feet to the Point of Beginning, in Lane County, Oregon. EXHIBIT A Tigard Industrial Park PARCEL I: - -------- Beginning at a point on the South right-of-way line of Katherine Street at a point 8.78 feet North 89 (degrees) 23' East and 42.29 feet South 18 (degrees) 20' West from the Northwest corner of Lot 21 of NORTH TIGARDVILLE ADDITION (Amended), a plat of record in Section 2, Township 2 South, Range 1 West, Willamette Meridian, in the County of Washington and State of Oregon, said point being on the East line of the Winn Tract, recorded August 4, 1945 in Book 247, page 53, Deed Records; thence South 18 (degrees) 20' West on the Easterly line of a two acre tract conveyed to Paul Winn, et ux, recorded August 4, 1945 in Book 247, page 53, Deed Records, and an extension thereof 292.25 feet to a point; thence South 71 (degrees) 40' East 148.71 feet to the Westerly right-of- way line of County Road No. 893 (Lucas Avenue); thence North 23 (degrees) 40' East on said Westerly right-of-way line of County Road No. 393 a distance of 304.31 feet to the Southerly right-of-way line of County Road No. 767 (Tigard Street); thence North 64 (degrees) 40' 30" West on said Southerly line of County Road No. 767 a distance of 108.15 feet to its intersection with the Southerly right-of-way line of Katherine Street; thence South 89 (degrees) 23' West on said right-of-way line and parallel with the North lines of Lots 21 and 22 of North Tigardville Addition as amended a distance of 73.62 feet to the point of beginning. TOGETHER WITH that portion of S.W. Lucas Avenue which inured thereto by reason thereof by Vacation Ordinance No. 75-17 recorded April 1, 1975 in Book 1016, page 693. EXCEPTING THEREFROM that portion as described in Deed to R.A. Gray Co., an Oregon corporation, recorded August 8, 1973 in Book 939, page 364. PARCEL II: - --------- TRACT A: Beginning 8.78 feet North 89 (degrees) 23' East and 306.20 feet South 18 (degrees) 20' West from the Northwest corner of Lot 21 of NORTH TIGARDVILLE ADDITION as amended, a plat of record in Section 2, Township 2 South, Range 1 West, Willamette Meridian, in the County of Washington and State of Oregon; thence North 71 (degrees) 40' West 324.30 feet to a point on the West line of Lot 22 of the above said Tigardville Addition; thence South 0 (degrees) 45' East on the above said West line of Lot 22 a distance of 236.12 feet to an angle point in said West line of Lot 22; thence South 11 (degrees) 12' West 9.29 feet to a point; thence South 67 (degrees) 08' East 374.02 feet to a point on the Westerly right of way line of County Road No. 893 (Lucas Road); thence North 23 (degrees) 40' East on said Westerly line of road 234.60 feet to a point; said point being the Southeast corner of that tract in correction deed recorded May 15, 1972 in Book 867, page 272, Records of Washington County; thence North 71 (degrees) 40' West 148.71 feet to a point; thence North 18 (degrees) 20' East 28.34 feet to the point of beginning. Exhibit A-Tigard Industrial Park - page 1 of 3 TOGETHER WITH that portion of S.W. Lucas Avenue which inured thereto by reason thereof by Vacation Ordinance No. 75-17, recorded April 1, 1975 in Book 1016, page 693. TRACT B: Beginning 8.78 feet North 89 (degrees) 23' East and 306.20 feet South 18 (degrees) 20' West from the Northwest corner of Lot 21 of NORTH TIGARDVILLE ADDITION, as amended, a plat of record in Section 2, Township 2 South, Range 1 West, Willamette Meridian, in the County of Washington and State of Oregon; thence South 18 (degrees) 20' West 23.53 feet to the true point of beginning of the parcel described herein; thence continuing South 18 (degrees) 20' West 4.81 feet to a point; thence South 71 (degrees) 40' East, 128.49 feet to a point; thence North 18 (degrees) 24' 57" East, 4.62 feet to a point; thence North 71 (degrees) 35' 03" West 128.50 feet to the true point of beginning. PARCEL III: - ---------- Beginning at the intersection of the Southerly right of way line of County Road No. 767 (Tigard Street) and the East line of Lot 21 of NORTH TIGARDVILLE ADDITION, as amended, a plat of record in Section 2, Township 2 South, Range 1 West, Willamette Meridian, in the County of Washington and State of Oregon; thence South 0 (degrees) 45' East on the East line of the above said Lot 21 a distance of 15.92 feet to a point on the Westerly line of that certain tract of land conveyed by Deed in Book 313, page 480 of the Washington County Deed Records; thence South 15 (degrees) 51' 39" West on said Westerly line 252.50 feet to a point; thence North 74 (degrees) 08' 20" West 256.96 feet to a point on the Easterly right of way line of County Road No. 893 (Lucas Avenue); thence North 23 (degrees) 40' East on above said right of way line 305.74 feet to the Southerly right of way line of County Road No. 767 (Tigard Street); thence South 64 (degrees) 40' 30" East 213.79 feet to the point of beginning. TOGETHER WITH that portion of S.W. Lucas Avenue which inured thereto by reason thereof by Vacation Ordinance No. 75-17 recorded April 1, 1975 in Book 1016, page 693. PARCEL IV: - --------- Beginning at a point on the Easterly right of way line of Lucas Avenue, said point of beginning being 305.74 feet South 23 (degrees) 40' West from the intersection of the Easterly right of way line of Lucas Avenue and the Southerly right of way line of County Road No. 767 (Tigard Street) in Section 2, Township 2 South, Range 1 West, Willamette Meridian, in the County of Washington and State of Oregon; thence South 74 (degrees) 08' 20" East 256.96 feet to a point on the Westerly line of Tract I of that certain tract of land conveyed by Deed in Book 313, page 480 of the Washington County Deed Records; thence South 15 (degrees) 51' 39" West on above said Westerly line 182.55 feet to the Southwest corner thereof; thence South 76 (degrees) 21' 30" East on the Southerly line of said tract (Book 313, page 480) 50.00 feet, more or less, to the center of Fanno Creek; thence upstream in center of creek to a point 151.96 feet Southerly from the last described line when measured at a right angle; thence leaving said creek North 75 (degrees) 11' West 315.00 feet, more or less, to a point on Exhibit A-Tigard Industrial Park - page 2 of 3 the Easterly right of way line of Lucas Avenue; thence North 23 (degrees) 40' East on said line 343.22 feet to the point of beginning. TOGETHER WITH that portion of S.W. Lucas Avenue which inured thereto by reason thereof by Vacation Ordinance No. 75-17 recorded April 1, 1975 in Book 1016, page 693. PARCEL V: - -------- Tract A: - ------- Beginning at a point on the Westerly right of way line of Lucas Avenue; said point of beginning being 538.91 feet South 23 (degrees) 40' West from the intersection of the Westerly right of way line of Lucas Avenue and the Southerly right of way line of County Road No. 767 (Tigard Street) in Section 2, Township 2 South, Range 1 West, of the Willamette Meridian, in the County of Washington and State of Oregon; thence North 67 (degrees) 08' West 374.02 feet to a point; thence South 11 (degrees) 12' West 108.00 feet, more or less, to the center of Fanno Creek; thence in the center of said creek and downstream to a point on the Southern Extension of the Westerly right of way line of Lucas Avenue; thence North 23 (degrees) 40' East 110.00 feet to the point of beginning. TOGETHER WITH that portion of S.W. Lucas Avenue which inured thereto by reason thereof by Vacation Ordinance No. 75-17 recorded April 1, 1975 in Book 1016, page 693. Tract B: - ------- Beginning at a point on the Easterly right of way line of Lucas Avenue; said point of beginning being 628.96 feet South 23 (degrees) 40' West from the intersection of the Easterly right of way line of Lucas Avenue and the Southerly right of way line of County Road No. 767 (Tigard Street) in Section 2, Township 2 South, Range 1 West, of the Willamette Meridian, in the County of Washington and State of Oregon; thence South 21 (degrees) 20' East 28.28 feet to a point; thence South 75 (degrees) 11' East 282.27 feet, more or less, to the center of Fanno Creek; thence in the center of said creek and upstream in a Westerly direction, to a point on the Southern extension of the Easterly right of way line of Lucas Avenue; thence North 23 (degrees) 40' East 52.00 feet, more or less, to the point of beginning. TOGETHER WITH that portion of S.W. Lucas Avenue which inured thereto by reason thereof by Vacation Ordinance No. 75-17 recorded April 1, 1975 in Book 1016, page 693. EXCEPTING THEREFROM that portion lying within Parcel IV above. Exhibit A-Tigard Industrial Park - page 3 of 3 EXHIBIT B Tigard Industrial Park 1. City Liens, if any, of the City of Tigard. 2. Statutory Powers and Assessments of Unified Sewerage Agency. 3. Rights of the public and of governmental bodies in and to that portion of the premises herein described lying below the high water mark of Fanno Creek. (Affects Parcels IV and V) 4. Any adverse claim based upon the assertion that some portion of said land have been removed from or brought within the boundaries thereof by an avulsive movement of the Fanno Creek or has been formed by the process of accretion or reliction or has been created by artificial means or has accreted to such portion so created. (Affects Parcels IV and V) 5. Easements for utilities over and across the premises formerly included within the boundaries of S.W. Lucas Avenue, now vacated, if any such exists. 6. An easement created by instrument, including the terms and provisions thereof; Recorded : November 8, 1972 in Book 896, page 128 Favor of : Unified Sewerage Agency of Washington County, a municipal corporation For : Sewer Affects : Reference is made to the document for the exact location (Affects Parcels II, and IV and covers additional property) 7. An easement created by instrument, including the terms and provisions thereof; Recorded : October 30, 1986 as Fee No. 86050542 Recorded : October 30, 1986 as Fee No. 86050543 Recorded : October 30, 1986 as Fee No. 86050544 Favor of : City of Tigard For : Storm drain and the maintenance thereof Affects : Reference is made to the document for the exact location (Affects Parcel II) 8. An easement created by instrument, including the terms and provisions thereof; Recorded : October 30, 1986 as Fee No. 86050548 Favor of : City of Tigard For : Sewer line appurtenances thereto and the maintenance thereof Affects : Reference is made to the document for the exact location (Affects Parcels II and covers additional property) Exhibit B-Tigard Industrial Park - page 1 of 3 9. Interest of Columbia Medical, lessee, under a lease dated October 1, 1994, including the terms and provisions thereof, disclosed by an Assignment of the Lessor's Interest in Leases Recorded : March 8, 1995 as Fee No. 95015306 10. Interest of Innovite, Inc., lessee, under a lease dated October 12, 1994, including the terms and provisions thereof, disclosed by an Assignment of the Lessor's Interest in Leases Recorded : March 8, 1995 as Fee No. 95015306 The lien of the above Lessor's Interest was subordinated to the lien of the Trust Deed recorded March 24, 1995 as Fee No. 95019249 by agreement for subordination, nondisturbance and attornment Dated : March 23, 1995 Recorded : March 24, 1995 as Fee No. 95019254 11. Interest of Barrier Corporation, lessee, under a lease dated April 1, 1994 and May 19, 1994, including the terms and provisions thereof, disclosed by an Assignment of the Lessor's Interest in Leases Recorded : March 8, 1995 as Fee No. 95015306 The lien of the above Lessor's Interest was subordinated to the lien of the Trust Deed recorded March 24, 1995 as Fee No. 95019249 by agreement for subordination, nondisturbance and attornment Dated : March 23, 1995 Recorded : March 24, 1995 as Fee No. 95019251 and Recorded : March 24, 1995 as Fee No. 95019252 and Recorded : March 24, 1995 as Fee No. 95019253 and Recorded : March 24, 1995 as Fee No. 95019255 12. Interest of Polycast, Inc., lessee, under a lease dated October 25, 1994, including the terms and provisions thereof, disclosed by an Assignment of the Lessor's Interest in Leases Recorded : March 8, 1995 as Fee No. 95015306 13. Interest of Frye Electronics, Inc., lessee, under a lease dated March 25, 1991, including the terms and provisions thereof, disclosed by an Assignment of the Lessor's Interest in Leases Recorded : March 8, 1995 as Fee No. 95015306 The lien of the above Lessor's Interest was subordinated to the lien of the Trust Deed recorded March 24, 1995 as Fee No. 95019249 by agreement for subordination, nondisturbance and attornment Dated : March 23, 1995 Recorded : March 24, 1995 as Fee No. 95019256 Exhibit B - Tigard Industrial Park page 2 0f 3 14. Interest of Proctor Sales, Inc., lessee, under a lease dated June 1, 1992, including the terms and provisions thereof, disclosed by an Assignment of the Lessor's Interest in Leases Recorded : March 8, 1995 as Fee No. 95015306 15. Interest of JTD Inc., lessee, under a lease dated December 5, 1994, including the terms and provisions thereof, disclosed by an Assignment of the Lessor's Interest in Leases Recorded : March 8, 1995 as Fee No. 95015306 16. Deed of Trust with Assignment of Rents and Fixture Filing, including the terms and provisions thereof, given to secure an indebtedness of $2,500,000.00 Dated : March 24, 1995 Recorded : March 24, 1995 as Fee No. 95019249 Grantor : Wilshire Properties-2 Incorporated, an Oregon corporation Trustee : First American Title Insurance Company of Oregon Beneficiary : Bank of America Oregon, an Oregon state chartered commercial bank Loan No. : 2098 17. An assignment of all rents, royalties, issues and profits accruing from said land, as additional security for the payment of indebtedness secured by the above Trust Deed Recorded : March 24, 1995 as Fee No. 95019250 Executed by : Wilshire Properties-2 Incorporated, an Oregon corporation To : Bank of America Oregon [18. Unrecorded leases or periodic tenancies, if any.] Exhibit B - Tigard Industrial Park page 3 0f 3 EXHIBIT B 2855 Prairie Road 1. Rights of the public in streets, roads and highways. [2. Combination Landlords Waiver or Mortgagee's Agreement of Subordination, including the terms and provisions thereof , given by Ebella Corporation to Far West Federal Bank, recorded December 2, 1985, Reception No. 85-43414, Official Records of Lane County, Oregon.] 3. Deed of Trust and Assignment of Rents, including the terms and provisions thereof, given to secure an indebtedness with interest thereon and such future advances as maybe provided therein, Dated : August 3, 1988 Recorded : August 18, 1988 Reel No. : 1530 Reception No. : 88-34041 Official Records of Lane County, Oregon Amount : $1,200,000.00 Grantor : Rubenstein Furniture Co., an Oregon general partnership Trustee : Transamerica Title Insurance Company Beneficiary : Standard Insurance Company, an Oregon corporation Modification/Assumption Agreement, including the terms and provisions thereof, recorded November 22, 1995, Reception No. 95-62943, Official Records of Lane County, Oregon. 4. Collateral assignment of 95% of the beneficial interest of Standard Insurance Company, an Oregon corporation, in and to the Trust Deed referenced above, under Reception No. 88-34041, said assignment was Recorded : February 19, 1997 Reception No. : 97-10845 Official Records of Lane County, Oregon To : First Savings Bank of Washington, a state chartered savings bank 5. The rights, if any, of the adjoining property owner to maintain an existing drainfield along the Southwesterly boundary of the above-described property, as disclosed by deed from Rubenstein Furniture Stores, fka Rubenstein Furniture Co., an Oregon general partnership, to Wilshire Properties-2 Incorporated, an Oregon corporation, recorded November 2, 1995, Reception No. 95-62945, Official Records of Lane County, Oregon. [6. Unrecorded leases, if any, and such other exceptions as may appear necessary upon the recording thereof.] WILSHIRE REAL ESTATE PARTNERSHIP L.P. PURCHASE AGREEMENT This Asset Purchase Agreement (the "Agreement") is made as of [April] ___, 1998 by and among Wilshire Real Estate Partnership L.P., a Delaware limited partnership ("Purchaser"), Wilshire Real Estate Investment Trust Inc., a Maryland corporation ("WREIT") general partner of Purchaser, and Wilshire Funding Corporation, a Delaware corporation ("WFC"), WMFC 1997-1 Inc., a Delaware corporation ("1997-1") and Wilshire Financial Services Group Inc., a Delaware corporation ("WFSG"), sole shareholder of WFC and parent of 1997-1 (WFSG, WFC and 1997-1 collectively, "Seller"). RECITALS A. Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, on the terms and subject to the conditions set forth herein, the Assets (as defined herein) owned by Seller. B. Purchaser and Seller desire to enter into this Agreement to govern the purchase by Purchaser from Seller, and sale by Seller to Purchaser, of the Assets. Therefore, in consideration of the mutual covenants, terms and conditions set forth herein, the parties agree as follows: 1. Definitions. The following terms are defined as follows: ----------- Affiliate. With respect to any specified Person, any other Person --------- controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities (including, without limitation, partnership interests), by contract or otherwise and the terms "controlling" and "controlled" have meanings correlative to the foregoing. Assets. The mortgage loans, real property and mortgage-backed ------ securities described on Exhibit A to this Agreement, together with all liens and guaranties granted in connection therewith, all residual rights of Seller in property that secure the aforesaid, all insurance policies on any of the property or the obligor on the account, all documentation pertaining thereto and all Asset Files. Asset File. All information in recorded form pertaining to the Assets ---------- held by or for Seller, including without limitation, all documents, microfiche, computer software and other media that includes correspondence, general credit information, credit records, payment histories, internal notes or memoranda, loan applications, appraisals, insurance guarantee policies, property insurance policies, mortgage insurance policies, title insurance policies, attorney opinions, and all original documents evidencing or relating to the Assets and any collateral that secures the Assets. Assignment Documents. As defined in Section 2.2. -------------------- ALTA. The American Land Title Insurance Association. ---- BPO. The most recent drive-by valuation, as reasonably adjusted by the --- Seller's in-house appraisal department (on a six-month "stabilized" rather than "quick sale" basis) generally prepared by a duly qualified and licensed real estate broker who has no interest, direct or indirect, in the mortgaged property or in Seller or Purchaser, or any Affiliate of Seller or Purchaser and whose compensation is not affected by the results of the BPO and which valuation indicates the expected proceeds of a sale of the related mortgaged property, and includes certain assumptions, including those as to the condition of the interior of the applicable mortgaged property and marketing time. Closing Date. The closing date of the initial public offering of ------------ common stock of WREIT, pursuant to Registration Statement No. 333-39035 on Form S-11, and any amendments thereto, filed by WREIT with the Securities and Exchange Commission. CLTA. The California Land Title Insurance Association. ---- Cut-Off Date. February 28, 1998. ------------ IPO Closing. The closing of the initial public offering of common ----------- stock of WREIT, pursuant to Registration Statement No.333-39035 on Form S-11, and any amendments thereto, filed by WREIT with the Securities and Exchange Commission. Loan Documents. All documents, instruments or agreements executed and -------------- delivered by Seller or the borrower in connection with a Mortgage Loan including, without limitation, notes and security instruments. MBS. Any Asset that is a mortgage-backed security. --- Mortgage. Any mortgage, deed of trust or other instrument securing an -------- Asset that creates a lien on an estate in real property securing the Asset. Mortgage Loan. Any Asset that is secured by a Mortgage. ------------- Person. Any legal person, including any individual, corporation, ------ partnership, association, joint-stock company, trust, limited liability company, unincorporated organization, governmental entity or other entity of similar nature. Purchase Price. As defined in Section 2.1(b). -------------- 2 Qualified Insurer. As defined in Section 4.2(c). ----------------- Survival Date. That date 6 months after the Closing Date. ------------- 2. Closing. The closing of the purchase and sale of the Assets shall be ------- held at the offices of Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Irvine, California 92614 on the Closing Date. 2.1 The obligation of Seller to sell the Assets shall be subject to satisfaction of each of the following conditions precedent: (a) All of the representations and warranties of Purchaser contained in this Agreement shall be true and correct as of the Closing Date. (b) On the Closing Date, upon Purchaser's receipt of the items specified in Section 2.2, Purchaser shall wire transfer $__________ to Seller (the "Purchase Price"). 2.2 The obligation of Purchaser to purchase the Assets shall be subject to satisfaction of each of the following conditions precedent on or before the Closing Date. Purchaser shall receive all items in such forms as are agreed upon and acceptable to Purchaser and WREIT, duly executed by all signatories as required pursuant to the respective terms thereof. If Purchaser purchases the Assets before satisfaction of any of these conditions, Seller shall, at Purchaser's request, satisfy the conditions after the Closing Date. (a) Seller shall deliver the Assets, the original Asset Files and a bill of sale for the Assets (the "Bill of Sale") in substantially the form of Exhibit B attached hereto, together with such other documents and instruments reasonably necessary for the individual transfer of each Asset by Seller to Purchaser, including without limitation, the following as applicable for each Asset (collectively, the "Assignment Documents"): (1) Original note (or lost note affidavit and indemnity acceptable to Purchaser) properly endorsed; (2) Original assignment of mortgage or deed of trust and; (3) Originals or copies of all recorded mortgages, deeds, and assignments thereof showing a complete chain of title to Seller; (4) Original or a copy of policy of lender's title insurance as of origination date of each Mortgage Loan; 3 (5) For any real property, a deed, all original leases and contracts pertaining to the property and assignments thereof to Purchaser, and keys to the property. (6) For any real property, an ALTA 1992 policy of title insurance with endorsements relating to creditor's rights and arbitration issues in form acceptable to Purchaser to the extent such endorsements are available in the relevant jurisdiction. (7) For any real property, original assignments of Uniform Commercial Code financing statements in proper form for the relevant jurisdiction. (8) For each MBS, a stock power executed in favor of Purchaser. Any Seller data regarding the Assets held in computer hardware or software shall be converted to media which will allow Purchaser to input such data into its computer system. Any additional documents and instruments shall be subject to the reasonable approval of counsel to Purchaser. (b) Seller shall deliver and release to Purchaser the Assets and all other documents required to be delivered pursuant to this Agreement. (c) Seller shall provide releases of all interests in the Assets held by any third party unless for a given parcel of real property the parties have mutually agreed to transfer such real property subject to indebtedness, in which case Seller shall provide consent to transfer such real property subject to the indebtedness from the lender holding such indebtedness. (d) Seller shall instruct the trustee for each MBS to transfer such MBS into Purchaser's name. (e) Seller shall provide copies of the agreements pursuant to which Seller acquired Assets that are Mortgage Loans. (f) Seller shall be responsible for the preparation of any and all other transfer documents reasonably necessary to evidence the transfer of the Assets. Such transfer documents shall be in the name and form reasonably acceptable to Purchaser. Any endorsements shall be "Payable to the Order of Wilshire Real Estate Partnership L.P.," in blank, or as otherwise specified by Purchaser. (g) All representations and warranties of Seller set forth herein are true and correct. 4 (h) For any real property, Purchaser has received adequate assurances from the title company issuing title insurance on such real property that a title policy will be issued that will be effective as of the Closing Date, with such exceptions approved by the Purchaser. 2.3 The obligations of all parties under this Agreement are conditioned upon the IPO Closing. 2.4 At Purchaser's request, the Assignment Documents promptly shall be recorded or filed, as applicable, in the name of the Purchaser or in the name of a person or entity designated by Purchaser in all appropriate public offices, files and records. If any such Assignment Document is lost or returned unrecorded or unfiled because of a defect therein, Seller promptly shall prepare substitute Assignment Documents to cure such defects and thereafter cause each such substitute Assignment Document to be duly recorded or filed, as applicable. Purchaser shall pay all recording and filing fees related to such a one-time recordation or filing, as applicable, of the assignments. 2.5 Any Assignment Documents or Asset Files with respect to one or more of the Assets that are in Seller's possession from and after the Closing Date shall be retained and maintained by the Seller in trust for the benefit of Purchaser and in a custodial capacity only, and subject in all events to the will of the Purchaser. Seller shall segregate all of such Assignment Documents and Asset Files from Seller's other books and records and shall appropriately mark each of them to reflect clearly the sale of the related Asset to Purchaser and the ownership of each Asset by Purchaser. Seller shall release its custody of the contents of any thereof only in accordance with written instructions from Purchaser except where such release is required as incidental to the Seller's servicing of the Assets (if and to the extent Seller is engaged to provide servicing with respect thereto). 2.6 Seller shall reflect the sale of each Asset sold pursuant to this Agreement on the Seller's balance sheet and other financial statements as a sale of assets by Seller. Seller shall be responsible for maintaining, and shall maintain, a complete set of books and records for the Assets which shall be clearly marked to reflect the sale of each Asset to Purchaser and the ownership of each Asset by Purchaser. 2.7 Except as otherwise provided herein, all costs and expenses incurred by all parties in connection with the transactions contemplated by this Agreement shall be paid by that party. 2.8 For any Asset which is real property, Seller shall pay all costs and expenses related to obtaining title insurance for any Asset, Seller and Purchaser shall each pay one-half of any escrow fees and transfer taxes, and Purchaser shall pay any recording fees. 5 3. Transfer of Servicing. --------------------- 3.1 The Assets shall be sold and conveyed to Purchaser on a servicing released basis. As of the Closing Date all rights regarding the servicing of Assets shall pass to Purchaser. 3.2 Seller shall provide Purchaser with a letter to be sent to all obligors on the Assets which are Mortgage Loans advising the obligors that the Assets have been sold and that all payments should be paid to Purchaser. 3.3 Seller shall provide Purchaser with a letter to be sent to all tenants in the Assets which are real property advising the tenants that the Assets have been sold and that all payments should be paid to Purchaser and that the tenants must change the loss payee endorsements on the insurance required under the applicable to lease to name Purchaser rather than Seller. 3.4 Purchaser shall be entitled to all payments received after the Cut-Off Date and Seller shall forward such payments to Purchaser within five days of receipt thereof. 3.5 Seller shall be responsible for payment of all expenses of servicing and payment of all third-party obligations of the borrower required to be paid under the Assets (including without limitation, tax and insurance payments), attributable to the time period prior to the Cut-Off Date. If funds are not available from borrower's impound account for such third- party obligations, Seller shall obtain Purchaser's prior approval before advancing such funds and adding the amount thereof to the borrower's balance. 3.6 After the Cut-Off Date, Seller shall not have any right to participate for its own account in pending litigation relating to any Asset sold to Purchaser. Seller agrees to make its employees available to Purchaser when reasonably required after the Closing Date to assist Purchaser in obtaining missing documents, missing information, or in litigation provided that Purchaser provides Seller reasonable advance notice and pays a reasonable fee for the employees' time and costs. 3.7 Seller shall deliver to Purchaser all security deposits held by Seller from tenants in the Assets which are real property. 3.8 Seller shall assign to Purchaser, in such form approved by Purchaser, all contracts relating to the operation and maintenance of the Assets which are real property and shall provide notice to the persons party to such contracts that the contracts are being assigned to Purchaser. 4. Representations and Warranties of Seller. ---------------------------------------- 4.1 This Agreement. Each Seller represents and warrants to Purchaser and WREIT -------------- that as of the date of this Agreement and as of the Closing Date: 6 (a) Each Seller is duly organized and validly existing under the laws of its state of organization. Each Seller has full power and authority to make, execute, deliver and perform this Agreement and all of the transactions contemplated under this Agreement and has taken all necessary action to authorize the execution, delivery and performance of this Agreement. (b) The sale and delivery of any Asset to Purchaser, the execution of this Agreement, and the performance of the transaction contemplated under this Agreement will not result in a breach of any provision of the charter or bylaws of each Seller or result in a material breach of any legal restriction or any agreement to which each Seller is now a party or by which it is bound, or result in a violation of any law, rule, regulation, order, judgment or decree to which such Seller or its property is subject. (c) Except as noted on Schedule 4.1(c) Seller is the owner of the Assets, free of any liens or encumbrances, and has the full right, title and interest to sell and assign the Assets to Purchaser and except (A) for Assets that are real property (i) liens for real property taxes and assessments not due and payable on the Closing Date, (ii) covenants, conditions and restrictions, rights-of-way, easements and other matters of public record as of the Closing Date generally acceptable to institutional investors in the area, (iii) such other matters to which like properties are commonly subject which do not, individually or in the aggregate, materially interfere with the practical realization of the benefits of ownership of such real property or with the current use thereof, (iv) ground leases described in written schedules previously provided to Purchaser, and (v) rights of tenants under leases and (B) for Assets that are junior Mortgage Loans, the senior Mortgages which have been disclosed to Purchaser. (d) Each Seller has obtained all consents, approvals or authorizations required in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated by this Agreement. (e) Each Seller has complied with all rules, regulations and statutes required in connection with the execution, delivery and performance of this Agreement or the consummation of the transaction contemplated by this Agreement. (f) There is no action, suit, proceeding, investigation or litigation pending or, to each Seller's knowledge, threatened, which either in any one instance or in the aggregate, if determined adversely to such Seller, would adversely effect the sale of the Assets to Purchaser, or such Seller's ability to perform its obligations under this Agreement. (g) Each Seller is solvent and is generally paying its debts as such become due and the execution and consummation of this Agreement will not render such Seller insolvent. There are no proceedings for reorganization, arrangement, liquidation or dissolution pending, or to each Seller's knowledge, threatened or contemplated under any federal, state or local law against such Seller. 7 (h) There are no brokers or other persons who are entitled to any payment arising from this Agreement or the sale of any Asset except as noted on Schedule 4.1(h). (i) No certificate of an officer furnished pursuant hereto in writing to the Purchaser or the trustee of any Asset that is MBS by the Seller contains any untrue statement of a material fact, or omits a material fact necessary to make the certificate not misleading. (j) No default exists on the part of the Seller, and no event has occurred which, with notice, lapse of time or both, would constitute a default on the part of the Seller in the due performance and observance of any term, covenant or condition of any agreement to which the Seller is a party or by which it is bound, which default would have a materially adverse effect on the Seller's performance of this Agreement. (k) The Seller's principal place of business and chief executive office are located in Oregon. (l) The Seller is not a "benefit plan investor" described in or subject to the Department of Labor Regulations set forth in 29 C.F.R. section 2510.3-101. (m) Upon execution and delivery of this Agreement, it shall be a valid and binding obligation of Seller, and enforceable against Seller in accordance with its terms. (n) The Seller acquired the Assets in the ordinary course of its business, in good faith, and for value. (o) The Seller does not have any actual knowledge or notice of any interest in the Assets that upon sale to the Purchaser and transfer in accordance herewith will be contrary to the interest of the Purchaser. (p) The transfer, assignment and conveyance of the Assets by the Seller pursuant to this Agreement is not subject to bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction. (q) The Seller intends to relinquish all ownership rights in the Assets sold pursuant to this Agreement; after the Closing Date, the Seller will have no right to the Assets. 4.2 Mortgage Loans. Seller shall assign to Purchaser all representations and -------------- warranties pertaining to each Mortgage Loan received by Seller when Seller acquired each such Mortgage Loan to the extent that such representations and warranties may be transferred. In addition, Seller represents and warrants to Purchaser that with regard to each Asset sold hereunder that is a Mortgage Loan that, as of the Closing Date: 8 (a) Except as specified in the computer tape provided to Purchaser on or about ____________, 1998, to Seller's knowledge there are no delinquent taxes, ground rents, water charges, sewer rents, assessments, insurance premiums, leasehold payments, including assessments payable in future installments, or other outstanding charges affecting the related mortgaged property that have arisen subsequent to the date that Seller acquired each such Mortgage Loan. (b) All escrow payments are in possession of Seller and have been collected in substantial compliance with all applicable federal, state and local laws and regulations and the loan documents subsequent to the date that Seller acquired each such Mortgage Loan. All escrows held and account records reflecting amounts held in escrow will be delivered to Purchaser at the Closing. (c) To Seller's knowledge all buildings upon the mortgaged property are insured by a Qualified Insurer against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the mortgaged property is located. All such policies contain a standard mortgage clause naming Seller, its successors and assigns as mortgagee and all premiums thereon have been paid. All such hazard insurance policies contain a standard mortgagee clause for the benefit of the holder of the related Mortgage, its successors and assigns, as mortgagee, are not terminable, the amount of coverage provided thereunder may not be reduced without ten (10) days prior written notice to the mortgagee, and there are no delinquent payments with regard to premiums payable thereunder. To Seller's knowledge each mortgaged property is also covered by commercial general liability insurance in an amount at least equal to One Million Dollars ($1,000,000) per occurrence. No notice of termination, cancellation or reduction has been received by the Seller with respect to any such hazard or liability insurance policy. All premiums thereon have been paid. To Seller's knowledge, no person has engaged in any act or omission that would impair the coverage of such policy or the benefits of the mortgagee's endorsement. Such hazard insurance policy is the valid and binding obligation of the insurer and is in full force and effect. The related Mortgage obligates the obligor to maintain all such insurance at its cost and expense, and on the obligor's failure to do so, authorizes the holder of the Mortgage to maintain such insurance and to obtain reimbursement therefor from the obligor. "Qualified Insurer" means an insurance company duly qualified as such under the laws of the state in which the mortgaged property is located, duly authorized and licensed in such state to transact the applicable insurance business and to write the insurance provided. (d) To Seller's knowledge, the Mortgage is a valid, existing and enforceable lien on the mortgaged property, including all improvements on the mortgaged property, subject only to (i) the lien of current real property taxes and assessments not yet due and payable, (ii) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording being acceptable to mortgage lending institutions generally and specifically referred to in the title insurance policy delivered to the originator of the Mortgage Loan and which do not adversely affect the appraised value of the mortgaged property, (iii) senior mortgage liens if the Asset is described as a junior mortgage in Exhibit A, and (iv) rights of tenants under leases or other rights of tenants. 9 (e) Each Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the mortgaged property of the benefits of the security provided thereby, including; (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale and (ii) otherwise by judicial foreclosure. (f) The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan if the mortgaged property is sold or transferred without the prior written consent of the mortgagee thereunder. (g) The lien of the Mortgage is insured by ALTA or CLTA lender's title insurance policy, issued by a title issuer acceptable to institutional mortgage lenders and qualified to do business in the jurisdiction where the mortgaged property is located, insuring the originator of the Mortgage Loan, its successors and assigns as to the lien of the Mortgage in the original principal amount of the Mortgage Loan after all advances of principal. Such title insurance policy is in full force and effect and will be in full force and effect and inure to the benefit of Purchaser upon the consummation of the transactions contemplated by this Purchase Agreement with respect to such mortgage loan. Full premiums for such policy, including all endorsements and special endorsements, have been paid. To the best of Seller's knowledge, no claims have been made under such lender's title insurance policy, and Seller has not, by act or omission, done anything which would impair the coverage of such lender's title insurance policy. The originator of the Mortgage Loan is the sole insured under such lender's title insurance policy and such policy is assignable to Purchaser without the consent of or any notification to the insurer. (h) Seller has no knowledge that the mortgaged property has any material damage or waste or of any proceeding pending for the total or partial condemnation thereof. (i) Seller has no knowledge of any contamination from hazardous substances nor that any hazardous substances have been disposed of or identified on, under or at any mortgaged property in violation of any federal, state, or municipal law, regulation or standard. (j) Seller has no actual knowledge, as of the date hereof, that the mortgaged property is not in compliance with any applicable zoning or building law or regulation or that all inspections, licenses and certificates required by law, regulation or insurance standards to be made or issued with respect to the mortgaged property and with respect to the use and occupancy of the same, have not been made or issued by the appropriate authority. (k) The Asset File contains an appraisal or BPO of the related mortgaged property that was made and signed, prior to the approval of the mortgage loan 10 application or at the time of purchase of the Asset by Seller, by a person, (1) who had no interest, direct or indirect, in the mortgaged property or the obligor or in any loan made by the approval or disapproval of the Mortgage Loan and (2) who was state-licensed or state-certified, if required under the laws of the state in which the related mortgaged property is located, at the time the appraisal or BPO was conducted and signed. (l) To Seller's actual knowledge, each Loan Document is the legal, valid and binding obligation of the parties thereto (subject to any non-recourse provisions therein), enforceable in accordance with its terms, execute as such enforceability may be limited by anti-deficiency laws or bankruptcy, reorganization or other similar laws affecting the enforcement of creditors' rights generally, and by general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law), and except that certain provisions of such Loan Documents are or may be unenforceable in whole or in part under applicable federal or state laws, but the inclusion of such provisions does not render any of the Loan Documents invalid as a whole, and such Loan Documents taken as a whole are enforceable to the extent necessary and customary for the practical realization of the rights and benefits afforded thereby and, subject to the foregoing qualifications, there is no offset, defense, counterclaim or right of rescission with respect to any of such Loan Documents. (m) The servicing of each Mortgage Loan purchased hereunder from the date of Seller's ownership thereof has been and as of the Closing Date will be in full compliance with all federal and state laws and regulations. (n) To Seller's actual knowledge, the related borrower is not a party to any bankruptcy, reorganization, insolvency or similar proceeding. (o) Except as disclosed in the Schedule 4.2(o), Seller has no actual knowledge that any Mortgage Loan is cross-defaulted with any loan (other than a Mortgage Loan), and no Loan is secured by any property that secures another loan (other than a Mortgage Loan). (p) To Seller's actual knowledge, except as set forth on Schedule 4.1(c), each such Mortgage, together with any separate security agreements and related documents, establishes a perfected first priority security interest in favor of the Seller in all the related borrower's fixtures and personal property used in, and reasonably necessary to operate, the real property underlying each Mortgage and, to the extent a security interest may be created therein, the proceeds arising from the real property underlying each Mortgage and any other collateral securing such Mortgage, subject only to certain encumbrances described in Schedule 4.1(c) annexed hereto and other encumbrances previously disclosed to Purchaser, if any. (q) Seller has no actual knowledge of mechanics' or other similar liens which have been filed for work, labor or materials (nor, to Seller's knowledge, are any rights outstanding that under applicable law could give rise to any such lien) affecting any real 11 property securing a Mortgage Loan which are or may be prior or equal to the lien of the related Mortgage, except those insured against pursuant to the applicable title insurance policy. (r) Each Assignment Document to be executed and delivered by or on behalf of Seller pursuant hereto is and will be in recordable for and legal, valid and binding. (s) Seller's endorsement of the note evidencing each Mortgage Loan, which note is secured by the related Mortgage, will constitute the legal and binding assignment of such note and together with an assignment of Mortgage Loan, assignment of the assignment of leases and rents, and Assignment of any UCC financing statement, legally and validly will convey all right, title and interest in such Mortgage Loan to Purchaser. (t) Seller has no actual knowledge that the principal amount of each Mortgage Loan stated on the related note has not been fully disbursed as of the origination date specified therein, there are no future advances required to be made by the lender under any of the related Loan Documents, all requirements under the related Loan Documents, if any, for disbursements of additional loan proceeds have been satisfied fully, and any construction of improvements on the related real property underlying a given Mortgage that has not been completed will not impair the value of that real property underlying the Mortgage relative to the value reflected in the most recent appraisal thereof. (u) Other than as set forth in the Loan Table, no Mortgage Loan is as of the date hereof, or will be as of the Closing Date, more than 30 days delinquent in payments of principal or interest. (v) Seller has not modified, and shall not on or prior to the Closing Date modify, the terms of any Mortgage Loan and none of the Loan Documents have been modified or waived, or shall be modified or waived on or prior to the Closing Date, in each case in any material respect except as previously disclosed by Seller to Purchaser; with respect to each Mortgage Loan, the applicable interest rate and the related monthly payment have been calculated correctly (or have been recalculated correctly, in the case of certain Mortgage Loans for which one or both of such amounts previously was calculated incorrectly, each of which incorrect calculations previously has been disclosed to Purchaser in writing) pursuant to the terms of the applicable Loan Documents for all purposes; and all information set forth in the Loan Table with respect to each Mortgage Loan, including without limitation the outstanding principal balance, is true and correct in all material respects. (w) No Mortgage Loan is an interest-only loan the documents governing which provide only for interest on that Mortgage Loan to be paid on a periodic basis, with no periodic payment on account of amortization of principal. (x) No Mortgage Loan has been, and as of the Closing Date no Mortgage Loan shall be, satisfied, canceled, subordinated, released or rescinded, in whole or 12 in part, and the related mortgagor has not been and shall not be released by Seller from any of such mortgagor's obligations under any Loan Documents. (y) Seller has no actual knowledge that any of the Loan Documents is or, on or prior to the Closing Date, will be subject to any right of rescission, set-off, valid counterclaim or defense, or that any exercise of any of the rights and remedies under the Loan Documents and in accordance with procedures permitted under applicable law will render any of such Loan Documents subject to any right of rescission, set-off, valid counterclaim or defense, and that any right of rescission, set-off, valid counterclaim or defense has been asserted with respect to any Mortgage Loan. (z) Seller has no actual knowledge that any real property securing a Mortgage Loan being or to be sold by Seller pursuant to this Agreement is not, and as of the Closing Date will not be, in all material respects, in compliance with, and is used and occupied in accordance with, all applicable statutes, rules, laws, regulations and ordinances and all restrictive covenants of record applicable to such real property; nor that all inspections, licenses and certificates of occupancy required by any of such statutes, rules, laws, regulations and ordinances to be made or issued with regard to such real property have not been obtained and are not in full force and effect (except to the extent the failure to obtain and maintain any thereof do not materially impair the current use of such real property or the rights of a holder of the related Mortgage Loan.) (aa) Seller did not engage in an adverse selection process in selecting the Mortgage Loans for sale, assignment and transfer to Purchaser. (bb) No more than 5% of the aggregate outstanding principal amount of the Mortgage Loans have the same borrower or, to Seller's best knowledge, are to borrowers, which are affiliates of each other. (cc) Except as set forth on Schedule 4.2(cc) hereto, each Mortgage prohibits any further pledge or lien on the real property securing each Mortgage, whether of equal or subordinate priority to the lien of the Mortgage, unless the prior written consent of the holder is obtained or certain conditions set forth in the Mortgage are satisfied. (dd) Seller has no actual knowledge of any circumstances or conditions with respect to the real property securing any Mortgage, that would constitute or result in a material violation of any environmental laws or require any expenditure material in relation to the principal balance of such Mortgage Loan to achieve or maintain compliance in all material respects with any and all environmental laws. (ee) Seller has no actual knowledge that all amounts required to be deposited by the borrower with respect to each Mortgage Loan at the origination of such Mortgage Loan were not deposited or that there are any deficiencies with regard thereto. 13 (ff) To Seller's actual knowledge, all significant leases with respect to each real property securing a Mortgage Loan are and as of the Closing Date will be in full force and effect, there has been and as of the Closing Date will be no material default under the lease by the related borrower or, to Seller's knowledge, except as disclosed on Schedule 4.2(ff), the lessee, and no person or entity other than the related borrower owns any interest in any payments due or to become due under the related leases. (gg) To Seller's actual knowledge, there are and as of the Closing Date will be no pending or threatened actions, suits or proceedings by or before any court or other governmental authority against or affecting the related borrower under each Mortgage Loan or the real property securing such Mortgage Loan which, if determined against such mortgagor or real property, would materially and adversely affect the value of such real property or the ability of the borrower to pay principal, interest and other amounts due under such Mortgage Loan. (hh) Each Asset File contains an original or a copy of lender's title insurance as of the origination date of each Mortgage Loan. 4.3 Real Property. Seller represents and warrants to Purchaser that with ------------- regard to each real property sold hereunder that, as of the Closing Date: (a) The Asset Files contain all material documents, or copies thereof, relating to each real property. (b) Seller is the sole owner and holder of the real property and has the full right to sell the real property pursuant hereto. (c) A valid and enforceable ALTA policy of title insurance, or equivalent coverage customarily approved by institutional investors in the jurisdiction in which the real property is located, has been obtained by Seller in an amount not less than the purchase price of such real property and insuring that the real property is owned by Purchaser, subject to (i) liens for real property taxes and assessments not due and payable on the Closing Date, (ii) covenants, conditions and restrictions, rights-of-way, easements and other matters of public record as of the Closing Date generally acceptable to institutional investors in the area, (iii) such other matters to which like properties are commonly subject which do not, individually or in the aggregate, materially interfere with the practical realization of the benefits of ownership of such real property or with the current use thereof, (iv) ground leases described in written schedules previously provided to Purchaser, and (v) rights of tenants under leases. (d) The real property is free and clear of all mechanics' and materialmen's liens or liens in the nature thereof. (e) Seller has no knowledge of any pending or threatened condemnation proceeding or similar proceedings, affecting the real property or any part thereof 14 which could have a material adverse effect upon the use of the real property for its current uses. (f) Except to the extent they do not materially and adversely affect the present use of the real property, all of the improvements that were included for the purpose of determining the valuation of the real property lie substantially within the boundaries and building restriction lines of such real property, and no improvements on adjoining properties encroach in any material respect upon such real property. (g) To Seller's knowledge, all public utility connections located at or on the real property have been paid for and all sewer, water and other utilities required for the operation of the real property enter through adjoining public streets or through valid recorded easements across adjoining private lands. (h) Seller has no knowledge of any contamination from hazardous substances and nor that any hazardous substances have been disposed of or identified on, under or at any real property in violation of any federal, state, or municipal law, regulation or standard. (i) There is maintained a hazard insurance policy on the real property. Seller has not received from any insurance company which carries insurance on the real property any notice of any defect or inadequacy in connection with the real property or its operation which has not been cured. (j) If the real property is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and the flood insurance described below is available), a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administrator is in effect or could be obtained with a reputable insurance carrier, in an amount representing coverage not less than the lesser of (i) the full insurable value of the related real property, or (ii) the maximum amount of insurance which is available under the Flood Disaster Protection Act of 1973. (k) Except as previously disclosed to Purchaser in the Asset Files, Seller has no knowledge that the real property, normal wear and tear excepted, is not in good condition and repair or that it has been damaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado, or other casualty, so as to affect adversely the value of the real property or the use for which the premises were intended. (l) Seller has performed or will perform all of Seller's obligations under any leases relating to the real property that are or will be required to be performed prior to the Closing Date. No brokerage commission or other compensation is or will be due or payable to any person with respect to or on account of any of such leases, or any renewal thereof, that could be a lien against the real property or a claim against Purchaser. 15 (m) Except as previously disclosed to Purchaser in the Asset Files, Seller has no knowledge of any litigation pending, or of any order, injunction or decree outstanding, existing or relating to the real property, that could reasonably be expected to have a material adverse effect on the real property or title thereto. Seller has no knowledge of any illegal activity being conducted on the real property which could serve as the basis for a claim or prosecution of any action or proceeding seeking to impose civil or criminal liability on Purchaser as the owner. (n) Except as disclosed on Schedule 4.3, there are no delinquent taxes, ground rents, water charges, sewer rents, assessments or other outstanding charges affecting the real property. (o) To Seller's knowledge any rent rolls and leases provided by the Seller to Purchaser are complete, true, and accurate, and are presented in a manner that is not misleading. All leases are in full force and effect with rents paid currently (except as indicated in the rent roll). With regard to the tenant leases, the Seller knows of no default by it or by any of the tenants, and there have been no verbal changes and no concessions granted by Seller with respect to the leases or tenants under the leases, except as indicated in the rent roll. (p) All information pertaining to the real property on any exhibits or schedules is true and correct in all material respects. 4.4 MBS. Seller represents and warrants to Purchaser that with regard to each --- MBS sold hereunder that, as of the Closing Date: (a) Seller acquired each MBS in the ordinary course of business, in good faith, for value and without notice of any claim against or claim to any of the MBS on the part of any person. (b) Seller does not have any actual or constructive knowledge or notice of any interest in the MBS that upon sale to the Purchaser and transfer in accordance herewith will be contrary to the interest of the Purchaser. (c) All conditions precedent and any restrictions upon the transfer of any MBS provided for in the pooling and servicing agreement relating to any given MBS have been satisfied (other than conditions precedent to be satisfied by Purchaser) and the transfer of each MBS to the Purchaser will be complete upon the execution and delivery of this Agreement by the parties hereto and the execution and delivery of the Bill of Sale and duly executed stock powers by Seller (provided that the transfer of registered ownership will only be complete after the trustee for each respective MBS has issued a new certificate, representing the MBS being transferred, registered in the name of the Purchaser). 16 5. Representations and Warranties of Purchaser. Purchaser represents and ------------------------------------------- warrants to Seller that, as of the Closing Date: (a) Purchaser is duly organized and validly existing under the laws of its state of organization. Purchaser has the full right, power and authority to make, execute, deliver and perform this Agreement and the transaction contemplated under this Agreement and has taken all necessary action to authorize the execution, delivery and performance of this Agreement. (b) Purchaser has obtained all consents, approvals or authorizations required in connection with the execution, delivery or performance of this Agreement or the consummation of the transaction contemplated by this Agreement. (c) Purchaser has complied with all rules, regulations and statutes required in connection with the execution, delivery and performance of this Agreement or the consummation of the transaction contemplated by this Agreement. (d) Purchaser has complied with all conditions precedent to be performed by a transferee provided for in each pooling and servicing agreement relating to any Asset that is an MBS. 6. Representations and Warranties of WREIT. WREIT represents and warrants --------------------------------------- to Seller that, as of the Closing Date: (a) WREIT is duly organized and validly existing under the laws of its state of organization. WREIT has the full right, power and authority to make, execute, deliver and perform this Agreement and the transaction contemplated under this Agreement and has taken all necessary action to authorize the execution, delivery and performance of this Agreement. (b) The execution of this Agreement, and the performance of the transaction contemplated under this Agreement will not result in a breach of any provision of the charter or bylaws of WREIT or result in a material breach of any legal restriction or any agreement to which WREIT is now a party or by which it is bound, or result in a violation of any law, rule, regulation, order, judgment or decree to which WREIT or its property is subject. (c) WREIT has obtained all consents, approvals or authorizations required in connection with the execution, delivery or performance of this Agreement or the consummation of the transaction contemplated by this Agreement. (d) WREIT has complied with all rules, regulations and statutes required in connection with the execution, delivery and performance of this Agreement or the consummation of the transaction contemplated by this Agreement. 17 7. Indemnification. --------------- (a) Subject to provisions of this Section 7, Seller shall indemnify and hold Purchaser harmless for any third party claims or losses arising out of the acts or omissions of Seller with regard to the Assets prior to the Closing Date and, subject to provisions of this Section 7, Purchaser shall indemnify and hold Seller harmless for any third party claims or losses arising out of the acts or omissions of Purchaser with regard to the Assets after the Closing Date. (b) Neither party shall be entitled to indemnification under Section 7(a) hereof unless a Notice of Breach has been delivered by the party seeking indemnification on or before the Survival Date. (c) Neither party shall be liable under Section 7(a) hereof unless the total amount recoverable under Section 7(a) hereof exceeds, in the aggregate, $100,000; provided, however, that if the indemnifying party's obligation under Section 7(a) hereof exceeds $100,000 in the aggregate, the indemnifying party's obligation under Section 7(a) hereof shall be for the full amount of such obligation less $100,000. 8. Proration. For real properties, rental revenues and other income, and --------- taxes, assessments, utility charges and other expenses affecting the property shall be prorated between Seller and Purchaser as of the Cut-Off Date, with the Seller to receive all income and be responsible for all expenses which accrued prior to the Cut-Off Date and the Purchaser to receive all income and be responsible for all expenses which accrued on or after the Cut-Off Date. 9. MBS Payments. For MBS, Seller shall receive all payments, including, ------------ without limitation, all principal and interest payments, relating to the MBS which are made prior to the Cut-Off Date and Purchaser shall receive all payments, including, without limitation, all principal and interest payments, relating to the MBS which are made on or after the Cut-Off Date. 10. Amendment. This Agreement may be amended only by written agreement --------- signed by Seller, WREIT and Purchaser. 11. Counterparts. This Agreement may be executed in counterparts. ------------ 12. Notices. Any notice hereunder shall be in writing and either shall be ------- delivered in person with receipt acknowledged or by registered or certified mail, return receipt requested, postage prepaid, or, in the case of facsimile transmission, when received and telephonically confirmed, in each case as follows: 18 If to the Seller at: c/o Wilshire Financial Services Group Inc. 1776 SW Madison Street Portland, OR 97205 Telephone: (503) 223-5600 Attention: Andrew Wiederhorn, CEO With a Copy to: Mark H. Peterman Stoel Rives LLP 900 SW Fifth Avenue, Suite 2300 Portland, OR 97204-1268 Telephone: (503) 294-9536 If to Purchaser at: Wilshire Real Estate Partnership L.P. 1776 SW Madison Street Portland, OR 97205 Telephone: (503) 223-5600 Attention: Lawrence Mendelsohn With a Copy to: James Waddington Proskauer Rose LLP 1585 Broadway New York, NY 10036-8299 Telephone: (212) 969-3110 If to WREIT at: Wilshire Real Estate Partnership L.P. 1776 SW Madison Street Portland, OR 97205 Telephone: (503) 223-5600 Attention: Lawrence Mendelsohn With a Copy to: James Waddington Proskauer Rose LLP 1585 Broadway New York, NY 10036-8299 Telephone: (212) 969-3110 13. No Partnership. Nothing herein contained shall be deemed or construed -------------- to create a partnership or joint venture between the parties hereto; the parties shall have the status of and act in all matters hereunder as independent contractors. Seller is not an agent of Purchaser and has no authority, and is not intended to have the power to create, extinguish or modify any right, obligation or liability of Purchaser to any person or entity whatsoever, including without limitation, any Asset obligor. 14. Successors and Assigns. This Agreement shall inure to the benefit of ---------------------- and be binding upon Seller, WREIT and Purchaser and their respective successors and assigns, as may 19 be permitted hereunder. Purchaser may assign this Agreement or any Asset hereunder, together with all rights under this Agreement with regard to such Asset. 15. Severability. Each part of this Agreement is intended to be ------------ severable. If any provision of this Agreement is invalid or unenforceable, such invalidity or unenforceability shall not affect the remaining provisions of this Agreement, which shall remain in full force and effect and shall be binding upon the parties. 16. Law Governing. This Agreement shall be construed in accordance with, ------------- and governed by, the laws of the State of Oregon without reference to the law therein regarding choice of law. 17. Survival; Repurchase and Damages. -------------------------------- (a) The covenants, warranties and representations of the parties shall survive the Closing Date; provided, however, that no claim or action for a breach of any representation or warranty contained in this Agreement may be maintained by any Party unless such party shall have delivered a Notice of Breach specifying the details of such breach (including, to the extent practicable, a quantification of the damages arising from such alleged breach) to the other party on or before the Survival Date. The foregoing limitation shall not apply to covenants. A Notice of Breach shall only be sufficient to preserve a claim or action with respect to an alleged breach to the extent the Notice of Breach sets forth sufficient details identifying the specific breach and a quantification, to the extent practicable, of the damages arising therefrom. (b) In the event of a breach of any representation or warranty set forth in Section 4, Seller shall have a period of [180] days from its receipt of Notice of any such breach within which to cure such breach in all material respects. Prior to enforcing its remedies against Seller, Purchaser shall make a claim on any title or property insurance policy, if any, to the extent that payment thereunder could reasonably be expected to reduce Seller's liability or to bring about a cure on account of such breach. If such breach by Seller shall not have been cured in all material respects within such [180] day period, Seller shall be required to repurchase the Asset pursuant to Section 7(c). (c) Seller shall be required to repurchase any Asset pursuant to this paragraph if prior to the Survival Date, Purchaser has notified Seller of a material breach of any representation and warranty set forth in Section 4 and such breach is not cured in all material respects within a [180]-day cure period. Seller shall be obligated, within 10 days following receipt of written demand by the Purchaser, to repurchase the related Asset. Seller shall repurchase any affected Asset hereunder at the Purchase Price of such Asset, plus the amount of any servicing advances made by Purchaser in respect of the related Asset, and minus any principal payments received by Purchaser arising from the Asset after the Cut-Off Date. In connection with any repurchase of an Asset hereunder by Seller, Purchaser shall tender to Seller all portions of the Asset File with respect to such Asset previously delivered to Purchaser and any additional documents related thereto in Purchaser's possession, and each 20 document therein which was endorsed or assigned to Purchaser as required by this Agreement, shall be endorsed and assigned to Seller in the same manner as provided therein. Notwithstanding anything to the contrary contained herein, Seller's obligation to repurchase any Asset shall terminate unless Purchaser shall have provided written notice to Seller of the breach on or before the Survival Date. 18. Further Assurances. The parties agree that they will execute and ------------------ deliver such further instruments and take such other action as any of them reasonably may require in order to more effectively to carry out the intent and purposes of this Agreement. 19. Attorney Fees. In the event there is any dispute arising out of this ------------- Agreement, the prevailing party shall be entitled to recover from the other all reasonable attorney fees and costs, whether or not at trial, on appeal, or in bankruptcy. 20. Jurisdiction and Venue. Any dispute arising out of this Agreement ---------------------- shall be resolved by the applicable courts in Oregon, and Seller and Purchaser consent to personal jurisdiction and venue therein. 21. Waivers. The failure of Purchaser or WREIT to enforce any provision ------- of this Agreement shall not be deemed a waiver of that provision or any other provision with respect to that transaction or any other transaction with Seller. 22. Entire Agreement. This Agreement, including any exhibits and ---------------- schedules referred to herein, the Offering Memorandum and all prior written and computer information regarding the Assets provided by Seller to Purchaser constitute the entire agreement between the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, representations and understandings of the parties. The representations and terms of this 21 Agreement shall supersede any inconsistent representations or terms in the prior written and computer information provided by Seller to Purchaser. Wilshire Financial Services Group Inc. By: -------------------------------------- Title: ----------------------------------- Wilshire Funding Corporation By: -------------------------------------- Title: ----------------------------------- WMFC 1997-1 Inc. By: -------------------------------------- Title: ----------------------------------- Wilshire Real Estate Investment Trust Inc. By: -------------------------------------- Title: ----------------------------------- Wilshire Real Estate Partnership L.P., by Wilshire Real Estate Investment Trust Inc., its General Partner By: -------------------------------------- Title: ----------------------------------- 22 EXHIBIT A DESCRIPTION OF ASSETS EXHIBIT B BILL OF SALE In accordance with the Asset Purchase Agreement (the "Agreement") dated as of ___________, 199___ between _______________________________ ("Seller"), and Wilshire Real Estate Partnership L.P. ("Purchaser"), Seller hereby transfers, assigns, sets over and otherwise conveys to Purchaser, (i) all right, title and interest in the Assets and any and all payments received from and after the Cut- Off Date, (ii) all right, title and interest in those representations and warranties which were received by Seller in relation to those Assets which are Mortgage Loans and that may be assigned, and (iii) all documents contained in the Asset Files. Capitalized terms used herein have the meanings given them in the Agreement. This Bill of Sale is made pursuant to and upon the representations and warranties on the part of the undersigned contained in the Agreement and such representations and warranties are not merged in this Bill of Sale. Other than such representations, the Assets are sold AS IS, without any other warranties, ------------------------------------ including without limitation any warranties of merchantability or fitness for a - ------------------------------------------------------------------------------- particular purpose. - ------------------- DATED this ____ day of ___________, 199___. By: --------------------------- Title: ------------------------ LOAN TABLE SCHEDULE 4.1(c) ENCUMBRANCES SCHEDULE 4.1(h) BROKER'S FEES SCHEDULE 4.2(o) CROSS DEFAULTS SCHEDULE 4.2(cc) MORTGAGE LOANS PERMITTING FURTHER LIENS SCHEDULE 4.3 OUTSTANDING CHARGES WILSHIRE REAL ESTATE PARTNERSHIP L.P. PURCHASE AGREEMENT This Asset Purchase Agreement (the "Agreement") is made as of ___________1998 by and among Wilshire Real Estate Partnership L.P., a Delaware limited partnership ("Purchaser"), Wilshire Real Estate Investment Trust Inc., a Maryland corporation ("WREIT") general partner of Purchaser and Wilshire Funding Company UK Limited, an English corporation ("WFC UK") ("Seller"). RECITALS A. Seller desires to sell to Purchaser and Purchaser desires to purchase from Seller, on the terms and subject to the conditions set forth herein, the Assets (as defined herein) owned by Seller. B. Purchaser and Seller desire to enter into this Agreement to govern the purchase by Purchaser from Seller, and sale by Seller to Purchaser, of the Assets. Therefore, in consideration of the mutual covenants, terms and conditions set forth herein, the parties agree as follows: 1. Definitions ----------- The following terms are defined as follows: "Affiliate" With respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities (including, without limitation, partnership interests), by contract or otherwise and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 1 "Assets" The mortgage loans, real property and mortgage-backed securities described in Schedule One to this Agreement, together with all liens and guaranties granted in connection therewith, all residual rights of Seller in property that secure the aforesaid, all insurance policies on any of the property or the obligor on the account, all documentation pertaining therto and all Asset Files. "Asset File" All information in recorded form pertaining to the Assets held by or for Seller, including without limitation, all documents, microfiche, computer software and other media that includes correspondence, general credit information, credit records, payment histories, internal notes or memoranda, loan applications, appraisals, insurance guarantee policies, property insurance policies, mortgage insurance policies, title insurance policies, attorney opinions, and all original documents evidencing or relating to the Assets and any collateral that secures the Assets. "Assignment Documents" As defined in Section 2.2. "Borrower" In relation to each Mortgage the person or persons specified as such in the Mortgage. "BPO" The most recent drive-by valuation, as reasonably adjusted by the Seller's in-house appraisal department (on a six month "stabilised" rather than "quick sale" basis) generally prepared by a duly qualified and licensed real estate broker who has no interest, direct or indirect, in the mortgaged property or in Seller or Purchaser, or any Affiliate of Seller or Purchaser and whose compensation is not affected by the results of the BPO and which valuation indicates the expected proceeds of a sale of the related mortgaged property, and includes certain assumptions, including those as to the condition of the interior of the applicable mortgaged property and marketing time. "Closing Date" The closing date of the initial public offering of common stock of WREIT, pursuant to Registration Statement No. 333-39035 on Form S- 11, and any amendments thereto, filed by WREIT with the Securities and Exchange Commission. "Cut-Off Date" _______________ 1998. 2 "IPO Closing" The closing of the initial public offering of common stock of WREIT, pursuant to Registration Statement No. 333-39035 on Form S-11, and any amendments thereto, filed by WREIT with the Securities and Exchange Commission. "MBS" Any Asset that is a mortgage-backed security. "Mortgage" any mortgage, floating charge, deed of trust or other instrument securing an Asset that creates a lien on an estate in real property securing the Asset. "Mortgage Loan" Any Asset that is secured by a Mortgage. "Person" Any legal person, including any individual, corporation, partnership, association, joint-stock company, trust, limited liability company, unincorporated organisation, governmental entity or other entity of similar nature. "Property" In relation to a Mortgage Loan the freehold or leasehold property upon which the repayment of the Mortgage Loan is secured. "Purchase Price" As defined in Section 2.1(b). "Related Security" The debentures guarantees charges over cash deposits, charges over Keyman Life policies, memoranda of deposit and/or charges over shares, deeds of priority, deeds of postponement, irrevocable letters held by Seller as security for the obligations of the Borrower. "Securities Act" The Securities Act of 1933, as amended. "Survival Date" That date [6 months] after the Closing Date. "Transfer" The form of transfer at Schedule Two. 2. Closing ------- The closing of the purchase and sale of the Assets shall be held at the offices of ____________ on the Closing Date. 3 2.1 The obligation of Seller to sell the Assets shall be subject to satisfaction of each of the following conditions precedent: (a) All of the representations and warranties of Purchaser contained in this Agreement shall be true and correct as of the Closing Date. (b) On the Closing Date, upon Purchaser's receipt of the items specified in Section 2.2, Purchaser shall wire transfer $/(Pounds)___________ to Seller (the "Purchase Price"). 2.2 The obligation of Purchaser to purchase the Assets shall be subject to satisfaction of each of the following conditions precedent on or before the Closing Date. Purchaser shall receive all items in such forms as are agreed upon and acceptable to Purchaser and WREIT, duly executed by all signatories as required pursuant to the respective terms thereof. If Purchaser purchases the Assets before satisfaction of any of these conditions, Seller shall, at Purchaser's request, satisfy the conditions after the Closing Date. (a) Seller shall deliver the Assets, the original Asset Files together with such other documents and instruments reasonably necessary for the individual transfer of each Asset by Seller to Purchaser, including without limitation, the following as applicable for each Asset (collectively, the "Assignment Documents"): (i) Original title deeds for each Property; (ii) Duly executed Transfers of each Mortgage Loan; (iii) Duly executed assignments of any Related Security; (iv) Notice to Borrower in the form of Schedule Three duly signed on behalf of Seller; (v) All Related Securities. (b) Seller shall deliver and release to Purchaser the Assets and all other documents required to be delivered pursuant to this Agreement. (c) Seller shall provide releases of all interests in the Assets held by any third party unless for any Property the parties have mutually agreed to transfer such Property subject to indebtedness, in which case Seller 4 shall provide consent to transfer such Property subject to the indebtedness from the lender holding such indebtedness. (d) Seller shall instruct the trustee for each MBS to transfer such MBS into Purchaser's name. (e) Seller shall provide copies of the agreements pursuant to which Seller acquired Assets that are Mortgage Loans. (f) Seller shall be responsible for the preparation of any and all other transfer documents reasonably necessary to evidence the transfer of the Assets. Such transfer documents shall be in the name and form reasonably acceptable to Purchaser. (g) Except as otherwise provided herein, Seller shall have delivered to the Purchaser, in escrow, all documents required to be delivered hereunder. (h) All representations and warranties of Seller set forth herein are true and correct. 2.3 The obligations of all parties under this Agreement are conditioned upon the IPO Closing. 2.4 At Purchaser's request, the Assignment Documents promptly shall be recorded or filed, as applicable, in the name of the Purchaser or in the name of a person or entity designated by Purchaser in all appropriate public offices, files and records. If any such Assignment Document is lost or returned unrecorded or unfiled because of a defect therein, Seller promptly shall prepare substitute Assignment Documents to cure such defects and thereafter cause each such substitute Assignment Document to be duly recorded or filed, as applicable. Purchaser shall pay all recording and filing fees related to one-time recordation or filing, as applicable, of the assignments. 2.5 Any Assignment Documents or Asset Files with respect to one or more of the Assets that are in Seller's possession from and after the closing Date shall be retained and maintained by the Seller in trust for the benefit of Purchaser and 5 in a custodial capacity only, and subject in all events to the will of the Purchaser. Seller shall segregate all of such Assignment Documents and Asset Files from Seller's other books and records and shall appropriately mark each of them to reflect clearly the sale of the related Asset to Purchaser and the ownership of each Asset by Purchaser. Seller shall release its custody of the contents of any thereof only in accordance with written instructions from Purchaser except where such release is required as incidental to the Seller's servicing of the Assets (if and to the extent Seller is engaged to provide servicing with respect thereto). 2.6 Seller shall reflect the sale of each Asset sold pursuant to this Agreement on the Seller's balance sheet and other financial statements as a sale of assets by Seller. Seller shall be responsible for maintaining, and shall maintain, a complete set of books and records for the Assets which shall be clearly marked to reflect the sale of each Asset to Purchaser and the ownership of each Asset by Purchaser. 2.7 Except as otherwise provided herein, all costs and expenses incurred by all parties in connection with the transactions contemplated by this Agreement shall be paid by that party. 3. Transfer of Servicing --------------------- 3.1 The Assets shall be sold and conveyed to Purchaser on a servicing released basis. As of the Closing Date all rights regarding the servicing of Assets shall pass to Purchaser. 3.2 Seller shall provide Purchaser with a letter to be sent to all Borrowers on the Assets which are Mortgage Loans advising the Borrowers that the Assets have been sold and that all payments should be paid to Purchaser. 3.3 Purchaser shall be entitled to all payments received after the Cut-Off Date and Seller shall forward such payments to Purchaser within five days of receipt thereof. 6 3.4 Seller shall be responsible for payment of all expenses of servicing and payment of all third-party obligations of the Borrower required to be paid under the Assets (including without limitation, tax and insurance payments), attributable to the time period prior to the Cut- Off Date. If funds are not available from Borrower's account for such third-party obligations, Seller shall obtain Purchaser's prior approval before advancing such funds and adding the amount therof to the Borrower's balance. 3.5 After the Cut-Off Date, Seller shall not have any right to participate for its own account in pending litigation relating to any Asset sold to Purchaser. Seller agrees to make its employees available to Purchaser when reasonably required after the Closing Date to assist Purchaser in obtaining missing documents, missing information, or in litigation provided that Purchaser provides Seller reasonable advance notice and pays a reasonable fee for the employees' time and costs. 3.6 Seller shall assign to Purchaser all contracts (if any) relating to the operation and maintenance of the Assets which are real property and shall provide notice to the persons party to such contracts that the contracts are being assigned to Purchaser. 4. Representations and Warranties of Seller ---------------------------------------- 4.1 This Agreement. Seller represents and warrants to Purchaser and WREIT -------------- that as of the date of this Agreement and as of the Closing Date: (a) Seller is duly organised and validly existing under the laws of England. Seller has full power and authority to make, execute, deliver and perform this Agreement and all of the transactions contemplated under this Agreement and has taken all necessary action to authorise the execution, delivery and performance of this Agreement. (b) The sale and delivery of any Asset to Purchaser, the execution of this Agreement, and the performance of the transaction contemplated under this Agreement will not result in a breach of any provision of the memorandum and articles of association of Seller or result in a 7 material breach of any legal restriction or any agreement to which Seller is now a party or by which it is bound, or result in a violation of any law, rule, regulation, order, judgment or decree to which such Seller or its property is subject. (c) Except as set out in Schedule Four Seller is the owner of the Assets, free of any liens or encumbrances (collectively "Encumbrances"), and has the full right, title and interest to sell and assign the Assets to Purchaser and except (A) for Assets that are real property (i) liens for real property taxes and assessments not due and payable on the Closing Date, (ii) covenants, conditions and restrictions, rights-of-way, easements and other matters of public record as of the Closing Date generally acceptable to institutional investors in the area, (iii) such other matters to which like properties are commonly subject which do not, individually or in the aggregate, materially interfere with the practical realisation of the benefits of ownership of such real property or with the current use thereof, (iv) leases described in written schedules previously provided to Purchaser, and (v) rights of tenants under leases and (B) for Assets that are second charges where the first charges have been disclosed to Purchaser. (d) Seller has obtained all consents, approvals or authorisations required in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated by this Agreement. (e) Seller has complied with all rules, regulations and statutes required in connection with the execution, delivery and performance of this Agreement or the consummation of the transaction contemplated by this Agreement. (f) There is no action, suit, proceeding, investigation or litigation pending or, to Seller's knowledge, threatened, which either in any one instance or in the aggregate, if determined adversely to Seller, would adversely effect the sale of the Assets to Purchaser, or Seller's ability to perform its obligations under this Agreement. 8 (g) Seller is solvent and is generally paying its debts as such become due and the execution and consummation of this Agreement will not render Seller insolvent. There are no proceedings for reorganisation, arrangement, liquidation or dissolution pending, or to Seller's knowledge, threatened or contemplated against Seller. 4.2 Representations and Warranties. Seller shall assign to Purchaser all ------------------------------ representations and warranties pertaining to each UK Mortgage Loan received by Seller when Seller acquired each such UK Mortgage Loan to the extent that such representations and warranties may be transferred. In addition, Seller represents and warrants to Purchaser that with regard to each Asset sold hereunder that is a UK Mortgage Loan that, as of the Closing Date: 4.2.1 The particulars of each Mortgage set out in the relevant schedule to the Transfers are in all material respects complete, true and accurate. 4.2.2 Each Property is situated in England, Wales or Scotland. 4.2.3 Each Property constitutes investment property let predominantly for office, industrial, retail, warehouse or, residential purposes and is either freehold or leasehold. 4.2.4 No Property is owner occupied nor constitutes a dwelling except for: (i) any Property which is a holiday home, hotel or public house; and (ii) any Property, part of which is let or is capable of being let on the basis of an assured shorthold tenancy, an assured tenancy or a protected tenancy; which residential aspect and tenancy was taken into account in the valuation of that Property referred to in paragraph 4.2.7(i) below. 4.2.5 (i) In relation to each Mortgage, the Borrower had, as at the date of that Mortgage, a good and marketable title to the fee simple absolute in possession or a term of years absolute in the 9 relevant Property and if the Property is registered, the title has been registered or is in the course of registration with title absolute in the case of freehold property or absolute or good leasehold title (where the freehold title has been deduced) in the case of leasehold property and each Property was, as at the date of that Mortgage, held by the Borrower free (save for the Mortgage and its Related Security and save for any Encumbrance which either (i) is postponed to and ranks in priority behind the Mortgage by virtue of a deed of priority or postponement which in the case of registered land, has been registered, or is in the course of registration, at HM Land Registry or (ii) as created, ranked in point of priority behind the Mortgage) from any Encumbrance which would materially and adversely affect such title or the value for mortgage purposes set out in the valuation referred to in paragraph 4.2.7(i) below. (ii) In relation to each Property, title to which is unregistered, where such unregistered property is subject to first registration, an application for registration of the Borrower's title and of the Mortgage has been delivered to HM Land Registry within two months from the date of dealing giving rise to first registration. (iii) In relation to any Mortgage where registration is pending at HM Land Registry, Seller has an absolute right to be registered as proprietor of the Mortgage as first mortgage of the interest in the relevant Property which is subject to that Mortgage. 4.2.6 All joint owners of the legal estate which is the subject of each Mortgage have joined as parties to the relevant Mortgage. 4.2.7 (i) In the case of each Mortgage, before the date on which the initial amount secured by that Mortgage was advanced, the Property charged as security therefor was valued by an independent qualified surveyor or valuer (being a fellow or associate of The Royal Institute of Chartered Surveyors of the 10 Incorporated Society of Valuers and Auctioneers) in accordance with usual valuation principles. (a) In the case of each Mortgage which comprises an initial advance and one or more further advances, before the date on which the last such further advance was advanced, the Property charged as security therefor was valued by an independent qualified surveyor or valuer (being a fellow or associate of The Royal Institute of Chartered Surveyors or the Incorporated Society of Valuers and Auctioneers) on a desktop basis but otherwise in accordance with usual valuation principles. 4.2.8 (i) Each Mortgage constitutes a valid and binding obligation of, and is enforceable against, the relevant Borrower, subject only, in the case of Mortgages required to be registered at HM Land Registry, to such registration; (ii) save as set out in Schedule Four each Mortgage is a valid and subsisting first fixed charge by way of legal mortgage on the Property to which such Mortgage relates; (iii) subject as set out in (i) above, Seller has a good title to each Mortgage at law and all things necessary to complete Seller title to each Mortgage (including an application for registration at HM Land Registry where necessary) have been duly done at the appropriate time or are in the process of being done without undue delay and within the relevant priority period conferred by an official search at the Central Land Charges Registry (in the case of unregistered land) or against the relevant title at HM Land Registry (in the case of registered land) or within two months after the conveyance to the relevant borrower (in the case of Property which comprises unregistered land title to which is required to be registered at HM Land Registry in order to transfer a legal estate in land); and 11 (iv) Seller is the legal and beneficial owner of each Mortgage, free and clear of all Encumbrances, overriding interests (other than those to which the Property is subject), claims and equities (including without limitation, rights of set- off or counterclaim) and there were at the time of completion of the relevant Mortgage and any further advances secured by that Mortgage no adverse entries of Encumbrances or applications for adverse entries of Encumbrances against any title at HM Land Registry to any relevant Property which entries would rank prior to the interests of Seller in such Mortgages. 4.2.9 An investigation as to the title of the Borrower to the relevant Property was, in accordance with good law and practice made prior to the completion of each relevant mortgage. 4.2.10 Since the date of each Mortgage, Seller has not received any written notice of any Encumbrance materially and adversely affecting its title to the relevant Mortgage nor any written notice of any occupational or similar equitable interest in the relevant Property other than those (if any) to which Seller has or should have given its written consent acting as a reasonably prudent lender of money secured on commercial property. 4.2.11 (i) At the date hereof either: (a) each Property is covered by buildings insurance maintained by the Borrower or another person with an interest in the relevant Property in an amount which is equal to or greater than the amount which a qualified surveyor or valuer engaged by Seller estimated to be equal to such Property's reinstatement value at the time of the original advance and Seller is or is in the course of being added as a joint-insured(s) thereunder, or its interest has been noted or is in the course of being noted on each policy or otherwise included by the insurer 12 under a "general interest noted" provision in the relevant policy; or (b) the relevant tenant of the Property is a department, agency or organisation of, or which is supported by, HM Government which a reasonably prudent lender of money secured on commercial property would allow to self insure. (ii) As at the date of each Mortgage, each Property covered by a policy of buildings insurance was covered against those risks usually covered by a reasonably prudent mortgagee of a property of the same nature and in a comparable location. 4.2.12 (i) None of the provisions of the Mortgage at the time it was entered into or since has been waived, altered or modified in any material respect and for this purpose none of the following shall be regarded as material: (a) any release of any one or more guarantors or any one or more joint Borrowers provided that there is at least one Borrower under each Mortgage; (b) any change of a mortgage payment date; (c) any agreement or waiver by Seller for the interest of Seller to be noted on the buildings insurance maintained from time to time in respect of the relevant Property rather than for that insurance to be in the joint names of Seller and the Borrower; (d) any substitution of a property with another Property having a value equal to or greater than the value of the original property at the time of the Mortgage. (ii) No representations or warranties have been made to any Borrowers by Seller, and there are no other terms and 13 conditions applicable to any Mortgage, other than in each case, those set out or referred to in the relevant Mortgage (so far as applicable) in effect at the relevant time and subject to such amendments, waivers, alterations and modifications as are permitted by, or regarded as immaterial for the purposes of, paragraph 4.2.12(i) above. (iii) The representations and warranties in this section 4.2 apply to each Property substituted for any other property which was originally secured by the relevant Mortgage as contemplated by paragraph 4.2.12(i)(d) above with each reference to the date of the Mortgage being construed as a reference to the date the Property was so substituted. 4.2.13 Seller has, since the creation of each relevant Mortgage, kept full and proper accounts, books and records showing clearly all transactions, payments, receipts and proceedings relating to the relevant Mortgage which are complete and accurate in all material respects. All such accounts, books and records are up to date and are held by, or to the order of Seller. 4.2.14 Each Mortgage arose from the ordinary course of Seller's commercial secured lending activities. 4.2.15 No agreement for any Mortgage is a regulated consumer credit agreement (as defined in Section 8 of the Consumer Credit Act 1974) or constitutes any other agreement regulated by the Consumer Credit Act 1974 or any modifications or re-enactment thereof. 4.2.16 Seller had, save as set out in Schedule Four immediately prior to the date hereof, a full first fixed charge by way of legal mortgage over the interest in the Property owned by each Borrower for the full amount secured by the relevant Mortgage. 4.2.17 No Mortgage is over any property which is the subject of the right to buy provisions of the Housing Act 1985. 14 4.2.18 Seller is not aware of any litigation or claim calling into question in any adverse way its title to any Mortgage. 4.2.19 Subject to completion of any registration which may be pending at HM Land Registry, all title deeds to the Properties and the deeds constituting the Mortgages and the files relating to each Mortgage are held by, or to the order of, Seller. 4.2.20 No Mortgage is subject to the Mortgage Interest Relief at Source Scheme provided for in sections 369 to 379 of the Income and Corporation Taxes Act 1988, as from time to time amended, or any predecessor thereof or replacement therefor. 4.2.21 Prior to entering into each Mortgage, all investigations, searches, and other actions and such enquiries as to the Borrower's ability to repay the relevant Mortgage were made and as to title of the Borrower to the relevant Property as would a reasonably prudent lender of money secured on commercial property make. Nothing was disclosed by such investigations, searches and enquiries which would have led such a reasonably prudent lender either initially or after further investigation to decline to proceed with the relevant Mortgage. 4.2.22 Each Mortgage is governed by English law. 4.2.23 In each case when the Borrower is a company, particulars of the Mortgage were delivered to the Companies Registry for registration within 21 days of the completion of the Mortgage pursuant to sections 395 or 410 of the Companies Act 1985. 4.2.24 Seller is not aware of any material default, material breach or material violation under a Mortgage which has not been remedied, cured or waived (but only in a case where a reasonably prudent lender of money secured on commercial property would grant such a waiver) or of outstanding material default, material breach or material violation by a Borrower under any Mortgage or of any outstanding event which with the giving of notice and/or the expiration of any applicable grace 15 period and/or making of any determination, would constitute such a default, breach or violation. 4.2.25 Seller has performed in all material respects all its obligations under or in connection with each Mortgage and so far as Seller is aware no Borrower has taken or has threatened to take any action against Seller for any material failure on the party of Seller to perform any such obligations. 4.2.26 No litigation is subsisting to which Seller and a Borrower are party and to the best of the knowledge and belief of Seller no other dispute or complaint to which Seller and a Borrower are party is subsisting, threatened or pending, which (in either case and if adversely determined) would be reasonably likely to affect materially and adversely any Mortgage. 4.2.27 If the Property subject to any Mortgage is leasehold, any requisite consent of the landlord to, or notice to the landlord of, the creation of such Mortgage has been obtained or given and placed with the title deeds and the relevant lease contains no provision whereby it may be forfeited on the bankruptcy or liquidation of the lessee. 4.2.28 In the case of each Property the title to which is registered or for which application for first registration has been made or caused to be made to the Chief Land Registrar, an application has been made for the registration against the registered title in question of a restriction to the effect that (except under order of the Registrar) no subsequent charge by the registered proprietor of such Property shall be registered without the written consent of Seller. 4.2.29 (i) No express recommendation was received by Seller from an independent qualified surveyor or valuer to carry out any environmental audit, survey or report which was not pursued; and 16 (ii) the results of any environmental audit, survey or report which have been procured by Seller would, as at that date, have been acceptable to a reasonably prudent lender of money secured on commercial property and have been taken into account in the relevant valuation. 4.2.30 No Mortgage has been discharged, terminated, redeemed, cancelled, rescinded or repudiated and neither Seller nor any Borrower has given any written intention to do so. 4.2.31 Seller acted as a reasonably prudent lender of money secured on commercial property in giving any consent which allowed any Borrower to: (i) grant or agree to grant or surrender any lease or tenancy of the relevant Property; (ii) allow any person any licence or other right to occupy or share occupation of that Property; (iii) give any consent, licence or agreement to any lease or tenancy of the Property or any sub-lease or sub-tenancy thereof or to the assignment of any lease or tenancy of the Property or of any sub-lease or sub-tenancy thereof; or (iv) make any alteration or addition to the Property or any development or change of use thereof. 4.2.32 No litigation, dispute or complaint to which Seller is a party is subsisting or, to its knowledge, threatened or pending which (in either case and if adversely determined) would be reasonably likely to affect materially the buildings insurance and no claim of a material nature has been made under any buildings insurance by Seller in relation to any Mortgage which is still outstanding. 4.2.33 As at the date hereof, the commercial loan managers at Seller who are responsible for the Mortgages: 17 (i) do not have any actual knowledge of any claim against a Borrower under: (a) the Clean Air Acts 1956, 1968 and 1993; (b) the Radioactive Substances Acts 1960 and 1993; (c) the Control of Pollution Act 1974; (d) the Food and Environmental Protection Act 1985; (e) the Water Resource Act 1991; (f) the Water Industry Act 1991; (g) the Planning (Hazardous Substances) Act 1990; (h) the Environmental Protection Act 1990 and the Environment Act 1995; (i) the Public Health Acts; or (j) the rule in Rylands v Fletcher or in nuisance; in relation to any Property which would, if adversely determined, materially and adversely affect the valuation of the relevant Property in the context of the loan to value calculation applied to the relevant Mortgage at or prior to its completion; (ii) have not received written notice of any matter likely in the opinion of that commercial loan manager to give rise to environmental liability for the Borrower in the foreseeable future of such materiality that it would materially and adversely affect the valuation of the relevant Property in the context of the loan to value calculation applied to the relevant Mortgage at or prior to its completion provided always that this paragraph (b) shall only apply to written notice of matters which under English environmental laws or regulations in force at today's date could give rise to a requirement to clean or to reinstate the relevant Property or to a claim against the Borrower; and (iii) have not received written notice of any default, forfeiture or variation of any occupational lease granted by a Borrower in respect of a Property or of the insolvency of any tenant of a 18 Property which would, in any case, render the relevant Property unacceptable as security for the advances secured by the Mortgage of that Property. 4.5 MBS. Seller represents and warrants to Purchaser that with regard to --- each MBS sold hereunder that, as of the Closing Date: (a) Seller acquired each MBS in the ordinary course of business, in good faith, for value and without notice of any claim against or claim to any of the MBS on the part of any person. (b) Seller does not have any actual or constructive knowledge or notice of any interest in the MBS that upon sale to the Purchaser and transfer in accordance herewith will be contrary to the interest of the Purchaser. (c) All conditions precedent and any restrictions upon the transfer of any MBS provided for in the pooling and servicing agreement relating to any given MBS have been satisfied (other than conditions precedent to be satisfied by Purchaser) and the transfer of each MBS to the Purchaser will be complete upon the execution and delivery of this Agreement by the parties hereto (provided that the transfer of registered ownership will only be complete after the trustee for each respective MBS has issued a new certificate, representing the MBS being transferred, registered in the name of the Purchaser). 5. Representations and Warranties of Purchaser. Purchaser represents and ------------------------------------------- warrants to Seller that, as of the Closing Date: (e) Purchaser is duly organized and validly existing under the laws of its state of organization. Purchaser has the full right, power and authority to make, execute, deliver and perform this Agreement and the transaction contemplated under this Agreement and has taken all necessary action to authorize the execution, delivery and performance of this Agreement. (f) Purchaser has obtained all consents, approvals or authorizations required in connection with the execution, delivery or performance of this Agreement or the consummation of the transaction contemplated by this Agreement. 19 (g) Purchaser has complied with all rules, regulations and statutes required in connection with the execution, delivery and performance of this Agreement or the consummation of the transaction contemplated by this Agreement. (h) Purchaser has complied with all conditions precedent to be performed by a transferee provided for in each pooling and servicing agreement relating to any Asset that is an MBS. 6. Representations and Warranties of WREIT. WREIT represents and warrants to --------------------------------------- Seller that, as of the Closing Date: (a) WREIT is duly organized and validly existing under the laws of its state of organization. WREIT has the full right, power and authority to make, execute, deliver and perform this Agreement and the transaction contemplated under this Agreement and has taken all necessary action to authorize the execution, delivery and performance of this Agreement. (b) The execution of this Agreement, and the performance of the transaction contemplated under this Agreement will not result in a breach of any provision of the charter or bylaws or WREIT or result in a material breach of any legal restriction or any agreement to which WREIT is now a party or by which it is bound, or result in a violation of any law, rule, regulation, order, judgement or decree to which WREIT or its property is subject. (c) WREIT has obtained all consents, approvals or authorizations required in connection with the execution, delivery or performance of this Agreement or the consummation of the transaction contemplated by this Agreement. (d) WREIT has complied with all rules, regulations and statues required in connection with the execution, delivery and performance of this Agreement or the consummation of the transaction contemplated by this Agreement. 7. Indemnification --------------- (a) Subject to provisions of this Section 7, Seller shall indemnify and hold Purchaser harmless for any third party claims or losses arising out of the acts or omissions of Seller with regard to the Assets prior to the Closing Date and, subject to provisions of this Section 7, Purchaser shall indemnify and hold 20 Seller harmless for any third party claims or losses arising out of the acts or omissions of Purchaser with regard to the Assets after the Closing Date. (b) Neither party shall be entitled to indemnification under Section 7(a) hereof unless a Notice of Breach has been delivered by the party seeking indemnification on or before the Survival Date. (c) Neither party shall be liable under Section 7(a) hereof unless the total amount recoverable under Section 7(a) hereof exceeds, in the aggregate, $[ ]; provided, however, that if the indemnifying party's obligation under Section 7(a) hereof exceeds $[ ] in the aggregate, the indemnifying party's obligation under Section 7(a) hereof shall be for the full amount of such obligation less $[ ]. 8. Proration --------- For real properties, rental revenues and other income, and taxes, assessments, utility charges and other expenses affecting the property shall be prorated between Seller and Purchaser as of the Cut-Off Date, with the Seller to receive all income and be responsible for all expenses which accrued prior to the Cut-Off Date and the Purchaser to receive all income and be responsible for all expenses which accrued on or after the Cut-Off Date. 9. MBS Payments ------------ For MBS, Seller shall receive all principal and interest payments relating to the MBS which are made prior to the Cut-Off Date and the Purchaser shall receive all principal and interest payments relating to the MBS which are made on or after the Cut-Off Date. 10. Amendment --------- This Agreement may be amended only by written agreement signed by Seller, WREIT and Purchaser. 11. Counterparts ------------ This Agreement may be executed in counterparts. 21 12. Notices ------- Any notice hereunder shall be in writing and either shall be delivered in person with receipt acknowledged or by registered or certified mail, return receipt requested, postage pre-paid, or, in the case of facsimile transmission, when received and telephonically confirmed, in each case as follows: If to the Seller at: 4 St Paul's Churchyard London EC4M 8AY England Attention: Managing Director With a Copy to: [Jill Forsyth] Wilshire Servicing Company UK Ltd Wilshire House 19/21 Woolmead Farnham, Surrey England Telephone: 01252 723779 If to Purchaser at: Wilshire Real Estate Partnership L.P. 1776 SW Madison Street Portland, OR 97205 Telephone: (503) 223 5600 Attention: Lawrence Mendelsohn With a Copy to: James Waddington Proskauer Rose LLP 1585 Broadway New York, NY 10036-8299 Telephone: (212) 969 3110 If to WREIT at: Wilshire Real Estate Partnership L.P. 1776 SW Madison Street Portland, OR 97205 Telephone: (503) 223 5600 Attention: Lawrence Mendelsohn With a Copy to: James Waddington Proskauer Rose LLP 22 1585 Broadway New York, NY 10036-8299 Telephone: (212) 969 3110 13. No Partnership -------------- Nothing herein contained shall be deemed or construed to create a partnership or joint venture between the parties hereto; the parties shall have the status of and act in all matters hereunder as independent contractors. Seller is not an agent of Purchaser and has no authority, and is not intended to have the power to create, extinguish or modify any right, obligation or liability of Purchaser to any person or entity whatsoever, including without limitation, any Asset obligor. 14. Successors and Assigns ---------------------- This Agreement shall inure to the benefit of and be binding upon Seller, WREIT and Purchaser and their respective successors and assigns, as may be permitted hereunder. Purchaser may assign this Agreement or any Asset hereunder, together with all rights under this Agreement with regard to such Asset. 15. Severability ------------ Each part of this Agreement is intended to be severable. If any provision of this Agreement is invalid or unenforceable, such invalidity or unenforceability shall not affect the remaining provisions of this Agreement, which shall remain in full force and effect and shall be binding upon the parties. 16. Law Governing ------------- This Agreement shall be construed in accordance with, and governed by, the laws of England. 17. Survival: Repurchase and Damages -------------------------------- (a) The covenants, warranties and representations of the parties shall survive the Closing Date; provided, however, that no claim or action for a breach of any representation or warranty contained in this Agreement may be maintained by any Party unless such party shall have delivered a notice of breach specifying the details of such breach (including, to the extent practicable, a quantification of the 23 damages arising from such alleged breach) to the other party on or before the Survival Date ("Notice of Breach"). A Notice of Breach shall only be sufficient to preserve a claim or action with respect to an alleged breach to the extent the Notice of Breach sets forth sufficient details identifying the specific breach and a quantification, to the extent practicable, of the damages arising therefrom. (b) In the event of a breach of any representation or warranty set forth in Section 4, Seller shall have a period of 120 days from its receipt of Notice of any such breach within which to cure such breach in all material respects. Prior to enforcing its remedies against Seller, Purchaser shall make a claim on any title or property insurance policy, if any, to the extent that payment thereunder could reasonably be expected to reduce Seller's liability or to bring about a cure on account of such breach. If such breach by Seller shall not have been cured in all material respects within such 120 day period, Seller shall be required to repurchase the Asset pursuant to Section 17(c). (c) Seller shall be required to repurchase any Asset pursuant to this paragraph if prior to the Survival Date, Purchaser has notified Seller of a material breach of any representation and warranty set forth in Section 4 and such breach is not cured in all material respects within 120 day cure period. Seller shall be obligated, within 10 days following receipt of written demand by the Purchaser, to repurchase the related Asset. Seller shall repurchase any affected Asset hereunder at the Purchase Price of such Asset, plus the amount of any servicing advances made by Purchaser in respect of the related Asset, and minus any amounts received by Purchaser arising from the Asset after the Cut-Off Date. In connection with any repurchase of an Asset hereunder by Seller, Purchaser shall tender to Seller all portions of the Asset File with respect to such Asset previously delivered to Purchaser and any additional documents related thereto in Purchaser's possession, and each document therein which was endorsed or assigned to Purchaser as required by this Agreement, shall be endorsed or assigned to Purchaser as required by this Agreement, shall be endorsed and assigned to Seller in the same manner as provided therein. Notwithstanding anything to the contrary contained herein, Seller's obligation to repurchase any Asset shall terminate unless Purchaser shall have provided written notice to Seller of the breach on or before the Survival Date. 24 18. Further Assurances ------------------ The parties agree that they will execute and deliver such further instruments and take such other action as any of them reasonably may require in order to more effectively to carry out the intent and purposes of this Agreement. 19. Attorney Fees ------------- In the event there is any dispute arising out of this Agreement, the prevailing party shall be entitled to recover from the other all reasonable attorney fees and costs, whether or not at trial, on appeal, or in bankruptcy. 20. Jurisdiction and Venue ---------------------- Any dispute arising out of this Agreement shall be resolved by the applicable courts in England, and Seller and Purchaser consent to personal jurisdiction and venue therein. 21. Waivers ------- The failure of Purchaser or WREIT to enforce any provision of this Agreement shall not be deemed a waiver of that provision or any other provision with respect to that transaction or any other transaction with Seller. 22. Entire Agreement ---------------- This Agreement, including any exhibits and schedules referred to herein, the Offering Memorandum and all prior written and computer information regarding the Assets provided by Seller to Purchaser constitute the entire agreement between the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, representations and understandings of the parties. The representations and terms of this Agreement shall supersede any inconsistent representations or terms in the prior written and computer information provided by Seller to Purchaser. EXECUTED AS A DEED the day and year first above written Signed as a Deed by ) Wilshire Funding Company UK Limited ) acting by a director and its secretary ) 25 Wilshire Real Estate Investment Trust Inc ) By: _____________________________________ ) Title: __________________________________ ) Wilshire Real Estate Partnership LP ) by Wilshire Real Estate Investment Trust Inc ) its General Partner ) By: _____________________________________ ) Title: __________________________________ ) 26 SCHEDULE ONE DESCRIPTION OF ASSETS 27 SCHEDULE TWO FORM OF TRANSFER 28 SCHEDULE THREE NOTICE TO BORROWER 29 SCHEDULE FOUR ENCUMBRANCES 30 EX-10.6 13 OPTION AGREEMENT Exhibit 10.6 OPTION AGREEMENT ---------------- This OPTION (the "Agreement") is entered into as of April _____, 1998 by and between WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation ("WREIT") and WILSHIRE SERVICING COMPAGNIE S.A., a corporation organized under the laws of France ("Wilshire France") R E C I T A L S: ---------------- WREIT has filed with the U.S. Securities and Exchange Commission a registration statement on Form S-11 (the "Registration Statement") for the sale of up to 10 million shares of common stock (and up to an additional 1.5 million shares pursuant to an over-allotment option) (the "IPO"). WFSG will contribute certain of the Initial Investments to the Wilshire Real Estate Partnership L. P. upon the Closing of the IPO for approximately $129.4 million of the proceeds from the IPO. WREIT will become a General Partner and Limited Partner of the Operating Partnership at the Closing. NOW, THEREFORE, in consideration of ten ($10.00) and other good and valuable consideration, the legal sufficiency of which is hereby acknowledged, and subject to the terms and conditions hereinafter set forth, the parties hereby agree as follows: T E R M S: ---------- 1. Recitals. The foregoing Recitals are true and correct and -------- incorporated herein by this reference, as if set forth in their entirety. 2. Capitalized Terms. Any capitalized term not defined herein shall have ----------------- the meaning ascribed to it in the Registration Statement. 3. Option. Wilshire France does hereby grant to WREIT (or its designee) ------ the option, from the date hereof through March 1, 2001, to acquire Wilshire France's 50% interest in two portfolios of International Investments acquired from affiliates of Unifina S.A. and Abbey National PLC for an exercise price of up to US $110.0 million. It is expressly understood and agreed by all parties to this Agreement that the Option granted herein is without obligation or liability to WREIT and WREIT shall have no obligation to exercise the Option. 1 4. Closings -------- (a) The Option. If WREIT exercises the Option, the closing for the ---------- assets to be acquired pursuant to such Option shall occur on the earlier of the following: (i) ten (10) days after Wilshire France receives notification from WREIT that the Option is being exercised, or (ii) forty-five (45) days after WREIT completes its due diligence for the assets contained in the Option. (b) Time and Place of Closing. The closing of the transactions ------------------------- contemplated by this Agreement shall be held at a time and location mutually selected by Wilshire France and WREIT. 5. Closing Deliveries. At the closing of the Option, the respective ------------------ selling entities shall deliver such documentation and conveyances typically required in a transaction of this nature and magnitude and such documentation and conveyances as to grant good and marketable title to the assets, free and clear of all liens and encumbrances. Wilshire France or an affiliate thereof shall deliver or cause to be delivered consents to the transfer of the assets, and all other documents reasonably requested by WREIT. 6. Approvals. If any approvals are required for the consummation of the --------- transactions contemplated herein, Wilshire France or an affiliate thereof, shall use all commercially reasonable efforts in good faith to secure such required approvals. 7. Covenants of Wilshire France. Wilshire France covenants as follows: ---------------------------- (a) Prohibited Transactions. It is currently not a party to any ----------------------- contract or letter of intent relating to the transfer, sale, assignment, purchase, pledge, conveyance of the assets contained in the Option. Wilshire France shall after the date hereof through the date that all of WREIT's rights pursuant to this Agreement, and the Option created hereunder is terminated, enter into any agreement or transaction relating to the transfer, sale, assignment, purchase, pledge, conveyance or disposition of any of the assets contained in the Option. (b) Definitive Agreement. In the event WREIT exercises the Option, -------------------- Wilshire France shall use its good faith, due diligence, and best efforts to enter into a definitive purchase agreement which will contain such representations, warranties, covenants, terms and conditions as would be usual and customary in transactions of this nature and magnitude. 8. Miscellaneous Matters. --------------------- (a) Parties Bound. This Agreement shall be binding upon and shall ------------- inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither this Agreement nor any right or obligation hereunder may be assigned or transferred, except that Wilshire France or WREIT may assign this Agreement and its rights and obligations hereunder to any direct or indirect subsidiary or affiliate thereof which shall have the capabilities of carrying out all of its obligations hereunder. 2 (b) Captions. The section, paragraph and sub-paragraph headings in -------- this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (c) Governing Law. This Agreement shall be governed by and continued ------------- in accordance with the laws of the State of New York. (d) Counterparts. This Agreement may be executed in several ------------- counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart. [Signature Page to Follow] 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. WILSHIRE REAL ESTATE INVESTMENT TRUST INC. By:_______________________________________ Its:______________________________________ Date:_____________________________________ WILSHIRE SERVICING COMPAGNIE S.A. By:_______________________________________ Its:______________________________________ Date:_____________________________________ 4 EX-10.7 14 FORM OF SERVICES AGREEMENT Exhibit 10.7 SERVICES AGREEMENT THIS AGREEMENT, dated as of April __, 1998 by and between WILSHIRE FINANCIAL SERVICES GROUP INC., a Delaware corporation ("WFSG"), WILSHIRE REALTY SERVICES CORPORATION, a Delaware corporation ("WRSC") and solely with respect to Section 3 hereof, WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation ("WREIT"). WITNESSETH: WHEREAS, WRSC has entered into a Management Agreement dated the date hereof (the "Management Agreement") with WREIT whereby WRSC has agreed to provide certain management and administrative services to WREIT; WHEREAS, WRSC desires to obtain certain assistance from WFSG, and WFSG is willing to provide such assistance, in performing certain of such managerial and administrative services for WREIT; NOW THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Definitions. Capitalized terms used but not defined herein ----------- shall have the respective meanings assigned them in the Management Agreement. SECTION 2. Duties of WFSG. WFSG shall, upon the request of WRSC, provide -------------- or cause to be provided to WRSC the following services, facilities, and equipment to assist WRSC in performing its obligations under the Management Agreement, including: (i) Administrative Services. Advice and assistance in connection with real estate or real estate related acquisitions, formulation of investment criteria, revisions to Guidelines, the purchase and commitment to purchase assets, the sale and commitment to sell assets, the maintenance and administration of asset portfolios, the collection of revenues (other than from servicing), and the payment of debts and obligations; (ii) Management and Accounting. Advice and assistance in connection with accounting and financial reporting functions, legal compliance, banking, risk management and strategic matters, and supervisory duties with respect to servicers and others, including assistance furnishing reports and statistical and economic research regarding the WREIT's activities; (iii) Human Resources Services. Provision of staff and employees and advice and assistance in connection with employee relations and employee benefits including record keeping; (iv) Computer Services. Maintenance of accounting systems and other appropriate computer systems; (v) Secretarial Services. Advice and assistance in connection with filing, duplicating, and mailroom services and miscellaneous secretarial services and supplies; (vi) Facilities. Provision of adequate facilities for business including office space, reception area, restrooms, and parking spaces, and adequate heating, air conditioning, and electricity during normal business hours; (vii) Equipment. Provision of any necessary equipment for use by WRSC in its business and competent and sufficient technical and support personnel to operate the equipment; and (viii) Tax Matters. Advice and assistance in connection with the maintenance of WREIT's status as a REIT and monitoring compliance with the various REIT qualification tests and other rules set out in the Internal Revenue Code and regulations thereunder. Notwithstanding the foregoing, any employee provided by WFSG under this Agreement will remain an employee of WFSG and it will pay all salaries, wages, insurance, overhead costs, benefits, and taxes attributable to such employee. SECTION 3. Right of First Refusal. The Right of First Refusal conferred ---------------------- on WREIT in this Section 3 is being conferred in consideration for WREIT's consent to subcontracting the management services to WFSG as contemplated by this Agreement. Nothing herein shall prevent WFSG or any of its subsidiaries from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in, or advisory service to others investing in, any type of real estate investment (including investments which constitute Primary Investments for WREIT); provided, however, that WFSG and its subsidiaries will grant a right of first refusal with respect to the Company's Primary Investments on the terms and conditions set forth below. So long as the Management Agreement remains in full force and effect, WFSG and its subsidiaries do hereby grant a right of first refusal ("Right of First Refusal") to WREIT with respect to real estate investments which constitute Primary Investments for WREIT; provided, however, that neither WFSG nor any subsidiary of WFSG is required to provide such Right of First Refusal with respect to Primary Investments that consist of mortgage-backed securities where the mortgage loans collateralizing such mortgage-backed securities are owned by WFSG or a subsidiary of WFSG. In addition, the foregoing Right of First -2- Refusal does not apply to the acquisition of real property by WFSG or a subsidiary in connection with foreclosure (or deed in lieu of foreclosure) on property securing a mortgage loan owned by WFSG or a subsidiary of WFSG. With respect to acquisitions of pools of assets consisting of both Primary Investments and Other Real Estate Related Assets, the Right of First Refusal will only apply to the Primary Investments contained in such pool and it is expressly agreed that WFSG or one of its subsidiaries may acquire other Real Estate Related Assets contained in such pool. Further, from time to time, mortgage lenders or others offer for sale large pools of mortgage loans and real properties pursuant to a competitive bidding process. In such a case, WFSG or its subsidiaries may choose an unaffiliated entity with which to submit a joint bid for the pool, as long as WFSG or its subsidiaries takes title only to assets as to which it has not given WREIT the Right to First Refusal. The parties acknowledge and agree that WFSG and its subsidiaries have no obligation to reveal to WREIT or its subsidiaries any business opportunities involving Other Real Estate Related Assets. WFSG agrees, and will cause each of its subsidiaries to agree, that it will not invest in any Primary Investments for its own account or that of one of its subsidiaries unless a majority of the Independent Directors of WREIT have decided that WREIT should not invest in such asset. WREIT agrees that it and such Independent Directors shall use commercially reasonable efforts to make any such decision in sufficient time to allow WFSG or one of its subsidiaries to bid on and acquire such asset if WREIT determines not to invest in such asset. The parties agree that because the market in which WREIT expects to purchase assets is characterized by rapid evolution of products and services, and, thus, there may in the future be relationships between WREIT, WRSC, WFSG and their respective affiliates in addition to those described herein, WREIT may change its policies in connection with any of the foregoing (including the definition of Primary Investments) with the approval of the majority of the Independent Directors and subject to the written agreement of WFSG and WRSC. Except for the acquisition of the Initial Investments (which have already been approved by the Independent Directors), WFSG agrees that any Primary Investments or Other Real Estate Related Assets to be acquired by WREIT (or one of its subsidiaries) from WFSG (or one of its subsidiaries) shall require the approval of a majority of the Independent Directors of WREIT. SECTION 4. Compensation. As compensation for the services provided by it ------------ hereunder, WFSG shall be entitled to receive portion of the base management fee and the incentive compensation fee payable to WRSC pursuant to Section 8(a) and (b) of the Management Agreement. The portion to be received by WFSG shall be determined by WFSG and WRSC on a quarterly basis and shall be based on the amount of services rendered by WFSG during such quarterly period. SECTION 5. Expenses. Expenses incurred by WFSG on behalf of WRSC shall be -------- reimbursed quarterly by WRSC within 60 days after the end of each quarter. WFSG shall -3- prepare a statement documenting such expenses during each quarter, and shall deliver such statement to WRSC within 45 days after the end of each quarter. SECTION 6. Limits of Responsibility. WFSG assumes no responsibility under ------------------------ this Agreement other than to render the services called for hereunder in good faith. WFSG, its directors, officers, stockholders, subsidiaries, affiliates and employees will not be liable to WRSC, WREIT, any subsidiary, the Independent Directors or WREIT's or any subsidiary's stockholders or partners for any acts or omissions by WFSG, its directors, officers, stockholders, subsidiaries, affiliates or employees under or in connection with this Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties. SECTION 7. No Joint Venture. WFSG and WRSC are not partners or joint ---------------- venturers with each other and nothing herein shall be construed to make them such partners or joint venturers or impose any liability as such on either of them. SECTION 8. Term; Termination. This Agreement shall have a term which is ----------------- coterminous with that of the Management Agreement. SECTION 9. Assignments and Amendments. This Agreement shall terminate -------------------------- automatically in the event of its assignment, in whole or in part, by either party, unless such other party has consented in writing. This Agreement may not be modified or amended other than by an agreement in writing by WFSG and WRSC and, in the case of Section 2, WFSG, WRSC and WREIT (provided however, that the Independent Directors of WREIT have approved the assignment and/or amendment). SECTION 10. Notices. Unless expressly provided otherwise herein, all ------- notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: If to WFSG: Wilshire Financial Services Group Inc. 1776 SW Madison St. Portland, Oregon 97205 Attention: President If to WRSC: Wilshire Realty Services Corporation 1776 SW Madison St. Portland, Oregon 97205 Attention: President -4- If to WREIT: Wilshire Real Estate Investment Trust Inc. 1776 SW Madison St. Portland, Oregon 97205 Attention: President Either party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 10 for the giving of notice. SECTION 11. Binding Nature of Agreement; Successors and Assigns. This --------------------------------------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns (to the extent permitted hereunder) as provided herein. SECTION 12. Entire Agreement. This Agreement contains the entire ---------------- agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. SECTION 13. Governing Law. This Agreement and all questions relating to ------------- its validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of New York, notwithstanding any New York or other conflict-of-law provisions to the contrary. SECTION 14. Indulgences, Not Waivers. Neither the failure nor any delay ------------------------ on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. SECTION 15. Costs and Expenses. Each party hereto shall bear its own ------------------ costs and expenses (including the fees and disbursements of counsel and accountants) incurred in connection with the negotiations and preparation of and the closing under this Agreement, and all matters incident thereto. SECTION 16. Titles Not to Affect Interpretation. The titles of paragraphs ----------------------------------- and subparagraphs contained in this Agreement are for convenience only, and they neither form -5- a part of this Agreement nor are they to be used in the construction or interpretation hereof. SECTION 17. Execution in Counterparts. This Agreement may be executed in ------------------------- any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. SECTION 18. Provisions Separable. The provisions of this Agreement are -------------------- independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. If in any judicial proceeding a court shall refuse to enforce all the provisions of this Agreement, the scope of any unenforceable provision shall be deemed modified and diminished to the extent necessary to render such provision valid and enforceable. In any event, the validity and enforceability of any such provision shall not affect any other provision of this Agreement, and this Agreement shall be construed and enforced as if such provision had not been included. SECTION 19. Attorneys' Fees. If any suit or action is filed by any party --------------- to enforce or interpret a provision of this Agreement or otherwise with respect to the subject matter of this Agreement, the prevailing party shall be entitled, in addition to other rights and remedies it may have, to reimbursement for its expenses incurred with respect to such suit or action, including court costs and reasonable attorneys' fees at trial, on appeal and in connection with any petition for review. -6- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. WILSHIRE FINANCIAL SERVICES GROUP INC. By: ___________________________________ Its: __________________________________ WILSHIRE REALTY SERVICES CORPORATION By: ___________________________________ Its: __________________________________ Accepted and agreed solely with respect to Section 3 as of the date first written above: WILSHIRE REAL ESTATE INVESTMENT TRUST INC. By: _____________________________ Its: ____________________________ -7- EX-10.8 15 FORM OF REGISTRATION RIGHTS AGREEMENT Exhibit 10.8 FORM OF REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of the ______ day of ____________, 1998 by and between Wilshire Real Estate Investment Trust Inc., a Maryland corporation (the "Company") and Wilshire Realty Services Corporation, a Delaware corporation (the "Manager"). RECITALS WHEREAS, at the closing of the Company's initial public offering of its common stock (the "Closing") the Company and the Manager entered into an agreement (the "Management Agreement") pursuant to which the Manager will perform managerial services for the Company and its subsidiaries; WHEREAS, the Company has established a stock option plan (the "Plan") pursuant to which options to acquire shares of Common Stock may be granted, and, pursuant to an agreement (the "Stock Option Agreement") the Company will grant at closing options available under the Plan (the "Options") to the Manager, which will entitle the Manager to acquire 985,000 shares (1,135,000 assuming the Underwriters exercise their overallotment option in full) of Common Stock which shares will become exerciseable over a four-year vesting period. WHEREAS, the shares of Common Stock subject to the Options have not been registered under the Securities Act of 1933, as amended (the "Securities Act"); WHEREAS, from time to time, the Manager may acquire additional shares of Common Stock; WHEREAS, the parties hereto desire to set forth certain rights of the Manager as holders of Common Stock; NOW, THEREFORE, for and in consideration of the mutual promises and agreements contained in this Agreement, the parties hereto mutually agree as follows: AGREEMENT ARTICLE I DEFINITIONS "Affiliate" means (i) any Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that beneficially owns, directly or indirectly, 5% or more of the outstanding capital stock, shares or equity interests of such Person, or (iii) any officer, director, employee, partner or trustee of such Person or any Person controlling, controlled by or under common control with such Person (excluding trustees and persons serving in similar capacities who are not otherwise Affiliates of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. "Agreement" means this Registration Rights Agreement, as the same shall be amended, modified, or supplemented from time to time. "Closing" means the date on which the Company's registration statement on Form S-11, pursuant to which the Company's initial public offering of Common Stock will be made, is declared effective. "Closing Date" means the date on which the Closing occurs. "Closing Price" means the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market. "Code" means the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time. Reference to any particular provision of the Code shall mean that provision of the Code as of the date hereof and any succeeding provision of the Code. "Market Price" means, as of any determination date, the average of the Closing Prices for the five consecutive Trading Days ending on such date. "Person" means a natural person, a corporation, a partnership, a trust, a joint venture, any regulatory authority, or any other entity or organization. "SEC" means the United States Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Shelf Registration" shall mean the registration of the shares owned by the Manager by the Company effected pursuant to Section 2.01 hereof. "Shelf Registration Period" shall mean the period of time the Company is required to make and maintain the Shelf Registration as defined in Section 2.01 hereof. "Trading Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. ARTICLE II SHELF REGISTRATION SECTION 2.01. Shelf Registration. Upon termination of the Management --------------------------------- Agreement by the Company, the Company agrees to file with the SEC, upon the request of the Manager within two (2) years of such termination, no later than thirty days after the request, a shelf registration statement under Rule 415 of the Securities Act, or similar rule that may be adopted by the SEC (a "Shelf Registration") with respect to all shares of Common Stock held by the Manager (or, if so requested by the Manager, a specified portion of such shares). The Company will use its best efforts to have such Shelf Registration declared effective under the Securities Act as soon as possible. The Manager shall notify the Company of the method or methods of disposition that may be utilized by them in disposing of such shares and such information shall be included in the prospectus included in such Shelf Registration to the extent such methods are permitted by applicable law. 2 The Company will use its best efforts to keep the Shelf Registration continuously effective until the date when all of the shares of Common Stock covered thereby are sold thereunder (the "Shelf Registration Period"). The Company agrees to furnish the Manager such number of copies of the relevant prospectuses, and supplements or amendments thereto, and such other documents as the Manager reasonably requests, during the Shelf Registration Period. The Company further agrees to supplement or make amendments to any Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or rules and regulations thereunder for the Shelf Registration. The Company shall keep the Manager advised as to the initiation and progress of the registration of the shares pursuant to the Shelf Registration. Moreover, upon request of the Manager, the Company shall register or qualify the shares covered by the Shelf Registration under the securities or blue sky laws of such jurisdictions within the United States as the Manager shall reasonably request, and do such other reasonable acts and things as may be required to enable the Manager to consummate the sale or other disposition in such jurisdiction of the shares of Common Stock. SECTION 2.02. Allocation of Expenses. The Company shall pay all expenses ------------------------------------- in connection with the Shelf Registration, including, without limitation (a) all expenses incident to filing with the National Association of Securities Dealers, Inc., (b) registration fees, (c) printing expenses, (d) accounting and legal fees and expenses, except to the extent the Manager elects to engage accountants or attorneys in addition to the accountants and attorneys engaged by the Company, (e) accounting expenses incident to or required by any such registration or qualification, and (f) expenses of complying with the securities or blue sky laws of any jurisdictions in connection with such registration or qualifications; provided, however, the Company shall not be liable for (i) any underwriting discounts or commissions to any broker attributable to the sale of the Manager's shares, or (ii) any fees or expenses incurred by the Manager in connection with such registration which, according to the written instructions of any regulatory authority, the Company is not permitted to pay. SECTION 2.03. Indemnification. In connection with the Shelf Registration, ------------------------------ the Company agrees to indemnify the Manager in accordance with the provisions of Sections 3.05 through 3.08 hereof. SECTION 2.04. Listing on Securities Exchange. If the Company shall list --------------------------------------------- or maintain the listing of any Common Stock on any securities exchange or national market system, it will at its expense and as necessary to permit the registration and sale of the Manager's shares of Common Stock hereunder, list and maintain such shares thereon. 3 ARTICLE III OTHER REGISTRATIONS SECTION 3.01. Participation in Other Registrations. --------------------------------------------------- (a) If at any time on or after the termination of the Management Agreement the Company shall propose the registration under the Securities Act of a public offering of Common Stock, the Company shall give written notice of such proposed registration as promptly as practicable to the Manager, and if, within fifteen (15) days after the giving of such notice, the Manager request the Company in writing to include any shares of Common Stock that are owned by the Manager and that have not previously registered under a Shelf Registration declared effective by the SEC, the Company shall include in the registration such amount of such shares of Common Stock as the Manager shall request; provided, however, that the Company shall not be required to give notice or include such shares in any such registration if the proposed registration relates solely to (i) securities to be offered to employees pursuant to a stock option, stock savings, or other employee benefit plan, (ii) securities proposed to be issued in exchange for securities or assets of, or in connection with a merger of consolidation with, another entity, (iii) securities to be offered by the Company generally to any class or series of its then existing security holders, (iv) securities issuable upon the conversion of securities which are the subject of an underwritten redemption, or (v) securities to be offered or issued pursuant to a combination of transactions referred to in clauses (i) through (iv). (b) If the proposed public offering is to be made pursuant to a firm commitment underwriting, at the option of either the Company or the proposed managing underwriter, the shares requested to be included by the Manager shall be included in such underwriting, on the same terms and conditions as to underwriting discounts and commissions. SECTION 3.02. Obligations of the Company. The Company shall undertake the ----------------------------------------- following obligations to the Manager in connection with the registration of the shares of the Manager pursuant to Section 3.01 hereof: (a) The Company shall furnish to the Manager or their managing underwriter such number of copies of each preliminary prospectus and final prospectus and amendment or supplement thereto as the Manager may reasonably request in order to effect the sale of the shares to be offered and sold by the Manager pursuant to Section 3.01 hereof, but only while the Company is required to cause the registration statement to remain current. (b) The Company shall use its best efforts to qualify the offering under applicable blue sky or other securities laws of such jurisdictions as may be specified by the Manager. (c) If necessary, the Company shall furnish to the Manager certificates representing ownership of the shares being offered which contain no restrictive legends, in such numbers and denominations as the Manager shall reasonably request. (d) The Company shall use its best efforts (including, without limitation, preparation of necessary post-effective amendments and supplements) to cause the registration statement to remain current for ninety (90) calendar days following its effective date or such lesser period as the Manager and its managing underwriter may accept. 4 (e) The Company shall afford the Manager and its representatives the opportunity to make such reasonable examination and inquiry into the financial condition and business of the Company and its Affiliates as the Manager's counsel may deem necessary or prudent in connection with the preparation of the registration statement or any other materials to be used in connection with the Manager's offering. SECTION 3.03. Conditions to Obligations of the Company. The obligations ------------------------------------------------------- of the Company to use its best efforts to cause the shares owned by the Manager to be registered under the Securities Act are subject to the following conditions: (a) In no event will the Company's obligations or duties under Article IV hereof apply or extend to any shares previously registered under a Shelf Registration pursuant to Article II hereof that was declared by the SEC to be, and that remains, effective. (b) Any request by the Manager for registration shall specify the amount of shares intended to be sold, contain the undertaking of the Manager to provide all such information as may be reasonably required in order to permit the Company to comply with all applicable requirements of the SEC and to obtain acceleration of the effective date of the registration statement, identify any proposed underwriters, and specify the proposed method of offering and sale. (c) The Company may require, as a condition to fulfilling its obligations hereunder, the indemnification agreements described in Section 3.06 from the Manager and their underwriters. (d) The Company shall not be required to register shares pursuant to Section 3.01 if, within ten (10) calendar days following receipt of the request for registration, the Company shall commit itself to repurchase the shares at the Market Price of such shares as of the date the Company receives such request. SECTION 3.04. Expenses of Registration. All underwriting discounts and --------------------------------------- commissions attributable to shares being sold by the Manager shall be borne by the Manager. As to the other expenses of registration: (a) In connection with any registration pursuant to Section 2.01, the Manager shall pay or reimburse the Company for the SEC registration fee, printing expenses, and the reasonable expenses of qualifying the offering under applicable blue sky or other securities laws; provided, however, that such fees and expenses shall be borne by the Company with respect to the first two (2) registrations requested by the Manager under Section 2.01; and provided, further, that if the Company shall include any other securities of its issue in any registration pursuant to Section 2.01, such fees and expenses shall be apportioned among the Manager and the other offerors in accordance with the amount of securities being offered. (b) In connection with the first two (2) registrations requested by the Manager under Section 3.01, the Company shall pay the fees and expenses referred to in Section 3.04(a); provided, however, that as to any fees and expenses required to be paid by other security holders of the Company, such fees and expense shall be apportioned among the Manager and other security holders in accordance with the amount of securities being offered. (c) Any other fees or expenses incurred by one of the parties to a registration, including, without limitation, fees and expenses of attorneys and accountants, shall be borne by such party. 5 SECTION 3.05. Indemnification by the Company. In the case of each --------------------------------------------- registration pursuant to Article II or III hereof, the Company agrees to indemnify and hold harmless the Manager, the directors and officers of the Manager, each underwriter of the shares of the Manager so registered, and each person (if any) who controls the Manager or any such underwriter within the meaning of Section 15 of the Securities Act, against any and all losses, claims, damages, or liabilities to which they or any of them may become subject under the Securities Act or any other statute or common law, including any amount paid in settlement of any litigation, commenced or threatened, if such settlement is effected with the written consent of the Company, and to reimburse them for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities, or actions arise out of or are based upon (a) any untrue statement or alleged untrue statement of a material fact contained in the registration statement filed to register the sale of such shares or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under blue sky or other securities laws of jurisdictions in which the shares are offered (a "Blue Sky Filing"), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or (b) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, if used prior to the effective date of such registration statement, or contained in the final prospectus (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto) if used within the period during which the Company is required to keep the registration statement to which such prospectus relates current, or the omission or alleged omission to state therein (if so used) a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the indemnification agreement contained in this Section 3.05 shall not (i) apply to such losses, claims, damages, liabilities, or actions arising out of, or based upon, any such untrue statement or alleged untrue statement, or any such omission or alleged omission, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Manager or such underwriter specifically for use in connection with preparation of the registration statement, any preliminary prospectus or final prospectus contained in the registration statement, any such amendment or supplement thereto or any Blue Sky Filing, or (ii) inure to the benefit of any underwriter or any person controlling such underwriter, if such underwriter failed to send or give a copy of the final prospectus to the person asserting the claim at or prior to the written confirmation of the sale of such shares to such person and if the untrue statement or omission concerned has been corrected in such final prospectus. SECTION 3.06. Indemnification by the Manager. In the case of each --------------------------------------------- registration pursuant hereto, the Manager and each underwriter of the shares of the Manager so registered shall agree in the same manner and to the same extent as set forth in Section 3.05 hereof to indemnify and hold harmless the Company, each person (if any) who controls the Company within the meaning of Section 15 of the Securities Act, the directors of the Company, and those officers of the Company who shall have signed any such registration statement, with respect to any untrue statement or alleged untrue statement in, or omission or alleged omission from, such registration statement or any post-effective amendment thereto or any preliminary prospectus or final prospectus (as amended or supplemented if amended or supplemented as aforesaid) contained in such registration statement or any Blue Sky Filing, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by such indemnifying party specifically for use in accordance with the preparation of the registration statement, any preliminary prospectus or final prospectus contained in the registration statement, any such amendment or supplement thereto, or any Blue Sky Filing. 6 SECTION 3.07. Indemnification Procedures. ----------------------------------------- (a) Each indemnified party shall, with reasonable promptness after its receipt of written notice of the commencement of any action against such indemnified party in respect of which indemnity may be sought from an indemnifying party on account of an indemnity agreement contained herein, notify the indemnifying party in writing of the commencement thereof. (b) The omission to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party unless the failure to give notice materially adversely affects the ability of the indemnifying party to defend a claim which is the subject of indemnification hereunder (in which case the indemnifying party shall be relieved of its obligation only to the extent of offsetting any loss, damage, or liability it suffers as a consequence of the failure against its monetary obligation to the indemnified party). (c) In case any such action shall be brought against any indemnified party and the indemnified party shall so notify an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party hereunder for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, except as provided below. (d) The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the indemnified party unless (i) the indemnifying party agrees to pay the same, (ii) the indemnifying party fails to assume the defense of such action with counsel reasonably satisfactory to the indemnified party, or (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel that representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party). No indemnifying party shall be liable for any settlement entered into without its consent. (e) The indemnity agreements contained herein shall be in addition to any liabilities which the indemnifying party may have pursuant to law. SECTION 3.08. Contribution. --------------------------- (a) If for any reason the indemnification provisions contemplated herein are either unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, or liabilities referred to therein, then the party that otherwise would be required to provide indemnification or the indemnifying party (in either case, for purposes of this section, the "Indemnifying Party") in respect of such losses, claims, damages, or liabilities, shall contribute to the amount paid or payable by the party that would otherwise be entitled to indemnification or the indemnified party (in either case, for purposes of this section, the "Indemnified Party") as a result of such losses, claims, damages, liabilities, or expense, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party, as well as any other relevant 7 equitable considerations. The relative fault of the Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact related to information supplied by the Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party. In no event shall any holder of shares covered by the registration be required to contribute an amount greater than the dollar amount of the proceeds received by such holder from the sale of shares pursuant to the registration giving rise to the liability. (b) The parties hereto agree that it would not be just and equitable if contribution pursuant to this section were determined by PRO RATA allocation (even if the holders or any underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person or entity determined to have committed a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. ARTICLE IV GENERAL SECTION 4.01. Notices. All communications required or permitted under this ---------------------- Agreement shall be in writing and shall be deemed to have been given when delivered personally or upon deposit in the United States mail, registered, postage prepaid return receipt requested, to the Manager at 1776 S.W. Madison Street, Portland, Oregon 97205; provided, however, that the Manager may specify a different address by notifying the Company in writing of such different address. Notices to the Company shall be delivered at or mailed to 1776 S.W. Madison Street, Portland, Oregon 97205, or such different address as the Company may notify the Manager in writing. SECTION 4.02. Entire Agreement. This Agreement and exhibits attached ------------------------------- hereto constitute the entire agreement of the parties and supersede all prior written agreements and prior and contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. SECTION 4.03. Pronouns and Plurals. When the context in which words are ----------------------------------- used in this Agreement indicates that such is the intent, words in the singular number shall include the plural and the masculine gender shall include the neuter or female gender as the context may require. SECTION 4.04. Headings. The article headings or sections in this Agreement ----------------------- are for convenience only and shall not be used in construing the scope of this Agreement or any particular article. SECTION 4.05. Counterparts. This Agreement may be executed in several --------------------------- counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart. SECTION 4.06. Governing Law. This Agreement shall be governed by and ---------------------------- construed in accordance with the laws of the State of New York. 8 IN WITNESS WHEREOF, each party hereto, through its officer thereunto duly authorized, has duly executed this Agreement as of the day and year first above written. WILSHIRE REAL ESTATE INVESTMENT TRUST INC. By: ______________________________ Name: ____________________________ Its: _______________________________ WILSHIRE REALTY SERVICES CORPORATION By: ______________________________ Name: ____________________________ Its: _______________________________ 9 EX-23.2 16 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 [LETTERHEAD OF ARTHUR ANDERSEN LLP] Consent of Independent Public Accountants ----------------------------------------- As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of the Amendment No. 3 to this registration statement (No. 333-39035) filed on Form S-11 by Wilshire Real Estate Investment Trust Inc. with the Securities and Exchange Commission. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California March 27, 1998 EX-23.4 17 CONSENT OF JOHN C. CONDAS EXHIBIT 23.4 I hereby consent to being named in the registration statement of Wilshire Real Estate Investment Trust, Inc. Dated March 27, 1998 /s/ JOHN C. CONDAS --------------------------------- John C. Condas -----END PRIVACY-ENHANCED MESSAGE-----