-----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, SfepAL6n5gaOs6vbA9vF1pn2CvYCQXNhNsFFQ4Wds/1ZoygN9G/3Cq7VhXXw2Mmk uk060+RgoaewAW5aIM2FHA== 0000950134-99-004064.txt : 19990517 0000950134-99-004064.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950134-99-004064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMRESCO CAPITAL TRUST CENTRAL INDEX KEY: 0001054337 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 752744858 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14029 FILM NUMBER: 99621046 BUSINESS ADDRESS: STREET 1: 700 NORTH PEARL STREET STREET 2: SUITE 2400 LB 342 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149537700 MAIL ADDRESS: STREET 1: 700 NORTH PEARL STREET STREET 2: SUITE 2400 LB 342 CITY: DALLAS STATE: TX ZIP: 75201 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-14029 AMRESCO CAPITAL TRUST (Exact name of Registrant as specified in its charter) TEXAS 75-2744858 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 N. PEARL STREET, SUITE 2400, LB 342, DALLAS, TEXAS 75201-7424 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 953-7700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 10,006,111 shares of common stock, $.01 par value per share, as of May 1, 1999. 2 AMRESCO CAPITAL TRUST INDEX
Page No. ----------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 ..................................... 3 Consolidated Statements of Income - For the Three Months Ended March 31, 1999 and the Period from February 2, 1998 (Date of Initial Capitalization) through March 31, 1998.............................. 4 Consolidated Statement of Changes in Shareholders' Equity - For the Three Months Ended March 31, 1999........................................................................................ 5 Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 1999 and the Period from February 2, 1998 (Date of Initial Capitalization) through March 31, 1998......................... 6 Notes to Consolidated Financial Statements.............................................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 21 PART II. OTHER INFORMATION Item 5. Other Information................................................................................ 22 Item 6. Exhibits and Reports on Form 8-K................................................................. 22 SIGNATURE ................................................................................................ 24
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMRESCO CAPITAL TRUST CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
March 31, 1999 December 31, (unaudited) 1998 -------------- -------------- ASSETS Mortgage loans, net ................................................................ $ 97,782 $ 96,976 Acquisition, development and construction loan arrangements accounted for as real estate or investments in joint ventures ......................................... 28,730 39,550 -------------- -------------- Total loan investments ............................................................. 126,512 136,526 Allowance for loan losses .......................................................... (1,610) (1,368) -------------- -------------- Total loan investments, net of allowance for losses ................................ 124,902 135,158 Commercial mortgage-backed securities - available for sale (at fair value) ......... 27,842 28,754 Real estate, net of accumulated depreciation of $122 and $56, respectively ......... 10,207 10,273 Investments in unconsolidated partnerships and subsidiary .......................... 11,528 3,271 Receivables and other assets ....................................................... 3,716 3,681 Cash and cash equivalents .......................................................... 6,846 9,789 -------------- -------------- TOTAL ASSETS .................................................................... $ 185,041 $ 190,926 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Accounts payable and other liabilities .............................................. $ 1,001 $ 941 Amounts due to affiliates ........................................................... 4,805 6,268 Line of credit ...................................................................... 39,338 39,338 Non-recourse debt on real estate .................................................... 7,500 7,500 Dividends payable ................................................................... -- 4,002 -------------- -------------- TOTAL LIABILITIES ............................................................... 52,644 58,049 -------------- -------------- Minority interests .................................................................. 500 2,611 -------------- -------------- COMMITMENTS AND CONTINGENCIES (NOTE 3) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 50,000,000 shares authorized, no shares issued ..... -- -- Common stock, $.01 par value, 200,000,000 shares authorized, 10,006,111 shares issued and outstanding .......................................................... 100 100 Additional paid-in capital .......................................................... 140,941 140,941 Unearned stock compensation ......................................................... (658) (848) Accumulated other comprehensive income (loss) ....................................... (7,378) (6,475) Distributions in excess of accumulated earnings ..................................... (1,108) (3,452) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY ...................................................... 131,897 130,266 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $ 185,041 $ 190,926 ============== ==============
See notes to consolidated financial statements. 3 4 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
Period from February 2, Three Months 1998 Ended through March 31, 1999 March 31, 1998 -------------- -------------- REVENUES: Interest income on mortgage loans ............................................................ $ 3,057 $ -- Income from commercial mortgage-backed securities ............................................ 914 -- Operating income from real estate ............................................................ 346 -- Equity in earnings of unconsolidated subsidiary, partnerships and other real estate venture .. 70 -- Interest income from short-term investments .................................................. 86 -- -------------- -------------- TOTAL REVENUES ............................................................................. 4,473 -- -------------- -------------- EXPENSES: Interest expense ............................................................................. 589 -- Management fees .............................................................................. 588 -- General and administrative ................................................................... 523 -- Depreciation ................................................................................. 86 -- Participating interest in mortgage loans ..................................................... 185 -- Provision for loan losses .................................................................... 742 -- -------------- -------------- TOTAL EXPENSES ............................................................................. 2,713 -- -------------- -------------- INCOME BEFORE GAINS ............................................................................ 1,760 -- Gain associated with repayment of ADC loan arrangement ...................................... 584 -- -------------- -------------- NET INCOME ..................................................................................... $ 2,344 $ -- ============== ============== EARNINGS PER COMMON SHARE: Basic ....................................................................................... $ 0.23 $ -- ============== ============== Diluted ..................................................................................... $ 0.23 $ -- ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic ....................................................................................... 10,000,111 100 ============== ============== Diluted ..................................................................................... 10,006,960 100 ============== ==============
See notes to consolidated financial statements. 4 5 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock $.01 Par Value Accumulated Distributions ------------------ Additional Unearned Other in Excess of Total Number of Paid-in Stock Comprehensive Accumulated Shareholders' Shares Amount Capital Compensation Income (Loss) Earnings Equity --------- ------ ------- ------------ ------------- ------------- ------------- Balance at January 1, 1999..... 10,006,111 $100 $140,941 $(848) $(6,475) $ (3,452) $ 130,266 Net income..................... 2,344 2,344 Unrealized loss on securities available for sale........... (903) (903) Amortization of unearned trust manager compensation ........ 22 22 Amortization of compensatory options ..................... 168 168 ---------- ---- -------- ----- ------- -------- --------- Balance at March 31, 1999...... 10,006,111 $100 $140,941 $(658) $(7,378) $ (1,108) $ 131,897 ========== ==== ======== ===== ======= ======== =========
See notes to consolidated financial statements. 5 6 AMRESCO CAPITAL TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
Period from February 2, Three Months 1998 Ended through March 31, 1999 March 31, 1998 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................................................. $ 2,344 $ -- Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ........................................................... 742 -- Depreciation ........................................................................ 86 -- Gain associated with repayment of ADC loan arrangement .............................. (584) -- Amortization of prepaid assets ...................................................... 59 -- Discount amortization on commercial mortgage-backed securities ...................... (76) -- Amortization of compensatory stock options and unearned trust manager compensation .. 190 -- Amortization of loan commitment fees ................................................ (138) -- Receipt of loan commitment fees ..................................................... 34 -- Increase in receivables and other assets ............................................ (374) -- Decrease in interest receivable related to commercial mortgage-backed securities .... 82 -- Increase in accounts payable and other liabilities .................................. 60 -- Increase in amounts due to affiliates ............................................... 234 -- Equity in undistributed earnings of unconsolidated subsidiary, partnerships and other real estate venture ........................................................ (70) -- Distributions from unconsolidated subsidiary ........................................ 79 -- -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 2,668 -- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in mortgage loans .......................................................... (8,276) -- Investments in ADC loan arrangements ................................................... (8,899) -- Sale of mortgage loan to affiliate ..................................................... 4,585 -- Principal collected on mortgage loans .................................................. 1,260 -- Principal and interest collected on ADC loan arrangement ............................... 11,513 -- Investments in unconsolidated partnerships and subsidiary .............................. (2,104) -- -------------- -------------- NET CASH USED IN INVESTING ACTIVITIES .......................................... (1,921) -- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock ............................................. -- 26 Proceeds from financing provided by affiliate .......................................... 312 -- Dividends paid to common shareholders .................................................. (4,002) -- -------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................ (3,690) 26 -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... (2,943) 26 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................................ 9,789 -- -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD .................................................. $ 6,846 $ 26 ============== ============== SUPPLEMENTAL INFORMATION: Interest paid, net of amount capitalized ............................................... $ 588 $ -- ============== ============== Income taxes paid ...................................................................... $ 25 $ -- ============== ============== Minority interest distribution associated with ADC loan arrangement .................... $ 2,111 $ -- ============== ============== Receivables transferred in satisfaction of amounts due to affiliate .................... $ 280 $ -- ============== ============== Amounts due to affiliate discharged in connection with sale of mortgage loan ........... $ 1,729 $ -- ============== ==============
See notes to consolidated financial statements 6 7 AMRESCO CAPITAL TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. ORGANIZATION AND RELATIONSHIPS AMRESCO Capital Trust (the "Company"), a real estate investment trust ("REIT"), was organized under the laws of the State of Texas. The Company was formed to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, acquisition loans, construction loans, rehabilitation loans and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real estate, equity investments in joint ventures and/or partnerships, and certain other real estate related assets. The Company was initially capitalized on February 2, 1998 and commenced operations on May 12, 1998, concurrent with the completion of its initial public offering ("IPO") of 9,000,000 common shares and private placement of 1,000,011 common shares. Pursuant to the terms of a Management Agreement dated as of May 12, 1998 and subject to the direction and oversight of the Board of Trust Managers, the Company's day-to-day operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group"). For its services, the Manager is entitled to receive a base management fee equal to 1% per annum of the Company's Average Invested Non-Investment Grade Assets, as defined, and 0.5% per annum of the Company's Average Invested Investment Grade Assets, as defined. In addition to the base management fee, the Manager is entitled to receive incentive compensation in an amount equal to 25% of the dollar amount by which Funds From Operations (as defined by the National Association of Real Estate Investment Trusts), as adjusted, exceeds a certain threshold. The Manager is also entitled to receive reimbursement for its costs of providing certain services to the Company. The base management fee, reimbursable expenses and incentive fee, if any, are payable quarterly in arrears. During the three months ended March 31, 1999, base management fees and reimbursable expenses charged to the Company totaled $447,000 and $34,000, respectively. No incentive fees were charged to the Company during this period. Immediately after the closing of the IPO, the Manager was granted options to purchase 1,000,011 common shares; 70% of the options are exercisable at an option price of $15.00 per share and the remaining 30% of the options are exercisable at an option price of $18.75 per share. During the three months ended March 31, 1999, management fees included compensatory option charges totaling $141,000. 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned partnership. The Company accounts for its investment in AMREIT II, Inc., a taxable subsidiary, using the equity method of accounting, and thus reports its share of income or loss based on its ownership interest. The Company uses the equity method of accounting due to the non-voting nature of its ownership interest and because the Company is entitled to substantially all of the economic benefits of ownership of AMREIT II, Inc. The Company owns non-controlling interests in two partnerships; the Company accounts for these investments using the equity method of accounting and thus reports its share of income or loss based on its ownership interests. The accompanying financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal and recurring accruals) necessary for a fair presentation of the interim financial statements. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. 7 8 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities at the date of the financial statements and revenues and expenses for the reporting period. Significant estimates include the valuation of commercial mortgage-backed securities, the allowance for loan losses and the determination of the fair value of certain share option awards. Actual results may differ from those estimates. 3. LOAN INVESTMENTS During the three months ended March 31, 1999, two of the Company's loans were fully repaid and one loan was sold to AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group. Additionally, a fourth loan was reclassified, net of a $500,000 charge-off, to investment in unconsolidated subsidiary following the subsidiary's acquisition (through foreclosure on February 25, 1999) of the partnership interests of one of the Company's borrowers. As of March 31, 1999, the Company's loan investments are summarized as follows (dollars in thousands):
Amount Date of Initial Scheduled Collateral Commitment Outstanding at Investment Maturity Location Property Type Position Amount March 31, 1999 - ---------- -------- -------- ------------- -------- ------ -------------- May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $ 14,700 $ 12,705 June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,248 June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 7,696 June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,492 June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 10,957 June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 28,541 July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp Interests 10,068 6,674 July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,774 July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,791 September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418 September 30, 1998 May 1, 2001 San Antonio, TX Residential Lots First Lien 2,952 2,291 September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien 8,400 2,246 Sunnyvale, TX September 30, 1998 July 15, 1999 Galveston, TX Apartment First Lien 3,664 3,664 September 30, 1998 June 8, 1999 Ft. Worth, TX Apartment Ptrshp Interests 2,650 2,649 September 30, 1998 June 30, 1999 Dallas, TX Medical Office First Lien 3,015 2,450 September 30, 1998 July 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 7,928 October 1, 1998 July 31, 1999 Richardson, TX Office First Lien 567 300 -------- -------- $182,737 $128,824 ======== ======== Interest Interest Date of Initial Pay Accrual Investment Rate Rate - ---------- ---- ---- May 12, 1998 10.0% 12.0% June 1, 1998 12.0% 12.0% June 12, 1998 10.0% 11.5% June 17, 1998 10.0% 13.5% June 19, 1998 12.0% 12.0% June 22, 1998 10.5% 10.5% July 1, 1998 10.0% 15.0% July 2, 1998 10.5% 10.5% July 10, 1998 10.0% 14.0% September 1, 1998 10.0% 12.0% September 30, 1998 16.0% 16.0% September 30, 1998 10.0% 14.0% September 30, 1998 10.0% 15.0% September 30, 1998 10.5% 16.0% September 30, 1998 10.0% 13.0% September 30, 1998 10.0% 12.5% October 1, 1998 9.3% 15.0%
At March 31, 1999, amounts outstanding under construction loans, acquisition/rehabilitation loans, acquisition loans, land development loans and bridge loans totaled $34,007,000, $41,938,000, $40,114,000, $4,837,000 and $7,928,000, respectively. Three of the 17 loan investments provide the Company with the opportunity for profit participation in excess of the contractual interest accrual rates. The loan investments are classified as follows (in thousands):
Loan Amount Balance Sheet Amount Outstanding at at March 31, 1999 March 31, 1999 ------------------------------------------ Mortgage loans, net..................... $ 99,005 $ 97,782 Real estate, net........................ 23,145 22,712 Investment in real estate venture....... 6,674 6,018 --------- --------- Total ADC loan arrangements.......... 29,819 28,730 --------- --------- Total loan investments.................. $ 128,824 126,512 ========= Allowance for loan losses.................................... (1,610) --------- Total loan investments, net of allowance for losses.......... $ 124,902 =========
The differences between the outstanding loan amounts and the balance sheet amounts are due primarily to loan commitment fees, minority interests and accumulated depreciation. 8 9 ADC loan arrangements accounted for as real estate consisted of the following at March 31, 1999 (in thousands): Land .................................. $ 4,648 Buildings and improvements ............ 3,691 Construction in progress .............. 14,438 -------- Total .............................. 22,777 Less: Accumulated depreciation ........ (65) -------- $ 22,712 ========
A summary of activity for mortgage loans and ADC loan arrangements accounted for as real estate or investments in joint ventures is as follows (in thousands): Balance at December 31, 1998 ......... $ 136,791 Investments in loans ................. 17,779 Collections of principal ............. (12,593) Cost of mortgage sold ................ (6,314) Foreclosure (partnership interests) .. (6,839) --------- Balance at March 31, 1999 ............ $ 128,824 =========
The activity in the allowance for loan losses was as follows (in thousands): Balance at December 31, 1998 ........... $ 1,368 Provision for losses ................... 742 Charge-offs ............................ (500) Recoveries ............................. -- ------- Balance at March 31, 1999 .............. $ 1,610 =======
As of March 31, 1999, the Company had outstanding commitments to fund approximately $53,913,000 under 17 loans, of which $1,403,000 is reimbursable by ACFI. The Company is obligated to fund these commitments to the extent that the borrowers are not in violation of any of the conditions established in the loan agreements. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee if amounts are repaid to the Company during certain prepayment lock-out periods. A portion of the commitments could expire without being drawn upon and therefore the total commitment amounts do not necessarily represent future cash requirements. 4. DEBT AND FINANCING FACILITIES Effective as of July 1, 1998, the Company (and certain of its subsidiaries) entered into a $400 million Interim Warehouse and Security Agreement (the "Line of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to certain limitations, borrowings under the facility can be used to finance the Company's structured loan and equity real estate investments. Prior to the modifications discussed below, borrowings under the Line of Credit bore interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum depending upon the type of asset, its loan-to-value ratio and the advance rate selected by the Company. Advance rates on eligible assets ranged from 50% to 95% depending upon the asset's characteristics. The weighted average interest rate at March 31, 1999 was 5.98%. Effective as of May 4, 1999, the Company (and certain of its subsidiaries) entered into an Amended and Restated Interim Warehouse and Security Agreement (the "Amended Line of Credit") with PSCC; the agreement amended the Company's existing Line of Credit. The Amended Line of Credit provides for the following modifications: (1) a reduction in the size of the committed facility from $400 million to $300 million; (2) the elimination of the requirement that assets financed with proceeds from the facility must be securitizable; (3) a reduction in the amount of capital the Company must fund with respect to construction and rehabilitation loans before PSCC is required to begin advancing funds; (4) an extension of the maturity date from July 1, 2000 to November 3, 2000; and (5) the modification to, and addition of, certain sublimits on certain types of loans and assets. Under the Amended Line of Credit, borrowings bear interest at LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the Company's Tangible Net Worth, as defined; borrowings in excess of the Company's Tangible Net Worth bear interest at LIBOR plus 3%. 9 10 As compensation for amending the existing line of credit and extending the maturity date, the Company granted warrants to Prudential Securities Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of beneficial interest at $9.83 per share. The exercise price represents the average closing market price of the Company's common shares for the ten-day period ending on May 3, 1999. The warrants were issued in lieu of a commitment fee or other cash compensation. Borrowings under the facility are secured by a first lien security interest on all assets funded with proceeds from the Amended Line of Credit. The Amended Line of Credit contains several covenants; among others, the more significant covenants include the maintenance of a $100 million consolidated Tangible Net Worth, subject to adjustment in connection with any future equity offerings; maintenance of a Coverage Ratio, as defined, of not less than 1.4 to 1; and limitation of Total Indebtedness, as defined, to no more than 400% of shareholders' equity. 5. EARNINGS PER SHARE A reconciliation of the numerator and denominator used in computing basic earnings per share and diluted earnings per share for the three months ended March 31, 1999 and the period from February 2, 1998 (date of initial capitalization) through March 31, 1998, is as follows (in thousands, except share data):
Period from February 2, Three Months 1998 Ended through March 31, 1999 March 31, 1998 ------------- ------------- Net income available to common shareholders $ 2,344 $ -- ============= ============= Weighted average common shares outstanding 10,000,111 100 ============= ============= Basic earnings per common share $ 0.23 $ -- ============= ============= Weighted average common shares outstanding 10,000,111 100 Effect of dilutive securities: Restricted shares 6,000 -- Net effect of assumed exercise of stock options 849 -- ------------- ------------- Adjusted weighted average shares outstanding 10,006,960 100 ============= ============= Diluted earnings per common share $ 0.23 $ -- ============= =============
Options to purchase 1,478,011 shares of common stock were outstanding at March 31, 1999. Options related to 1,472,011 shares were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the Company's common shares. The Company was initially capitalized on February 2, 1998 with the sale of 100 shares to AMRESCO, INC. The Company had no earnings prior to the commencement of its operations on May 12, 1998. No options were outstanding during the period from February 2, 1998 through March 31, 1998. 6. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances except those resulting from investments by, and distributions to, its owners. Other comprehensive income includes unrealized gains and losses on marketable securities classified as available-for-sale. During the three months ended March 31, 1999, total nonowner changes in equity aggregated $1,441,000 and were comprised of net income of $2,344,000 and an unrealized loss on securities available for sale of $903,000. The unrealized loss on securities available for sale had no impact on the Company's taxable income or cash flow. 7. SEGMENT INFORMATION The Company, as an investor in real estate related assets, operates in only one reportable segment. Within this segment, the Company makes asset allocation decisions based upon its diversification strategies and changes in market conditions. The Company does not have, nor does it rely upon, any major customers. All of the Company's investments are secured 10 11 directly or indirectly by real estate properties located in the United States; accordingly, all of its revenues were derived from U.S. operations. 8. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and that it measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) is dependent upon the intended use of the derivative and the resulting designation. SFAS No. 133 generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of (1) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (2) the earnings effect of the hedged forecasted transaction. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, although earlier application is encouraged. The Company has not yet assessed the impact that SFAS No. 133 will have on its financial condition or results of operations. 9. SUBSEQUENT EVENTS On April 22, 1999, the Company declared a dividend of $0.36 per share; the dividend is payable on May 17, 1999 to shareholders of record on April 30, 1999. On April 30, 1999, the Company (through a majority-owned partnership) acquired interests in three newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. These properties, which were acquired by subsidiary partnerships at an aggregate purchase price of $30.7 million, include an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine, Texas. In connection with these acquisitions, the title-holding partnerships obtained non-recourse financing aggregating $19.5 million from an unaffiliated third party. Immediately prior to the closing, the Company contributed $11.4 million of capital to the partnership. The proceeds from this contribution were used to fund the balance of the purchase price and to provide initial working capital to the title-holding partnerships. The non-recourse loans bear interest at 6.68% per annum and require interest only payments through December 31, 2001; thereafter, interest and principal payments are due based upon 25-year amortization schedules. The loans mature on January 1, 2014. As further described in Note 4, the Company's Line of Credit was modified effective as of May 4, 1999. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW AMRESCO Capital Trust (the "Company") is a real estate investment trust ("REIT") which was formed in early 1998 to take advantage of certain mid- to high-yield lending and investment opportunities in real estate related assets, including various types of commercial mortgage loans (including, among others, participating loans, mezzanine loans, acquisition loans, construction loans, rehabilitation loans and bridge loans), commercial mortgage-backed securities ("CMBS"), commercial real estate, equity investments in joint ventures and/or partnerships, and certain other real estate related assets. Subject to the direction and oversight of the Board of Trust Managers, the Company's day-to-day operations are managed by AMREIT Managers, L.P. (the "Manager"), an affiliate of AMRESCO, INC. (together with its affiliated entities, the "AMRESCO Group"). The Company commenced operations on May 12, 1998 concurrent with the completion of its initial public offering of 9,000,000 common shares and private placement of 1,000,011 common shares with AMREIT Holdings, Inc., a wholly-owned subsidiary of AMRESCO, INC. To date, the Company's investment activities have been focused in three primary areas: loan investments, CMBS and equity investments in real estate. The Company expects that its mid- to high-yield loan investments and, to a lesser extent, equity investments in real estate, will continue to comprise a substantial portion of its investment portfolio. Similarly, the Company expects to continue to have 15% to 20% of its invested capital (comprising equity and proceeds from its two credit facilities) allocated to CMBS. Additionally, the Company expects to make several of these investments through one or more partnerships in which it holds a minority ownership interest (i.e., 5% to 10%). During the three months ended March 31, 1999, one such partnership was formed. The Company's investment activities remained slow during the first quarter of 1999 as the mortgage REIT market continued to be affected by the aftermath of the dislocation in the capital markets which occurred in mid to late 1998. The Company closed no new loan investments during the first quarter. This was not due to a lack of investment opportunities but rather was in response to the capital market constraints which impacted the Company. Notwithstanding the lack of new investment activity during the first quarter, the Company advanced $17.8 million under structured loan commitments it had closed on or prior to December 31, 1998; a substantial portion of these funds were provided by the repayment of two loan investments and the sale of one mortgage loan during the quarter. Additionally, the Company's equity investments in real estate increased to $4.8 million as a result of the acquisition of a 49% limited partner interest in a partnership which owns a 116,000 square foot suburban office building. Finally, the Company contributed $0.7 million to a recently formed investment partnership with Olympus Real Estate Corporation. The partnership, which is 5% owned by the Company, acquired several classes of subordinated CMBS at an aggregate purchase price of $12.7 million. The Company believes it has operated and it intends to continue to operate in a manner so as to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As such, the Company has distributed and it intends to continue to distribute at least 95% of its REIT taxable income annually. The Company may experience high volatility in financial statement net income and tax basis income from quarter to quarter and year to year, primarily as a result of fluctuations in interest rates, borrowing costs, reinvestment opportunities, prepayment rates and favorable and unfavorable credit related events (e.g., profit participations or credit losses). Additionally, the Company's accounting for certain real estate loan arrangements as either real estate or joint venture investments may contribute to volatility in financial statement net income. Because changes in interest rates may significantly affect the Company's activities, the operating results of the Company will depend, in large part, upon the ability of the Company to manage its interest rate, prepayment and credit risks, while maintaining its status as a REIT. The following discussion of results of operations and liquidity and capital resources should be read in conjunction with the consolidated financial statements and notes thereto included in "Item 1. Financial Statements". 12 13 RESULTS OF OPERATIONS General Under generally accepted accounting principles, net income for the three months ended March 31, 1999 was $2,344,000, or $0.23 per common share. The Company commenced operations on May 12, 1998; as a result, comparisons to the prior year's first quarter are not available. The Company's primary sources of revenue for the three months ended March 31, 1999, totaling $4,473,000, were as follows: o $3,164,000 from loan investments. As certain of the Company's loan investments are accounted for as either real estate or joint venture investments for financial reporting purposes, these revenues are included in the consolidated statement of income as follows: interest income on mortgage loans - $3,057,000; and operating income from real estate - $107,000. The loan investments earn interest at accrual rates ranging from 10.5% to 16% per annum as of March 31, 1999. o $914,000 from investments in CMBS. o $239,000 of operating income from real estate owned by the Company (through a majority-owned partnership). Additionally, the Company realized a gain of $584,000 in connection with the repayment of an ADC loan arrangement. The gain was comprised principally of interest income earned at the accrual rate over the life of the loan investment. The Company incurred expenses of $2,713,000 during the three months ended March 31, 1999, consisting primarily of the following: o $588,000 of management fees, including $447,000 of base management fees payable to the Manager pursuant to the Management Agreement and $141,000 of expense associated with compensatory options granted to the Manager. No incentive fees were incurred during the period. o $523,000 of general and administrative costs, including $200,000 of resolution costs associated with a non-performing loan, $96,000 for professional services, $59,000 for directors and officers' insurance, $34,000 of reimbursable costs pursuant to the Management Agreement, $27,000 related to compensatory options granted to certain members of the AMRESCO Group and $22,000 related to restricted stock awards to the Company's Independent Trust Managers. o $589,000 of interest expense (net of capitalized interest totaling $151,000) associated with the Company's credit facilities and a non-recourse loan secured by real estate. o $742,000 of provision for loan losses. During the period, the Company charged-off $500,000 against an existing allowance for losses related to the non-performing loan referred to above. This loan is discussed further in this section of Management's Discussion and Analysis of Financial Condition and Results of Operations under the sub-heading "Loan Investments". The Company's policy is to distribute at least 95% of its REIT taxable income to shareholders each year; to that end, dividends are paid quarterly. Tax basis income differs from income reported for financial reporting purposes due primarily to differences in methods of accounting for ADC loan arrangements and stock-based compensation awards and the nondeductibility, for tax purposes, of the Company's loan loss reserve (for a discussion of ADC loan arrangements, see the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998). As a result of these accounting differences, net income under generally accepted accounting principles is not necessarily an indicator of distributions to be made by the Company. On April 22, 1999, the Company declared its first quarter dividend; the dividend, totaling $0.36 per share, is payable on May 17, 1999 to shareholders of record on April 30, 1999. For federal income tax purposes, this dividend should be treated as ordinary income to the Company's shareholders. 13 14 Loan Investments During the three months ended March 31, 1999, two of the Company's loans were fully repaid prior to their scheduled maturities and one loan was sold to AMRESCO Commercial Finance, Inc. ("ACFI"), a member of the AMRESCO Group. The proceeds from these transactions totaled $16,353,000, including accrued interest and a prepayment fee aggregating $180,000. In connection with the loan sale, amounts due to ACFI were reduced by $2,009,000; as of March 31, 1999, amounts due to ACFI totaled $4,324,000. Additionally, a fourth loan was reclassified, net of a $500,000 charge-off, to investment in unconsolidated subsidiary following the subsidiary's acquisition (through foreclosure on February 25, 1999) of the partnership interests of one of the Company's borrowers. Principal collections on certain of the Company's other loan investments totaled $1,005,000 during the quarter ended March 31, 1999. During the quarter, the Company advanced $17,779,000 under its loan commitments. No new loan commitments were closed during the first quarter. Excluding the loan classified as an investment in unconsolidated subsidiary, the Company has 17 loans representing $182.7 million in aggregate commitments; as of March 31, 1999, $128.8 million had been advanced under these facilities. A portion of the commitments may expire without being drawn upon and therefore the total commitment amounts do not necessarily represent future cash requirements. After giving effect to ACFI's economic interest (as described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998), commitments and amounts outstanding totaled approximately $177.9 million and $125.4 million, respectively, at March 31, 1999. At March 31, 1999, ACFI's contingent obligation for additional advances which may be required to be made under certain of the Company's loans approximated $1,403,000. Based upon the amounts outstanding under these facilities and after giving effect to the contractual right sold to ACFI, the Company's portfolio of commercial mortgage loans had a weighted average interest pay rate of 10.8% and a weighted average interest accrual rate of 11.9% as of March 31, 1999. Six of the 17 loans provide for profit participation above the contractual accrual rate; three of these six facilities are included in the pool of loans in which ACFI has a contractual right to collect certain excess proceeds. The Company's loan investments are summarized as follows (dollars in thousands):
Amount Outstanding at Date of Initial Scheduled Collateral Commitment March 31, Investment Maturity Location Property Type Position Amount 1999 (c) ---------- -------- -------- ------------- -------- ------ -------- May 12, 1998 March 31, 2001 Richardson, TX Office Second Lien $14,700 $12,705 June 1, 1998 June 1, 2001 Houston, TX Office First Lien 11,800 10,248 June 12, 1998 June 30, 2000 Pearland, TX Apartment First Lien 12,827 7,696 (b) June 17, 1998 June 30, 2000 San Diego, CA R&D/Bio-Tech First Lien 5,560 4,492 (b) June 19, 1998 June 18, 2000 Houston, TX Office First Lien 24,000 10,957 (b) June 22, 1998 June 19, 2000 Wayland, MA Office First Lien 45,000 28,541 July 1, 1998 July 1, 2001 Dallas, TX Office Ptrshp 10,068 6,674 (a) Interests July 2, 1998 June 30, 2000 Washington, D.C. Office First Lien 7,000 5,774 July 10, 1998 July 31, 2000 Pasadena, TX Apartment First Lien 3,350 2,791 September 1, 1998 February 28, 2001 Los Angeles, CA Mixed Use First Lien 18,419 17,418 September 30, 1998 May 1, 2001 San Antonio, TX Residential Lots First Lien 2,952 2,291 September 30, 1998 Various San Antonio, TX/ Residential Lots First Lien 8,400 2,246 Sunnyvale, TX September 30, 1998 July 15, 1999 Galveston, TX Apartment First Lien 3,664 3,664 September 30, 1998 June 8, 1999 Ft. Worth, TX Apartment Ptrshp 2,650 2,649 Interests September 30, 1998 June 30, 1999 Dallas, TX Medical Office First Lien 3,015 2,450 September 30, 1998 July 22, 1999 Norwood, MA Industrial/Office First Lien 8,765 7,928 October 1, 1998 July 31, 1999 Richardson, TX Office First Lien 567 300 -------- -------- 182,737 128,824 ACFI's Economic Interest (4,869) (3,466) -------- -------- $177,868 (d) $125,358 (d) ======== ======== Interest Interest Date of Initial Pay Accrual Investment Rate Rate ---------- ---- ---- May 12, 1998 10.0% 12.0% June 1, 1998 12.0% 12.0% June 12, 1998 10.0% 11.5% June 17, 1998 10.0% 13.5% June 19, 1998 12.0% 12.0% June 22, 1998 10.5% 10.5% July 1, 1998 10.0% 15.0% July 2, 1998 10.5% 10.5% July 10, 1998 10.0% 14.0% September 1, 1998 10.0% 12.0% September 30, 1998 16.0% 16.0% September 30, 1998 10.0% 14.0% September 30, 1998 10.0% 15.0% September 30, 1998 10.5% 16.0% September 30, 1998 10.0% 13.0% September 30, 1998 10.0% 12.5% October 1, 1998 9.3% 15.0%
(a) Accounted for as investment in joint venture for financial reporting purposes. (b) Accounted for as real estate for financial reporting purposes. (c) For all loan investments, payments of interest only are due monthly at the interest pay rate. All principal and all remaining accrued and unpaid interest are due at the scheduled maturities of the loans. (d) Amounts exclude the loan which was reclassified to investment in unconsolidated subsidiary during the three months ended March 31, 1999. The Company provides financing through certain real estate loan arrangements that, because of their nature, qualify either as real estate or joint venture investments for financial reporting purposes (see notes [a] and [b] accompanying the table 14 15 above). As of March 31, 1999, loan investments representing approximately $52,455,000 in aggregate commitments were accounted for as either real estate or joint venture interests; approximately $29,819,000 had been advanced to borrowers under the related agreements. For a discussion of these loan arrangements, see the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. A mezzanine (second lien) loan with an outstanding balance of $6,839,000 and a recorded investment of $6,659,000 was over 30 days past due as of December 31, 1998. The allowance for loan losses related to this investment totaled $500,000 at December 31, 1998. On February 25, 1999, an unconsolidated taxable subsidiary of the Company assumed control of the borrower (a partnership) through foreclosure of the partnership interests. In addition to the second lien mortgage, the property is encumbered by a $17 million first lien mortgage provided by an unaffiliated third party. During the first quarter, the Company charged-off $500,000 against the allowance for losses related to this investment. Should the Company incur an actual loss on this investment, tax basis income would be adversely affected. At March 31, 1999, the Company's commercial mortgage loan commitments were geographically dispersed in three states and the District of Columbia: Texas (54%); Massachusetts (29%); California (13%); and Washington, D.C. (4%). The underlying collateral for these loans was comprised of the following property types: office (64%); multifamily (12%); mixed use (10%); residential (6%); industrial (4%); R&D/Bio-Tech (3%); and medical office (1%). Construction loans, acquisition/rehabilitation loans, acquisition loans, single-family lot development loans and bridge loans comprised 30%, 33%, 27%, 7% and 3% of the portfolio, respectively. Eighty-five percent of the portfolio is comprised of first lien loans while the balance of the portfolio (15%) is secured by second liens and/or partnership interests. The percentages reflected above are based upon committed loan amounts and give effect to ACFI's economic interest. Additionally, the percentages exclude the loan which was reclassified to investment in unconsolidated subsidiary during the first quarter. Until the loan investment portfolio becomes larger, geographic and product type concentrations are expected. The Company expects to see more diversification both geographically and by product type as the loan portfolio grows. Geographic and product type concentrations present additional risks, particularly if there is a deterioration in the general condition of the real estate market or in the sub-market in which the loan collateral is located, or if demand for a particular product type does not meet expectations due to adverse market conditions that are different from those projected by the Company. In an effort to reduce concentration risks, the Company is targeting transactions which will more broadly diversify its loan investment portfolio. Commercial Mortgage-backed Securities As of March 31, 1999, the Company holds five commercial mortgage-backed securities ("CMBS") which were acquired at an aggregate purchase price of $34.5 million. All of these securities were acquired on or before September 1, 1998. Due to the continued widening of spreads in the CMBS market during the first quarter, the value of the Company's CMBS holdings declined by $907,000 during the three months ended March 31, 1999; accordingly, the Company recorded an unrealized loss of $907,000 on its CMBS portfolio during the quarter ended March 31, 1999. Additionally, the Company recorded an unrealized gain of $4,000, net of tax effects, related to one commercial mortgage-backed security owned by its unconsolidated taxable subsidiary; the security held by this subsidiary has an investment rating of "B-". As these securities are classified as available for sale, the aggregate unrealized loss was reported as a component of accumulated other comprehensive income (loss) in shareholders' equity for financial reporting purposes. The cumulative unrealized losses (totaling $7.4 million) have had no impact on the Company's taxable income or cash flow. Management intends to retain these investments for the foreseeable future. Excluding the potential tax effects associated with the security held by the Company's unconsolidated taxable subsidiary, the weighted average unleveraged yield over the expected life of these investments is expected to approximate 11.4%. The Company's direct CMBS investments are summarized as follows (dollars in thousands):
Percentage of Security Aggregate Aggregate Total Based Rating Amortized Cost Fair Value on Fair Value ------------- ------------------ ----------------- ---------------- BB- $4,239 $3,482 12% B 19,530 16,095 58% B- 11,225 8,265 30% ------- ------- --- $34,994 $27,842 100% ======= ======= ===
15 16 The Company's estimated returns on its CMBS investments are based upon a number of assumptions that are subject to certain business and economic risks and uncertainties including, but not limited to, the timing and magnitude of prepayments and credit losses on the underlying mortgage loans that may result from general and/or localized real estate market factors. These risks and uncertainties are in many ways similar to those affecting the Company's commercial mortgage loans. These risks and uncertainties may cause the actual yields to differ materially from expected yields. Equity Investments in Real Estate The Company's equity investments in real estate increased to $4.8 million during the three months ended March 31, 1999 as a result of the acquisition of a 49% limited partner interest in a partnership which owns a 116,000 square foot office building in Richardson, Texas. The property is encumbered by a first lien mortgage in the amount of $13.9 million. The Company contributed $1.4 million of capital to the partnership. On April 30, 1999, the Company (through a majority-owned partnership) acquired interests in three newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth (Texas) area. These properties, which were acquired by subsidiary partnerships at an aggregate purchase price of $30.7 million, include an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine, Texas. In connection with these acquisitions, the title-holding partnerships obtained non-recourse financing aggregating $19.5 million from an unaffiliated third party. Immediately prior to the closing, the Company contributed $11.4 million of capital to the partnership. The proceeds from this contribution were used to fund the balance of the purchase price and to provide initial working capital to the title-holding partnerships. The non-recourse loans bear interest at 6.68% per annum and require interest only payments through December 31, 2001; thereafter, interest and principal payments are due based upon 25-year amortization schedules. The loans mature on January 1, 2014. The partnership expects to acquire a fifth center, an 87,540 square foot facility in Richardson, Texas, during the third quarter of 1999 following the completion of construction and satisfaction of certain other closing conditions. The fifth center is expected to be acquired at a purchase price of approximately $10.8 million; it is anticipated that this acquisition will be financed with a $3.2 million equity contribution from the Company and $7.6 million of third party non-recourse financing. Ultimately, the Company expects to construct an additional 62,000 square feet of side-store space; this development is expected to occur at the three recently acquired properties and at the fifth center (following the acquisition thereof). It is currently anticipated that the development costs will be financed with an additional $1 million equity contribution from the Company and $3.8 million of third party financing proceeds. LIQUIDITY AND CAPITAL RESOURCES The Company's ability to execute its business strategy, particularly the growth of its investment and loan portfolio, depends to a significant degree on its ability to obtain additional capital. The Company's principal demands for liquidity are cash for operations, including funds for its lending activities and other investments, interest expense associated with its indebtedness, debt repayments and distributions to its shareholders. In the near term, the Company's principal sources of liquidity are the funds available to it under its financing facilities described below. Effective as of July 1, 1998, the Company (and certain of its subsidiaries) entered into a $400 million credit facility (the "Line of Credit") with Prudential Securities Credit Corporation ("PSCC"). Subject to PSCC's approval on an asset by asset basis, borrowings under the facility can be used to finance the Company's structured loan and equity real estate investments. As a result of the dislocation in the capital markets in mid to late 1998, PSCC became more restrictive in the application of its approval rights with respect to financing for new investments sought by the Company; accordingly, very few new investments were consummated during the fourth quarter of 1998 and the first quarter of 1999. Prior to the modifications discussed below, borrowings under the Line of Credit bore interest at rates ranging from LIBOR plus 1% per annum to LIBOR plus 2% per annum. Borrowings are secured by a first lien security interest in all assets funded with proceeds from the Line of Credit. At March 31, 1999, $39,338,000 had been borrowed under the Line of Credit. The weighted average interest rate at March 31, 1999 was 5.98%. To reduce the impact that rising interest rates would have on this floating rate indebtedness, the Company entered into an interest rate cap agreement effective January 1, 1999. The agreement, which expires on July 1, 2000, has a notional amount of $33,600,000. The agreement entitles the Company to receive from a counterparty the amounts, if any, by which one month LIBOR exceeds 6.0%. There are no margin requirements associated with interest rate caps and therefore there is no liquidity risk associated with this particular hedging 16 17 instrument. As of March 31, 1999, no payments were due from the counterparty as one month LIBOR had not exceeded 6.0%. On May 4, 1999, the Company (and certain of its subsidiaries) entered into an Amended and Restated Interim Warehouse and Security Agreement (the "Amended Line of Credit"). The terms of the Amended Line of Credit are discussed below in "Part II, Item 5. Other Information". In anticipation of completing the modifications to its line of credit, the Company intensified its loan production efforts during the first quarter. Effective as of July 1, 1998, the Company (and certain of its subsidiaries) entered into a $100 million Master Repurchase Agreement (the "Repurchase Agreement") with PSCC; subsequently, PSCC was replaced by Prudential-Bache International, Ltd. ("PBI"), an affiliate of PSCC, as lender. Borrowings under the Repurchase Agreement can be used to finance a portion of the Company's portfolio of mortgage-backed securities. The Repurchase Agreement provides that the Company may borrow a varying percentage of the market value of the purchased mortgage-backed securities, depending on the credit quality of such securities. Borrowings under the Repurchase Agreement bear interest at rates ranging from LIBOR plus 0.20% per annum to LIBOR plus 1.5% per annum depending upon the advance rate and the credit quality of the securities being financed. Borrowings under the facility are secured by an assignment to PBI of all mortgage-backed securities funded with proceeds from the Repurchase Agreement. The Repurchase Agreement matures on June 30, 2000. At March 31, 1999, there were no borrowings under the Repurchase Agreement. On April 29, 1999, $11,795,000 was borrowed under this facility in order to provide the funds necessary to complete the acquisition of the three grocery-anchored shopping centers described above. Under the terms of the Amended Line of Credit and the Repurchase Agreement, PSCC and PBI, respectively, retain the right to mark the underlying collateral to market value. A reduction in the value of its pledged assets may require the Company to provide additional collateral or fund margin calls. From time to time, the Company may be required to provide such additional collateral or fund margin calls. The Company believes that the funds available under its two credit facilities will be sufficient to meet the Company's liquidity and capital requirements in 1999. The Company believes that the Amended Line of Credit will provide it with more flexibility, which in turn will allow it to utilize favorable financing terms in connection with the origination of investments and enable it to resume the growth of its assets, albeit at a slower rate than was achieved in the second and third quarters of 1998. The Company, however, remains subject to capital constraints. In particular, the Company's ability to raise additional capital through the public equity and debt markets continues to be severely limited. The Company is continuing its efforts to obtain additional secured loan facilities that would better match the duration of its assets. Additionally, these efforts are designed to provide alternatives to the Amended Line of Credit and, ultimately, to replace it. However, there can be no assurances that the Company will be able to obtain renewal or additional financing on acceptable terms. Management currently believes that the dislocation in the capital markets will not extend long-term; however, its duration is impossible to predict at this time. In the near term, the Company believes it will be constrained from accessing the public equity markets. In addition, new issues of long-term public unsecured debt will be difficult to obtain and, in any event, will likely not be available to the Company at a reasonable cost. Additional secured debt beyond the Company's Amended Line of Credit will also be difficult to obtain and may not be offered at a reasonable cost. Aside from limiting the Company's access to additional capital in the near term to fund growth, the Company has been relatively insulated from the effects of the dislocation in the capital markets. While the market value of the Company's CMBS holdings has declined, the Company invested in these bonds for the long term yields that they are expected to produce. Management believes that the current market dislocation presents significant investment opportunities for selective acquisitions of CMBS and that the fundamental value of the real estate mortgages underlying these bonds has been largely unaffected to date, although general economic conditions could adversely impact real estate values in the future. REIT STATUS Management believes that the Company is operated in a manner that will enable it to continue to qualify as a REIT for federal income tax purposes. As a REIT, the Company will not pay income taxes at the trust level on any taxable income which is distributed to its shareholders, although AMREIT II, Inc., its "Non-Qualified REIT Subsidiary", may be subject to tax at the corporate level. Qualification for treatment as a REIT requires the Company to meet certain criteria, including certain requirements regarding the nature of its ownership, assets, income and distributions of taxable income. The Company may, however, be subject to tax at normal corporate rates on any ordinary income or capital gains not distributed. 17 18 YEAR 2000 ISSUE General Many of the world's computers, software programs and other equipment using microprocessors or embedded chips currently have date fields that use two digits rather than four digits to define the applicable year. These computers, programs and chips may be unable to properly interpret dates beyond the year 1999; for example, computer software that has date sensitive programming using a two-digit format may recognize a date using "00" as the year 1900 rather than the year 2000. This inability to properly process dates is commonly referred to as the "Year 2000 issue", the "Year 2000 problem" or "Millennium Bug." Such errors could potentially result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities, which, in turn, could lead to disruptions in the Company's operations or performance. All of the Company's information technology infrastructure is provided by the Manager, and the Manager's systems are supplied by AMRESCO, INC. The Company's assessments of the cost and timeliness of completion of Year 2000 modifications set forth below are based on representations made to the Company and the best estimates of the individuals within or engaged by AMRESCO, INC. charged with handling the Year 2000 issue, which estimates were derived using numerous assumptions relating to future events, including, without limitation, the continued availability of certain internal and external resources and third party readiness plans. Furthermore, as the AMRESCO, INC. Year 2000 initiative (described below) progresses, AMRESCO, INC., the Manager and the Company continue to revise estimates of the likely problems and costs associated with the Year 2000 issue and to adapt contingency plans. However, there can be no assurance that any estimate or assumption will prove to be accurate. The AMRESCO, INC. Year 2000 Initiative AMRESCO, INC. is conducting a comprehensive Year 2000 initiative with respect to its internal business-critical systems, including those upon which the Company depends. This initiative encompasses information technology ("IT") systems and applications, as well as non-IT systems and equipment with embedded technology, such as fax machines and telephone systems, which may be impacted by the Year 2000 issue. Business-critical systems encompass internal accounting systems, including general ledger, accounts payable and financial reporting applications; cash management systems; loan servicing systems; and decision support systems; as well as the underlying technology required to support the software. The initiative includes assessing, remediating or replacing, testing and upgrading the business-critical IT systems of AMRESCO, INC. with the assistance of a consulting firm that specializes in Year 2000 readiness. Based upon a review of the completed and planned stages of the initiative, and the testing done to date, AMRESCO, INC. does not anticipate any material difficulties in achieving Year 2000 readiness with respect to its internal business-critical systems used in connection with the operations of the Manager or the Company, and the Company has received a written representation from AMRESCO, INC. that Year 2000 readiness was achieved by December 1998 with respect to all its internal business-critical systems used in connection with the operations of the Manager or the Company. In addition to the internal IT systems and non-IT systems of AMRESCO, INC., the Company may be at risk from Year 2000 failures caused by or occurring to third parties. These third parties can be classified into two groups. The first group includes borrowers, significant business partners, lenders, vendors and other service providers with whom the Company, the Manager or AMRESCO, INC. has a direct contractual relationship. The second group, while encompassing certain members of the first group, is comprised of third parties providing services or functions to large segments of society, both domestically and internationally, such as airlines, utilities and national stock exchanges. As is the case with most other companies, the actions the Company, the Manager and AMRESCO, INC. can take to avoid any adverse effects from the failure of companies, particularly those in the second group, to become Year 2000 ready is extremely limited. However, AMRESCO, INC. has communicated with those companies that have significant business relationships with AMRESCO, INC., the Manager or the Company, particularly those in the first group, to determine their Year 2000 readiness status and the extent to which AMRESCO, INC., the Manager or the Company could be affected by any of their Year 2000 readiness issues. In connection with this process, AMRESCO, INC. has sought to obtain written representations and other independent confirmations of Year 2000 readiness from the third parties with whom AMRESCO, INC., the Manager or the Company has material contracts. Responses from all third parties having material contracts with AMRESCO, INC., the Manager or the Company have not been received, nor is it likely that responses will be received from all such third parties. In addition to contacting these third parties, where there are direct interfaces between the 18 19 systems of AMRESCO, INC. and the systems of these third parties in the first group, AMRESCO, INC. plans to complete testing by the end of the second quarter of 1999 in conformance with the Guidelines of the Federal Financial Institutions Examination Council. Based on responses received and testing to date, it is not currently anticipated that AMRESCO, INC., the Manager or the Company will be materially affected by any third party Year 2000 readiness issues in connection with the operations of the Manager or the Company. For all business-critical systems interfaces used in connection with the operations of the Manager and the Company, AMRESCO, INC. advised the Company that readiness was achieved by December 31, 1998. Backup service providers that have achieved Year 2000 readiness have been put in place for significant third party providers that did not complete their Year 2000 initiatives by March 31, 1999. There can be no assurance that the systems of AMRESCO, INC. or those of third parties will not experience adverse effects after December 31, 1999. Furthermore, there can be no assurance that a failure to convert by another company, or a conversion that is not compatible with the systems of AMRESCO, INC. or those of other companies on which the systems of AMRESCO, INC. rely, would not have a material adverse effect on the Company. Under the terms of the Company's Management Agreement with the Manager, all of the costs associated with addressing the Company's Year 2000 issue are to be borne by the Manager. Therefore, the Company does not anticipate that it will incur material expenditures in connection with any modifications necessary to achieve Year 2000 readiness. Potential Risks In addition to the internal systems of AMRESCO, INC. and the systems and embedded technology of third parties with whom AMRESCO, INC., the Manager and the Company do business, there is a general uncertainty regarding the overall success of global remediation efforts relating to the Year 2000 issue, including those efforts of providers of services to large segments of society, as described above in the second group. Due to the interrelationships on a global scale that may be impacted by the Year 2000 issue, there could be short-term disruptions in the capital or real estate markets or longer-term disruptions that would affect the overall economy. Due to the general uncertainty with respect to how this issue will affect businesses and governments, it is not possible to list all potential problems or risks associated with the Year 2000 issue. However, some examples of problems or risks to the Company that could result from the failure by third parties to adequately deal with the Year 2000 issue include: o in the case of lenders, the potential for liquidity stress due to disruptions in funding flows; o in the case of exchanges and clearing agents, the potential for funding disruptions and settlement failures; o in the case of counter parties, accounting and financial difficulties to those parties that may expose the Company to increased credit risk; and o in the case of vendors or providers, service failures or interruptions, such as failures of power, telecommunications and the embedded technology in building systems (such as HVAC, sprinkler and fire suppression, elevators, alarm monitoring and security, and building and parking garage access). 19 20 With respect to the Company's loan portfolios, risks due to the potential failure of third parties to be ready to deal with the Year 2000 issue include: o potential borrower defaults resulting from increased expenses or legal claims related to failures of embedded technology in building systems, such as HVAC, sprinkler and fire suppression, elevators, alarm monitoring and security, and building and parking garage access; o potential reductions in collateral value due to failure of one or more of the building systems; o interruptions in cash flow due to borrowers being unable to obtain timely lease payments from tenants or incomplete or inaccurate accounting of rents; o potential borrower defaults resulting from computer failures of retail systems of major tenants in retail commercial real estate properties such as shopping malls and strip shopping centers; o construction delays resulting from contractors' failure to be Year 2000 ready and increased costs of construction associated with upgrading building systems to be Year 2000 compliant; and o delays in reaching projected occupancy levels due to construction delays, interruptions in service or other market factors. These risks are also applicable to the Company's portfolio of CMBS as these securities are dependent upon the pool of mortgage loans underlying them. If the investors in these types of securities demand higher returns in recognition of these potential risks, the market value of any CMBS portfolio of the Company also could be adversely affected. Additionally, the Company has made equity investments in a partnership that will ultimately own interests in five grocery-anchored shopping centers and in a partnership which owns a suburban office building. These operations will be subject to many of the risks set forth above. Although the Company intends to monitor Year 2000 readiness, there can be no guarantee that all building systems will be Year 2000 compliant. The Company believes that the risks most likely to affect the Company adversely relate to the failure of third parties, including its borrowers and sources of capital, to achieve Year 2000 readiness. If its borrowers' systems fail, the result could be a delay in making payments to the Company or the complete business failure of such borrowers. The failure, although believed to be unlikely, of the Company's sources of capital to achieve Year 2000 readiness could result in the Company being unable to obtain the funds necessary to continue its normal business operations. Some of the risks associated with the Year 2000 issue may be mitigated through insurance maintained or purchased by the Company, its affiliates, its business partners, borrowers and vendors. However, the scope of insurance coverage in addressing these potential issues under existing policies has yet to be tested, and the economic impact on the solvency of the insurers has not been explored. Therefore, no assurance can be given that insurance coverage will be available or, if it is available, that it will be available on a cost-effective basis or that it will cover all or a significant portion of any potential loss. Business Continuity/Disaster Recovery Plan AMRESCO, INC. currently has a business continuity/disaster recovery plan that includes business resumption processes that do not rely on computer systems and the maintenance of hard copy files, where appropriate. The business continuity/disaster recovery plan is monitored and updated as potential Year 2000 readiness issues of AMRESCO, INC. and third parties are specifically identified. Due to the inability to predict all of the potential problems that may arise in connection with the Year 2000 issue, there can be no assurance that all contingencies will be adequately addressed by such plan. 20 21 FORWARD-LOOKING STATEMENTS Certain statements contained in this Form 10-Q are not based on historical facts and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends that forward-looking statements be subject to such Act and any similar state or federal laws. Forward-looking statements, which are based on various assumptions, include statements regarding the intent, belief or current expectations of the Company, its Manager, and their respective Trustees or directors and officers, and may be identified by reference to a future period or periods or by use of forward-looking terminology such as "intends," "may," "could," "will," "believe," "expect," "anticipate," "plan," or similar terms or variations of those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to risks, uncertainties and changes with respect to a variety of factors, including, but not limited to, changes in international, national, regional or local economic environments, changes in prevailing interest rates, credit and prepayment risks, basis and asset/liability risks, spread risk, event risk, conditions which may affect public securities and debt markets generally or the markets in which the Company operates, the Year 2000 issue, the availability of and costs associated with obtaining adequate and timely sources of liquidity, dependence on existing sources of funding, the size and liquidity of the secondary market for commercial mortgage-backed securities, geographic or product type concentrations of assets (temporary or otherwise), hedge mismatches with liabilities, other factors generally understood to affect the real estate acquisition, mortgage and leasing markets and securities investments, changes in federal income tax laws and regulations, and other risks described from time to time in the Company's SEC reports and filings, including its registration statement on Form S-11 and periodic reports on Form 10-Q, Form 8-K and Form 10-K. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is a party to various financial instruments which are subject to market risk. These instruments include mortgage loan investments, investments in commercial mortgage-backed securities ("CMBS") and certain of the Company's borrowing facilities. The Company is also a party to an interest rate cap agreement which it entered into in order to mitigate the market risk exposure associated with its credit facilities. The Company's financial instruments involve, to varying degrees, elements of interest rate risk. Additionally, the Company's investment portfolio, which is comprised of both financial instruments (mortgage loans and CMBS) and equity investments in real estate, is subject to real estate market risk. The Company is a party to certain other financial instruments, including trade receivables and payables and amounts due to affiliates which, due to their short-term nature, are not subject to market risk. For a discussion of market risk exposures, reference is made to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The market risk exposures described therein have not materially changed since December 31, 1998; accordingly, no additional discussion or analysis is provided in this Form 10-Q. 21 22 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On April 30, 1999, the Company (through a majority-owned partnership) acquired interests in three newly constructed, grocery-anchored shopping centers in the Dallas/Fort Worth, Texas area. The properties include an 86,516 square foot facility in Flower Mound, Texas, a 61,440 square foot facility in Fort Worth, Texas and an 85,611 square foot facility in Grapevine, Texas. Completion of construction of the grocery store anchor space and occupancy of such space occurred less than ninety days prior to the acquisition of the properties by the Company. Leases with the grocery store anchor tenant were executed effective as of the closing date. Acquisition costs for the properties totaled $30.7 million. The acquiring partnerships financed the acquisitions with $19.5 million of non-recourse loan proceeds from an unaffiliated third party and $11.4 million in equity contributions from the Company. Construction and leasing of additional side-store space is planned to take place in the future and is expected to require an additional $1.0 million equity investment by the Company. Effective as of May 4, 1999, the Company (and certain of its subsidiaries) entered into an Amended and Restated Interim Warehouse and Security Agreement (the "Amended Line of Credit") with Prudential Securities Credit Corporation ("PSCC"); the agreement amended the Company's existing line of credit with PSCC. The Amended Line of Credit provides for the following modifications: (1) a reduction in the size of the committed facility from $400 million to $300 million; (2) the elimination of the requirement that assets financed with proceeds from the facility must be securitizable; (3) a reduction in the amount of capital the Company must fund with respect to construction and rehabilitation loans before PSCC is required to begin advancing funds; (4) an extension of the maturity date from July 1, 2000 to November 3, 2000; and (5) the modification to, and addition of, certain sublimits on certain types of loans and assets. Under the Amended Line of Credit, borrowings bear interest at LIBOR plus 1.25% per annum to the extent such borrowings do not exceed the Company's Tangible Net Worth, as defined; borrowings in excess of the Company's Tangible Net Worth bear interest at LIBOR plus 3%. As compensation for amending the existing line of credit and extending the maturity date, the Company granted warrants to Prudential Securities Incorporated, an affiliate of PSCC, to purchase 250,002 common shares of beneficial interest at $9.83 per share. The exercise price represents the average closing market price of the Company's common shares for the ten-day period ending on May 3, 1999. The warrants were issued in lieu of a commitment fee or other cash compensation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits and Exhibit Index Exhibit No. 4.1 Rights Agreement, dated as of February 25, 1999, between the Company and The Bank of New York, as Rights Agent, which includes: as Exhibit A thereto, the Form of Statement of Designation of Series A Junior Participating Preferred Shares, par value $.01 per share, of the Company; as Exhibit B thereto, the Form of Right Certificate; and as Exhibit C thereto, the Summary of Rights to Purchase Preferred Shares (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated February 25, 1999, which exhibit is incorporated herein by reference). 10.1 Amended and Restated Interim Warehouse and Security Agreement dated as of May 4, 1999, by and among Prudential Securities Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II, Inc., ACT Equities, Inc. and ACT Holdings, Inc. 10.2 Warrant Agreement dated as of May 4, 1999 between AMRESCO Capital Trust and Prudential Securities Incorporated. 27 Financial Data Schedule. 22 23 (b) Reports on Form 8-K. The following reports on Form 8-K were filed with respect to events occurring during the quarterly period for which this report is filed: (i) Form 8-K dated February 25, 1999 and filed with the Commission on March 4, 1999, reporting the adoption of a Shareholder Rights Agreement under Item 5 of such form. 23 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMRESCO CAPITAL TRUST Registrant Date: May 13, 1999 By: /s/Thomas J. Andrus ------------------------ Thomas J. Andrus Executive Vice President and Chief Financial Officer 24 25 INDEX TO EXHIBITS
EXHIBIT No. DESCRIPTION ------- ----------- 4.1 Rights Agreement, dated as of February 25, 1999, between the Company and The Bank of New York, as Rights Agent, which includes: as Exhibit A thereto, the Form of Statement of Designation of Series A Junior Participating Preferred Shares, par value $.01 per share, of the Company; as Exhibit B thereto, the Form of Right Certificate; and as Exhibit C thereto, the Summary of Rights to Purchase Preferred Shares (filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated February 25, 1999, which exhibit is incorporated herein by reference). 10.1 Amended and Restated Interim Warehouse and Security Agreement dated as of May 4, 1999, by and among Prudential Securities Credit Corporation and AMRESCO Capital Trust, AMREIT I, Inc., AMREIT II, Inc., ACT Equities, Inc. and ACT Holdings, Inc. 10.2 Warrant Agreement dated as of May 4, 1999 between AMRESCO Capital Trust and Prudential Securities Incorporated. 27 Financial Data Schedule.
EX-10.1 2 AMENDED AND RESTATED INTERIM WAREHOUSE MAY 4,1999 1 EXHIBIT 10.1 AMENDED AND RESTATED INTERIM WAREHOUSE AND SECURITY AGREEMENT BY AND AMONG PRUDENTIAL SECURITIES CREDIT CORP. AS THE LENDER AND AMRESCO CAPITAL TRUST AND AMREIT I, INC. AND AMREIT II, INC. AND ACT EQUITIES, INC. AND ACT HOLDINGS, INC. AS, INDIVIDUALLY AND COLLECTIVELY, THE BORROWER DATED AS OF MAY 4, 1999 2
TABLE OF CONTENTS SECTION PAGE Section I. The Loan............................................................................. 1 Section II. Loan Files and Custodian............................................................. 9 Section III. Representations, Warranties and Covenants............................................ 10 Section IV. Mandatory Partial Prepayment of Loan................................................. 18 Section V. Release of Loan Files Following Payment of Loan...................................... 20 Section VI. Servicing............................................................................ 21 Section VII. No Oral Modifications; Successors and Assigns; Assignment of Collateral.............. 21 Section VIII. Reports.............................................................................. 21 Section IX. Events of Default.................................................................... 24 Section X. Remedies Upon Default................................................................ 26 Section XI. Pre-Existing Conditions.............................................................. 27 Section XII. Indemnification...................................................................... 27 Section XIII. Periodic Due Diligence Review........................................................ 28 Section XIV. Power of Attorney.................................................................... 29 Section XV. Choice of Law; Agreement Constitutes Security Agreement.............................. 29 Section XVI. Lender May Act Through Affiliates.................................................... 29 Section XVII. Notices.............................................................................. 29 Section XVIII. Severability......................................................................... 31 Section XIX. Counterparts......................................................................... 31 Section XX. Additional Borrowers................................................................. 31 Section XXI. No Exclusivity....................................................................... 31 Section XXII. Joint and Several Liability.......................................................... 32 Section XXIII. Consent to Jurisdiction and Service of Process....................................... 32 Section XXIV. Waiver of Jury Trial................................................................. 32 Appendix I Certain Definitions Appendix II Representations And Warranties Regarding All Pledged Eligible Assets Schedule A Approved Assets
i 3 Schedule B Disclosure Of Proceedings Pending Against The Borrower, Events Causing Material Adverse Changes And Changes To The Management Agreement Exhibit A Form Of Secured Note Exhibit B Form Of Legal Opinion Exhibit C Form Of Underwriting Transmittal Exhibit D Form Of Funding Notice Exhibit E Form Of Commercial Loan/Asset Schedule Exhibit F Form Of Warrant Agreement
ii 4 AMENDED AND RESTATED INTERIM WAREHOUSE AND SECURITY AGREEMENT THIS AMENDED AND RESTATED INTERIM WAREHOUSE AND SECURITY AGREEMENT dated as of May 4, 1999 (as amended or otherwise modified in writing by the parties hereto from time to time, this "Agreement") is by and among PRUDENTIAL SECURITIES CREDIT CORP., a Delaware corporation, having an office at 1220 N. Market Street, Wilmington, Delaware 19801 (the "Lender") and AMRESCO CAPITAL TRUST, a Texas real estate investment trust ("ACT"), AMREIT I, INC., a Delaware corporation ("AMREIT I") AMREIT II, INC., a Nevada corporation ("AMREIT II"), ACT EQUITIES, INC., a Georgia corporation ("EQUITIES"), and ACT HOLDINGS, INC., a Georgia corporation ("HOLDINGS"),each having its principal office at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201 (individually and collectively, the "Borrower"). WHEREAS, the Lender and the Borrower entered that certain Interim Warehouse and Security Agreement dated as of July 1, 1998, by and between the Lender and the Borrower (the "Original Agreement") and now wish to amend and restate the Original Agreement herein in full; and WHEREAS, the Lender intends to lend and the Borrower intends to borrow up to $300,000,000 to provide interim warehouse financing of Eligible Assets (as defined herein). Capitalized terms used in this Agreement and not otherwise specifically defined herein are defined in Appendix I hereto. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereto hereby agree as follows: Section I. The Loan. Subject to the terms of this Agreement: 1. Maximum Loan Amount. Subject to the terms and conditions set forth in this Agreement, the Lender agrees to lend to the Borrower up to a maximum of $300,000,000 (the "Maximum Loan Amount") under this Agreement (such borrowing, the "Loan") to be made in one or more advances (each, an "Advance"), subject to the following limitations: (a) the "Mezzanine Loan/Equity Investment Sub-Limit" -- the aggregate outstanding Advances made in connection with one or more Mezzanine Loans/Equity Investments shall not exceed $40,000,000 at any time (excluding Land Development Loans and Mezzanine Construction Loans included in Section I(1)(C) below); (b) the "Construction Loan Sub-Limit" -- the aggregate outstanding Advances made in connection with one or more Construction Loans shall not exceed $115,000,000 at any time; and (c) the "Less Than 70% Pre-Leased Sub-Limit" -- of the $115,000,000 Construction Loan Sub-Limit, no more than $50,000,000 in aggregate outstanding Advances at 1 5 any time may be for (i) construction projects that are less than 70% leased, measured on a project by project basis, at the time of the Initial Advance for each such construction project (a "Less Than 70% Pre-Leased Project") and (ii) outstanding Advances (after adjustment pursuant to Sections I(3)(e) and (f)) for Land Development Loans and Mezzanine Construction Loans. If at any time a particular construction project subject to the Less Than 70% Pre-Leased Sub-Limit becomes greater than or equal to 70% leased (a "Greater Than or Equal to 70% Pre-Leased Project"), then (i) the Borrower may request in writing that the Lender no longer consider the aggregate outstanding Advances made with respect to such construction project as part of the $50,000,000 Less Than 70% Pre-Leased Sub-Limit and only consider such Advances as part of the $115,000,000 Construction Loan Sub-Limit and (ii) the Lender shall have the right, in its sole discretion, to approve or disapprove the Borrower's request. In determining whether a construction project is a Less Than 70% Pre-Leased Project or a Greater Than or Equal to 70% Pre-Leased Project, a lease must meet the following criteria: the tenant must be a bona fide, credit-worthy party unaffiliated with the project developer; the lease must be a bona fide lease on fair market value terms and conditions, bearing the duly authorized signatures of landlord and tenant; the lease must have a minimum initial term of not less than five years; and the lease shall not be subject to any termination rights or conditions subsequent, other than customary conditions relating to timely completion of the project and tenant improvement work and other customary termination rights such as those for landlord's default. The Lender, in its sole discretion, may (but shall not be required to) consider exceptions to such lease requirements based on other specific property types. Once the construction project is complete and the tenants take possession of leased space in the project pursuant to a fully executed lease which satisfies the criteria for leases set forth above in this Section I(1)(c), the Borrower may also request the Lender to recharacterize the aggregate outstanding Advances relating to such Construction Loan as no longer part of the Construction Loan Sub-Limit. The Lender, in its sole discretion, may (but shall not be required to) consider such request. 2. Eligible Assets. The Borrower agrees that the Loan shall be used to warehouse certain commercial mortgage loans and commercial real estate assets, including, but not limited to, Mortgage Loans, Construction Loans, Mezzanine Loans/Equity Investments, Bridge Loans, Rehabilitation Loans, Acquisition Loans and Participating Loans (all of the foregoing described loans and other assets, collectively, "Eligible Assets"). To qualify as an Eligible Asset, the Borrower shall not commit to finance more than 100% of the Budgeted Costs or 100% of the Stabilized Value of such Eligible Asset. A schedule of all currently approved assets (the "Approved Assets") and their respective asset classifications, sub-limit categories and maximum Advance levels, as approved by Lender, is set forth on Schedule A attached hereto and made a part hereof. In accordance with the procedures provided herein and subject to the terms and conditions of this Agreement, the Borrower is entitled to request Advances on Approved Assets up to the maximum Advance amount set forth in Schedule A for such Approved Asset, and, in the event of such request, Lender is obligated to fund up to such maximum Advance amounts in accordance with the terms hereof, including, without limitation, the Borrower's performance of all conditions precedent to the Lender's Obligation to make specific Advances. Land Development Loans and Mezzanine Construction Loans shall not be deemed Eligible Assets except those described on Schedule A. Any outstanding Advances for either Land Development Loans or Mezzanine Construction Loans made pursuant to the Original Agreement may remain outstanding pursuant to this Agreement and, subject to the terms and conditions of this Agreement, the Lender will advance up to the maximum Advance amount related thereto as 2 6 set forth on Schedule A so long as the conditions set forth in Sections I(3)(e) and (f) are satisfied and no events of default exist with respect thereto. All Eligible Assets must: (x) be originated in accordance with prudent underwriting standards and the Borrower's approved due diligence standards, closing procedures manual (the form and content of which have been provided in advance to the Lender and approved in advance by the Lender in writing, both as more particularly set forth in Section I(3)(a)(vi) below) (collectively, the "Borrower's Guidelines") and related documents or otherwise have been approved by the Lender in writing and (y) have an Approved Exit Strategy prior to the Initial Advance for such Eligible Asset. The Eligible Assets to be pledged to the Lender under this Agreement shall be identified by the Borrower to the Lender in writing from time to time, and at any time upon the Lender's request. Any Eligible Asset for which an Advance is made under this Agreement is hereinafter referred to as a "Pledged Eligible Asset." 3. Advances. (a) Subject to the terms and conditions of this Agreement, each Advance shall be made, pursuant to the terms of this Agreement on a date prior to the Maturity Date referred to below (each such date, a "Funding Date"); provided that: (i) not later than (A) five Business Days prior to the proposed Funding Date for an Initial Advance, the Borrower shall deliver to the Lender a written underwriting transmittal in the form of Exhibit C hereto previously approved by the Lender and used by the Borrower for the Approved Assets (an "Underwriting Transmittal") for each Eligible Asset proposed to be pledged in connection with such Initial Advance, and (B) two Business Days prior to the proposed Funding Date for an Initial Advance, the Borrower shall deliver to the Lender (i) a written notice (a "Funding Notice") in the form of Exhibit D hereto and (ii) a schedule, via facsimile, in the form of Exhibit E hereto, detailing certain specified characteristics of the Eligible Assets proposed to be pledged in connection with such Initial Advance (each such schedule, a "Commercial Loan/Asset Schedule"); (ii) the representations, warranties and covenants of the Borrower set forth in this Agreement shall be true and correct on and as of each such Funding Date as if made on and as of such date; (iii) no Event of Default shall have occurred and be continuing or would exist after the making of the Advance on such Funding Date; (iv) the Lender shall have received in connection with each Initial Advance, by no later than 12:00 noon (New York City time) on the related Funding Date, a certificate from the Custodian referred to below to the effect that it has reviewed the loan files relating to the Eligible Assets being pledged in connection with the Advance being made on such Funding Date and has found no material deficiencies in such loan files (the "Custodian's Certification"); provided, however, if the Funding Date is the same date as the closing of the underlying loan, then the Lender shall have received by no later than one Business Day prior to the Funding Date a certificate from the escrow officer of a title company approved by the Lender (the "Escrow Officer"), engaged by the 3 7 Borrower and the underlying mortgagor/borrower in connection with such Pledged Eligible Asset which verifies that the Escrow Officer has received the loan files relating to such Eligible Asset to be pledged in connection with the Advance and that the Escrow Officer will forward such loan files directly to the Custodian no later than the first Business Day following the Funding Date; (v) for Eligible Assets, the Borrower shall have delivered or caused to be delivered to the Custodian or the Escrow Officer all required documents with respect to the Eligible Assets being pledged to the Lender under this Agreement on such Funding Date; (vi) prior to the first Advance after the execution of this Agreement and under this Agreement relating to a Pledged Eligible Asset: (A) the Lender has received a complete and up-to-date copy of the Borrower's Guidelines and all other relevant handbooks and manuals, as the Lender may reasonably request; (B) the Lender has approved the Borrower's Guidelines and related documents; and (C) prior to each Advance, the Lender shall have approved in writing all changes or modifications thereto, if any, that, in the reasonable judgment of the Lender, may result in a material relaxation of the standards or requirements contained in the Borrower's Guidelines and/or related documentation; (vii) prior to the first Advance under this Agreement relating to a Pledged Eligible Asset, the Lender shall have received a current Secretary's Certificate of each Borrower certifying as to the incumbency of the officers of the Borrower, with copies of (A) any amendments to ACT's Declaration of Trust since July 1, 1998, as to AMREIT I and AMREIT II any amendments to each such Borrower's respective Articles of Incorporation and certificate of incorporation since July 1, 1998, and, as to EQUITIES and HOLDINGS, copies of each such Borrower's respective Articles of Incorporation and certificate of incorporation; (B) any amendments to ACT's, AMREIT I's and AMREIT II's by-laws since July 1, 1998 and copies of EQUITIES' and HOLDINGS' by-laws; and (C) a good standing certificate for each of the Borrowers (other than ACT) dated as of a recent date; (viii) with respect to each Eligible Asset, the Lender shall have given its prior approval to allow an Advance with respect to such Eligible Asset, subject to all of the terms and conditions of this Agreement having been fully and unconditionally satisfied; (ix) with respect to any Advance relating to Pledged Eligible Assets after the Initial Advance, the Lender shall have received (A) an additional Funding Notice at least two Business Days prior to the date requested for funding such Advance, and (B) the Borrower's representation that no change has occurred with respect to any material fact contained in the Underwriting Transmittal relating to the Pledged Eligible Asset; (x) to the extent described in Section IV(C) of this Agreement, no notice described in Section IV(C) shall have been received by the Lender; 4 8 (xi) prior to each Initial Advance with respect to each Pledged Eligible Asset, if in the Lender's reasonable discretion, the Lender requires the Borrower to enter into an Interest Rate Protection Agreement as provided herein, the Lender shall have received fully-executed copies of such Interest Rate Protection Agreements relating to such Pledged Eligible Asset (which Interest Rate Protection Agreement must be transferable as set forth more particularly in Section IV(E) below), each certified by an officer of Borrower as a true, correct and complete copy of the original; (xii) (A) contemporaneously with the execution of this Agreement, with respect to each Pledged Eligible Asset (i) that was originated by a Person other than the Borrower, (ii) that was purchased by the Borrower prior to the execution of this Agreement, and (iii) for which the Lender has made one or more Advances prior to the execution of this Agreement, the Borrower shall provide evidence sufficient to satisfy the Lender that such Pledged Eligible Asset was acquired in a true and legal sale, including, without limitation, an opinion, in form and substance and from legal counsel to the Borrower (which may be employed by the Borrower) acceptable to the Lender in its sole discretion, that such Pledged Eligible Asset was acquired in a true and legal sale; (B) prior to each Initial Advance after the execution of this Agreement and under this Agreement with respect to each Pledged Eligible Asset (i) that was originated by a Person other than the Borrower and (ii) that was purchased by the Borrower prior to the execution of this Agreement, the Lender may, in its sole discretion, require the Borrower to provide evidence sufficient to satisfy the Lender that such Pledged Eligible Asset was acquired in a true and legal sale, including, without limitation, an opinion, in form and substance and from legal counsel to the Borrower (which may be employed by the Borrower) acceptable to the Lender in its sole discretion, that such Pledged Eligible Asset was acquired in a true and legal sale; and (C) prior to each Initial Advance with respect to each Pledged Eligible Asset (i) that was originated by a Person other than the Borrower and (ii) that was purchased by the Borrower after the execution of this Agreement, the Lender may, in its sole discretion, require the Borrower to provide evidence sufficient to satisfy the Lender that such Pledged Eligible Asset was acquired in a true and legal sale, including, without limitation, an opinion, in form and substance and from outside legal counsel to the Borrower acceptable to the Lender in its sole discretion, that such Eligible Asset was acquired in a true and legal sale; (xiii) prior to each Advance with respect to each Pledged Eligible Asset, there shall be no default, breach, violation or event of acceleration existing under any Pledged Eligible Asset or the related documents to any Pledged Eligible Asset and no event known to the Borrower after due inquiry which, with the passage of time or with notice and the expiration of any grace period or cure period, would constitute a default, breach, violation or event of acceleration; 5 9 (xiv) prior to making each Advance and after giving effect to such Advance, the Borrower shall be in compliance with the sub-limits set forth in Sections I(1)(a), (b) and (c); (xv) prior to the first Advance after the execution of this Agreement and under this Agreement relating to a Pledged Eligible Asset, one or more legal opinion(s) from legal counsel (which may be in house counsel) to the Borrower in the form of Exhibit B attached hereto, an executed copy of the Secured Note in the form of Exhibit A attached hereto and an executed copy of the Warrant Agreement in the form of Exhibit F attached hereto; (xvi) prior to the Initial Advance as to each Pledged Eligible Asset, the Initial Advance and all future Advances for such Pledged Eligible Asset, as approved by the Lender, will not cause the Borrower to exceed the sublimits set forth in Section I(1) of this Agreement; (xvii) prior to the Initial Advance as to each Pledged Eligible Asset, if more than 30 days shall have passed since the Borrower submitted the Underwriting Transmittal, the Lender shall have received a certificate of an officer of the Borrower certifying that no Material Adverse Change has occurred between the submission of the Underwriting Transmittal and the Funding Date; and (xviii) for any equity interest comprising all or any portion of any Pledged Eligible Asset, including, without limitation, Mezzanine Loan/Equity Investments, the Borrower shall grant the Lender a security interest in the Borrower's equity interest comprising such Pledged Eligible Asset and shall take all necessary and advisable steps to perfect such interest, including, without limitation, if certificated, delivery of any certificates evidencing the Borrower's equity interest, or, if uncertificated, the recording with the appropriate state authorities, a Form UCC-1 financing statement, and shall provide the Lender with copies of any such other documents related to such equity investment and the entity in which the Owner is investing. (b) The Lender shall evaluate all Eligible Assets on an individual basis. The Lender agrees to approve or disapprove any Eligible Asset within five Business Days of receipt by the Lender of the Underwriting Transmittal and the information and documents required in this Section I(3); provided, however, that the Lender shall have no obligation to make the first Advance after the execution of this Agreement and under this Agreement in connection with any Funding Notice until the Lender, Custodian or Escrow Officer, as applicable, shall also have received the documents required in Sections I(3)(a)(i), (iv), (v), (vi) and (vii). In the event the Lender does not approve in writing such Eligible Asset within five Business Days, the Lender shall be deemed to have elected not to finance such Eligible Asset. (c) The Lender shall not be obligated to make an Advance as to any particular Pledged Eligible Asset more frequently than once in any calendar month. (d) The "Maximum Advance Amount" for each Eligible Asset approved after the date of this Agreement shall be the lesser of: 6 10 (i) 76% of the amount Borrower has executed a written commitment to lend to the underlying mortgagor/borrower or to invest as equity for such Pledged Eligible Asset; (ii) 85% of the LTV for such Pledged Eligible Asset; or (iii) 95% of the LTC for such Pledged Eligible Asset. (e) The "Maximum Advance Amount" with respect to each Mezzanine Construction Loan and each Land Development Loan outstanding as of the date of this Agreement shall be 76% and 50%, respectively, of the amount Borrower has executed a written commitment to lend to the underlying mortgagor/borrower with respect to such Mezzanine Construction Loan or Land Development Loan. In connection with this modification in the Maximum Advance Amount, with respect to each Mezzanine Construction Loan and each Land Development Loan, the Borrower shall repay the Lender on or before the date of this Agreement the amount by which the aggregate outstanding Advances, together with any interest accrued and unpaid thereon, exceeds the Maximum Advance Amount that would have been made under this Agreement (i.e., 76% and 50% of the Budgeted Costs for each Mezzanine Construction Loan and Land Development Loan, respectively). (f) Following the adjustment of the aggregate outstanding Advances for Land Development Loans and Mezzanine Construction Loans pursuant to the preceding Section I(3)(e), the aggregate amount of Advances for Mezzanine Construction Loans, together with the aggregate amount of Advances made for Less Than 70% Pre-Leased Projects shall at all times be less than $50,000,000. If at any time the aggregate amount of such Advances is greater than $50,000,000, the Borrower shall promptly repay the Lender the amount by which the aggregate amount of such Advances exceeds $50,000,000. (g) The Lender shall not be obligated to make any Advance with respect to any Eligible Asset prior to the Borrower and/or the underlying mortgagor/borrower having funded 90% of the Haircut for such Pledged Eligible Asset. Once the Borrower has funded 90% of the Haircut for such Pledged Eligible Asset, then Lender shall loan the Borrower 90% of the Maximum Advance Amount for such Pledged Eligible Asset. The Lender shall then fund, on a pro rata basis, the remaining 10% of the approved Maximum Advance Amount as the Borrower funds its remaining 10% of the Haircut. 4. Interest; Facilities Fee. (a) The Loan shall accrue interest daily on its outstanding principal amount, with interest calculated for the actual number of days elapsed based on a 360-day year. The interest rate (the "Interest Rate") on the Loan shall be (except as otherwise provided in Section X(D) hereof) the Applicable Interest Rate Spread plus LIBOR as determined by the Lender as of 11:00 a.m. New York time on the Eurodollar Business Day immediately preceding each of (i) the related Funding Date and (ii) the first day of each succeeding calendar month. The Lender shall send the Borrower at the beginning of each month a written statement indicating the amount of interest accrued during the immediately preceding month. Interest which accrues during each calendar month shall be payable on the third Business Day following 7 11 the date the Lender sends such written notice to the Borrower, with any outstanding interest due and payable in its entirety on the Maturity Date, or if earlier, the date of termination of this Agreement. "LIBOR" means (i) the rate (expressed as a percentage per annum) for a one-month deposit in U.S. dollars that appears on Telerate Page 3750 as of 11:00 a.m., New York City time on the applicable Eurodollar Business Day for such period or (ii) if such rate does not appear on Telerate Page 3750 as of 11:00 a.m. New York City time, on the applicable Eurodollar Business Day, the rate (expressed as a percentage per annum) for a one-month deposit in U.S. dollars as reported by Morgan Guaranty Trust Company of New York or its successor (or such other prime bank in the London Interbank market as the Lender shall designate). "Eurodollar Business Day" means a Business Day in New York on which commercial banks are open for international business (including dealings in deposits in U.S. dollars) in London. (b) The Applicable Interest Rate Spread for the outstanding principal amount of this Loan up to the Borrower's Tangible Net Worth (as set forth in the statement provided pursuant to Section VIII(B)(12)) shall be 125 basis points. For any outstanding principal amount equal to or in excess of the Borrower's Tangible Net Worth, the Applicable Interest Rate Spread shall be 300 basis points. The parties hereto agree that the aforementioned increase in the Applicable Interest Rate reflects the increased risk associated with lending to the Borrower and is not intended as a penalty against the Borrower. (c) Borrower shall compensate the Lender for all losses, expenses and liabilities sustained by the Lender in connection with the liquidation or re-employment of such funds and losses relating to hedging arrangements established by the Lender with respect to the Pledged Eligible Assets which the Lender may sustain: (i) if for any reason an Advance for Pledged Eligible Assets approved by the Lender is not made on a date specified therefor in a Funding Notice and the Borrower has met all conditions to borrowing, (ii) if any prepayment or other principal payment occurs on a date other than the first day of a month or on such other date as may be required hereunder, (iii) if any prepayment of the Loans is not made on any date specified in a notice of prepayment given by the Borrower, or (iv) as a consequence of any other default by the Borrower in the repayment of the Loan when required by the terms of this Agreement. 5. Maturity and Prepayment. (a) The Loan evidenced hereby shall mature on the Maturity Date, and all amounts outstanding under this Agreement, including, without limitation, all Advances made with respect to any Pledged Eligible Asset and any accrued and unpaid interest thereon, shall be due and payable on the Maturity Date, and in the event of non-payment in full on the Maturity Date, the Lender may exercise all rights and remedies available to it as the holder of a first perfected security interest under the Uniform Commercial Code of the State of New York (the "New York UCC"). (b) The Loan is prepayable without premium or penalty, in whole or in part, at any time prior to the date that is one year after the date of this Agreement (the "One-Year Anniversary"); provided, however, that in connection with any prepayment of the Loan in part (other than any prepayment pursuant to Section IV(A) or (B) or any prepayment resulting from a payment in full of the Pledged Eligible Asset by the underlying mortgagor/borrower or pursuant 8 12 to the equity investment documentation on existing equity investments, in which case such Pledged Eligible Asset (if prepaid in full) shall be released by the Lender upon payment in full of the related Advance), Pledged Eligible Assets may not be removed from this Loan if the Lender determines in its sole discretion that a Collateral Deficiency Situation would then exist unless the Borrower fully and unconditionally cures such Collateral Deficiency Situation in accordance with the provisions of Section IV(C). Any prepayment by the Borrower in whole or in part during the period between the One-Year Anniversary and the Maturity Date (other than any prepayment pursuant to Section IV(A), (B) or (C) or any prepayment resulting from a payment in full of the Pledged Eligible Asset by the underlying mortgagor/borrower or pursuant to the equity investment documentation on existing equity investments) requires the Borrower to pay 120% of the aggregate outstanding Advances made by the Lender to the Borrower with respect to the Pledged Eligible Asset being removed from this Loan. If the Borrower intends to prepay the Loan in whole or in substantial part from a source other than the proceeds of a Securitization, payment in full by the underlying mortgagor/borrower, or as a result of an Exit Strategy, the Borrower shall provide two Business Days' written notice to the Lender. The Borrower shall hold any principal repayments received from any underlying mortgagor/borrower in trust for the Lender and shall pay directly to the Lender in an amount that equals the amount of the Advances made by Lender for the Subject Pledged Eligible Asset from the principal repayment; provided, however, at the Borrower's written election and with the written approval of the Lender in its sole discretion, any principal repayments received by the Borrower may be applied against any unfunded Advance Amount applicable to a Pledged Eligible Asset which the Lender is otherwise obligated to advance to the Borrower in accordance with this Agreement. Any written notice by the Borrower with respect to such scheduled amortization payments shall be irrevocable and shall specify which Pledged Eligible Asset such prepayment is being applied towards. Any amounts prepaid or repaid under this Agreement prior to the One-Year Anniversary may be re-borrowed, subject to the terms and conditions of this Agreement. Any amounts prepaid or repaid under this Agreement any time during the period between the One-Year Anniversary of this Agreement and the Maturity Date may not be re-borrowed. (c) If any payment under this Agreement shall be due on a day that is not a Business Day, such payment shall be made on the succeeding Business Day, and such extension of time shall be included in the computation of payment of interest under this Agreement or under the Secured Note. 6. Break-Up Fee. Pursuant to the terms and conditions of the Securitization Agreement, under certain circumstances PSI may be entitled to a break-up fee with respect to the disposition of Pledged Eligible Assets from securitizations involving such assets, equal to 25 basis points multiplied by the dollar amount of aggregate outstanding Advances as to such Pledged Eligible Assets. 7. Secured Note. The Loan shall be evidenced by the secured promissory note of the Borrower in the form attached hereto as Exhibit A (the "Secured Note"). Section II. Loan Files and Custodian. The Borrower shall deliver to Bank One, Texas, N.A., as custodian on behalf of the Lender, or such other custodian that may be mutually agreeable to the Lender and the Borrower from time to time (the "Custodian"), with respect to each Pledged Eligible Asset, the documents and instruments listed in Section 2 of that 9 13 certain Amended and Restated Custodial Agreement, dated as of May 4, 1999 (as amended, supplemented and modified from time to time, the "Custodial Agreement"), among the Lender, the Borrower and Custodian. The Pledged Eligible Assets, the documents and instruments evidencing and relating to the Pledged Eligible Assets (collectively, the "Commercial Loan/Asset Files"), the certificates evidencing the Borrower's equity interest in any Mezzanine Loan/Equity Investment or, if uncertificated, the document granting the Lender a security interest in such equity investment (if the Lender requires such a document outside of this Agreement) and any documents recorded with the appropriate state agencies necessary and advisable to perfect such security interest, the collateral securing such Pledged Eligible Assets, together with any proceeds thereof and any rights the Borrower may have under any Interest Rate Protection Agreements, are hereinafter referred to as the "Collateral". The Borrower hereby pledges all of its right, title and interest in and to the Collateral to the Lender to secure the repayment of principal of and interest on the Loan and all other amounts owing by the Borrower to the Lender under this Agreement or under any other agreement or arrangement now existing or hereinafter entered into among such parties, including, without limitation, the Custodial Agreement, the Warrant Agreement and the Securitization Agreement (collectively, the "Secured Obligations"). Section III. Representations, Warranties and Covenants. A. The Borrower represents and warrants to the Lender that, except as otherwise disclosed and approved by the Lender: 1. Each Borrower has been duly organized and is validly existing as (i) with respect to ACT, a real estate investment trust duly organized under the laws of the State of Texas, (ii) with respect to AMREIT I, a corporation duly organized and in good standing under the laws of the State of Delaware, (iii) with respect to AMREIT II, a corporation duly organized and in good standing under the laws of the State of Nevada, (iv) with respect to EQUITIES, a corporation duly organized and in good standing under the laws of the State of Georgia and (v) with respect to HOLDINGS, a corporation duly organized and in good standing under the laws of the State of Georgia. 2. Each Borrower is duly licensed or is otherwise qualified in each state in which it transacts business to the extent required under applicable law, except where the failure to take such action would not (either individually or in the aggregate) have a Material Adverse Effect and is not a default of such state's applicable laws, rules and regulations. Each Borrower has the requisite power and authority and legal right to own and grant a lien on all of its right, title and interest in and to the Collateral, and to execute and deliver, engage in the transactions contemplated by, and perform and observe the terms and conditions of, this Agreement, the Custodial Agreement, the Warrant Agreement, the Securitization Agreement and the Secured Note. 3. At all times after the Custodian has received a Pledged Eligible Asset from the Borrower and until payment in full of the Loan, the Borrower will not knowingly or intentionally commit any act in violation of applicable laws, or regulations promulgated with respect thereto. 10 14 4. Each Borrower is solvent and no condition exists under any mortgage, borrowing agreement or other instrument or agreement pertaining to indebtedness for borrowed money to which any Borrower is a party which (either individually or in the aggregate) has caused, or would be reasonably likely to cause, a Material Adverse Effect, and the execution, delivery and performance by the Borrower under this Agreement, the Secured Note, the Warrant Agreement, the Securitization Agreement and the Custodial Agreement and the consummation of the transactions contemplated hereby and thereby do not and will not conflict with any term or provision of the declaration of trust or certificate of incorporation, as applicable, or by-laws of the Borrower or any law, rule, regulation, order, judgment, writ, injunction or decree applicable to the respective Borrower of any court, regulatory body, administrative agency or governmental body having jurisdiction over such Borrower and will not result in any violation of any such mortgage, instrument or agreement. 5. All financial statements or certificates of any Borrower, any Affiliate of any Borrower or any of its officers furnished to the Lender are true, correct and complete in all material respects and do not omit to disclose any material liabilities or other facts relevant to the Borrowers' or such Affiliates' condition. All such financial statements (other than any financial statements prepared to show the Borrower's taxable income) have been prepared in accordance with GAAP; provided, however, that interim financial statements shall not be required to and may not include footnotes. 6. No consent, approval, authorization or order of, registration or filing with, or notice to any governmental authority or court is required under applicable law in connection with the execution, delivery and performance by any Borrower of this Agreement, the Secured Note, the Warrant Agreement, the Securitization Agreement or the Custodial Agreement and the consummation of the transactions contemplated thereby. 7. There is no action, proceeding or investigation pending with respect to which any Borrower has received service of process or, to the best of any Borrower's knowledge, threatened against it before any court, administrative agency or other tribunal (A) asserting the invalidity of this Agreement, the Secured Note, the Warrant Agreement, the Securitization Agreement or the Custodial Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement, the Secured Note, the Warrant Agreement, the Securitization Agreement or the Custodial Agreement, or (C) which if determined against any Borrower would materially and adversely affect the validity or collectability of the Pledged Eligible Assets or the performance by the Borrower of its obligations under, or the validity or enforceability of, this Agreement, the Secured Note, the Warrant Agreement, the Securitization Agreement or the Custodial Agreement. 8. Except as has been disclosed to the Lender in Schedule B attached hereto and approved by the Lender prior to the first Advance after the execution of this Agreement, and after the Initial Advance, as disclosed to the Lender from time to time (and subject to the Lender's rights hereunder to declare a Collateral Deficiency Situation), there is no action, proceeding or investigation pending with respect to which any Borrower has received service of process, or to the best of the Borrower's knowledge, threatened against it before any court, administrative agency or other tribunal challenging the enforceability of any material 11 15 mortgage loan document relating to a Pledged Eligible Asset or raising a defense to the exercise of any remedies under such mortgage loan documents. 9. Except as has been disclosed to the Lender in Schedule B attached hereto and approved by the Lender, no event has occurred which has caused a Material Adverse Effect since the date set forth in the financial statements supplied to the Lender. 10. This Agreement, the Secured Note, the Warrant Agreement, the Securitization Agreement and the Custodial Agreement have been duly authorized, executed and delivered by each Borrower that is a party to such agreement, all requisite trust or corporate action, as applicable, having been taken, and each is valid, binding and enforceable against the respective Borrower in accordance with its terms except as such enforcement may be affected by bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance, redemption or other similar laws affecting the enforcement of creditor's rights generally, or by general principles of equity. 11. Except as has been disclosed to Lender in Schedule B attached hereto, the Management Agreement has not been amended, superseded, or otherwise modified. 12. No Event of Default under the Original Agreement, this Agreement, the Secured Note, the Securitization Agreement or the Custodial Agreement has occurred or is continuing to occur. 13. As of the date of this Agreement and immediately after giving effect to each Advance, the Borrower is and will be able to pay its debts as they mature and does not and will not have insufficient capital to engage in the business in which it is engaged and proposes to engage. The Borrower does not intend to incur, or believe that it has incurred, debts beyond its ability to pay such debts as they mature. The Borrower is not contemplating the commencement of insolvency, bankruptcy, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, conservator, trustee or similar official in respect of the Borrower or any of its assets. The Borrower is not transferring any Pledged Eligible Assets with any intent to hinder, delay or defraud any of its creditors. 14. Solely as a result of the transactions contemplated in this Agreement, the Lender is not required to be licensed, registered or approved or to obtain permits or otherwise qualify (i) to do business in any state in which it currently is not so required or (ii) under any state consumer lending, fair debt collection or other applicable state statute or regulation; or prior to the Borrower subsequently entering such a transaction, the Borrower shall obtain the necessary license, registration, approval or permit. 15. Each Eligible Asset originated by an originator other than the Borrower has been conveyed to the Borrower pursuant to a true and legal sale and, prior to any Initial Advance with respect to such Eligible Asset, the Borrower has delivered to the Lender the opinion of legal counsel required by the Lender, if any, pursuant to Section I(3)(a)(xii)(A), (B) or (C). 16. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Borrower to the Lender in connection with 12 16 the negotiation, preparation or delivery of this Agreement, the Warrant Agreement, the Custodial Agreement, the Secured Note, and the Securitization Agreement or included herein or therein or delivered pursuant hereto or thereto (or to the extent prepared or furnished by an underlying mortgagor/borrower or parties other than the Borrower or its Affiliates, to the best of Borrower's knowledge), do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements herein or therein not misleading. All written information furnished by or on behalf of the Borrower to the Lender in connection with this Agreement, the Warrant Agreement, the Custodial Agreement, the Secured Note, and the Securitization Agreement and the transactions contemplated hereby and thereby will be true, correct and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to the Borrower that, after due inquiry, could reasonably be expected to have a Material Adverse Effect that has not been disclosed in this Agreement, the Warrant Agreement, the Custodial Agreement, the Secured Note or the Securitization Agreement or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Lender for use in connection with the transactions contemplated hereby or thereby. 17. Each Plan to which the Borrower makes direct contributions and each other Plan and each Multiemployer Plan is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or state law. 18. The Borrower has conducted a comprehensive review and assessment of its computer applications and has made an appropriate inquiry of the Borrower's material vendors and contractors with respect to the year 2000 problem (i.e., the inability of certain computer applications to recognize correctly and perform date-sensitive functions involving certain dates prior to and after December 31, 1999). Based on the foregoing review, assessment and inquiry, the Borrower reasonably believes that the year 2000 problem will not result in any Material Adverse Effect. Without diminishing or extinguishing this representation in any respect as between the parties hereto, it is understood and agreed that this year 2000 readiness disclosure is made pursuant to the terms and conditions of the Year 2000 Information and Readiness Act. 19. The Borrower has REIT status and maintains its common stock listed on the NASDAQ. The Borrower has timely elected or will timely elect to be taxed as a REIT for its taxable year ended December 31, 1998. The Borrower does not know of any currently existing event or condition which would cause or is reasonably likely to cause the Borrower to fail to qualify as a REIT. B. With respect to every Pledged Eligible Asset, the Borrower represents and warrants to the Lender that: 1. Such Pledged Eligible Asset and all accompanying collateral documents obtained and required to be obtained in connection with the Pledged Eligible Assets are complete and authentic and all signatures thereon are genuine. 13 17 2. Such Pledged Eligible Asset arose from a bona fide loan or contract, as applicable, complying in all material respects with all applicable State and Federal laws and regulations, and is not subject to any valid defense, set-off or counterclaim. 3. Except as set forth in Section III(B)(9) below, no default has occurred in any provisions of such Pledged Eligible Asset. 4. With respect to such Pledged Eligible Asset, all amounts represented to be payable on the related Promissory Note or other contract are, in fact, payable pursuant to the provisions of such Promissory Note or other contract. 5. To the best of the Borrower's knowledge, any property subject to any security interest given in connection with such Pledged Eligible Asset is not subject to any other encumbrances other than as disclosed to and approved in writing by the Lender in writing in its sole discretion or as described in the Underwriting Transmittal or as otherwise would not adversely impact the quality and condition of title to such property being good and marketable and/or the value of the property. 6. The Borrower holds good and indefeasible title to, and is the sole owner of, such Pledged Eligible Asset and as of the related Funding Date, such Pledged Eligible Asset is not subject to any liens, charges, mortgages, encumbrances or rights of any Person other than the Lender except (a) such liens that are to be released simultaneously with the pledge to the Lender under this Agreement, (b) as identified in an Underwriting Transmittal for an Approved Asset or (c) as has otherwise been approved by the Lender in writing in its sole discretion. 7. Each Pledged Eligible Asset conforms to the description thereof as set forth on the related Commercial Loan/Asset Schedule delivered to the Custodian and the Lender. 8. All applicable disclosures required by the Real Estate Settlement Procedures Act, by Regulation X promulgated thereunder and by Regulation Z of the Board of Governors of the Federal Reserve System promulgated pursuant to the statute commonly known as the Truth-in-Lending Act and the Notice of the Right of Rescission required by said statute and regulation have been properly made and given. 9. Except as otherwise disclosed in the Underwriting Transmittal, as of the first Funding Date under this Agreement or any subsequent Funding Date, such Pledged Eligible Asset is not thirty-one or more days delinquent as of the last payment due date for such Pledged Eligible Asset and since inception such Pledged Eligible Asset has not been thirty-one or more days delinquent on more than one occasion. 10. The Pledged Eligible Assets do not have characteristics which are materially worse than those of other similar Eligible Assets financed by the Borrower during the twelve-month period preceding the first Funding Date under this Agreement. 11. To the extent applicable, the representations and warranties set forth in Appendix II are true, correct and complete in all material respects as to the Pledged 14 18 Eligible Assets as of the date of closing of each such Pledged Eligible Asset, except as disclosed in the related Underwriting Transmittal prepared and delivered by the Borrower. 12. Each Pledged Eligible Asset was originated pursuant to prudent underwriting standards, the Borrower's Guidelines and other relevant handbooks (including any amendments and modifications thereto as approved in writing by the Lender pursuant to Section I(3)(a)(vi)) heretofore provided to, and approved by, the Lender, except for such material exceptions which have been disclosed to, and where required hereunder pre-approved by, the Lender in the Underwriting Transmittal. C. The Borrower covenants with the Lender that, during the term of this Loan: 1. Financial Covenants. (a) Tangible Net Worth. ACT, on a consolidated basis, shall at all times maintain Tangible Net Worth and a schedule showing Tangible Net Worth (and shall deliver prior to the first Advance under this Agreement, a schedule showing the Borrower's Tangible Net Worth) in an amount not less than the sum of (i) $100,000,000, plus (ii) 75% of the net cash proceeds of any equity subsequently raised by the Borrower in any public or private offering, as of the last day of any calendar quarter. (b) Coverage Ratio. ACT, on a consolidated basis, shall not permit the Coverage Ratio at the end of any calendar quarter to be less than 1.4 to 1. (c) Leverage Ratio. The Total Indebtedness of the Borrower shall not exceed, at the end of any calendar quarter, 400% of shareholders' equity, as determined in accordance with GAAP. (d) Liquidity. At all times, the Borrower shall either hold in cash or cash equivalents as a capital reserve or leave unborrowed under this Loan or under another outstanding lending facility with the Lender or an Affiliate of the Lender in an amount not less than $3,000,000, which is 1% of the Maximum Loan Amount. 2. REIT Status. ACT has continuously conducted its business so as to qualify as a real estate investment trust ("REIT") as defined in Section 856 of the Code for all taxable years commencing with taxable year ending December 31,1998, and has elected to be taxed as a REIT for its taxable year ending December 31, 1998, and such election has not been terminated, nor does ACT contemplate revoking its REIT status. The Borrower does not know of any currently existing event or condition which would cause or is reasonably likely to cause the Company to fail to qualify as a REIT. If the Borrower does, however, at any point decide to forego qualification as a REIT under the Code, the Borrower must provide the Lender with written notice of such decision at its earliest opportunity and the Lender shall have no further obligation to fund additional Advances; provided, however, that all Advances outstanding shall not be accelerated solely for failure of this covenant. 15 19 3. Underwriter. Subject to the provisions of Section I(6), PSI shall have the right to be engaged in the Manager Role within eighteen months following the date of this Agreement as provided in the Securitization Agreement and as set forth in Section III(C)(8). 4. Licenses. With respect to each state in which the Borrower is not licensed or otherwise qualified to do business, upon (i) meeting the requirements which make it subject to such licensing or qualification in any such state or (ii) the advice of counsel that the Borrower become licensed or qualified, the Borrower shall either (x) become licensed or otherwise become qualified to do business in each such state or (y) cease doing business in such state relating to Pledged Eligible Assets subject to this Agreement except in either instance described in (x) or (y) the failure to take such action would not (either individually or in the aggregate) have a Material Adverse Effect. 5. Delivery of Documents. If requested by the Lender, the Borrower shall deliver to the Lender copies of each of the documents to be delivered to the Custodian under the Custodial Agreement and the Lender shall be entitled to rely on each of the representations and warranties in favor of the Custodian contained therein as if such representation and warranty were made directly to the Lender for its benefit. 6. Standard Loan Documents. The Borrower shall use, or cause to be used, standard loan documents for each Pledged Eligible Asset, in form and substance satisfactory to the Lender, modified, as necessary in the reasonable opinion of the Borrower and consistent with institutional lending documentation for similar transactions, reflect modifications thereto as customarily agreed to by institutional lenders, provided that such loan documents contain customary provisions in institutional loan documents for similar transactions protective of the Lender's interests under such loan documents and which are adequate for the realization against the collateral securing the Mortgage Loan, subject to any limitations imposed by (a) bankruptcy, reorganization, fraudulent conveyance, moratorium, redemption or other similar laws affecting the enforcement of creditor's rights generally and (b) general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or in law). 7. Warrant Agreement. Simultaneously with the execution of this Agreement, Borrower shall execute and deliver to PSI the Warrant Agreement, which shall be in a form acceptable to PSI and Lender in their sole discretion. In addition, the Borrower shall perform its obligations under the Warrant Agreement in a complete and timely manner during the term of the Warrant Agreement. AMREIT I, AMREIT II, EQUITIES and HOLDINGS are not parties to the Warrant Agreement, however, each of AMREIT I, AMREIT II, EQUITIES and HOLDINGS has been provided a copy of the Warrant Agreement and each of AMREIT I, AMREIT II, EQUITIES and HOLDINGS agrees that a default by ACT under the Warrant Agreement shall constitute an Event of Default under this Agreement. Further, each of AMREIT I, AMREIT II, EQUITIES and HOLDINGS waives any defenses that it may have in connection with such Event of Default. 8. Financing Transactions. If, at any time within the 18 months following the date of this Agreement, the Borrower or any of its Affiliates proposes or enters into a letter of intent or agreement: (i) to dispose of, sell or otherwise transfer any interest in any of their respective assets or businesses and the Borrower elects to engage a Financial Advisor 16 20 (defined below), unless otherwise approved in writing by the Lender in its sole discretion; (ii) to acquire or purchase any interest or investment in any assets, business or other entity and the Borrower elects to engage a Financial Advisor (defined below); (iii) to issue or offer publicly or privately any securities (other than pursuant to that certain Exchange Agreement dated as of February 2, 1999 between Borrower and OLY/ACT, L.P., OLY/GP ACT L.P. and EQUITIES, without modification, except as reasonably approved by the Lender and the Borrower hereby acknowledges that it shall be reasonable for the Lender to disapprove any modification which frustrates the intent and purpose of this Section III(c)(8), relating to the potential exchange of partnership assets for the Borrower's common shares in the event that the Borrower or any Affiliate does not engage a financial advisor in connection with such transaction); or (iv) to securitize the Pledged Eligible Assets as provided in the Securitization Agreement (each of such transactions referred to in clauses (i), (ii), (iii) or (iv) hereof being hereafter referred to as a "Financing Transaction"), the Lender and/or its Affiliates (as the Lender may designate) shall have the exclusive right (but not the obligation) to act as the financial advisor, placement agent, underwriter, lender consultant or otherwise (collectively, the "Financial Advisor"), as the case may be, with respect to such Financing Transaction. The Borrower or any of its Affiliates must present the terms of any proposed Financing Transaction to the Lender or its Affiliates in order for the Lender or its Affiliates to consider whether to exercise its exclusive right to be the Financial Advisor. The terms of any such proposed Financing Transaction shall include provisions for the compensation of the Financial Advisor in an amount and on terms no less favorable than the prevailing rate and terms required by a majority of nationally recognized commercial/investment banks for transactions of similar size and nature. In the event that the Lender or its Affiliates decline in writing to exercise such right, the Borrower may proceed to conduct such Financing Transaction with a third party on the same amount, terms and conditions as presented to the Lender so long as (i) if the Financing Transaction is the merger of the Borrower with or into another entity, then the Borrower and the applicable suitor or target have entered into a definitive agreement (to consummate such merger) within 180 days of Lender's decision to decline to exercise its right, and (ii) if the Financing Transaction is any other type of transaction, the Financing Transaction closes within 180 days of Lender's decision to decline to exercise its right. In the event that any of the Lender or its Affiliates elects to act as a Financial Advisor with respect to a particular Financing Transaction, then each of the Borrower and/or its Affiliates and the Lender and/or its Affiliates, as applicable, shall enter into customary agreements which will include, among other things, the terms of any such financing, provisions for the payment of the compensation described above for the Lender and/or its Affiliates in their capacity as Financial Advisor, provisions for the indemnification of the Lender and its Affiliates in its capacity as Financial Advisor, and customary representations, warranties, covenants and conditions (including, without limitation, due diligence, market conditions and approval by the applicable committees of the Lender and/or its Affiliates). 9. Assets Determined to be Defective. Upon discovery by the Borrower that a Pledged Eligible Asset no longer meets the eligibility criteria listed herein applicable to any such Pledged Eligible Asset, the Borrower shall promptly give written notice of such discovery to the Lender. 10. Limitation on Liens on Collateral. The Borrower will defend the Collateral against, and will take such other action as is necessary to remove, any lien, security interest or claim on or to the Collateral, other than the security interests created under this 17 21 Agreement, and the Borrower will defend the right, title and interest of the Lender in and to any of the Collateral against the claims and demands of all persons whomsoever. 11. Year 2000 Readiness. The Borrower will take those actions reasonably necessary to ensure that the Borrower's internal mission critical systems are able to operate and effectively process data which includes dates on and after January 1, 2000. Without diminishing or extinguishing this covenant in any respect as between the parties hereto, it is understood and agreed that this year 2000 readiness covenant is made pursuant to the terms and conditions of the Year 2000 Information and Readiness Act. 12. Update to the Borrower's Representations and Warranties. The Borrower will, at the request of the Lender in connection with the subsequent disposition or securitization, if any, of the Pledged Eligible Assets or any portion thereof, update the representations and warranties contained in Section III mutatis mutandis and make such additional representations and warranties or modifications to such representations and warranties as reasonably requested by the Lender or any rating agency with respect to each such Pledged Eligible Asset. Such updating may be effected by delivery to the Lender of an officer's certificate of the Borrower providing that each of the representations and warranties of the Borrower contained in Section III is true, correct and complete in all material respects as of the date of such subsequent disposition or securitization, except to the extent that such representation and warranty specifically relates to an earlier date, in which case such representation or warranty was true and correct in all material respects as of such earlier date, and setting forth any such additional or modified representations and warranties as set forth above. 13. Negative Covenants. (a) Prohibition on Fundamental Changes. Neither the Borrower nor the Manager shall enter into any transaction of merger or consolidation or amalgamation or liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or dissolution) or sell all or substantially all of its assets, without the prior written consent of the Lender. (b) Compliance with Laws. At all times after the Custodian has received a Pledged Eligible Asset from the Borrower and until payment in full of the Loan, the Borrower shall not commit any act in violation of applicable laws, or regulations promulgated with respect thereto. (c) Limitation on Sale or Other Disposition of Collateral. Neither the Borrower nor the Manager shall lease (other than in the ordinary course of business), transfer, assign, sell or otherwise dispose of any Collateral without the prior written consent of the Lender, unless the proceeds of such sale or disposition are applied to repay Advances so that, after giving effect to such transaction, a Collateral Deficiency Situation does not exist with respect to any Pledged Eligible Asset. Section IV. Mandatory Partial Prepayment of Loan. A. Upon discovery by the Borrower or the Lender of any breach of any of the representations, warranties or covenants set forth in this Agreement, the party discovering such 18 22 breach shall promptly give notice of such discovery to the other. If there has been a material breach with respect to any Pledged Eligible Asset of one or more of the representations, warranties or covenants set forth in Section III(B) preceding (notwithstanding any qualification therein as to the Borrower's knowledge), the Borrower shall repay the Loan in an amount equal to the aggregate outstanding Advances made for such Pledged Eligible Asset. B. If any Pledged Eligible Asset, as indicated on any Supplemental Commercial Loan/Asset Schedule delivered pursuant to Section VIII(A) hereof or otherwise, becomes thirty-one or more days delinquent, the Borrower shall prepay the Loan in part with respect to such Pledged Eligible Asset, or, with the Lender's written consent, deliver a qualifying substitute Eligible Asset in its place. Any such Pledged Eligible Asset which becomes thirty-one or more days delinquent shall be subject to an immediate re-determination of its Stabilized Value by the Lender. At the written request of the Borrower to the Lender, upon delivery of a qualifying substitute Eligible Asset or payment in full of all Advances related to such delinquent Pledged Eligible Asset, and so long as no Event of Default has occurred and is continuing, the Lender agrees to cause to be released from the lien hereof the Pledged Eligible Asset and the documents described as Mortgage Documents in the Custodial Agreement. C. If, on any date other than a Funding Date, the Lender determines that a Collateral Deficiency Situation exists, the Lender shall so notify the Borrower, and the Borrower, within three Business Days, shall either (i) pay to the Lender the Restoration Amount or (ii) deliver to the Custodian on behalf of the Lender assets or collateral (including, but not limited to, a letter of credit or a pledged certificate of deposit) or additional Eligible Assets, such that the difference between the Maximum Advance Amount and the aggregate Outstanding Advances as to such additional Eligible Asset, together with the other assets or collateral have an aggregate Stabilized Value at least equal to the Restoration Amount, as determined by the Lender in its sole discretion. D. Additional Advances for Excess Collateral. In the event that the Borrower has a good faith belief that the Eligible Asset Value of a Pledged Eligible Asset has increased as a result of an increase in its DSCR or other means supportable by the Borrower and agreed to by the Lender in writing in its sole discretion, so long as no default or Event of Default has occurred and is continuing: 1. The Borrower may prepare a Request for Additional Advance in a form satisfactory to the Lender ("Request for Additional Advance"), specifying (i) the Pledged Eligible Asset(s) and Advance Amount for which an Advance is sought and the requested Funding Date, (ii) the Borrower's determination of the new Eligible Asset Value and DSCR with respect to such Pledged Eligible Asset, and (iii) an Underwriting Transmittal supporting the increase in Eligible Asset Value and DSCR. 2. The Borrower may transmit the Request for Additional Advance by facsimile transmission to the Lender. Upon review of the Request for Additional Advance and confirmation that, after giving effect to the requested Additional Advance, the Lender determines that a Collateral Deficiency Situation, any default or any Event of Default will not exist the Lender may, in its sole discretion, decide to approve the Additional Advance and 19 23 countersign the Request for Additional Advance and may advance funds in the amount set forth in such Request for Additional Advance. In the event that the Lender's assessment of the Stabilized Value of the Pledged Eligible assets would alter the information set forth in any Request for Additional Advance, the Lender shall promptly notify the Borrower in writing of such assessment. 3. The Lender shall not be obligated to countersign a Request for Additional Advance. E. Hedging. The Borrower and the Lender shall negotiate in good faith on a hedging strategy in respect of the Pledged Eligible Assets; provided, however, that in the event the Borrower and the Lender shall disagree on a hedging strategy, the Borrower shall implement the hedging strategy as reasonably determined by the Lender. The Lender shall not require any hedging strategy that would materially affect the Borrower's ability to maintain its status as a REIT. At the time of the Lender's approval of a Pledged Eligible Asset, the Lender will inform the Borrower if it anticipates requiring such a strategy with respect to such asset; provided, however, that such notice shall not preclude the Lender from requiring a hedging strategy for such Pledged Eligible Asset at a later time. The Lender will advise PSI to recommend and provide quotes for Interest Rate Protection Agreements in connection with Pledged Eligible Assets and Eligible Assets in process. Prior to entering into any Interest Rate Protection Agreement, the Borrower shall consult with the Lender and obtain the Lender's written approval, not to be unreasonably withheld, conditioned or delayed, of the proposed terms of any such Interest Rate Protection Agreement. The benefits and liabilities under any Interest Rate Protection Agreement shall be transferable to any subsequent transferee of the Pledged Eligible Asset, at the option of such transferee. Any Interest Rate Protection Agreements shall be priced "at market" and subject to a "check away" mechanism. In determining whether a Collateral Deficiency Situation exists, the Lender will offset any increase in fair market value of any Interest Rate Protection Agreements in which the Lender has been granted a first-lien security interest against any decrease in Market Value relating to the Pledged Eligible Assets, and the Lender shall offset any increase in Market Value of the Pledged Eligible Assets against any Hedge Loss related to Interest Rate Protection Agreements in which the Lender has been granted a first-lien security interest. The Borrower agrees to bear all risk for the Market Value of the Pledged Eligible Assets and the combined position of such Pledged Eligible Assets and hedges pursuant to all Interest Rate Protection Agreements. Any Hedge Loss associated with any Pledged Eligible Asset that is not recoverable in a disposition of such Pledged Eligible Asset shall be deemed to be an Advance as to such Pledged Eligible Asset and a Secured Obligation under this Agreement. Section V. Release of Loan Files Following Payment of Loan. The Lender agrees to cause to be released from the lien hereof the Pledged Eligible Assets and the documents described as Mortgage Documents in the Custodial Agreement at the request of the Borrower upon payment in full of the Loan, or, if a partial payment of the Loan shall have occurred, the Pledged Eligible Assets and the related documents held by the Custodian relating to the Advances being repaid associated with such Pledged Eligible Assets; provided, that, with respect to payments in full of any Pledged Eligible Asset, the Borrower agrees to (i) provide the Lender with a copy of a report from the Borrower, as servicer, or a subservicer of the Borrower, or a certification indicating that such Pledged Eligible Asset has been paid in full and (ii) pay to the 20 24 Lender in full all outstanding Advances with respect to such Pledged Eligible Asset (subject to the Borrower's rights under Section I(5)(b)). The Lender agrees to release such lien within one Business Day after receipt of the documents referred to in (i) and (ii) in the immediately preceding sentence. Section VI. Servicing. The Borrower shall service or cause the Pledged Eligible Assets to be serviced (i) in accordance with the provisions of the Management Agreement executed in connection with the servicing of the Eligible Assets and (ii) with the degree of skill and care consistent with that which the Borrower customarily exercises with respect to similar Eligible Assets owned, managed or serviced by it and all applicable industry standards. The Borrower shall (i) comply with all applicable Federal and State laws and regulations, (ii) maintain all State and Federal licenses, except where the failure to take such action would not (either individually or in the aggregate) have a Material Adverse Effect, necessary for it to perform its servicing responsibilities under this Agreement and (iii) not impair the rights of the Lender in any Pledged Eligible Assets or any payment under this Agreement. Section VII. No Oral Modifications; Successors and Assigns; Assignment of Collateral. No provisions of this Agreement shall be waived or modified except by a writing duly signed by the authorized agents of the Lender and the Borrower. This Agreement shall be binding upon the successors and assigns of the parties hereto. The Borrower acknowledges and agrees that the Lender may re-pledge, enter into repurchase transactions and otherwise re-hypothecate (including the granting of participation interests therein, provided that any such participation and re-hypothecation does not materially increase any obligation of the Borrower under this Agreement and provided further that the Lender shall provide written notice to the Borrower of any such participation) the Collateral for the Loan; provided, however, that no such act shall in any way affect the Borrower's rights to the Collateral. Section VIII. Reports. A. The Borrower shall provide the Lender with a report (a "Supplemental Commercial Loan/Asset Schedule") (i) on the date any additional or substitute Eligible Assets are delivered pursuant to Section IV(B) or Section IV(C) hereof and at least (a) two Business Days before each Funding Date for any Eligible Asset and (b) the fifteenth day of the month, and (ii) within two Business Days following any request by the Lender or any Affiliate thereof for such a schedule. Such Supplemental Commercial Loan/Asset Schedule will contain information concerning (a) the Pledged Eligible Assets then held pursuant to this Agreement, (b) any Eligible Assets proposed to be delivered pursuant to this Agreement on the next Funding Date or in connection with the cure of a Collateral Deficiency Situation pursuant to Section IV(B) or Section IV(C) hereof, and (c) the portfolio performance data with respect to all Pledged Eligible Assets, including, without limitation, any outstanding delinquencies, prepayments in whole or in part and any repurchases by the Borrower, and shall be in a format as may be agreed upon by the Borrower and the Lender from time to time. The Borrower shall also provide to the Lender every two weeks a pipeline report, indicating the status of pending transactions, including transactions for which a term sheet or other proposal has been submitted, the status of all transactions in which commitments have been granted, the expected closing/funding date, and a designation of the loans included on such list that the Borrower anticipates will become Pledged Eligible Assets, in a form satisfactory to the Lender. Each such report referenced in this 21 25 paragraph shall be transmitted by the Borrower to the Lender via facsimile, except for each monthly report which shall be transmitted by the Borrower to the Lender either via modem or on a computer disk or tape. The Borrower at its option shall either deliver to the Lender and/or permit the Lender or its agents, consultants, accountants or attorneys to inspect any property, books, valuations, records, audits or other information as the Lender may reasonably require during business hours with reasonable advance notice. B. The Borrower shall furnish to the Lender: 1. immediately, copies of any material and adverse notices (including, without limitation, notices of defaults, breaches, potential defaults or potential breaches) given to or received from the Borrower's or any of its Affiliate's other lenders; 2. immediately, a notice of the occurrence of any "Event of Default" under this Agreement or of any situation which the Borrower, with the passage of time, reasonably expects to develop into an "Event of Default" under this Agreement; 3. immediately upon, but in no event later than three Business Days after, service of process on the Borrower, or any agent thereof for service of process, notice in respect of any legal or arbitrable proceedings affecting the Borrower (a) that questions or challenges the validity or enforceability of this Agreement, the Secured Note, the Warrant Agreement, the Securitization Agreement and the Custodial Agreement or any document, agreement or instrument pertaining to the Collateral, or (b) in which the amount in controversy exceeds $3,000,000; 4. immediately upon the Borrower having actual knowledge, notice of the occurrence of any default related to any Collateral, any Material Adverse Effect and any event or change in circumstances which could reasonably be expected to have a Material Adverse Effect; 5. immediately upon the Borrower having actual knowledge, notice that the Mortgaged Property in respect of any Pledged Eligible Asset has been materially damaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, or otherwise damaged so as to materially and adversely affect the Stabilized Value of the underlying real property or the Market Value of such Pledged Eligible Asset; 6. immediately upon notice of entry of a judgment or decree against the Borrower in an amount in excess of $3,000,000; 7. within 120 days of the end of each calendar year, consolidated audited financial statements of ACT, together with a calculation showing compliance with each financial covenant set forth in Section III(C)(1); 8. within 120 days of AMREIT I's, AMREIT II's, EQUITIES' and HOLDINGS' fiscal year end, unaudited financial statements of such Borrower certified by such Borrower's Chief Financial Officer or Controller, or the Chief Financial Officer, Treasurer or Controller of AMREIT Managers, L.P. (the "Manager") as true, correct and complete in all 22 26 material respects, and fairly representing the information set forth therein, together with a calculation showing compliance with each financial covenant set forth in Section III(C)(1); 9. within 60 days after the end of each calendar quarter consolidated unaudited financial statements of ACT, and unaudited financial statements for AMREIT I, AMREIT II, EQUITIES and HOLDINGS, respectively, for each of such Borrower's first three quarters of each fiscal year together with a calculation showing compliance with each financial covenant set forth in Section III(C)(1); 10. within five Business Days of their release, quarterly and annual consolidated and consolidating financial statements of ACT; 11. within five Business Days of their filing with the SEC, copies of all 10-Ks, registration statements, other "corporate finance" SEC filings (other than 8-Ks) and any other filings reasonably requested by the Borrower and its Affiliates; provided, that, ACT will provide the Lender with a copy of ACT's annual 10-K filed with the SEC no later than 120 days after the end of the year; and 12. within fifteen days after the end of each calendar quarter, a schedule showing the Borrower's Tangible Net Worth as of the end of such calendar quarter, certified as true, correct and complete by the Chief Accounting Officer of the Borrower. All required financial statements, information and reports shall be prepared in accordance with GAAP, or, if applicable to SEC filings, SEC accounting regulations; provided, however, that interim financial statements do not need to include footnotes. C. In conjunction with the delivery of each notice delivered by the Borrower pursuant to Section VIII(B)(1) through (6), the Borrower shall deliver to the Lender an officer's certificate setting forth details of the occurrence referred to therein and certifying as to what action the Borrower has taken or proposes to take with respect thereto, and in conjunction with the delivery of the financial statements to be delivered by the Borrower pursuant to Sections VIII(B)(8), (9) and (10) the Borrower shall deliver to the Lender an officer's certificate of the Borrower certifying that, as of the date of delivery of such financial statements, the Borrower is in compliance with all the terms of this Agreement including, without limitation, each of the covenants set forth in Section III(C), together with calculations showing compliance with such covenants. D. The Lender covenants and agrees to use commercially reasonable efforts to preserve the confidentiality of any financial data concerning the Borrower, any Affiliate of the Borrower, or any of the Borrower's businesses or operations or any information with respect to which the Borrower or any Affiliate has (a) an obligation of confidentiality to a third party (to the extent such obligation has been disclosed to the Lender) or (b) informed the Lender of the confidential nature of the specific information, except to the extent the Lender is required to disclose such information pursuant to any applicable law, rule, regulation or order of any governmental authority and if the Lender is requested or is required by applicable law (by interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any such information, to the extent reasonably practicable the Lender 23 27 shall provide the Borrower with prompt notice of such request or requirement so that the Borrower may consider seeking a protective order or an injunction; provided that (i) any information contained in any annual report, or any Form 10-K, Form 10-Q or Form 8-K reports (if any) which have been delivered to the SEC, or any annual or quarterly reports to the stockholders of the Borrower subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, proxy material delivered to the stockholders of any Borrower or any report delivered to the SEC, or any other information that is in the public domain or has become publicly known, shall not in any event be deemed confidential, and (ii) the Lender may make any information received by it available (A) to a proposed transferee of or proposed participant in any interest in the Secured Note, provided that such proposed transferee or proposed participant agrees in writing to be bound by the provisions of this Section VIII(D), (B) to any accountants or other professionals engaged by the Lender, provided that each such accountant or professional agrees to be bound by the provisions of this Section VIII(D), or (C) in connection with the enforcement of this Agreement or any litigation in connection therewith. Further, the Lender agrees that, prior to the Maturity Date, it will not intentionally use the information provided by the Borrower and not otherwise generally known or obtainable through sources other than the Borrower to take any action to personally, by telephone or mail, solicit any underlying borrower for any purpose which is in conflict with the services and products which the Borrower is providing or can provide with the Borrower's current products and services to such underlying borrower, including to refinance loans made by the Borrower to such underlying borrower, without the prior written consent of the Borrower. Section IX. Events of Default. Each of the following shall constitute an "Event of Default" under this Agreement: A. Failure of the Borrower to (i) make any payment of interest or principal which has become due, whether by acceleration or otherwise, under the terms of the Secured Note, this Agreement, any other warehouse and security agreement or any other document evidencing or securing indebtedness of the Borrower to the Lender or to any Affiliate of the Lender or any other lender, unless in each instance the indebtedness was specifically non-recourse by its terms and the Borrower and the lender under such indebtedness are not in litigation as a result of such loan default, (ii) pay or deliver any Restoration Amount within the time period specified in Section IV(C), (iii) pay the Lender the amount of interest accrued in the immediately preceding month within the time period specified in Section I(4) or (iv) make a payment of any other amount payable under the terms of this Agreement or the Secured Note when due. B. A final judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate shall be rendered against the Borrower or any of its Qualified or Non-Qualified REIT Subsidiaries by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be discharged (or provision shall not be made for such discharge), bonded or paid, or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof, and the Borrower or any such Qualified REIT Subsidiary and Non-Qualified REIT Subsidiary shall not, within such period of 60 days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal. 24 28 C. Assignment or attempted assignment by the Borrower of this Agreement or any rights under this Agreement, without first obtaining the specific written consent of the Lender, or the granting by the Borrower of any security interest, lien or other encumbrance on any Pledged Eligible Assets to any person other than the Lender. D. The filing by the Borrower of a petition for liquidation, reorganization, arrangement or adjudication as a bankrupt or similar relief under the bankruptcy, insolvency or similar laws of the United States or any state or territory thereof or of any foreign jurisdiction; the failure of the Borrower to secure dismissal of any such petition filed against it within 60 days of such filing; the making of any general assignment by the Borrower for the benefit of creditors; the appointment of a receiver or trustee for the Borrower, or for any part of the Borrower's property; the institution by the Borrower of any other type of insolvency proceeding (under the Bankruptcy Code or otherwise) or of any formal or informal proceeding, for the dissolution or liquidation of, settlement of claims against, or winding up of the affairs of, the Borrower; the institution of any such proceeding against the Borrower if the Borrower shall fail to secure dismissal thereof within 60 days thereafter; the consent by the Borrower to any type of insolvency proceeding against the Borrower (under the Bankruptcy Code or otherwise); the occurrence of any event or existence of any condition which could be the ground, basis or cause for any proceeding or petition described in this Section IX. E. The occurrence of any material adverse change in the financial condition of the Borrower, without Borrower being subject to the requirement of or entitled to the benefit of any notice, cure or grace period. For purposes of this Section IX(E), a material adverse change in the financial condition of the Borrower shall include, but is not limited to, a breach of any financial covenant set forth in Section III(C)(1). F. The existence of any condition which, in the Lender's sole determination reasonably exercised, constitutes an impairment of the Borrower's ability to perform its obligations under this Agreement or the Secured Note and which condition is not remedied within ten days after written notice to the Borrower thereof or, if the conditions cannot be fully remedied within such ten days, substantial progress has not been made within such ten days toward remedy of the condition. G. Failure by the Borrower to service the Pledged Eligible Assets in substantial compliance with the servicing requirements set forth in Section VI hereof and such failure continues unremedied for a period of thirty days after notice thereof from the Lender. H. Except as set forth in Sections IX(E) and (F) above, a material breach by the Borrower of any representation, warranty or covenant set forth in this Agreement or in any Funding Notice, in the form of Exhibit D attached hereto, delivered by the Borrower to the Lender, and such breach relating to any other covenant in this Agreement remains unremedied for a period of thirty days after notice thereof from the Lender or, if such breach is not reasonably susceptible to cure with such thirty-day period, such longer period as may be reasonably required (but in no event in excess of 120 days in the aggregate) to cure such breach as long as the Borrower has commenced such cure within the thirty-day period and diligently prosecutes same to the satisfaction of the Lender, or a use by the Borrower of the proceeds of the Loan for a purpose other than as set forth in Section I(2) hereof. 25 29 I. Except with respect to non-recourse obligations of the Borrower as provided in Section IX(A), any "Event of Default" under any agreement between the Borrower and the Lender or any Affiliate of the Lender, after the expiration of any applicable grace or cure periods set forth in such agreement, including, without limitation, defaults under the Securitization Agreement, the Warrant Agreement or the Custodial Agreement. J. Any Person or any two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended), directly or indirectly, of Securities of the Borrower (or other Securities convertible into such Securities) representing 51% or more of the combined voting power of all Securities of the Borrower, as applicable, entitled to vote in the election of directors, other than Securities having such power only by reason of the happening of a contingency, if the foregoing occurs without Lender's prior written consent. Section X. Remedies Upon Default. A. Upon the happening of one or more Events of Default, the Lender may (x) refuse to make any Advances under this Agreement and (y) immediately declare the principal of the Secured Note then outstanding to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Agreement; provided, however, that upon the occurrence of the Event of Default referred to in Section IX(D), such amounts shall immediately and automatically become due and payable without any further action by any person or entity. Upon such declaration or such automatic acceleration, the balance then outstanding on the Secured Note shall become immediately due and payable without presentation, demand or further notice of any kind to the Borrower. B. Upon the happening of one or more Events of Default, the Lender shall have the right to obtain physical possession, and to commence an action to obtain physical possession, of all files of the Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of the Borrower or any third party acting for the Borrower. The Lender shall be entitled to specific performance of all agreements of the Borrower contained in this Agreement. The Borrower and the Lender hereby acknowledge that the Lender's right to obtain physical possession of the Collateral is deemed for all purposes to be equivalent to the rights of "seizure of property or maintenance or continuation of perfection of an interest in property" as specified under Bankruptcy Code Sections 362(b) and 546(b)(2). C. Upon the happening of one or more Events of Default, the Lender shall have the right to direct all servicers and/or subservicers then servicing any Pledged Eligible Assets to remit all collections on the Pledged Eligible Assets to the Lender, and if any such payments are received by the Borrower, the Borrower shall hold such payments in trust for the Lender and not commingle the amounts received with other funds of the Borrower and shall promptly pay them over to the Lender. In addition, the Lender shall have the right to dispose of the Collateral as provided in this Agreement, or as provided in the other documents executed in connection with this Agreement, or in any commercially reasonable manner, or as provided by law. Such disposition may be on either a servicing-released or a servicing-retained basis. The Lender shall be entitled to place the Pledged Eligible Assets which it recovers after any default in 26 30 a pool for issuance of asset-backed securities at the then-prevailing price for such securities and to sell such securities for such prevailing price in the open market as a commercially reasonable disposition of Collateral, subject to the applicable requirements of the New York UCC. The Lender shall also be entitled to sell any or all of such Eligible Assets individually for the prevailing price as a commercially reasonable disposition of Collateral subject to the applicable requirements of the New York UCC. The specification in this Section X(C) of manners of disposition of collateral as being commercially reasonable shall not preclude the use of other commercially reasonable methods (as contemplated by the New York UCC) at the option of the Lender. D. Following the occurrence and during the continuance of an Event of Default, interest shall accrue on the Loan at a default interest rate of LIBOR plus 5.00%. Section XI. Pre-Existing Conditions. The Borrower (and each of its successors and assigns) does hereby forever release, discharge and acquit the Lender and PSI, and their respective parents, subsidiaries and Affiliates, and their respective officers, directors, shareholders, agents and employees, and their respective successors, heirs and assigns, and each of them, of and from any and all claims, demands, obligations, liabilities, indebtedness, breaches of contract, breaches of duty or any relationship, acts, omissions, misfeasance, malfeasance, cause or causes of action, debts, sums of money, accounts, compensation, contracts, controversies, promises, damages, costs, losses and expenses, of every type, kind, nature, description or character, and irrespective of how, why, or any reason of facts, whether heretofore or now existing or arising or which could, might or may be claimed to now exist or arise, of whatever kind or name, whether known or unknown, suspected or unsuspected, liquidated or unliquidated, each as though fully set forth at length and which in any way arise out of, or are connected with or relate to the Original Agreement or otherwise prior to the date of this Agreement. Section XII. Indemnification. A. The Borrower agrees to hold the Lender, PSI and their respective Affiliates (the "Indemnified Parties") harmless from and indemnifies the Indemnified Parties against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by, or asserted against any of the Indemnified Parties relating to or arising out of this Agreement, the Secured Note, the Custodial Agreement, the Warrant Agreement, the Securitization Agreement or any transaction contemplated hereby or thereby resulting from anything other than the Indemnified Parties' gross negligence or willful misconduct. B. The Borrower shall reimburse each of the Indemnified Parties for any of the respective Indemnified Party's reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, execution and enforcement of this Agreement, the Secured Note, the Warrant Agreement, the Custodial Agreement, the Securitization Agreement and the transactions contemplated hereby and thereby including, without limitation, due diligence review costs, reasonable attorney's fees and, subject to Section XIII below, any other costs and expenses incurred by the Lender in determining the acceptability to the Lender of any Eligible Assets. 27 31 C. The Borrower shall indemnify and hold each of the Indemnified Parties harmless from and against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, or asserted against the Indemnified Parties and relating to arising out of any Hedge Loss, except for losses caused by the Indemnified Parties' gross negligence or willful misconduct. The Borrower's obligations under this Section XII(C) shall be secured by the Collateral. D. The Borrower's agreements in this Section XII shall survive the payment in full of the Secured Note and the expiration or termination of this Agreement. The Borrower hereby acknowledges that, notwithstanding the fact that the Secured Note is secured by the Collateral, the obligations of the Borrower under the Secured Note are recourse obligations of the Borrower. Section XIII. Periodic Due Diligence Review. The Lender has the right to perform continuing due diligence reviews with respect to the Pledged Eligible Assets and for purposes of verifying compliance with the representations, warranties and covenants made under this Agreement, or otherwise, and each of the Borrowers agree that upon reasonable (but no less than one Business Day's) prior notice to the Borrower, the Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Commercial Loan/Asset Files and any and all documents, records, agreements, instrument or information relating to such Pledged Eligible Asset in the possession or under the control of any Borrower and/or the Custodian. The Lender shall use reasonable efforts to perform each such due diligence review within three Business Days. The Borrower shall also make available to the Lender a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Commercial Loan/Asset Files and the Pledged Eligible Assets. Without limiting the generality of the foregoing, the Borrower acknowledges that the Lender may make Advances to the Borrower based solely upon the information provided by the Borrower to the Lender in the Underwriting Transmittal and/or the Commercial Loan/Asset Schedule and the representations, warranties and covenants contained in this Agreement, and that the Lender, at its option, has the right at any time to conduct a partial or complete due diligence review on some or all of the Pledged Eligible Assets securing such Loan, including, without limitation, conducting a property site inspection and otherwise re-generating the information used to originate such Mortgage Loan. The Borrower agrees to cooperate with the Lender in connection with such underwriting, including, but not limited to, providing the Lender with access to any and all documents, records, agreements, instruments or information relating to such Pledged Eligible Assets in the possession, or under the control, of the Borrower. Subject to any applicable Due Diligence Cap, the Borrower further agrees that the Borrower shall reimburse the Lender for any and all out-of-pocket costs and expenses incurred by the Lender in connection with the Lender's activities pursuant to this Section XIII ("Due Diligence Costs"); and (ii) in the event that a Default or an Event of Default shall have occurred, the Borrower shall reimburse the Lender for all Due Diligence Costs and no such Due Diligence Cap shall apply. For Pledged Eligible Assets over $15,000,000, all Construction Loans and all loans with a Debt Service Coverage Ratio below 1.0 to 1.0, the due diligence cap shall be the actual cost, not to exceed $1,500 per real property asset securing such Pledged Eligible Asset. For all other Pledged Eligible Assets, the annual due diligence cap shall be the actual cost, not to exceed $5,000 in the aggregate. The limitations on due diligence set forth in this paragraph is referred to as the "Due 28 32 Diligence Cap." Moreover, the Borrower shall provide any additional information in connection with each Pledged Eligible Asset that the Lender reasonably requests. Section XIV. Power of Attorney. The Borrower hereby authorizes the Lender, at the Borrower's expense, to file such financing statement or statements relating to the Collateral without the Borrower's signature thereon as the Lender at its option may deem appropriate, and appoints the Lender as the Borrower's agent and attorney-in-fact to execute any such financing statement or statements in the Borrower's name and to perform all other acts which the Lender deems appropriate to perfect and continue the security interest granted hereby and to protect, preserve and realize upon the Collateral, including, but not limited to, the right to endorse notes, complete blanks in documents, transfer servicing, and sign assignments on behalf of the Borrower as its agent and attorney-in-fact. This power of attorney is coupled with an interest and is irrevocable without the Lender's consent and, to the maximum extent permitted by law, the Borrower waives the benefit of any laws requiring the Lender to act as the Borrower's fiduciary in connection with the exercise of such power of attorney. Notwithstanding the foregoing, the power of attorney hereby granted may be exercised only during the occurrence and continuance of an Event of Default hereunder. Section XV. Choice of Law; Agreement Constitutes Security Agreement. This Agreement shall be governed by the laws of the State of New York (without regard to choice of law principles thereof), and shall constitute a security agreement within the meaning of the New York UCC. THE PARTIES HERETO AGREE THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS AGREEMENT OR THE SECURED NOTE SHALL BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. Section XVI. Lender May Act Through Affiliates. The Lender may, from time to time, designate one or more Affiliates for the purpose of performing any action hereunder. Section XVII. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or by overnight courier, or, if by other means, when received by the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). 29 33 If to the Borrower: Amresco Capital Trust 700 North Pearl Street Suite 2400 Dallas, Texas 75201 Attention: Michael L. McCoy, General Counsel Phone Number: 214-953-7733 Fax Number: 214-953-7757 If to the Lender and/or Prudential Securities Incorporated: Prudential Securities Incorporated Investment Banking One New York Plaza, 18th Floor New York, New York 10292 Attention: Lainie Kaye Phone Number: 212-778-5760 Fax Number: 212-778-5099 With copies to: Prudential Securities Incorporated One Seaport Plaza, 30th Floor New York, New York 10292-2018 Attention: Frederick Robustelli, Esq. Phone Number: 212 214-6813 Fax Number: 212-214-7938 and Prudential Securities Incorporated One Seaport Plaza, 27th Floor New York, New York 10292 Attention: Elizabeth Castagna Phone Number: 212-214-7775 Fax Number: 212-214-7572 and Prudential Securities Incorporated One New York Plaza, 15th Floor New York, New York 10292-2015 Attention: Jeff Theodorou Phone Number: 212-778-7444 Fax Number: 212-778-3293 30 34 and Prudential Securities Incorporated One New York Plaza, 14th Floor New York, New York 10292 Attention: Robert Becker Phone Number: 212-778-3025 Fax Number: 212-778-6509 and Prudential Securities Incorporated One Seaport Plaza 199 Water Street, 27th Floor New York, New York 10292 Attention: Michael Pierro Phone Number: 212-214-7336 Fax Number: 212-214-7678 and O'Melveny & Myers LLP 275 Battery Street, 26th Floor San Francisco, California 94111 Attention: Peter T. Healy, Esq. Phone Number: 415-984-8700 Fax Number: 415-984-8701 Section XVIII. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization, without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section XIX. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. Section XX. Additional Borrowers. The Lender acknowledges that from time to time ACT may need to form additional Qualified REIT Subsidiaries and/or Non-Qualified REIT Subsidiaries. Upon delivery of a written notice of formation of subsidiaries and an explanation of the purpose for such subsidiaries, the Lender agrees to allow such subsidiaries to be added as a Borrower for purposes of financing Eligible Assets. Section XXI. No Exclusivity. The Lender acknowledges that this Agreement may not be the exclusive source to the Borrower for interim financing for Eligible Assets and that the Borrower may have other interim warehouse facilities. The Lender's rights with respect to any Securitization extends only to Pledged Eligible Assets financed pursuant to this Agreement. 31 35 Section XXII. Joint and Several Liability. Any liability of a Borrower under this Agreement or any certificate or other agreement delivered in connection herewith shall be the joint and several liability of ACT, AMREIT I, and AMREIT II and any other Subsidiary that is or becomes a Borrower. Section XXIII. Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, THE BORROWER, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE BORROWER AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION XVII; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER BORROWER IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT THE LENDER RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION XXIII RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. Section XXIV. Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be 32 36 all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION XXIV AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. [Signature Page S-1 Attached] 33 37 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. AMRESCO CAPITAL TRUST By: -------------------------------------- Name: Jon S. Pettee Title: President By: -------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President AMREIT I, INC. By: -------------------------------------- Name: Jon S. Pettee Title: President By: -------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President AMREIT II, INC. By: -------------------------------------- Name: Jon S. Pettee Title: President By: -------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President S-1 38 ACT EQUITIES, INC. By: -------------------------------------- Name: Jon S. Pettee Title: President By: -------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President ACT HOLDINGS, INC. By: -------------------------------------- Name: Jon S. Pettee Title: President By: -------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President PRUDENTIAL SECURITIES CREDIT CORP. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-2 39 Appendix I CERTAIN DEFINITIONS Certain Definitions. The following capitalized terms are either defined below or in the corresponding sections specified below: "ACT" means AMRESCO Capital Trust. "Acquisition Loan" means a Mortgage Loan used to finance the acquisition of an existing real property. "Advance" - Section I(1). "Advanced Amount" means the amount of each Advance with respect to a Pledged Eligible Asset. "Affiliate" means, when used with reference to a specified person, (i) any person that directly or indirectly controls or is controlled by or is under common control with the specified person, (ii) any person that is an officer of, partner in or trustee of, or serves in a similar capacity with respect to, the specified person or of which the specified person is an officer, partner or trustee, or with respect to which the specified person serves in a similar capacity, and (iii) any person that, directly or indirectly, is the beneficial owner of 5% or more of any class of equity securities of the specified person or which the specified person is directly or indirectly the owner of 5% or more of any class of equity securities; provided, however, that ACT will not be treated as an Affiliate of the Manager and its Affiliates and provided further that with respect to the Borrower, Affiliate shall not include any Non-Qualified REIT Subsidiary, joint venture, partnership, limited liability company, UPREIT, DOWNREIT or structure unless such entity becomes the Borrower hereunder. "Agreement" - Introductory Clause. "AMREIT I" means the wholly-owned Qualified REIT Subsidiary of ACT. "AMREIT II" means the Non-Qualified REIT Subsidiary of ACT. "AMREIT Managers, L.P." means the Manager of ACT. "Applicable Interest Rate Spread" - Section I(4)(b). "Approved Assets" - Section I(2). "Approved Exit Strategy" means the Borrower's plan for each Eligible Asset on an asset specific basis or on the Borrower entity level basis, as approved by the Lender in Lender's sole discretion and in writing prior to an Initial Advance, to payoff or refinance the aggregate Advances outstanding as to such Eligible Asset. The Approved Exit Strategy may be the exit strategy for the Eligible Asset described in the Underwriting Transmittal. The Approved Appendix I-1 40 Exit Strategy will generally be the exit strategy for the underlying mortgagor/borrower, similar to those for currently approved Pledged Eligible Assets, which are typically the sale or refinance of the underlying project within the term of the related loan, but may also include (a) the possibility prior to the Maturity Date of a sale, merger, consolidation or other corporate level capital transaction of Borrower, a portfolio refinancing by Borrower or some other corporate level debt transaction by Borrower, or (b) the net worth and financial ability of Borrower prior to the Maturity Date is sufficient to provide the exit strategy for the particular asset. "Borrower" means individually and collectively, ACT, AMREIT I, AMREIT II, EQUITIES and HOLDINGS. "Borrower's Guidelines" - Section I(2). "Break-Up Fee" - Section I(6). "Bridge Loan" means a Mortgage Loan used for temporary financing. "Budgeted Costs" - means the total construction or other project or asset budget (including interest carry and budgeted soft costs, but excluding any developer profit to the underlying mortgagor/borrower or any Affiliate of the underlying mortgagor/borrower or the fair market value of any land in excess of the purchase price thereof) of the construction project or other real estate asset, as applicable, described in the applicable Underwriting Transmittal. The Borrower may request that the fair market value of the land in excess of the purchase price thereof be included in the Budgeted Costs; provided, however, the Lender, in its sole discretion may (but shall not be required to) consider such request. "Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in the State of New York or State of Texas or State of Georgia are authorized or obligated by law or executive order to be closed. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" - Section II. "Collateral Deficiency Situation" shall be deemed to be existing as of any day on which (a) the outstanding principal amount of all of the Advances as of such day exceeds, by more than $250,000, (b) the sum of either 76%, for each Pledged Eligible Asset except Land Development Loans, or 50%, for Land Development Loans, times the lesser of the Stabilized Value of each such Pledged Eligible Asset (i) on the date of the Initial Advance and (ii) on the date of the calculation to determine if a Collateral Deficiency Situation exists. "Commercial Loan/Asset Files" - Section II. "Commercial Loan/Asset Schedule" - Section I(3)(a)(i). "Commonly Controlled Entity" means an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of Appendix I-2 41 ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Construction Loan" means a Mortgage Loan the proceeds of which are to be used to finance the costs of the initial construction or substantial rehabilitation of real property. If less than 25% of the total square footage of the then existing building improvements is subject to a lease which satisfies the conditions for leases set forth in the definition of Rehabilitation Loans at the time the Borrower requests an Initial Advance as to such Mortgage Loan, such Mortgage Loan shall be deemed a Construction Loan for all purposes under this Agreement. If the underlying mortgagor/borrower leases more than 25% of the total square footage of the then existing building improvements pursuant to a lease which satisfies the conditions for leases set forth in the definition of Rehabilitation Loans subsequent to Borrower's request for an Initial Advance as to such Mortgage Loan, the Borrower may request the Lender to recharacterize such Mortgage Loan as a Rehabilitation Loan. The Borrower may also request the Lender to recharacterize a Construction Loan as a different asset classification. The Lender, in its sole discretion, may (but shall not be required to) consider such requests. "Construction Loan Sub-Limit" - Section I(1)(b). "Coverage Ratio" means, with respect to the Borrower, on a consolidated basis, a ratio of the Borrower's GAAP basis earnings before interest, taxes, depreciation and amortization, to scheduled interest on Total Indebtedness. "Custodial Agreement" - Section II. "Custodian" - Section II. "Custodian's Certification" - Section I(3)(a)(iv). "Debt Service Coverage Ratio" or "DSCR" means, with respect to any Mortgage Loan, the number (as approved (as to form, substance and mathematical accuracy) by the Lender in writing) reflected on the Commercial Loan/Asset Schedule as being the ratio of (i) any interest reserve funded or to be funded by the Borrower (up to a maximum of one year) in connection with a Mortgage Loan, plus net operating income of the Mortgaged Property securing the Mortgage Loan, as determined by the Borrower in accordance with its underwriting guidelines, to (ii) debt service at the current pay rate on the Mortgage Loan; provided, however, that at the expiration of the period provided for in the Borrower's Underwriting Transmittal for the Mortgaged Property to achieve a stabilized occupancy, the DSCR, to the extent necessary to calculate the Eligible Asset Value or for any other purpose hereunder, will be based upon the actual net income of the Mortgaged Property. "Due Diligence Cap" - Section XIII. "Due Diligence Costs" - Section XIII. Appendix I-3 42 "Eligible Asset Value" means, with respect to any Eligible Asset, the product of LTV for such Eligible Asset multiplied by the value of collateral related to such Eligible Asset as determined by the Borrower, and approved by Lender. "Eligible Assets" - Section I(2). "EQUITIES" means ACT Equities, Inc. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Escrow Officer" - Section I(3)(a)(iv). "Eurodollar Business Day" - Section I(4)(a). "Event of Default" - Section IX. "Financial Advisor" - Section III(C)(8). "Financing Transaction" - Section III(C)(8). "First Securitization" means each initial securitization, if any, involving the public or private placement of securities relating to all or any portion of the Pledged Eligible Assets. "Funding Date" - Section I(3)(a). "Funding Notice" - Section I(3)(a)(i). "GAAP" means, generally accepted accounting principles consistently applied as in effect at the time of the application of the provisions of this Agreement. "Greater Than 70% Pre-Leased Project" - Section I(1)(c). "Haircut" shall mean, with respect to a particular Pledged Eligible Asset, an amount equal to the difference between (i) the amount which the Borrower has executed a written commitment to lend to the underlying mortgagor/borrower of or to invest as equity in such Pledged Eligible Asset and (ii) the applicable Maximum Advance Amount for such Pledged Eligible Asset. "Hedge Loss" shall mean, with respect to any Interest Rate Protection Agreement entered into by the Borrower with the Lender or any Affiliate thereof (in either case, the "Hedging Counterparty"), the amount, if any, owed thereunder by the Borrower to the Hedging Counterparty as of any date of determination, in the aggregate, including, without limitation, the amount of other losses relating to any such hedging instrument and the carrying costs for such hedging position, minus the sum of (a) all Hedge Losses previously paid by the Borrower to the Hedging Counterparty in connection with such Interest Rate Protection Agreement, if any, and Appendix I-4 43 (b) any amount the Borrower has received from the Hedging Counterparty with respect to such Interest Rate Protection Agreements. "HOLDINGS" means ACT Holdings, Inc. "Indemnified Parties" - Section XII(A). "Initial Advance" means either the only Advance relating to a Pledged Eligible Asset or the first Advance relating to a Pledged Eligible Asset, such as a Construction Loan or Rehabilitation Loan, for which more than one Advance may be made. "Interest in Real Property" mean, among other things, 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. "Interest Rate" - Section I(4)(a). "Interest Rate Protection Agreement" shall mean, with respect to any or all of the Mortgage Loans, any short sale of US Treasury Security, or futures or forward contract, or mortgage related security, or Eurodollar futures contract, or options related contract, or interest rate swap, cap or collar agreement or similar arrangements providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by the Borrower and the Lender, PSI, an Affiliate of the Lender or PSI, or a third party reasonably acceptable to the Lender, which shall be transferable with the Mortgage Loan, at the transferee's option. "Investment Grade" means securities rated AAA through BBB - (or equivalent rating) by any of Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. "Land Development Loan" shall mean loans wherein more than 30% of the proceeds of which are used for (i) surveying, grading, cutting and filling the land, (ii) the demolition of developments on the land, (iii) the reconfiguration, importation and/or deportation of soil or other earthen materials, (iv) land use planning, (v) procuring regulatory approvals, permits, zoning, subdivision approvals, mapping and land use changes, (vi) the construction of streets, (vii) the acquisition of unfinished land with the intention of conducting any of the foregoing activities or merely holding the land for resale, or (vii) anything in the nature of the foregoing. "Lender" means Prudential Securities Credit Corp. "Less Than 70% Pre-Leased Project" - Section I(1)(c). Appendix I-5 44 "Less Than 70% Pre-Leased Sub-Limit" - Section I(1)(c). "Liquidity Reserve" - Section III(C)(1)(d). "LIBOR" - Section I(4)(a). "Loan" - Section I(1). "LTC" means the percentage determined by dividing the maximum committed loan or investment amount by the Budgeted Costs. For purposes of calculating the LTC, the Borrower shall include the amount of all liens or encumbrances on the underlying asset which are senior to the Borrower's loan to the underlying mortgagor/borrower and the maximum amount which Borrower has committed to loan with respect to such Pledged Eligible Asset. "LTV" means the number (as approved (as to form, substance and mathematical accuracy) by the Lender in writing) specified in the Commercial Loan/Asset Schedule as the percentage determined by dividing the maximum committed loan or investment amount by the Stabilized Value of the collateral related to such loan or investment. For purposes of calculating the LTV, the Borrower shall include the amount of all liens or encumbrances on the underlying asset which are senior to the Borrower's loan to the underlying mortgagor/borrower and the maximum amount which Borrower has committed to loan with respect to such Pledged Eligible Asset. "Management Agreement" means the Management Agreement dated as of May 12, 1998 by and between ACT and the Manager, as it may be amended. "Manager" means AMREIT Managers, L.P. "Manager Role" means the sole placement agent or the sole underwriter, as the case may be for each First Securitization, if any, to be sponsored by the Borrower (or by an Affiliate thereof) and collateralized by some or all of the Pledged Eligible Assets. "Market Value" means, as of any date in respect of an Eligible Asset or Pledged Eligible Asset, the price at which such Eligible Asset or Pledged Eligible Asset (together with any Interest Rate Protection associated with such asset) could be sold in an orderly manner, as determined in good faith by the Lender in its sole and reasonable discretion. "Maturity Date" means the earlier to occur of (a) the date eighteen months after execution of this Agreement and (b) 60 days following the termination of the Securitization Agreement by the Borrower. "Material Adverse Effect" shall mean a material adverse change regarding (a) the Mortgaged Property, business, operations, financial condition or prospects of the Borrower, (b) the ability of the Borrower to perform its obligations under any of the Loan Documents to which it is a party, (c) the validity or enforceability of any of the Loan Documents, (d) the rights and remedies of the Lender under any of the Loan Documents, (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith or (f) the Collateral. Appendix I-6 45 "Maximum Advance Amount" - Section I(3)(d) or (e), as applicable. "Maximum Loan Amount" - Section I(1). "Mezzanine Construction Loan" means a Mezzanine Loan/Equity Investment (as defined below) the proceeds of which are to be used to finance the costs of the initial construction of real property. "Mezzanine Loan/Equity Investment" means either (a) a commercial real estate loan the repayment of which is subordinated to a senior Mortgage Loan and which is secured either by a second lien mortgage or a pledge of the ownership interests of the borrower or (b) a joint venture interest in or equity investment in an entity which directly or indirectly owns a real estate asset or a direct equity investment in a real estate asset. "Mezzanine Loan/Equity Investment Sub-Limit" - Section I(1)(a). "Mortgage Loan" means a commercial loan secured by real property and a Mezzanine Loan(s). "Mortgaged Property" means the real property and improvements securing a Mortgage Loan. "Multiemployer Plan" means a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Non-Qualified REIT Subsidiary" means any corporation in which ACT owns 10% or less of the voting shares in such corporation. "New York UCC" - Section I(5)(a). "One Year Anniversary" - Section I(5)(b). "Original Agreement" - Recitals. "Participating Loan" means a Mortgage Loan that entitles the lender to the receipt of interest at a stated rate, plus a percentage of the pledged real estate's revenues or cash flow, or a specified percentage or fixed amount of the net proceeds from any sale of the property, which Participating Loan may be a Mezzanine Loan/Equity Investment, Construction Loan, Rehabilitation Loan, Bridge Loan or other Mortgage Loan. "Person" means any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association, government (or any agency, instrumentality or political subdivision thereof) or any other entity of whatever nature. Appendix I-7 46 "Plan" means at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledged Eligible Assets" means, as of any date of determination, any Eligible Assets then held by the Custodian on behalf of the Lender to secure the Loan. "PSI" means Prudential Securities Incorporated, an Affiliate of the Lender. "Qualified REIT Subsidiary" means any corporation if 100% of the stock of such is held by ACT at all times during such corporation's existence or otherwise satisfies Section 856(i)(2) of the Code. "Rehabilitation Loan" means a Mortgage Loan, the proceeds of which are used to finance the acquisition and renovation or rehabilitation of existing real property; provided, however, that at the time the Borrower requests an Initial Advance as to such Mortgage Loan, 25% or more of the total square footage of the then existing building improvements shall be subject to a lease that: (i) is currently in full force and effect with no material defaults; (ii) is with a tenant paying rent on a current basis without deferral, credit or qualification, except for a reasonable reduction for inconvenience during rehabilitation; and (iii) does not expire until after a date that is six months following the anticipated date of completion of such renovation or rehabilitation (other than tenant improvement work) set forth in the applicable construction plans delivered by the Borrower to the Lender. If less than 25% of the total square footage of the then existing building improvements is subject to such a lease at the time the Borrower requests an Initial Advance as to such Mortgage Loan, such Mortgage Loan shall be deemed a Construction Loan for all purposes under this Agreement. If the underlying mortgagor/borrower leases more than 25% of the total square footage of the then existing building improvements subsequent to the Borrower's request for an Initial Advance as to such Mortgage Loan, the Borrower may request the Lender to recharacterize such Mortgage Loan as a Rehabilitation Loan. The Borrower may also request the Lender to recharacterize a Rehabilitation Loan as a different asset classification. The Lender, in its sole discretion, may (but shall not be required to) consider such requests. "REIT" means a real estate investment trust, as defined under Section 856 of the Code. "Request for Additional Advance" - Section IV(D)(1). "Restoration Amount" means, as of any date of determination, the amount, if any, by which (i) the outstanding principal amount of the Loan as of such date (including accrued interest thereon) exceeds (ii) the sum of the applicable Advance Rate for each Pledged Eligible Asset times the lesser of (1) the Stabilized Value of each Pledged Eligible Asset), and (2) the outstanding principal balance of each such Pledged Eligible Asset. "SEC" means the U.S. Securities and Exchange Commission. Appendix I-8 47 "Secured Note" - Section I(7). "Secured Obligations" - Section II. "Securitization" means the First Securitization and any subsequent securitization involving the public or private placement of securities relating to all or any portion of the Pledged Eligible Assets. "Securitization Agreement" means the Amended and Restated Securitization Agreement, dated as of May 4, 1999, by and between the Borrower and PSI and regarding the securitization of some of the Pledged Eligible Assets. "Stabilized Value" means, as of any date in respect of an Eligible Asset or Pledged Eligible Asset, the stabilized value of the collateral property underlying such Eligible Asset or Pledged Eligible Asset, as determined in good faith by the Borrower and approved by the Lender in its sole discretion. The Stabilized Value of a Pledged Eligible Asset shall be described in the Underwriting Transmittal of such Pledged Eligible Asset. "Supplemental Commercial Loan/Asset Schedule" - Section VIII(A). "Tangible Net Worth" means, for any calendar quarter, total shareholder's equity reflected in ACT's financial statements on a consolidated basis prepared in accordance with GAAP less goodwill, patents, trademarks, copyrights, franchises and any other items which would be treated as intangibles under GAAP. A schedule of Tangible Net Worth shall be prepared by the Borrower within 30 days after the end of each calendar quarter and such schedule shall be delivered to the Lender. The Lender shall have 10 days to disapprove of such schedule by citing any specific defects in a written notice to the Borrower. The Borrower shall then have 10 days to cure all such defects. If the Borrower cures such defects in the Lender's reasonable discretion, such schedule shall be deemed approved by the Lender. As of December 31, 1998, Tangible Net Worth was $130,266,000.00. "Total Indebtedness" means, for any period, the aggregate indebtedness of the Borrower during such period computed in accordance with GAAP less (i) the amount of any non-specific balance sheet reserves maintained in accordance with GAAP, (ii) obligations under any Interest Rate Protection Agreement, (iii) loan or investment commitments or loan take-out agreements issued by the Borrower in the ordinary course of its business, (iv) obligations to indemnify parties involved in Securitization or the underwriting and placement (whether publicly or privately) of ACT's shares of beneficial interest or other indemnities made in the ordinary course of business, (v) endorsements for collection or deposit in the ordinary course of the Borrower's business, and (vi) obligations for which the Borrower is not the obligor but which are required to be included on the Borrower's financial statements by GAAP. "Underwriting Transmittal" - Section I(3)(a)(i). "Warrant Agreement" means the Warrant Agreement attached hereto as Exhibit F and executed as of the date of this Agreement by and between the ACT and PSI. Appendix I-9 48 Appendix II REPRESENTATIONS AND WARRANTIES REGARDING ALL PLEDGED ELIGIBLE ASSETS 1. As to each Pledged Eligible Asset, the Borrower hereby represents and warrants to the Lender that as of the related Closing Date; provided, however, that any such representation and warranty may be modified as set forth in, or an exception thereto may be contained in, the executed Underwriting Transmittal in effect for such Pledged Eligible Asset: (a) Commercial Loan/Asset Schedule. The information set forth in the related Commercial Loan/Asset Schedule is true, complete and correct in all material respects. (b) Origination. Such Pledged Eligible Asset complied, on the date such asset was originated ("Closing Date"), in all material respects with all terms, conditions and requirements of prudent underwriting standards, the Borrower's approved due diligence standards and closing procedures as approved by the Lender (the "Borrower's Guidelines") then in effect, except as disclosed by the Borrower in writing in the list of exceptions included in the Underwriting Transmittal and approved by the Lender. (c) Disbursement of Proceeds. The closing of such Pledged Eligible Asset was in compliance, in all material respects, with the Borrower's Guidelines then in effect, except as disclosed in writing by the Borrower to the Lender in the list of exceptions included in the related Commercial Loan/Asset File or the Underwriting Transmittal and thereby approved by the Lender, and the proceeds, or the applicable portion thereof, of such Pledged Eligible Asset have been disbursed in accordance with the related loan documents ("Pledged Asset Documents"). Except as disclosed in writing by the Borrower to the Lender in the list of exceptions included in the related Underwriting Transmittal, any and all requirements imposed by the Borrower as to the status of any on-site or off-site improvements related to the related real property ("Property") and the disbursement of any escrow funds therefor have been complied with as of the date of the Underwriting Transmittal. All costs, fees and expenses incurred in connection with the origination and closing of such Pledged Eligible Asset, including, without limitation, recording costs and fees, have been paid to the appropriate Person or arrangements have been made for their payment to the appropriate Person on a timely basis by the related mortgagor or borrower, and the related mortgagor is not entitled to any refund of any amounts paid or due under the related promissory note or contract or the related mortgage, if any, except for a refund of a cost, fee or expense related to the origination or closing of such Pledged Eligible Asset which borrower is obligated to pay, and has made arrangements to pay, in full on a timely basis. (d) Documents Valid. Each representation and warranty of the Borrower set forth in Section III(B) of this Agreement or this Appendix to this Agreement, to the extent related to the enforceability of any instrument, agreement or other document or as to offsets, defenses, counterclaims or rights of rescission related to such enforceability is qualified to the extent that (i) enforcement may be limited (A) by bankruptcy, insolvency, reorganization fraudulent conveyance, redemption, moratorium or other similar laws affecting the enforcement Appendix II-1 49 of creditors' rights generally, (B) by general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law), and (C) by any applicable anti-deficiency law or statute, and (ii) such instrument, agreement or other document contains certain provisions which may be unenforceable in accordance with their terms, in whole or in part, but the unenforceability of such provisions will not (A) cause the related note or contract or mortgage, if any, to be void, (B) invalidate the related borrower's obligation to pay interest on, and repay the principal of, the related Pledged Eligible Asset in accordance with the payment terms of the related note or contract, the related mortgage, if any, and other written agreements delivered to the Borrower in connection therewith, (C) invalidate the obligation of any related guarantor to pay guaranteed obligations with respect to interest on, and the principal of, the related Pledged Eligible Asset in accordance with the payment terms of such guarantor's written guaranty, (D) impair the mortgagee's right to accelerate and demand payment of the interest on, and principal of, the related Pledged Eligible Asset upon the occurrence of a legally enforceable default, or (E) impair the mortgagee's right to realize against the related Property, if any, by judicial or, if applicable, nonjudicial foreclosure except as provided in any subordination agreement and subject to applicable law. (e) Pledge of Security Interest; Note or Contract Endorsement. The related pledge of the Lender's security interest in the related collateral documents ("Security Documents") is in recordable or otherwise appropriate form and constitutes the Borrower's legal, valid and binding assignment to the Lender of any related mortgage, assignment of leases and rents and/or other collateral. The Borrower's endorsement and delivery of the related note or contract in accordance with the terms of this Agreement constitutes the Borrower's legal, valid and binding assignment to the Lender of such note or contract, and together with the related assignment of Security Documents legally and validly conveys all right, title and interest of the Borrower in such Pledged Eligible Asset to the Lender. (f) No Modification, Release or Satisfaction. Neither the Security Documents nor the related note or contract has been impaired, waived, modified, altered, satisfied, canceled or subordinated or rescinded by the Borrower, and the related Property has not been released from the lien of such Security Documents or the lien of the senior lender and the related mortgagor has not been released by the Borrower from its obligations under such Security Documents, in whole or in any part, in each such event in a manner which materially interferes with the benefits of the security intended to be provided by such Security Documents except as provided in the loan documents or as set forth on the respective Underwriting Transmittal. No instrument has been executed by the Borrower that would effect any such waiver, modification, alteration, satisfaction, cancellation, subordination, rescission or release, with the exception of the written instruments (i) which are a part of the related Commercial Loan/Asset File, (ii) which have been recorded if necessary to protect the interests of the Lender, and (iii) the substance of which is included in the list of exceptions in such Underwriting Transmittal. (g) Escrow Deposits. All escrow deposits and other escrow payments required under the related Pledged Asset Documents to be paid to the Borrower prior to the Funding Date have been paid to, and are in the possession of, or under the control of, or have been applied in accordance with their intended purposes by, the Borrower or its agent. Appendix II-2 50 (h) No Buydowns or Third Party Advances. The Borrower has not, directly or indirectly, advanced funds, induced or solicited any payment from a Person other than the related obligor or, to the best of the Borrower's knowledge, received any payment from a Person other than such obligor, for the payment of any amount required under the related note or contract or Security Documents, except for (a) interest accruing from the date of such note or contract or date of disbursement of the Pledged Eligible Asset proceeds, whichever is later, to the date which precedes by thirty days the first due date under the related promissory note or contract, (b) interest paid pursuant to any interest reserve specified in the Underwriting Transmittal or (c) payments from any tax, insurance or other reserves specified in the Underwriting Transmittal. The Pledged Asset Documents contain no provisions pursuant to which monthly payments are (x) paid or partially paid with funds deposited in any separate account established by borrower, the related mortgagor or anyone on behalf of such mortgagor, or (y) paid by any source other than such mortgagor (except provisions pertaining to a related guarantor's obligations under the terms of such guarantor's written guaranty) and contain no similar provision which may constitute a "buydown" provision unless disclosed in the Underwriting Transmittal. (i) No Condemnation or Damages. To the best of the Borrower's knowledge, there are no proceedings pending or threatened for the total or partial condemnation of the related Property as of the applicable closing date, except for any proceedings as to partial condemnation which are disclosed in writing in the list of exceptions included in such Underwriting Transmittal. To the best of the Borrower's knowledge, each Pledged Eligible Asset is being used for the purpose(s) set forth in the Underwriting Transmittal and is in good repair and free of any damage, waste or defective condition that would materially or adversely affect the value of the property as security for a Pledged Eligible Asset or for the use the property was intended at the time of the origination of the Pledged Eligible Asset. (j) Title Survey; Improvements. The related Commercial Loan/Asset File includes an ALTA/ACSM Land Title Survey with respect to the related Property or, if an ALTA/ACSM Land Title Survey is not available or as otherwise approved in writing by the Lender, an as-built survey with respect to such Property which satisfied the requirements of the title insurance company for its deletion of the standard general exceptions for encroachments, boundary and other survey matters and for easements not shown by the public records from the related title insurance policy as required by the Borrower's Guidelines. In either such event, such survey has been certified by the surveyor to the Borrower if a mortgagee, or the owner of the Property if the Borrower is not the mortgagee and the title insurance company in accordance with the applicable requirements of the Borrower's Guidelines and satisfies the other applicable requirements set forth in the Borrower's Guidelines, except as disclosed in writing in the list of exceptions included in such Underwriting Transmittal. In reliance on the survey and the Title Policy (defined below), except for encroachments and similar matters which do not materially and adversely affect such Property as security for such Pledged Eligible Asset or which are disclosed in writing in the list of exceptions included in such Underwriting Transmittal, (i) none of the improvements which were included for the purpose of determining the value of such Property at the time of the origination of such Pledged Eligible Asset lie outside the boundaries and building restriction lines of such Property, (ii) no improvements on adjoining properties materially encroach upon such Property, and (iii) to the best of the Borrower's knowledge (based upon a representation or opinion obtained from the related mortgagor), no improvements Appendix II-3 51 located on or forming a part of such Property are in violation of any applicable zoning and building laws or ordinances. (k) Compliance with Laws. To the best of the Borrower's knowledge (based upon a representation or opinion obtained from the related mortgagor), (i) the related Property complies, in all material respects, with all laws and regulations pertaining to the use and occupancy thereof, other than applicable zoning and building laws and regulations (addressed in Section 1(j) above) and Environmental Laws (as defined and addressed in Sections 1(t) and (u) below) and all applicable insurance requirements, and (ii) the related mortgagor has obtained or will obtain all inspections, licenses, permits, authorizations and certificates necessary for such compliance, including but not limited to, certificates of occupancy and fire underwriter certificates. The Borrower has not received notification from any governmental authority that such Property is in material non-compliance with such laws or regulations, is being used, operated or occupied unlawfully or has failed to have or obtain such inspections, licenses or certificates, as the case may be. (l) Title Insurance. The related Property (excluding any related personal property) is covered by an ALTA lender's or owner's title insurance policy or, if an ALTA lender's or owner's title insurance policy is unavailable, another state-approved form of lenders title insurance policy issued by a qualified insurer, in an amount not less than the stated original principal amount of such Pledged Eligible Asset (a "Title Policy") and, if the Pledged Eligible Asset is a loan, insuring that the related mortgage is a valid lien on such Property with a priority corresponding to the priority stated in its Underwriting Transmittal, subject to the Permitted Exceptions described in Subsection 2(a) below. The Borrower has not taken, or omitted to take, any action, and, to the best of the Borrower's knowledge, no other Person has taken, or omitted to take, any action, that would materially impair the coverage benefits of any such title insurance policy. Such title policy does not include the general exception for intervening liens which appeared in the commitment for such title insurance. (m) Hazard Insurance. The related Property is insured by a fire and extended perils insurance policy, issued by a commercial insurer, providing coverage against loss or damage sustained by reason of fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicles and smoke and, to the extent required by the Borrower consistent with the Borrower's Guidelines then in effect against earthquake and other risks insured against for which persons operating like properties in the locality of such Property obtain insurance, in an amount not less than the lesser of (i) the full replacement cost of all improvements to such Property, and (ii) the outstanding principal balance of such Pledged Eligible Asset, but in any event in an amount sufficient to avoid the operation of any co-insurance provisions contained in such insurance policy. The related mortgage contains provisions requiring the related mortgagor to maintain business interruption and/or rental continuation coverage sufficient to protect against loss for such period as shall be consistent with the requirements of the Borrower's Guidelines under a policy issued by a qualified insurer. If any improvement on such Property is located in an area identified by the Federal Emergency Management Agency as having special flood hazards under the National Flood Insurance Act of 1968, as amended, such Property is insured by a flood insurance policy, issued by a qualified insurer, meeting the current requirements of the Federal Insurance Administration in an amount Appendix II-4 52 not less than the lesser of (A) the stated principal amount of the related promissory note or contract, and (B) the maximum amount of insurance available under the Flood Disaster Protection Act of 1973, as amended. In the event the Borrower is the mortgagee, each such insurance policy includes a lender's loss payable endorsement in favor of the Borrower and requires the insurer to endeavor to provide at least thirty days' prior written notice to the Borrower of termination or cancellation, and no such notice has been received by the Borrower. To the best of the Borrower's knowledge, such insurance policies are in full force and effect. To the best of the Borrower's knowledge, all premiums due and payable on such insurance policies prior to the Funding Date have been paid and nothing has occurred that would materially impair the benefits of coverage thereunder. In connection with the placement of any such insurance, no commission, fee or other compensation has been or will be received by the Borrower or, to the best of the Borrower's knowledge, any officer, director or employee of the Borrower. The related mortgage, if any, obligates the related mortgagor to maintain all such insurance and, at such mortgagor's failure to do so, authorizes the mortgagee to maintain such insurance at such mortgagor's cost and expense and to seek reimbursement therefore from such mortgagor. (n) Proceeds of Mortgage Loan. To the best of the Borrower's knowledge, the proceeds of such Pledged Eligible Asset have not been and shall not be applied to satisfy, in whole or in part, any debt owing by the related mortgagor/borrower to an Affiliate of the Borrower with respect to the origination of such Pledged Eligible Asset whereby such Affiliate has taken or will take (i) a discounted pay-off of such debt in connection with such application, or (ii) a subordinated lien on any property securing such debt or an equity interest in the related mortgagor in connection with such application unless, in any such case, such fact is disclosed in the list of exceptions included in the related Commercial Loan/Asset File. (o) Customary Provisions. The related promissory note or contract or the related mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the practical realization against the related Property of the benefits of the security. (p) Pledged Eligible Asset Terms. The interest rate on such promissory note constituting a Mortgage Loan Document or contract is as set forth in the Commercial Loan/Asset Schedule; provided, however, that if such promissory note or contract relates to an adjustable rate note, the mechanism by which the interest rate is adjusted shall be set forth in the Commercial Loan/Asset Schedule. Except as specified in the Underwriting Transmittal relating to an accrual rate of interest in excess of a required pay rate of interest, the related Mortgage Loan Documents do not provide for any negative amortization. The related mortgage, if any, provides for the appointment of a receiver for rents, or the mortgagee's entry into possession of the related Property to collect rents, in connection with an event of default or acceleration. (q) Inspection. Consistent with the provisions of the Borrower's Guidelines, the Borrower has inspected or has caused the related Property to be inspected in connection with the origination of such Pledged Eligible Asset no earlier than six months prior to the initial Funding Date. Appendix II-5 53 (r) No Notice of Bankruptcy. The Borrower has no knowledge nor has it received any notice that the related Mortgagor is a debtor in any state or federal bankruptcy or insolvency proceeding. (s) Access Routes. Based upon the information provided the Borrower in the Pledged Asset Documents, at the Closing Date of such Pledged Eligible Asset, (i) the underlying borrower had sufficient rights with respect to amenities, ingress and egress and similar matters to support the intended use described in the Underwriting Transmittal, and (ii) to the best of the Borrower's knowledge, such Property was receiving or has access to adequate services from public or private water, sewer and other utilities. (t) Environmental Assessment. In connection with the origination of such Pledged Eligible Asset, a Phase I environmental assessment and report and, if recommended by the Phase I environmental assessment and report, a Phase II environmental assessment and report with respect to the related Property were obtained from an independent environmental engineer or consultant; and such report(s) did not indicate the existence of conditions or circumstances respecting such Property that would (i) constitute or result in a material violation of any applicable Environmental Law, (ii) impose any material constraint on the operation of such Property or require material change in the use thereof, or (iii) require clean-up, remedial action or other response with respect to Hazardous Materials on or affecting such Property under any applicable Environmental Law, with the exception of conditions or circumstances (A) which such report(s) indicated could be cleaned up, remediated or brought into compliance with applicable Environmental Law by the taking of certain actions, and (B) either (1) for which a hold-back or other escrow of funds, if any, not less than the costs of taking such clean-up, remediation or compliance actions as estimated in such report(s) has been created to be held by the Borrower or an escrow agent until such clean-up, remediation or compliance actions have been taken, (2) for which an environmental insurance policy in an amount satisfactory to the Borrower has been obtained by the related mortgagor or an indemnity for such costs has been obtained from a potentially culpable party, or (3) such clean-up, remediation or compliance actions in compliance with applicable Environmental Law have been completed prior to the related Funding Date, or (4) for which other arrangements disclosed to the Lender have been made. For purposes of this Agreement, the term "Hazardous Materials" shall include, without limitation, gasoline, petroleum products, explosives, radioactive materials, polychlorinated biphenyls or related or similar materials, asbestos or any material containing asbestos, and any other substance or material as may be defined as a hazardous or toxic substance under any applicable Environmental Law; and the term "Environmental Law" shall mean any environmental law ordinance, rule, regulation or order of a federal, state or local governmental authority including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. 9601 et seq), the Hazardous Material Transportation Act, as amended (49 U.S.C. 1801 et seq,), the Resource Conservation and Recovery Act, as amended (42 U.S.C. 6901 et seq,), the Federal Water Pollution Control Act, as amended (33 U.S.C. 12S1 et seq.,), the Clean Air Act (42 U.S.C. 7401 et seq.), as amended, and the regulations promulgated pursuant thereto. (u) Notice of Environmental Problem. Except for the notices, if any, described in the list of exceptions included in the related Underwriting Transmittal and furnished Appendix II-6 54 to the environmental engineer or consultant in connection with its assessment(s) described in Section 1(t) above (and addressed by such engineer or consultant in such assessments), the Borrower has not received actual notice from: (i) any federal, state or other governmental authority of (A) any failure of the related Property to comply with any applicable Environmental Laws, or (B) any known or threatened release of Hazardous Materials on or from such Property in violation of Environmental Laws; or (ii) the related mortgagor that (A) such mortgagor has received any such notice from any such governmental authority, (B) such Property fails to comply with Environmental Laws, or (C) there is any known or threatened release of Hazardous Materials on or from such Property in violation of Environmental Laws. (v) No Untrue Information. No statement, report or other document furnished by or on behalf of the Borrower or any affiliate thereof in writing (including writings in electronic form) pursuant to this Agreement relating to such Pledged Eligible Asset contains any untrue statement by the Borrower or any Affiliate thereof of any material fact or an omission by the Borrower or any Affiliate thereof of a material fact necessary to make the statements contained therein not misleading. Based upon its review of its files and such inquiry as is customary by a prudent commercial mortgage lender, the Borrower does not know or have reason to know that any such statement, report or other document furnished by or on behalf of the Borrower or any Affiliate thereof in writing (including writings in electronic form) pursuant to this Agreement relating to such Pledged Eligible Asset incorporating any statement, report or other document furnished to the Borrower by any underlying borrower or any other Person contains any untrue statement by any other Person of any material fact or an omission of a material fact necessary to make the statements contained therein not misleading. 2. As to each Pledged Eligible Asset which constitutes a Mortgage Loan or other Pledged Eligible Asset, if applicable, and is secured by an interest in real property, the Borrower hereby represents and warrants to the Lender that as of the related Funding Date; provided however, that any such representation and warranty maybe modified as set forth in, or an exception thereto may be contained in, the executed Underwriting Transmittal in effect for such Pledged Eligible Asset: (a) Lien Position. The related mortgage is a valid, subsisting and enforceable lien on the related Property (including all buildings and improvements on such Property and all installations and mechanical, electrical, plumbing, heating and air conditioning systems located in or annexed to such buildings, and all additions, alterations and replacements made at any time prior to the related Funding Date with respect to the foregoing, but excluding any related personal property), which Property is free and clear of all encumbrances and liens having priority over the lien of such Mortgage, except for (i) any liens of a prior lender described in the Title Policy and Underwriting Transmittal, (ii) liens for real estate taxes and special assessments not yet due and payable, (iii) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording of such mortgage which do not materially and adversely (1) affect the value of such Property, and (2) interfere with the related mortgagor's use of such Property for the intended purposes therefor, (iv) leases and subleases pertaining to such Property which the Borrower, in accordance with the Borrower's Guidelines, did not require to be subordinated to the lien of such mortgage, and (iv) other matters to which like properties are commonly subject which do not, individually or in the aggregate, materially Appendix II-7 55 interfere with the benefits of the security intended to be provided by such Mortgage ("Permitted Exceptions"). Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the related Pledged Eligible Asset establishes and creates a valid, subsisting and enforceable lien on and a security interest in the property described therein, and the Borrower has full right to sell and assign the same to the Lender. (b) No Taxes or Assessments. All taxes and governmental assessments which became due and owing prior to the Funding Date in respect of the related Property (excluding any related personal property) and which, if left unpaid, would be or might become, a lien on such Property having priority over the related mortgage, have been paid or an escrow of funds in an amount sufficient to cover such taxes and assessments has been established. (c) No Mechanics Liens. In reliance on the related Title Policy and to the best of the Borrower's knowledge, the related Property (excluding any related personal property) is free and clear of any mechanics' and materialmen's liens or liens in the nature thereof, and no rights are outstanding that, under law, could give rise to any such liens, any of which liens are or may be prior to, or equal with, the lien of the related mortgage, except those which are insured against by the Title Policy. (d) UCC Financing Statements. One or more Uniform Commercial Code financing statements covering all furniture, fixtures, equipment and other personal property in which Mortgagor has an interest (i) which are collateral under the related Security Documents executed and delivered in connection with such Pledged Eligible Asset, and (ii) in which a security interest can be perfected by the filing of Uniform Commercial Code financial statement(s) under applicable law have been filed or recorded (or have been sent for filing or recording) in all Uniform Commercial Code filing offices necessary to the perfection of a security interest in such furniture, fixtures, equipment and other personal property under applicable law. (e) Property Leased to Tenants. As to each Pledged Eligible Asset other than a multifamily property secured by a Property which is subject to one or more leases that are relied on for purposes of determining the DSCR of such loan, the Borrower has obtained estoppel certificates from tenants (or, at a minimum, tenants occupying 90% of the net leased area relied on in determining the DSCR, but specifically including any such tenant who leases 25% or more of the net leasable area of the Property), and other information with respect to the leases ("Leases") relating to such Property in which the underlying borrower is the landlord or lessor thereunder (including copies thereof) and the tenants with such Leases as required by the Borrower's Guidelines, and based upon such investigation by the Borrower: (i) To the best of the Borrower's knowledge, the related mortgagor/borrower is complying, in all material respects, with each lease pertaining to the Property except as disclosed in writing in the list of exceptions included in the related Underlying Transmittal. (ii) Except as disclosed in writing in the list of exceptions included in the related Underwriting Transmittal, no Lease with respect to 10% or more of the net Appendix II-8 56 leasable area of such Property requires the landlord to rebuild or repair any damages or destruction to the leased premises or to compensate the tenant for any condemnation affecting the leased premises. (iii) Except as disclosed in writing in the list of exceptions included in the related Underwriting Transmittal, to the best of the Borrower's knowledge, (A) no Lease with respect to 10% or more of the net leasable area of such Property contains an option to purchase or any right of a tenant to terminate the Lease or vacate the leased premises prior to expiration of the lease term, (B) each Lease is in full force and effect, (C) each tenant is current in the payment of rent due under each Lease of 10% or more of the net leasable area of such Property and has not paid the remaining rents more than one month in advance, and (D) such Commercial Loan/Asset File contains true and complete copies of each Lease, as amended. (f) Mortgage Loans Secured by Ground Lease. With respect to each Pledged Eligible Asset that is secured in whole or in part by the interest of a related mortgagor as a lessee under a ground lease of the related Property (a "Ground Lease"), either (i) the ground lessor's related fee interest in such Property (the "Fee Interest") is subject to or subordinate to the lien of the related mortgage as set forth in the Commercial Loan/Asset Schedule, or (ii): (A) such Ground Lease is in full force and effect and such Ground Lease or a memorandum thereof has been duly recorded; such Ground Lease does not prohibit the interest of the related lessee thereunder from being encumbered by the related mortgage; and there have been no material changes in the terms of any such Ground Lease except as set forth in written instruments which are part of the related Commercial Loan/Asset File; (B) except as may be indicated in the related Title Policy referred to in Section 1(l) above, such Ground Lease is not subject to any liens or encumbrances superior to, or of equal priority with, the related mortgage, other than the related Fee Interest; (C) the related lessee's interest in such Ground Lease may be transferred to the Lender and its successors and assigns through foreclosure of the related Mortgage or conveyance in lieu of foreclosure and, thereafter, may be transferred to another Person by the Lender and its successors and assigns upon notice to, but without the consent of, the related lessor (or, if any such consent is required, either (1) it has been obtained prior to the Funding Date, or (2) it will not to be unreasonably withheld); (D) the related lessor is required to give notice of any default under such Ground Lease by the related lessee to the Borrower either under the terms of such Ground Lease (the related lessor having received notice of the related mortgage) or under the terms of a separate written agreement binding upon the related lessor; (E) except as disclosed in writing in the list of exceptions included in the related Underwriting Transmittal, before the related lessor may terminate Appendix II-9 57 such Ground Lease because of a default thereunder by the related lessee, the Borrower is entitled, under the terms of such Ground Lease or a separate written agreement binding upon the related lessor, to receive notice of such default and to cure or, alternatively, to commence proceedings to foreclose the related mortgage plus a reasonable opportunity to cure such default after foreclosure or a conveyance in lieu of foreclosure if the Borrower pursues foreclosure in good faith and with due diligence; (F) except as expressly approved by the Lender in writing, the currently effective term of such Ground Lease (excluding any extension or renewal which is not binding on the lessor thereunder) extends not less than ten years beyond the maturity date of the related Pledged Eligible Asset; (G) except as expressly approved by the Lender in writing, under the terms of such Ground Lease and the related Mortgage, taken together, any related property insurance proceeds other than in respect of a total or substantially total loss or taking, would be applied either (1) to the repair or restoration of the damaged portion of the related Property, with the mortgagee or a trustee or escrow agent appointed by it having the right to hold and disburse such proceeds as the repair or restoration progresses (except where such mortgage provides that the related mortgagor or its agent may hold and disburse such proceeds), or (2) to the payment of the outstanding principal balance of such Pledged Eligible Asset together with any accrued interest thereon; (H) such Ground Lease does not impose any restrictions on subletting which the Borrower considered to be commercially unreasonable at the time of origination of such Pledged Eligible Asset; and (I) the Borrower has not received any notice and otherwise has no knowledge that (1) the lessor under such Ground Lease is asserting a default by the lessee or an event of default thereunder, or (2) any event has occurred which, with the passage of time, the giving of notice, or both (other than rental or other payments being due, but not yet delinquent), would result in a default or an event of default under the terms of such Ground Lease. (g) Deed of Trust. With respect to each related mortgage that is a deed of trust or trust deed, a trustee, duly qualified under applicable law to serve as such, has either been properly designated and currently so serves or may be substituted in accordance with applicable law. Except in connection with a trustee's sale after default by the related mortgagor or in connection with the release of the related Property following the payment of such Pledged Eligible Asset in full, no fees or expenses are payable by the Lender to such trustee. (h) Type of Property. The related Property consists of an estate in fee simple or leasehold estate in real property and improvements thereon as set forth in the Commercial Loan/Asset Schedule. (i) Mortgage Acceleration Provisions. The related mortgage contains a provision for the acceleration of the payment of the unpaid principal balance of such Pledged Appendix II-10 58 Eligible Asset in the event that the related Property is sold or transferred without the prior written consent of the mortgagee thereunder, except as provided in any subordination agreement contained in the Commercial Loan/Asset File. (j) No Additional Collateral. The related promissory note or contract is not, and has not been, secured by any collateral except the lien of the related mortgage and the Security interest of any related Security Documents assigned pursuant to the related assignment to the Lender. Except for any cross-collateralizations described in the Underwriting Transmittal, such mortgage was not given as collateral or security for the performance of obligations of any Person other than the related mortgagor. (k) Assignment of Leases and Rents. Any related assignment of leases and rents incorporated within the related mortgage or set forth in a separate document creates a valid assignment of, or security interest in, the right to receive all payments due under the related Leases, if any, with a priority corresponding to the priority stated in the Underwriting Transmittal and subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium or other laws relating to or affecting the rights of creditors generally and general principles of equity (regardless of whether considered in a proceeding in equity or at law); and no Person other than the related mortgagor owns any interest in the right to receive any payments due under such Leases that is superior to or of equal priority with the mortgagee's interest therein. (l) Default, Breach and Acceleration. There is no monetary default, breach, violation or event of acceleration existing under the related Pledged Eligible Asset or the related documents to such Pledged Eligible Asset and no event (other than a failure to make payments due but not yet delinquent) which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a monetary default, breach, violation or event of acceleration. In addition, to the best of the Borrower's knowledge there is no non-monetary default, breach, violation or event of acceleration. Appendix II-11 59 Schedule A APPROVED ASSETS Schedule A-1 60 Schedule B DISCLOSURE OF PROCEEDINGS PENDING AGAINST THE BORROWER, EVENTS CAUSING MATERIAL ADVERSE CHANGES AND CHANGES TO THE MANAGEMENT AGREEMENT None Schedule B-1 61 Exhibit A FORM OF SECURED NOTE Dated as of May 4, 1999 FOR VALUE RECEIVED, the undersigned, AMRESCO CAPITAL TRUST, a real estate investment trust organized under the laws of the State of Texas, AMREIT I, INC., a Delaware corporation, AMREIT II, INC., a Delaware corporation, ACT EQUITIES, INC., a Georgia corporation and ACT HOLDINGS, INC., a Georgia corporation, each having an address at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201 (individually and collectively, the "Borrower"), jointly and severally, promise to pay to the order of PRUDENTIAL SECURITIES CREDIT CORP., a Delaware corporation, whose address is One New York Plaza, New York, New York 10292 (the "Lender"), on or before each Maturity Date the amount then outstanding (including accrued interest at the rate(s) set forth in the Agreement) under that certain Amended and Restated Interim Warehouse and Security Agreement, dated as of May 4, 1999, between the Borrower and the Lender (as amended from time to time, the "Agreement"). Initially, the maximum principal amount which may be outstanding is $300,000,000 (subject to certain limitations as set forth therein). Capitalized terms used herein and not defined herein shall have their respective meanings as set forth in the Agreement. The holder of this Note is authorized to record the date and amount of each Advance and the date and amount of each repayment of principal thereof on the schedule to be maintained by the Lender (which schedule may be obtained upon the Borrower's request), and any such recordation shall constitute prima facie evidence of the accuracy of the amount so recorded; provided that the failure of the holder hereof to make such recordation (or any error in such recordation) shall not affect the obligations of the Borrower hereunder or under the Agreement. MAXIMUM RATE OF INTEREST: It is intended that the rate of interest herein shall never exceed the maximum rate, if any, which may be legally charged on the Loan evidenced by this Note ("Maximum Rate"), and if the provisions for interest contained in this Note would result in a rate higher than the Maximum Rate, interest shall nevertheless be limited to the Maximum Rate and any amounts which may be paid toward interest in excess of the Maximum Rate shall be applied to the reduction of principal, or, at the option of the Lender, returned to the Borrower. DUE DATE: The Loan evidenced hereby not paid before each Maturity Date shall be due and payable on each Maturity Date. PLACE OF PAYMENT: All payments hereon shall be made, and all notices to the Lender required or authorized hereby shall be given, at the office of the Lender at the address designated in the heading of this Note, or to such other place as the Lender may from time to time direct by written notice to the Borrower. Exhibit A-1 62 PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder are payable by wire transfer in immediately available funds to the account number specified by the Lender, in lawful money of the United States. Payments remitted by the Borrower via wire transfer initiated after 1:00 p.m. New York City time shall be deemed to be received on the next Business Day. The Borrower agrees to pay all costs of collection when incurred, including, without limiting the generality of the foregoing, reasonable attorneys' fees through appellate proceedings, and to perform and comply with each of the covenants, conditions, provisions and agreements contained in every instrument now evidencing or securing said indebtedness. SECURITY: This Note is issued pursuant to the Agreement and is secured by a pledge of the Collateral described therein. Notwithstanding the pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees that the Borrower's obligations under this Note are recourse obligations of the Borrower to which the Borrower pledges its full faith and credit. DEFAULTS: Upon the happening of an Event of Default (as defined in the Agreement), the Lender shall have all rights and remedies set forth in the Agreement. The failure to exercise any of the rights and remedies set forth in the Agreement shall not constitute a waiver of the right to exercise the same or any other option at any subsequent time in respect of the same event or any other event. The acceptance by the Lender of any payment hereunder which is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing rights and remedies at that time or at any subsequent time or nullify any prior exercise of any such rights and remedies without the express consent of the Lender, except as and to the extent otherwise provided by law. WAIVERS: The Borrower waives diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, and expressly agrees that this Note, or any payment hereunder, may be extended from time to time, and consents to the acceptance of further collateral, the release of any collateral for this Note, the release of any party primarily or secondarily liable hereon, and that it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust the Lender's remedies against the Borrower or any other party liable hereon or against any collateral for this Note. None of the foregoing shall affect the liability of the Borrower. No extension of time for the payment of this Note, or an installment hereof, made by agreement by the Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of the Borrower, even if the Borrower is not a party to such agreement; provided, however, the Lender and the Borrower, by written agreement between them, may affect the liability of the Borrower. TERMINOLOGY: If more than one party joins in the execution of this Note, the covenants and agreements herein contained shall be the joint and several obligation of each and all of them and of their respective heirs, executors, administrators, successors and assigns, and relative words herein shall be read as if written in the plural when appropriate. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Exhibit A-2 63 Note. Words of masculine or neuter import shall be read as if written in the neuter or masculine or feminine when appropriate. AGREEMENT: Reference is made to the Agreement for provisions as to Advances, rates of interest, mandatory principal repayments, collateral and acceleration. If there is any conflict between the terms of this Note and the terms of the Agreement, the terms of the Agreement shall control. APPLICABLE LAW: THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK, THE LAWS OF WHICH THE BORROWER HEREBY EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. WAIVER OF JURY TRIAL: EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. [Signature Page S-1 Attached] Exhibit A-3 64 AMRESCO CAPITAL TRUST By: ---------------------------------------- Name: Jon S. Pettee Title: President By: ---------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President AMREIT I, INC. By: ---------------------------------------- Name: Jon S. Pettee Title: President By: ---------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President AMREIT II, INC. By: ---------------------------------------- Name: Jon S. Pettee Title: President By: ---------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President S-1 65 ACT EQUITIES, INC. By: ---------------------------------------- Name: Jon S. Pettee Title: President By: ---------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President ACT HOLDINGS, INC. By: ---------------------------------------- Name: Jon S. Pettee Title: President By: ---------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President S-2 66 Exhibit B FORM OF LEGAL OPINION __________ __, 1999 Lender - ---------------- - ---------------- - ---------------- Re: Amended and Restated Interim Funding Arrangement for Eligible Assets Gentlemen: I am the counsel to AMRESCO Capital Trust, a Texas real estate investment trust ("ACT"), AMREIT I, Inc., a Nevada corporation, AMREIT II, a Delaware corporation, ACT Equities, Inc., a Georgia corporation, and ACT Holdings, Inc., a Georgia corporation (individually and collectively, the "Borrower"). I have represented the Borrower in connection with the execution and delivery of the following documents: (i) Amended and Restated Interim Warehouse and Security Agreement, dated as of __________, 1999 (the "Agreement"), by and between the Borrower and Prudential Securities Credit Corp. (the "Lender"); (ii) Secured Note executed as of ___________________, 1999 by the Borrower in favor of the Lender (the "Note"); ---- (iii) Amended and Restated Custodial Agreement, dated as of ___________________, 1999 (the "Custodial Agreement"), among the Lender, the Borrower and ____________ (the "Custodian"); (iv) Amended and Restated Securitization Agreement, dated as of ______, 1999 by and between the Borrower and Prudential Securities Incorporated (the "Securitization Agreement"); (v) Warrant Agreement, dated as of ______, 1999 by and between ACT and Prudential Securities Incorporated (the "Warrant Agreement"); and (vi) The Letter Agreement Amending Section III(C)(8) of the Warehouse Agreement, dated as of ______, 1999 addressed to the Borrower and sent by the Lender (the "Letter Agreement"). Capitalized terms used herein, but not defined herein, shall have the meanings assigned to them in the Interim Warehouse and Security Agreement. Exhibit B-1 67 I have examined executed copies of the Agreement, the Note, the Custodial Agreement, the Securitization Agreement, the Warrant Agreement and the Letter Agreement. I have also examined originals or photostatic or certified copies of all such corporate records of the Borrower and such certificates of public officials, certificates of corporate officers, and other documents, and such questions of law, as I have deemed appropriate and necessary as a basis for the opinions hereinafter expressed. In making my examination and rendering the opinions herein expressed, I have made the following assumptions: (i) each party to each of the Agreement (other than the Borrower), the Custodial Agreement (other than the Borrower), the Securitization Agreement (other than the Borrower), the Warrant Agreement (other than the Borrower) and the Letter Agreement (other than the Borrower) has the power to enter into and perform all of its obligations thereunder, (ii) the due authorization, execution and delivery of each of the Agreement, the Custodial Agreement, the Securitization Agreement, the Warrant Agreement and the Letter Agreement by all parties thereto (other than the Borrower), and (iii) the validity and binding effect on all parties thereto (other than the Borrower) of each of the Agreement, the Custodial Agreement, the Securitization Agreement, the Warrant Agreement and the Letter Agreement. The opinions expressed below with respect to enforceability are subject to the following additional qualifications: (a) The effect of insolvency, reorganization, moratorium, conservatorship, receivership, or other similar laws relating to or affecting the rights of creditors generally in the event of insolvency, reorganization, moratorium or receivership. (b) The application of general principles of equity, including, but not limited to, the right of specific performance (regardless of whether enforceability is considered in a proceeding in equity or at law). (c) The unenforceability of provisions to the effect that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such rights or remedies, or to the effect that provisions therein may only be waived in writing to the extent that an oral agreement has been entered into modifying such provisions. I am licensed to practice law in the State of Texas. For purposes of this opinion, I have assumed the laws of the State of Texas are substantially similar to the laws of the State of New York. Subject to such assumption, each opinion hereinafter set forth is an opinion concerning only the law of the State of Texas and New York, the corporate laws of Texas, Nevada, Delaware and Georgia and applicable federal law. All opinions expressed herein are based on laws, regulations and policy guidelines currently enforced and may be affected by future changes in law. Furthermore, no opinion is expressed herein regarding the applicable federal securities, state Blue Sky, legal investment or real estate syndication laws. Based upon the foregoing, and subject to the last paragraph hereof, I am of the opinion that: Exhibit B-2 68 1. The Agreement, the Note, the Custodial Agreement, the Warrant Agreement and the Securitization Agreement each constitute the valid, legal and binding agreement of the Borrower, and each is enforceable against the Borrower in accordance with its terms. 2. No consent, approval, authorization or order of, registration or filing with, or notice to, any governmental authority or court is required under federal laws or the laws of the States of Texas or New York for the execution, delivery and performance of the Agreement, the Note, the Custodial Agreement, the Warrant Agreement or the Securitization Agreement, as applicable, by the Borrower, except such of which as have been obtained. 3. The execution, delivery and performance by the Borrower of the Agreement, the Note, the Custodial Agreement, the Warrant Agreement and the Securitization Agreement, does not conflict with or result in a breach of, or constitute a default under any law, rule or regulation of the federal government or of the States of Texas or New York. 4. The execution, delivery and performance of the Agreement, the Note, the Custodial Agreement, the Warrant Agreement and the Securitization Agreement by the Borrower will not result in a default under any mortgage, borrowing agreement, or other instrument or agreement pertaining to indebtedness for borrowed money to which the Borrower is a party. 5. Upon the execution of the Agreement, a valid security interest in the Eligible Assets and the proceeds thereof is granted to the Lender, which security interest would be a valid, first-priority, perfected security interest with respect to such Eligible Assets and the proceeds thereof upon the delivery of the Commercial Loan/Asset Files to the Custodian or the recording of a Form UCC-1 financing statement with the appropriate state authorities. 6. Attached as Exhibit A and incorporated by reference herein is a listing of states in which the Borrower is licensed as a mortgage lender or maintains a comparable license. Attached as Exhibit B and incorporated by reference herein is a listing of states in which each Borrower has qualified to do business. Each Borrower is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification. This Opinion is furnished by me as counsel to the Borrower and is solely for the benefit of the addressees hereof; except that this Opinion may be relied upon by any holder in due course of the Note. Yours truly, Exhibit B-3 69 Exhibit C FORM OF UNDERWRITING TRANSMITTAL Exhibit C-1 70 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Executive Summary - ----------------- OVERVIEW - ----------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ----------------- LOAN SUMMARY - ----------------- - ------------------------------------------------------------------------------- Loan Purpose Borrower Name Property Type Referral Source SF/Units Investment Officer Location Manager ACT Loan Amount Expected Closing Date Lien Position Commitment Expiration Date LTC Prior 3rd Party Lien Amount - ------------------------------------------------------------------------------- - ----------------- RECOMMENDED STRUCTURE - ----------------- - ------------------------------------------------------------------------------- Commitment Amount Commitment % Fees Expected Initial Funding Pay Rate % Fixed/Floating Loan Term Accrual Rate % Fixed/Floating (Months) Amortization Term Cash Flow Participation Yes No % (Months) Number of Extension Options Residual Participation Yes No % Number of Months Projected ACT IRR Extension Fees Earlier Payoff % mos. Lockout Period Primary Term % mos. Prepayment Penalty Extended Term % mos. Primary Term Leveraged @ % @ rate = ---- ------ - ------------------------------------------------------------------------------- Exhibit C-2 71 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Participation Discussion & Waterfall Description: - ------------------------------------------------------------------------------- - ----------------- EXIT STRATEGY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-3 72 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Capital Structure - ----------------- SOURCES USES - ------------------------------------------------------------------------------- Borrower PSF/OR PSF/OR Equity: UNIT UNIT Cash $ % Purchase Price $ % Deferred Fees $ % Land $ % Other $ % Construction Cost $ % Other Debt $ % Interest Reserve $ % ACT Debt $ % Tenant Improvements $ % $ % Leasing Commissions $ % Deferred Maintenance $ % Closing Costs $ % Contingencies $ % Other ======================= ============================= TOTAL Total - ------------------------------------------------------------------------------- - ----------------- SOURCE OF DEVELOPER EQUITY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-4 73 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- - ----------------- INTEREST RESERVE - ------------------------------------------------------------------------------- Lease up Assumptions Calculation (note offsetting income) - ------------------------------------------------------------------------------- ADEQUACY DISCUSSION: - ------------------------------------------------------------------------------- - ----------------- TI RESERVE - ------------------------------------------------------------------------------- Calculation: - ------------------------------------------------------------------------------- Adequacy Discussion: - ------------------------------------------------------------------------------- - ------------------------------------------ LEASE COMMISSIONS (DESCRIBE FEE STRUCTURE) - ------------------------------------------------------------------------------- Average Rent PSF $ Average Lease Term years Average Commission % - ------------------------------------------------------------------------------- Adequacy Discussion: - ------------------------------------------------------------------------------- Exhibit C-5 74 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- - ----------------- FEE BREAKDOWN - ------------------------------------------------------------------------------- ACT: Broker: Developer: Overhead: Profit: Management: Leasing Commissions: - ------------------------------------------------------------------------------- Exhibit C-6 75 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Capital Structure (continued) - ---------------------------------------------- JUSTIFICATION OF POSITION IN CAPITAL STRUCTURE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ----------------- PRIOR LIEN DETAIL - ------------------------------------------------------------------------------- Amount: $ Holder: Rate: Address: Term: Maturity Date: Amortization: Other: Inter-Creditor Rights: - ------------------------------------------------------------------------------- - ----------------------------- Other Sources & Uses Comments - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-7 76 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Borrower & Guarantors - ---------------------------- BORROWER/SPONSOR INFORMATION - ------------------------------------------------------------------------------- Borrower Name: Borrower Entity Type: Sponsor/Principal of Borrower: Borrower Address: Special Purpose Entity [ ] Yes [ ] No Related Loans (Borrower, $ Amount) Is SPE Bankruptcy Remote [ ] Yes [ ] No - ------------------------------------------------------------------------------- BORROWER/PRINCIPAL/SPONSOR CREDIT HISTORY AND REAL ESTATE EXPERIENCE/SUMMARY OF 3RD PARTY INQUIRIES - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-8 77 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- - ---------------- GUARANTORS - ---------------- - ---------------- Guarantor 1 - ------------------------------------------------------------------------------- Name Comments: F/S Date Total Assets Liquid Assets Net Worth - ------------------------------------------------------------------------------- Guarantor 2 - ------------------------------------------------------------------------------- Name Comments: F/S Date Total Assets Liquid Assets Net Worth - ------------------------------------------------------------------------------- Guarantor 3 - ------------------------------------------------------------------------------- Name Comments: F/S Date Total Assets Liquid Assets Net Worth - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Are all principals signing guaranties? [ ] Yes [ ] No - ------------------------------------------------------------------------------- List any exceptions: - ------------------------------------------------------------------------------- Standard Carve-Out for Bankruptcy Standard Carve-Out for Fraud/Misrepresentation Standard Carve-Out for Misapplication of Funds Standard Carve-Out for Obstruction of Remedies Standard Carve-Out for Unpermitted Transactions Standard Environmental Guaranty Standard Indemnification Standard Completion - ------------------------------------------------------------------------------- Exhibit C-9 78 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Project Team - ------------------------ CONTRACTOR INFORMATION - ------------------------------------------------------------------------------- Name: FS Date: Bonded: [ ] Yes [ ] No Total Assets: Liquid Assets: Net Worth: - ------------------------------------------------------------------------------- Contractor Experience Discussion: - ------------------------------------------------------------------------------- - -------------------- PROPERTY MANAGEMENT - ------------------------------------------------------------------------------- Firm Firm Contact - ------------------------------------------------------------------------------- Does Owner manage property? [ ] Yes Contractual Mgmt Fee Percent [ ] No - ------------------------------------------------------------------------------- Underwritten Mgmt Fee Percent - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - --------------- Leasing Agent - ------------------------------------------------------------------------------- Company Name Leasing Agent Contact - ------------------------------------------------------------------------------- Leasing Managed by Property [ ] Yes [ ] No Leasing Agent Fee % Owner - ------------------------------------------------------------------------------- Leasing Managed by Property [ ] Yes [ ] No New Leases Manager - ------------------------------------------------------------------------------- Renewals - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- Exhibit C-10 79 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Property Economics Summary(1) - ------------------- ------------------- AT INITIAL FUNDING: AT STABILIZATION: - ------------------------------------------------------------------------------- Expected Closing Date Expected Date NOI NOI TI/LC Reserves TI/LC Reserves CFADS CFADS DSCR (w/o Int. Res.) DSCR DSCR (with Int. Res.) Init. Funding/Acq. Price Total Cost Estimated Value Cost PSF Value PSF LTC Stabilized LTV Occupancy Occupancy Pre-leasing - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - ------------------------ (1) See Tabs entitled "Economics:" "Act Model" and "ARGUS" for Details. Exhibit C-11 80 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Market Summary - ---------------------------- CURRENT MARKET INFORMATION - ------------------------------------------------------------------------------- Information as of Date Market Occupancy Underwritten Market Rents Occupancy Trends Rent Trends Economic Trends - ------------------------------------------------------------------------------- GENERAL MARKET COMMENTS: - ------------------------------------------------------------------------------- SUB-MARKET COMMENTS: - ------------------------------------------------------------------------------- - ------------------- RENT COMPARABLES - ------------------------------------------------------------------------------- NAME/ADDRESS SIZE (SF, YEAR BUILT OCCUPANCY RENTAL TI'S UNITS) (%) RATE - ------------------------------------------------------------------------------- 1. 2. 3. Subject Property - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - ------------------------- SALES COMPARABLES - LAND - ------------------------------------------------------------------------------- NAME/ADDRESS SALES SIZE (SF, SALES SALES SALES PRICE/BUIDABLE UNITS) DATE PRICE PRICE SF PSF - ------------------------------------------------------------------------------- 1. 2. 3. Subject Property - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- Exhibit C-12 81 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Sales Comparables - Buildings - ------------------------------------------------------------------------------- NAME/ADDRESS SALES CAP SIZE (SF, YEAR OCCUPANCY RENTAL PRICE RATE UNITS) BUILT (%) RATE SF, UNIT (%) - ------------------------------------------------------------------------------- 1. 2. 3. Subject Property - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- Exhibit C-13 82 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- PROPERTY/COLLATERAL DESCRIPTION MULTI-FAMILY - -------------- PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - -------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ---------------------- PROPERTY DESCRIPTION - ------------------------------------------------------------------------------- Year Built: Attached Garage Year Rehabilitated: Unattached Garage Rentable Area: Covered Parking Roof Type: Uncovered Parking Land Area (acres): Total Spaces Units per acre: No. of Spaces per Unit Current Occupancy: - -------------------------------------------------------------------------------
- ------------ UNIT MIX - ----------------------------------------------------------------------------------------------------------------------------------- Unit Type Number Average Size (Sq. ft.) Current Rental Rate - --------- ------ --------------------- ------------------- Base PSF - ------------------- ----------------- --------------------------------- ------------------------------- --------------------------- 1BR/1B - ------------------- ----------------- --------------------------------- ------------------------------- --------------------------- 2BR/1B - ------------------- ----------------- --------------------------------- ------------------------------- --------------------------- 2BR/2B - ------------------- ----------------- --------------------------------- ------------------------------- --------------------------- Other - ------------------- ----------------- --------------------------------- ------------------------------- --------------------------- TOTAL OR AVG. - ------------------- ----------------- --------------------------------- ------------------------------- ---------------------------
- ----------------- UNIT AMENITIES - --------------------------- ------------------------------ ------------------------- ----------------------- ---------------------- [ ] Washer-Dryer [ ] Self-Cleaning Oven [ ] Dry Bar [ ] Ceiling Fans [ ] Garden Tubs [ ] W/D Connections [ ] Icemakers [ ] Built-In Bookcases [ ] Crown Molding [ ] Double Vanities [ ] Trash Compactor [ ] Frost-free Refrigerator [ ] Security System [ ] Mini Blinds [ ] Balconies/Patios [ ] Disposal [ ] Built-Ins [ ] Vaulted Ceilings [ ] Vertical Blinds [ ] Free Cable T.V. - --------------------------- ------------------------------ ------------------------- ----------------------- ----------------------
Exhibit C-14 83 - ------------------------------------------------------------------------------- Deal Name: Date: - -------------------------------------------------------------------------------
- --------------------------- ------------------------------ ------------------------- ----------------------- ---------------------- [ ] Microwave Oven [ ] Fireplaces [ ] 9' Ceilings [ ] Walk-In Closets [ ] Storage [ ] Dishwasher [ ] Wet Bar [ ] Other: - --------------------------- ------------------------------ ------------------------- ----------------------- ---------------------- COMMENTS: - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------- PROJECT AMENITIES - --------------------------- ------------------------------ ------------------------- ----------------------- ---------------------- [ ] Clubhouse [ ] Computer Center [ ] Secured Access [ ] Volleyball Courts [ ] Pool [ ] Movie Theater [ ] On-site Security [ ] Basketball Courts [ ] Hot Tub/Jacuzzi [ ] Laundry Facilities [ ] Day Care Center [ ] BBQ/Picnic Areas [ ] Tennis Court [ ] Exercise Room [ ] Water Features [ ] Playground [ ] Door-to-Door Trash Pickup [ ] Other: - --------------------------- ------------------------------ ------------------------- ----------------------- ---------------------- COMMENTS: - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-15 84 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- PROPERTY/COLLATERAL DESCRIPTION INDUSTRIAL - ----------------- PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - -------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------ PROPERTY DESCRIPTION - ------------------------------------------------------------------------------- Year Built: Number of Parking Spaces Year Rehabilitated: Per 1,000 Sq. Ft. Current Occupancy % WH Bay Depths FT If new construction, percent Preleased: SF WH Clear Height FT Rentable Area SF Truck Court Depth FT Office SF Land Area (acres) % Air Conditioned SF Site Coverage Percentage % Warehouse SF % Sprinklered [ ] Yes [ ] No Rail Service [ ] Yes [ ] No - -------------------------------------------------------------------------------
- ----------------- MAJOR TENANTS - --------------------------------- ------------ ------------------ -------------------------- ----------------- ----------------- Tenant Name Size (SF) Percent of Total Current Rental Rate Expense Basis Expiration Date -------------- ----------- Per Month Per SF - --------------------------------- ----------- ------------------- ------------- ------------ ----------------- ----------------- % Net % Base Year % Gross % Or Total or Average % Modified - --------------------------------------------------------------------------------------------------------------------------------
Comments: - ------------------------------------------------------------------------------- Exhibit C-16 85 - ------------------------------------------------------------------------------- Deal Name: Date: - -------------------------------------------------------------------------------
- ------------------------- Lease Rollover Exposure - --------------------------- ------------------------ -------------------------- -------------------------- ------------------------ Year Area (Sq. Ft.) Percent (%) Cumulative Percent (%) No. of Tenants - --------------------------- ------------------------ -------------------------- -------------------------- ------------------------ 1 2 3 4 5 Total - --------------------------- ------------------------ -------------------------- -------------------------- ------------------------
Exhibit C-17 86 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- PROPERTY/COLLATERAL DESCRIPTION OFFICE - ----------- PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - --------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ----------------------- PROPERTY DESCRIPTION - ------------------------------------------------------------------------------- Year Built: Parking Spaces Year Rehabilitated: Number of Per 1,000 Sq. Structured Ft. Current Occupancy % Number of Open Per 1,000 Sq. Spaces Ft. =================================== If new construction, percent Preleased: % Total Per 1,000 Sq. Rentable Area SF Ft. # of Floors Floor Plate Size SF Retail Component SF % Land Area (acres) Site Coverage Percentage % - ------------------------------------------------------------------------------- - --------------------- BUILDING AMENITIES - ------------------------------------------------------------------------------- [ ] Card Access [ ] On-Site Security [ ] On-Site Restaurant [ ] Conference Facilities [ ] On-Site Management [ ] On-Site Copy Center [ ] Concierge [ ] Other [ ] Other - -------------------------------------------------------------------------------
- ------------------- MAJOR TENANTS - ------------------------------------ ------------ ------------------ -------------------------- ----------------- ----------------- Tenant Name Size (SF) Percent of Total Current Rental Rate Expense Basis Expiration Date -------------- ----------- Per Month PSF - ------------------------------------ ----------- ------------------- ------------- ------------ ----------------- ----------------- % Net % Base Year % Gross % Or Total or Average % Modified - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-18 87 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Comments: - -------------------------------------------------------------------------------
- ------------------------ Lease Rollover Exposure - --------------------------- ------------------------ -------------------------- -------------------------- ------------------------ Year Area (Sq. Ft.) Percent (%) Cumulative Percent (%) No. of Tenants - --------------------------- ------------------------ -------------------------- -------------------------- ------------------------ 1 2 3 4 5 Total - --------------------------- ------------------------ -------------------------- -------------------------- ------------------------
Exhibit C-19 88 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- PROPERTY/COLLATERAL DESCRIPTION RETAIL - ------------ PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - ---------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
- ---------------------- PROPERTY DESCRIPTION - ----------------------------------------------------- ------------------------- ----------------------------------- --------------- Year Built: Number of Parking Spaces Year Rehabilitated: Per 1,000 Sq. Ft. Bay Depths Current Occupancy % Primary Anchors(s) FT If new construction, percent Preleased: % Secondary Anchor(s) FT Rentable Area SF In-Line FT Primary Anchor(s): SF % Land Area (acres): Secondary Anchor(s): SF % Site Coverage Percentage % In-Line SF % Pad Sites SF % Floors 1st Floor SF % 2nd Floor SF % - ----------------------------------------------------- ------------------------- ----------------------------------- ---------------
- ---------------- MAJOR TENANTS - ------------------------------------ ------------ ------------------ -------------------------- ----------------- ----------------- Tenant Name Size (SF) Percent of Total Current Rental Rate Expense Basis Expiration Date -------------- ----------- Per Month Per SF - ------------------------------------ ----------- ------------------- ------------- ------------ ----------------- ----------------- % Net % Base Year % Gross % Or Total or Average % Modified - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-20 89 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Comments: - -------------------------------------------------------------------------------
- ------------------------ LEASE ROLLOVER EXPOSURE - -------------------------------- ------------------------ -------------------------- -------------------------- ------------------- Year Area (Sq. Ft.) Percent (%) Cumulative Percent (%) No. of Tenants - -------------------------------- ------------------------- ------------------------- -------------------------- ------------------- 1 2 3 4 5 Total - -------------------------------- ------------------------- ------------------------- -------------------------- -------------------
Exhibit C-21 90 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Third Party Reports
- ------------------------- APPRAISAL INFORMATION - --------------------- ----------------- ----------------- -------------- ------------------------------- ------------- --------- Appraised Value As Is $ $ PSF Income Approach $ $ PSF As Completed $ $ PSF Stabilized Occupancy % Effective Date As Is DCF $ $ PSF As Completed Yield Rate % Appraisal Date Terminal Cap Rate % In Conformance with USPAP? [ ] Yes [ ] No Direct Capitalization $ $ PSF In Conformance with FIRREA? [ ] Yes [ ] No Cap Rate % Appraisal Firm Sales Comparison Approach $ $ PSF Appraiser(s) Multiplier Cost Approach $ $ PSF Land Value $ $ PSF - --------------------- ----------------- ----------------- -------------- ------------------------------- ------------- ---------
- ------------------------------------------------------------------------------- COMMENTS: (Reconcile Appraised Value to Underwritten Value and comment on reasonableness) - ------------------------------------------------------------------------------- - ----------------------------- ENVIRONMENTAL INFORMATION - ------------------------------------------------ ------------------------------ Phase I Date Environmental Firm Name Report issued to ACT Cost To Cure per Report Were Substantial Environmental Iss. Noted Type of O&M Plan in Place - ------------------------------------------------ ------------------------------ WERE ENVIRONMENTAL ISSUES NOTED CONCERNING THE FOLLOWING: - ------------------------------------------------ ------------------------------ Underground Storage Tanks Above Ground Storage Tanks PCBs/Transformers Lead-Based Paint Radon Lead in Drinking Water Asbestos/ACM Wastes Site on Property Adjacent Sites On-Site Operations Storage of Hazardous Materials History Review Regulatory Review Was Phase II Performed? - ------------------------------------------------ ------------------------------ COMMENTS: - ------------------------------------------------------------------------------- Exhibit C-22 91 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- - ------------------------ ENGINEERING INFORMATION - ------------------------------------------------------------------------------- Engineering Report Date Engineering Firm Name - ------------------------------------------------------------------------------- DEFERRED MAINTENANCE INFORMATION - ------------------------------------------------------------------------------- Immediate Deferred Maintenance $ Estimate - ------------------------------------------------------------------------------- COMMENTS: - ------------------------------------------------------------------------------- Exhibit C-23 92 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Recommendation - ------------- STRENGTHS - ------------------------------------------------------------------------------- LOAN AND PROPERTY STRENGTHS COMMENTS: o o o o - ------------------------------------------------------------------------------- - ------------- WEAKNESSES - ------------------------------------------------------------------------------- LOAN AND PROPERTY WEAKNESSES COMMENTS: o o o o - ------------------------------------------------------------------------------- - ----------------------------- RISK MITIGANTS INFORMATION - ------------------------------------------------------------------------------- o o o o - ------------------------------------------------------------------------------- Recommended by: ----------------------------------- Manager: ----------------------------------- Investment Committee: ----------------------------------- ----------------------------------- ----------------------------------- Date: ----------------------------------- Exhibit C-24 93 - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Exhibit C-25 94 [AMRESCO CAPITAL TRUST LOGO] EQUITY APPLICATION - ------------------------------------------------------------------------------- Deal Name: Date: - ------------------------------------------------------------------------------- Executive Summary - ------------ OVERVIEW - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------- INVESTMENT SUMMARY - ------------------------------------------------------------------------------- Investment Purpose Partnership Name Property Type Referral Source SF/Units Investment Officer Location Manager ACT Investment Expected Closing Date % of Equity Commitment Expiration Date % of Cost Prior 3rd Party Lien Amount - -------------------------------------------------------------------------------
- ------------------------- RECOMMENDED STRUCTURE - ----------------------------------------------------------------------------------------------------------------------------------- Investment Amount Expected Initial Funding Investment Fees % ACT % of Cashflow: Property Returns Year 1 Avg IRR ---------------- ------ --- --- % Until Return Of % Unleveraged % % % % Until Return Of % Leveraged % % % % Until Return Of % % Until Return Of % INVESTOR YIELDS ACT Yield % % % Levered (LA too) Partner Yield % % % - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-26 95 - ------------------------------------------------------------------------------- Participation Discussion & Waterfall Description: - ------------------------------------------------------------------------------- - ------------------ EXIT STRATEGY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-27 96 Capital Structure
- ---------------------- ------------------------- SOURCES USES - -------------------------------------------------- -------------------------------------------------------------------- Partner Equity: PSF/OR UNIT PSF/OR UNIT Cash $ % Purchase Price $ % Deferred Fees $ % Land $ % Other $ % Construction Cost $ % ACT Equity $ % Interest Reserve $ % 3rd Party Debt $ % Tenant Improvements $ % $ % Leasing Commissions $ % Deferred Maintenance $ % Closing Costs $ % Contingencies $ % Other ============================== ============================================= TOTAL Total - -------------------------------------------------- --------------------------------------------------------------------
PARTNERSHIP STRUCTURE - ---------------------------- ---- ----------- -------- ------ Name Ownership % $ Amount Source ---- ----------- -------- ------ General Partner % Limited Partner % Limited Partner % Limited Partner % 100.0% - ---------------------------- ---- ----------- -------- ------
Exhibit C-28 97 - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - ---------------------- INTEREST RESERVE - ------------------------------------------------------------------------------- Lease up Assumptions Calculation (note offsetting income) Adequacy Discussion - ------------------------------------------------------------------------------- - ----------------------- TI RESERVE - ------------------------------------------------------------------------------- Calculation: Adequacy Discussion: - ------------------------------------------------------------------------------- - ------------------------------------------ LEASE COMMISSIONS (DESCRIBE FEE STRUCTURE) - ------------------------------------------------------------------------------- Average Rent PSF: $ Average Lease Term: Commission %: % - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- Exhibit C-29 98 Capital Structure (continued) - ------------------------------------ FEE BREAKDOWN - ------------------------------------------------------------------------------- ACT: Broker: Partner: Overhead: Profit: Management: Leasing Commissions: - ------------------------------------------------------------------------------- - ------------------------------------------------ JUSTIFICATION OF POSITION IN CAPITAL STRUCTURE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------- PRIOR LIEN DETAIL - ------------------------------------------------------------------------------- Amount: $ Holder: Rate: Address: Term: Maturity Date: Amortization: Other: Inter-Creditor Rights: - ------------------------------------------------------------------------------- - --------------------------------- Other Sources & Uses Comments - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-30 99 Sponsors - ------------------------ SPONSOR INFORMATION - ------------------------------------------------------------------------------- Partnership Name: Partnership Entity Type: Sponsor/Principal: Address: Special Purpose Entity [ ] Yes [ ] No Related Loans (Principal, $ Amount) Is SPE Bankruptcy Remote [ ] Yes [ ] No - ------------------------------------------------------------------------------- PRINCIPAL/SPONSOR CREDIT HISTORY AND REAL ESTATE EXPERIENCE/SUMMARY OF 3RD PARTY INQUIRIES - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-31 100 - ---------------------------- THIRD PARTY LOAN GUARANTORS - ---------------------------- Guarantor 1 - ------------------------------------------------------------------------------- Name Comments: F/S Date Total Assets Liquid Assets Net Worth - ------------------------------------------------------------------------------- Guarantor 2 - ------------------------------------------------------------------------------- Name Comments: F/S Date Total Assets Liquid Assets Net Worth - ------------------------------------------------------------------------------- Guarantor 3 - ------------------------------------------------------------------------------- Name Comments: F/S Date Total Assets Liquid Assets Net Worth - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Are all listed above signing guaranties? [ ] Yes [ ] No - ------------------------------------------------------------------------------- Is ACT signing guaranties? [ ] Yes [ ] No - ------------------------------------------------------------------------------- DETAILS OF GUARANTY BEING PROVIDED BY ACT OR RELATED ACT ENTITY: - ------------------------------------------------------------------------------- Exhibit C-32 101 Project Team - ------------------------- CONTRACTOR INFORMATION - ------------------------------------------------------------------------------- Name: FS Date: Bonded: [ ] Yes [ ] No Total Assets: Liquid Assets: Net Worth: - ------------------------------------------------------------------------------- Contractor Experience Discussion: - ------------------------------------------------------------------------------- - ------------------------------------------- PROPERTY MANAGEMENT - ------------------------------------------- - ------------------------------------------------------------------------------- Firm Firm Contact - ------------------------------------------------------------------------------- Does Owner [ ] Yes [ ] No Contractual Mgmt Fee Percent manage property? - ------------------------------------------------------------------------------- Underwritten Mgmt Fee Percent - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - ------------------ Leasing Agent - ------------------------------------------------------------------------------- Company Name Leasing Agent Contact - ------------------------------------------------------------------------------- Leasing Managed by [ ] Yes [ ] No Leasing Agent Fee % Property Owner - ------------------------------------------------------------------------------- Leasing Managed by [ ] Yes [ ] No New Leases Property Manager - ------------------------------------------------------------------------------- Renewals - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-33 102 Property Economics Summary(2) - ---------------------------------- ------------------------------------ AT FUNDING: AT STABILIZATION: - ---------------------------------- ------------------------------------ Expected Closing Date Expected Date NOI $ NOI $ TI/LC Reserves $ TI/LC Reserves $ CFADS $ CFADS $ DSCR to 3rd Party Loan DSCR to 3rd Party Loan Cashflow to ACT $ Cashflow to ACT $ C-on-C Yield to ACT % Yield to ACT % Cashflow to Partner $ Cashflow to Partner $ Yield to Partner % Yield to Partner % Total Cost $ Estimated Value $ Cost PSF $ Value PSF $ LTC % LTV % Occupancy % Occupancy % Preleased % % - ---------------------------------- ------------------------------------ Comments: - ------------------------------------------------------------------------------- - ---------------------------- (2) See Tabs Entitled "Economics," "Act Model" and "ARGUS" for Details Exhibit C-34 103 Market Summary - -------------------------------------- CURRENT MARKET INFORMATION - ------------------------------------------------------------------------------- Information as of Date Market Occupancy Underwritten Market Occupancy Trends Rents Rent Trends Economic Trends - ------------------------------------------------------------------------------- GENERAL MARKET COMMENTS: - ------------------------------------------------------------------------------- SUB-MARKET COMMENTS: - -------------------------------------------------------------------------------
- ------------------ RENT COMPARABLES - ------------------------------- ------------------- --------------------- ------------------- ---------------- ---------------- NAME/ADDRESS SIZE (SF, UNITS) YEAR BUILT OCCUPANCY (%) RENTAL RATE TI'S - ------------------------------- ------------------- --------------------- ------------------- ---------------- ---------------- 1. 2. 3. Subject Property - ------------------------------------------------------------------------------------------------------------------------------- Comments: - -------------------------------------------------------------------------------------------------------------------------------
- ---------------------------- SALES COMPARABLES - LAND - ---------------------------------------- ------------------ -------------- ------------------- ------------- --------------------- NAME/ADDRESS SALES PRICE SALES SIZE (SF, UNITS) SALES DATE SALES PRICE PSF PRICE/BUIDABLE SF - ---------------------------------------- ------------------ -------------- ------------------- ------------- --------------------- 1. 2. 3. Subject Property - ----------------------------------------------------------------------------------------------------------------------------------- Comments: - ---------------------------------------------------------------------------------------------------------------------------------
Exhibit C-35 104
- --------------------------------- Sales Comparables - Buildings - ------------------------------------- ---------------- -------------- --------------- ------------- ------------------ ------------ NAME/ADDRESS SIZE (SF, SALES PRICE/ SF, CAP RATE UNITS) YEAR BUILT OCCUPANCY (%) RENTAL RATE UNIT (%) - ------------------------------------- ---------------- -------------- --------------- ------------- ------------------ ------------ 1. 2. 3. Subject Property - ------------------------------------- ---------------- -------------- --------------- ------------- ------------------------------- Comments: - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-36 105 Property/Collateral Description Multi-Family - ----------- PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - ----------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------ PROPERTY DESCRIPTION - ------------------------------------------------------------------------------- Year Built: Attached Garage Year Rehabilitated: Unattached Garage Rentable Area: Covered Parking Roof Type: Uncovered Parking Land Area (acres): Total Spaces Units per acre: No. of Spaces per Unit Current Occupancy: - -------------------------------------------------------------------------------
- ----------------- UNIT MIX - ------------------- ----------------- --------------------------------- ----------------------------------------------------------- Unit Type Number Average Size (Sq. ft.) Current Rental Rate - --------- ------ ---------------------- ------------------- Base PSF ---- --- - ------------------- ----------------- ------------------ -------------- ------------------------------- --------------------------- 1BR/1B - ------------------- ----------------- ------------------ -------------- ------------------------------- --------------------------- 2BR/1B - ------------------- ----------------- ------------------ -------------- ------------------------------- --------------------------- 2BR/2B - ------------------- ----------------- --------------------------------- ------------------------------- --------------------------- Other - ------------------- ----------------- --------------------------------- ------------------------------- --------------------------- TOTAL OR AVG. - ------------------- ----------------- --------------------------------- ------------------------------- ---------------------------
- ------------------ UNIT AMENITIES - --------------------------- ------------------------------ ------------------------- ----------------------- ----------------------- [ ] Washer-Dryer [ ] Self-Cleaning Oven [ ] Dry Bar [ ] Ceiling Fans [ ] Garden Tubs [ ] W/D Connections [ ] Icemakers [ ] Built-In Bookcases [ ] Crown Molding [ ] Double Vanities [ ] Trash Compactor [ ] Frost-free Refrigerator [ ] Security System [ ] Mini Blinds [ ] Balconies/Patios [ ] Disposal [ ] Built-Ins [ ] Vaulted Ceilings [ ] Vertical Blinds [ ] Free Cable T.V. [ ] Microwave Oven [ ] Fireplaces [ ] 9' Ceilings [ ] Walk-In Closets [ ] Storage [ ] Dishwasher [ ] Wet Bar [ ] Other: - ------------------------------------------------------------------------------------------------------------------------------------ COMMENTS: - --------------------------- --------------------------------------------------------------------------------------------------------
Exhibit C-37 106
- ---------------------- PROJECT AMENITIES - ------------------------------------------------------------------------------------------------------------ [ ] Clubhouse [ ] Computer Center [ ] Secured Access [ ] Volleyball Courts [ ] Pool [ ] Movie Theater [ ] On-site Security [ ] Basketball Courts [ ] Hot Tub/Jacuzzi [ ] Laundry Facilities [ ] Day Care Center [ ] BBQ/Picnic Areas [ ] Tennis Court [ ] Exercise Room [ ] Water Features [ ] Playground [ ] Door-to-Door Trash Pickup [ ] Other: - ------------------------------------------------------------------------------------------------------------ COMMENTS: - ------------------------------------------------------------------------------------------------------------
Exhibit C-38 107 PROPERTY/COLLATERAL DESCRIPTION INDUSTRIAL - ---------------- PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - ------------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
- ---------------------------------------------- PROPERTY DESCRIPTION - ----------------------------------------------------------------------------------------------------------------------------------- Year Built: Number of Parking Spaces Year Rehabilitated: Per 1,000 Sq. Ft. Current Occupancy % WH Bay Depths FT If new construction, percent Preleased: SF WH Clear Height FT Rentable Area SF Truck Court Depth FT Office SF Land Area (acres) % Air Conditioned SF Site Coverage Percentage % Warehouse SF % Sprinklered [ ] Yes [ ] No Rail Service [ ] Yes [ ] No - -----------------------------------------------------------------------------------------------------------------------------------
- --------------- MAJOR TENANTS - ------------------------------------ ------------ ------------------ -------------------------- ----------------- ----------------- Tenant Name Size (SF) Percent of Total Current Rental Rate Expense Basis Expiration Date -------------- ----------- Per Month Per SF - ------------------------------------ ----------- ------------------- ------------- ------------ ----------------- ----------------- % Net % Base Year % Gross % Or Total or Average % Modified - ----------------------------------------------------------------------------------------------------------------------------------- Comments: - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-39 108
- ------------------------- Lease Rollover Exposure - ------------------------------ ------------------------ -------------------------- -------------------------- --------------------- Year Area (Sq. Ft.) Percent (%) Cumulative Percent (%) No. of Tenants - ------------------------------ ------------------------- ------------------------- -------------------------- --------------------- 1 2 3 4 5 Total - ------------------------------ ------------------------- ------------------------- -------------------------- ---------------------
Exhibit C-40 109 PROPERTY/COLLATERAL DESCRIPTION OFFICE - ------------- PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - --------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
- ------------------------ PROPERTY DESCRIPTION - --------------------------------------------- ----------------------- ------------------------------------- ----------------------- Year Built: Parking Spaces Year Rehabilitated: Number of Structured Per 1,000 Sq. Ft. Current Occupancy % Number of Open Spaces Per 1, 000 Sq. Ft. ===================================== ======================= If new construction, percent Preleased: % Total Per 1,000 Sq. Ft. Rentable Area SF # of Floors Floor Plate Size SF Retail Component SF % Land Area (acres) Site Coverage Percentage % - --------------------------------------------- ----------------------- ------------------------------------- -----------------------
- -------------------- BUILDING AMENITIES - -------------------------- -------------------------- ------------------------- [ ] Card Access [ ] On-Site Security [ ] On-Site Restaurant [ ] Conference Facilities [ ] On-Site Management [ ] On-Site Copy Center [ ] Concierge [ ] Other [ ] Other - -------------------------- -------------------------- -------------------------
- ------------------ MAJOR TENANTS - ------------------------------------ ------------ ------------------ -------------------------- ----------------- ----------------- Tenant Name Size (SF) Percent of Total Current Rental Rate Expense Basis Expiration Date -------------- ----------- Per Month PSF - ------------------------------------ ----------- ------------------- ------------- ------------ ----------------- ----------------- % Net % Base Year % Gross % Or Total or Average % Modified - ----------------------------------------------------------------------------------------------------------------------------------- Comments: - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-41 110
- -------------------------- Lease Rollover Exposure - -------------------------------- ---------------------- ------------------------- -------------------------- ---------------------- Year Area (Sq. Ft.) Percent (%) Cumulative Percent (%) No. of Tenants - -------------------------------- ---------------------- ------------------------- -------------------------- ---------------------- 1 2 3 4 5 Total - -------------------------------- ---------------------- ------------------------- -------------------------- ----------------------
Exhibit C-42 111 PROPERTY/COLLATERAL DESCRIPTION RETAIL - -------- PROPERTY - ------------------------------------------------------------------------------- Name: Street Address: City: State: Zip: - ------------------------------------------------------------------------------- - --------------------------- AREA/LOCATION DESCRIPTION - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
- --------------------- PROPERTY DESCRIPTION - ----------------------------------------------------- ------------------------ ----------------------------------- --------------- Year Built: Number of Parking Spaces Year Rehabilitated: Per 1,000 Sq. Ft. Bay Depths Current Occupancy % Primary Anchors(s) FT If new construction, percent Preleased: % Secondary Anchor(s) FT Rentable Area SF In-Line FT Primary Anchor(s): SF Land Area (acres): % Secondary Anchor(s): SF Site Coverage Percentage % % In-Line SF % Pad Sites SF % Floors 1st Floor SF % 2nd Floor SF % - ----------------------------------------------------- ------------------------ ----------------------------------- ---------------
- ----------------- MAJOR TENANTS - ------------------------------------ ------------ ------------------ -------------------------- ----------------- ----------------- Tenant Name Size (SF) Percent of Total Current Rental Rate Expense Basis Expiration Date -------------- ----------- Per Month Per SF - ------------------------------------ ----------- ------------------- ------------- ------------ ----------------- ----------------- % Net % Base Year % Gross % Or Total or Average % Modified - ----------------------------------------------------------------------------------------------------------------------------------- Comments: - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-43 112
- ------------------------ LEASE ROLLOVER EXPOSURE - -------------------------------- ------------------------ -------------------------- -------------------------- ------------------- Year Area (Sq. Ft.) Percent (%) Cumulative Percent (%) No. of Tenants - -------------------------------- ------------------------- ------------------------- -------------------------- ------------------- 1 2 3 4 5 Total - -------------------------------- ------------------------- ------------------------- -------------------------- -------------------
Exhibit C-44 113 Third Party Reports
- ------------------------ APPRAISAL INFORMATION - --------------------- ----------------- ----------------- --------- ------------------------------- ------------- ----------------- Appraised Value As Is $ $ PSF Income Approach $ $ PSF As Completed $ $ PSF Stabilized Occupancy % Effective Date As Is DCF $ $ PSF As Completed Yield Rate % Appraisal Date Terminal Cap Rate % In Conformance with USPAP? [ ] Yes [ ] No Direct Capitalization $ $ PSF In Conformance with FIRREA? [ ] Yes [ ] No Cap Rate % Appraisal Firm Sales Comparison Approach $ $ PSF Appraiser(s) Multiplier Cost Approach $ $ PSF Land Value $ $ PSF - --------------------- ----------------- ----------------- --------- ------------------------------- ------------- ----------------- COMMENTS: (Reconcile Appraised Value to Underwritten Value and comment on reasonableness) - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------- ENVIRONMENTAL INFORMATION - ------------------------------------------------------------------------ ---------------------------------------------------------- Phase I Date Environmental Firm Name Report issued to ACT Cost To Cure per Report Were Substantial Environmental Iss. Noted Type of O&M Plan in Place - ------------------------------------------------------------------------ ---------------------------------------------------------- WERE ENVIRONMENTAL ISSUES NOTED CONCERNING THE FOLLOWING: - ------------------------------------------------------------------------ ---------------------------------------------------------- Underground Storage Tanks Above Ground Storage Tanks PCBs/Transformers Lead-Based Paint Radon Lead in Drinking Water Asbestos/ACM Wastes Site on Property Adjacent Sites On-Site Operations Storage of Hazardous Materials History Review Regulatory Review Was Phase II Performed? - ------------------------------------------------------------------------ ---------------------------------------------------------- COMMENTS: - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit C-45 114 - --------------------------- ENGINEERING INFORMATION - ------------------------------------------------------------------------------- Engineering Report Date Engineering Firm Name - ------------------------------------------------------------------------------- DEFERRED MAINTENANCE INFORMATION - ------------------------------------------------------------------------------- Immediate Deferred Maintenance $ Estimate - ------------------------------------------------------------------------------- COMMENTS: - ------------------------------------------------------------------------------- Exhibit C-46 115 Partnership Agreement Information - --------------------- Buy/Sell Provisions - ------------------------------------------------------------------------------- Lockout Period: - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - --------------------- Control Provisions - ------------------------------------------------------------------------------- Leases: Budgets: - ------------------------------------------------------------------------------- Comments: - ------------------------------------------------------------------------------- - --------------------- Removal Provisions - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - --------------------- Radius Restrictions - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - --------------------- Funding Requirements - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-47 116 - --------------------- Other Comments - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Exhibit C-48 117 Recommendation - --------------------------- STRENGTHS - ------------------------------------------------------------------------------- INVESTMENT AND PROPERTY STRENGTHS COMMENTS: o o o o - ------------------------------------------------------------------------------- - --------------------------- WEAKNESSES - ------------------------------------------------------------------------------- INVESTMENT AND PROPERTY WEAKNESSES COMMENTS: o o o o - ------------------------------------------------------------------------------- - --------------------------- RISK MITIGANTS INFORMATION - ------------------------------------------------------------------------------- o o o o - ------------------------------------------------------------------------------- Recommended by: ------------------------------------ Manager: ------------------------------------ Investment Committee: ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ ------------------------------------ Date: ------------------------------------ Exhibit C-49 118 REIT TAX DUE DILIGENCE - EQUITY (Office Buildings, Retail & Multi-family) Date:_______________________ Name of Property:_______________________________________________________________ [If all of the leases of the property do not have the same basic provisions, fill out a separate form for each version.] 1. How are rents determined? _________________ Fixed Amount _________________ Based upon the net income or net profits of the tenant _________________ Based upon a fixed percentage of the gross sales or gross receipts of the tenant Based upon an "overage provision" whereby all or a portion of the rent is based on the tenant's net / gross (circle one) income or profits in excess of a base amount _________________ Other (please explain) 2. Does the lease provide that in the case of a sublease that the landlord is entitled to all or a percentage of the excess rent received? Yes ___ No ___ 3. Has there been any sublet of all or part of the premises? Yes ___ No ___ 4. Are any of the following services provided to tenants? (please circle those that apply) o reserved parking o valet parking o cable TV o security system o laundry facilities o maid/janitorial services o provision for health clubs, gyms or workout facilities (includes discounts for tenants) 5. List any of the services circled above which are not typical and customary for properties of a similar character and quality in the same geographic area. 6. List any other services provided which are not typical or customary for properties which are of a similar character and quality in the same geographic area. 7. Is any portion of the rent for any lease of the property attributable to personal property (i.e., furniture, appliances, washer, dryers, etc.)? ___ Yes ___ No ___ N/A If yes, is the percentage of the total rent attributable to the personal property less than 15 percent of the total rent? ___ Yes ___ No ___ N/A 8. Are any services rendered to any tenant by third-party suppliers or independent contractors hired by the ompany (or its affiliates)? If so, please describe the nature of such services, the name of the third-party supplier or independent contractor, and the fee arrangement. ___ Yes ___ No ___ N/A Explain: 9. Does the company (or any of its affiliates) engage in any revenue-generating activities not mentioned previously in this questionnaire other than the rental of real property (and associated activities)? ___ Yes ___ No ___ N/A Explain: Exhibit C-50 119 Signature _________________________________ REIT TAX DUE DILIGENCE - LOANS Date:_________________________ Name of Property:_______________________________________________________________ 1. Is an interest in a partnership or LLC securing the loan? (Note: shares of a corporation, not including LLC's generally should not be taken as collateral since a REIT cannot own more than 10% of the voting stock of any one corporation.) ___ Yes ___ No (shares of a corporation are collateral) - SKIP TO QUESTION 3. ___ No (the real and personal property is the only collateral) - SKIP TO QUESTION 3. 2. The partnership or LLC interest securing the loan represents what percentage of capital and profits of the entity? (if 100% so state.) Capital_______% Profits_______% 3. What is the gross value of the land and improvements at the time of commitment (not any stabilized value)? (If this is a construction loan, then the value is the value of the land plus the improvement costs to be capitalized as part of the realty.) Land Value $______________________________. Improvement Costs $_______________________________. 4. What is the value of the personal property securing the loan? $___________. 5. What is the loan principal amount? $_________________. IF A SHARED APPRECIATION ANSWER QUESTION 6, OTHERWISE SKIP TO #7. [If the answer to any of these questions in #6 is Yes, then the gain may be subject to a 100% tax] 6. Is the debtor considered a "dealer" in property (i.e., the property is held as inventory and the gain on the sale is ordinary income instead of capital gain)? Yes _____. No _____. a. Does the debtor intend to engage a broker to sell the property prior to or during construction or prior to lease up, or does the debtor otherwise intend to engage in any "for sale" marketing activities? Yes _____. No _____. b. Has the debtor contacted any potential buyers for the property? Yes _____. No _____. c. Does the debtor intend to hold the property for more than twelve months after completion? Yes _____. No _____. 7. Does a note secure the note? Yes _____. No _____(SKIP TO THE END) a. Is the note serving as collateral secured by real estate? Yes _____. No _____. [If you answered Yes to the questions in #7, see questions 1 through 6 above to evaluate such note as collateral.] Signature ______________________________ Exhibit C-51 120 Exhibit D FORM OF FUNDING NOTICE _________ __, 199_ Prudential Securities Credit Corp. One New York Plaza New York, NY 10292 Re: Amended and Restated Interim Warehouse and Security Agreement dated as of ___________________, 1999 (the "Agreement") Gentlemen: Reference is made to the Agreement for defined terms used herein. Pursuant to Section I(3)(a)(i) of the Agreement, this letter constitutes notice that the undersigned desires to obtain an Advance in the principal amount of $____________, with respect to the Eligible Assets shown on the attached Commercial Loan/Asset Schedule. Attached as Schedule I hereto is the calculation of the Advanced Amount in accordance with the Agreement including a breakdown of each calculation required to determine such Advanced Amount. The Borrower further represents, warrants and certifies that: (1) the undersigned has no notice or knowledge of any Event of Default; (2) the representations, warranties and covenants in the Agreement relating to the Eligible Assets shown on the attached Commercial Loan/Asset Schedule are true and correct as of the date hereof and shall be true and correct on the date of the Advance requested herein, before and after giving effect thereto; and (3) each of the conditions precedent to an Advance listed in Section I(2) of the Agreement has been satisfied as of the date hereof. [Insert Appropriate Borrower Name] AMRESCO CAPITAL TRUST By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- AMREIT I, INC. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Exhibit D-1 121 AMREIT II, INC. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- ACT EQUITIES, INC. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- ACT HOLDINGS, INC. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- Exhibit D-2 122 Exhibit E FORM OF COMMERCIAL LOAN/ASSET SCHEDULE Exhibit E-1 123 Exhibit F FORM OF WARRANT AGREEMENT Warrant Agreement dated as of May 4, 1999 between AMRESCO Capital Trust and Prudential Securities Incorporated (filed as Exhibit 10.2 to the Registrant's Current Report on Form 10-Q for the quarterly period ended March 31, 1999 filed with the Securities and Exchange Commission on May 13, 1999, which exhibit is incorporated herein by reference). Exhibit F-1 EX-10.2 3 WARRANT AGREEMENT DATED MAY 4,1999 1 EXHIBIT 10.2 WARRANT AGREEMENT BETWEEN AMRESCO CAPITAL TRUST AND PRUDENTIAL SECURITIES INCORPORATED DATED AS OF MAY 4, 1999 2 WARRANT AGREEMENT THIS WARRANT AGREEMENT (this "Agreement") dated as of May 4, 1999, between AMRESCO CAPITAL TRUST (together with its permitted successors and assigns, the "Company"), a Texas real estate investment trust with its principal office at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201, and PRUDENTIAL SECURITIES INCORPORATED, a Delaware corporation ("PSI") with its principal office at One New York, 18th Floor, New York, New York 10292. R E C I T A L S : WHEREAS, the Company and Prudential Securities Credit Corp., an Affiliate of PSI ("PSCC"), are parties to that certain Amended and Restated Interim Warehouse and Security Agreement dated as of the date hereof (as the same may be amended, supplemented or otherwise modified from time to time and together with all documents and agreements executed and delivered in connection therewith, collectively, the "Warehouse Agreement"); and WHEREAS, as a condition to the obligation of PSCC to enter into the Warehouse Agreement, PSI has required, inter alia, that the Company shall have executed and delivered this Agreement. NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto agree as follows: Section 1. Definitions. For purposes of this Agreement, the terms set forth below in this Section 1 shall have the respective meanings hereinafter assigned to them in this Agreement: "Act" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute. "Affiliate" of any Person shall mean any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control another Person if such first Person possesses directly or indirectly the power to direct, or cause the direction of, the management and policies of the second Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Agreement. "Appraiser" shall mean an investment bank or other qualified independent appraiser of national standing. "Benefit Plans" shall mean the Company's option and benefit plans, whether currently in effect or adopted in the future, which are used to compensate the officers and other employees of the Manager (as defined in the Warehouse Agreement) and any successor manager under the Management Agreement (as defined in the Warehouse Agreement), and Affiliates of the Manager, including, without limitation, the AMRESCO Capital Trust 1998 Share Option and Award Plan. "Blue Sky Laws" shall mean any and all applicable state securities laws. 3 "Board of Trust Managers" shall have the same meaning as in the Company's Charter, and shall also include any governing body with similar functions of any successor entity of the Company as it may then be constituted. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the States of New York, Texas or Georgia. "Closing Date" shall mean the date this Agreement is originally executed. "Commission" shall mean the Securities and Exchange Commission or any entity succeeding to its functions relating to the registration of securities and securities markets under the federal securities laws. "Common Shares" shall mean (except where the context otherwise indicates) the common shares of beneficial interest of the Company as constituted on the Closing Date, and any equity interests (whether in the form of common stock or otherwise) into which such Common Shares may thereafter be changed, by reclassification or otherwise, and shall also include (i) equity interests (whether in the form of common stock or otherwise) of the Company of any other class (regardless of how denominated) which is also not preferred as to dividends or distributions of assets over any other class of equity of the Company and which is not subject to redemption, and (ii) equity interests (whether in the form of common stock or otherwise) of any successor or acquiring Person received by or distributed to the holders of Common Shares of Company in the circumstances contemplated by Section 14(f). "Common Share Certificate" shall mean a certificate evidencing one or more Common Shares. "Company" shall mean AMRESCO Capital Trust, a Texas real estate investment trust. "Company's Charter" shall mean the Company's Declaration of Trust and By-laws, true, accurate and correct copies of which are attached hereto as Exhibit A. "Convertible Securities" shall mean any evidences of indebtedness, shares of stock or other securities directly or indirectly convertible into or exchangeable (with or without payment of additional consideration) for Common Shares. "Current Price" with respect to any security on any day shall mean the closing sale price, regular way, on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the Nasdaq Stock Market or, if such security is not quoted on the Nasdaq Stock Market, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or, if the security is not publicly traded, the Fair Market Value of such security determined in accordance with Section 13. 2 4 "Date of Exercise" shall mean, with respect to any Warrant, the first date on which the Company shall have received (i) the Warrant Certificate evidencing such Warrant, together with a purchase form (in the form attached hereto as Exhibit C) duly completed and signed, and (ii) payment of the Exercise Price. "Demanding Parties" is defined in Section 12(b). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute. "Exercise Price" shall mean the exercise price of a Warrant, which shall initially be $9.83 per Warrant Share, subject to adjustment as provided in Section 14. "Expiration Date" shall mean, with respect to any Warrant, the calendar date corresponding to the date seven (7) years from the Closing Date. "Fair Market Value" is defined in Section 13. "GAAP" shall mean generally accepted accounting principles as in effect in the United States of America from time to time. "Holder" shall mean the registered holder, from time to time, of any Subject Security. "Indemnified Person" is defined in Section 12(f)(i). "NASD" shall mean the National Association of Securities Dealers, Inc. "Nasdaq Stock Market" shall mean The Nasdaq Stock Market's National Market. "Options" shall mean rights, options or warrants (other than the Warrants) to subscribe for, purchase or otherwise acquire either Common Shares or Convertible Securities. "Other Registrable Securities" shall mean securities of the Company (other than the Registrable Securities) as to which the holders of such securities have registration rights as of or subsequent to the Closing Date and as to which other Persons are granted registration rights. "Other Securities" shall mean any securities (other than Common Shares) of the Company or any other Person which the Holders at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to the Warrant Shares, or which at any time shall be issuable or shall have been issued to holders of the Warrant Shares in exchange for, in addition to or in replacement of, the Warrant Shares. "Person" shall mean an individual, an association, a partnership, a corporation, a limited liability company, a trust, an unincorporated organization, a government or any other entity or organization. "Piggyback Registration" is defined in Section 12(a)(i). 3 5 "Preferred Shares" shall mean shares of beneficial interest which are preferred as to dividends or distributions of assets over any other class of equity securities of the Company. "Prospectus" shall mean the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "PSCC" shall mean Prudential Securities Credit Corp. "PSI" shall mean Prudential Securities Incorporated. "Public Offering" shall mean an offering and/or sale to the public of Common Shares, which offering and sale are registered under the Act. "Register" shall mean the register for the registration and registration of transfer of the Warrants, which shall be maintained by the Company at its principal office, or such other place as the Company may specify in writing to the Persons named therein as Holders of the Warrants. "Registrable Securities" shall mean the Warrants, any Common Shares or Other Securities issuable or issued upon exercise of the Warrants, any Common Shares or Other Securities of the Company issued as a dividend or other distribution with respect to, or in exchange or in replacement of such Common Shares. "Registration Statement" shall mean any registration statement of the Company that covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such Registration Statement. "Representative" is defined in Section 13. "Shelf Registration Statement" shall have the meaning provided in Section 12 (c) hereof. "Supplemental Shelf Registration Statement" shall have the meaning provided in Section 12(c)(ii) hereof. "Subject Securities" shall mean, without duplication if the context requires, the Warrants issued hereunder and the Warrant Shares and Other Securities issued upon exercise of such Warrants. "Third-Party Warrants" shall have the meaning set forth in Section 2(b)(vi) of this Agreement. 4 6 "Trading Day" shall mean (x) if the applicable security is quoted on the Nasdaq Stock Market, a day on which a trade may be made on the Nasdaq Stock Market, (y) if the applicable security is listed or admitted for trading on a national securities exchange, a day on which such national securities exchange is open for business or (z) if the applicable security is not otherwise listed, admitted for trading or quoted, any day other than a Saturday or 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. "Warehouse Agreement" is defined in the first Recital. "Warrant" shall mean a Warrant issued to PSI pursuant hereto and all Warrants issued upon transfer, division or combination of, or in substitution for, any thereof. "Warrant Certificate" shall mean a certificate substantially in the form of Exhibit B attached hereto evidencing one or more Warrants. "Warrant Shares" shall mean the Common Shares issuable, from time to time, upon exercise of the Warrants. Section 2. Representations, Warranties and Covenants. (a) The Company represents and warrants to the Holder that: (i) The Company has the power to execute and deliver this Agreement and has the power to issue the Warrant Shares and to perform its obligations under this Agreement and the Warrant Certificates. (ii) The execution, delivery and performance by the Company of this Agreement and the issuance of Warrant Shares upon the exercise of the Warrants have been duly authorized by all necessary action, and do not (A) violate any provision of applicable law or regulation, or of the Company's Charter, or of any order, writ, injunction or decree of any court or governmental authority applicable to the Company, or (B) result in a breach of, or constitute a default under, or require any consent under, any contractual obligation to which the Company is a party or by which the Company is bound or affected. The Company has taken sufficient corporate action to reserve a sufficient number of authorized but unissued Common Shares in connection with the prospective issuance of the Warrant Shares. (iii) This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid, binding and enforceable obligation of the Company, except as limited by bankruptcy, insolvency or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights and by the application of equitable principles. The Warrants and the Warrant Certificates constitute legal, valid, binding and enforceable obligations of the Company, except as limited by bankruptcy, insolvency or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights and by the application of equitable principles, and the Warrant Shares, when issued upon exercise of the Warrants, will be duly authorized, validly issued, fully paid and 5 7 nonassessable and be free from all taxes, liens and charges with respect to the issuance thereof (other than any liens or charges resulting from the Holder's actions). (iv) The Company's authorized Common Shares are as described in the Company's Charter. A total of 10,006,111 Common Shares were issued and outstanding on the Closing Date. (v) Except as set forth on Exhibit E attached hereto, there are no Options, subscriptions or similar rights to acquire from the Company, or agreements or other obligations by the Company, absolute or contingent, to issue, sell or register Common Shares, whether by Public Offering or on conversion or exchange of Convertible Securities or otherwise. (vi) No holder of Common Shares has any preemptive rights to subscribe for or to purchase any Warrants or Warrant Shares under the Company's Charter, any agreement to which the Company is a party or otherwise bound or the corporate law of the Company's jurisdiction of organization. (vii) No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required to be obtained by the Company in connection with the execution of this Agreement and the transactions contemplated hereby, including the valid issuance of the Subject Securities. (viii) It is not necessary in connection with the offer, issuance or sale to PSI of the Subject Securities to register the Subject Securities under the Act or any Blue Sky Law. (ix) No legal proceeding or investigation is pending or to the best knowledge of the Company threatened before any court, arbitrator or administrative or governmental authority, bureau or agency to restrain or prohibit the Company from performing this Agreement or the transactions contemplated hereby. (x) No representation or warranty made by the Company in this Agreement, or in any schedule, written statement or certificate furnished to the Holder in connection with the transactions contemplated by this Agreement, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein and therein not false or misleading. (b) The Company hereby covenants for so long as this Agreement remains in effect that: (i) The Company will not (and will cause any Affiliate not to) take any action, including, without limitation, amending the Company's Charter, reorganizing, consolidating, merging, dissolving, transferring assets or issuing or selling securities or take any other voluntary action, to avoid, or seek to avoid, observing or performing any of the terms, conditions or covenants, of this Agreement or the Subject Securities, and will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holders 6 8 against dilution or impairment to the extent contemplated by the terms hereof. In furtherance and not in limitation of the foregoing, the Company shall not (1) enter into any agreement with respect to its securities that is inconsistent with the rights granted to Holders of Subject Securities in this Agreement or otherwise conflicts with the provisions hereof, or (2) increase the par value of any Warrant Shares or Other Securities above the Exercise Price then in effect. Before taking any action that would cause an adjustment pursuant to Section 14, the Company will take all corporate action that, in the opinion of its legal counsel, may be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the then applicable Exercise Price. (ii) The Company will take all actions necessary or appropriate to be taken by it to validly and legally issue fully paid and nonassessable Common Shares upon exercise of the Warrants and will use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Agreement. In respect of the issuance of the Warrants to the Holders, the exercise thereof by the Holders and the resulting issuance of Subject Securities, the Company shall not set off, recoup, claim, abate, withhold or defer any property or amount for any reason whatsoever. (iii) At all times during the term of this Agreement, the Company shall retain a nationally recognized accounting firm as its auditor. (iv) (A) The Company will file with the Commission such information as the Commission may require under Section 13 or 15(d) of the Exchange Act, as applicable, and shall use commercially reasonable efforts to take all action as may be required as a condition to the availability of Rule 144 or Rule 144A under the Act (or any successor or similar exemptive rules hereafter in effect) and (B) the Company shall make available to Holders of Subject Securities such reports, documents and information as such Holders reasonably request to enable such Holders to make sales of Subject Securities pursuant to such rules. If the Company ceases to be subject to Section 13 or 15(d) of the Exchange Act, the Company shall make available to the Holder of Subject Securities in connection with any sale thereof, the information required by Rule 144A(d)(4) under the Act in order to permit resales of Subject Securities pursuant to Rule 144A. (v) The Company shall use commercially reasonable efforts to qualify at all times after May 12, 1999 for registration of its Common Shares on Form S-3 or such successor form. (vi) In the event that any of the terms of any warrant agreement or any warrants issued by the Company (other than Options granted under Benefit Plans after the Closing Date which entitle all of the holders thereof to purchase not more that 1,000,000 shares of Common Stock of the Company and any Options granted under the Benefit Plans prior to the Closing Date) to any other third party are more favorable to such third party than the terms hereof are to the Holders, then a majority-in-interest of the Holders may prepare, and the Company agrees to sign, an amendment to this Agreement making such changes as shall be necessary in order to make the terms of this Agreement at least as favorable as those set forth in the warrant agreement or warrants issued to such third party ("Third-Party Warrants"). 7 9 (c) PSI hereby represents and warrants to and agrees with the Company that: (i) PSI is acquiring and will acquire the Subject Securities for its own account for investment and not with a view to any distribution thereof that might cause a violation of the Act or any rules or regulations thereunder; provided, however, that subject to Section 6 hereof, the disposition of the Subject Securities shall be at all times within the sole discretion of the Holders. (ii) PSI has had an opportunity to ask questions of the principal officers and representatives of the Company and to obtain any additional information necessary to permit an evaluation of the benefits and risks associated with the investment made hereby. (iii) PSI has had sufficient experience in business, financial and investment matters to evaluate the merits and risks involved in the investment made hereby and is able to bear the economic risk (including complete loss) of such investment for an indefinite period of time. (d) In addition to any reduction in the Exercise Price required by Section 14, the Company and PSI hereby agree that the Company shall have the right to reduce the Exercise Price at any time, in its sole discretion, for such limited periods as it may from time to time determine, upon no less than ten days and no more than sixty days prior written notice to Holders, provided that no such reduction may be effected without the approval of a majority of the Board of Trust Managers. Section 3. Warrant Certificates. The Warrant Certificates shall be in registered form only and shall be substantially in the form of Exhibit B attached hereto, with such changes therein as may be required from time to time to reflect any adjustments made pursuant to Section 14 hereof. The Warrant Certificates may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law, or with any rule or regulation made pursuant thereto, or with any rule or regulation of any stock exchange on which the Common Shares or the Warrants may be listed, or any inter-dealer quotation system upon which the Common Shares or the Warrants may be quoted. Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Executive or Senior Vice President, and attested by its Secretary or an Assistant Secretary. The signature of any of such officers may be manual or facsimile. Warrant Certificates bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that any of such individuals shall have ceased to hold such offices prior to the delivery of such Warrant Certificates or did not hold such offices on the date of this Agreement. 8 10 Section 4. Issuance and Delivery of Warrant Certificates. The Company hereby agrees to issue and deliver on the Closing Date to PSI 250,002 Warrants registered in the name of PSI, and shall deliver to PSI one (1) Warrant Certificate in the amount of 250,002 Warrants, evidencing such Warrants. Section 5. Registration. The Warrants shall be registered in the name(s) of the recordholder(s) thereof from time to time. The Company may deem and treat the registered Holder(s) of the Warrants as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing on the Warrant Certificates made by anyone) for the purpose of any exercise thereof or any distribution to the Holder(s) thereof, and for all other purposes. Section 6. Transfer; Registration of Transfers and Exchanges. (a) Subject to compliance with U.S. securities laws, the Warrants and all rights thereunder are fully transferable in whole or in part and from time to time to any "qualified institutional buyer" (as defined in Rule 144A under the Act) or "accredited investor" (as defined in Rule 501 under the Act), and to any other individual with the consent of the Company, which consent shall not be unreasonably withheld or delayed, provided, however, that PSI shall not transfer the Warrants to more than seven Persons. The Company shall register the transfer of any outstanding Warrants made in accordance with the terms hereof and applicable law upon the Register, upon surrender of the Warrant Certificate(s) to the Company's principal office, accompanied by a written instrument of transfer substantially in the form attached hereto as Exhibit D, duly executed by the registered Holder(s) thereof or by the duly appointed legal representative thereof. Upon any such registration of transfer, new Warrant Certificate(s) evidencing such transferred Warrants shall be issued to the transferee(s) and the surrendered Warrant Certificate(s) shall be cancelled. (b) Warrant Certificates may be exchanged at the option of the Holder thereof, when surrendered to the Company at its principal office, for other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be cancelled. Section 7. Duration and Exercise of Warrants. (a) The Warrants shall be exercisable by the Holder thereof on any Business Day on or after the Closing Date and prior to the close of business on the Expiration Date. (b) Subject to the provisions of this Agreement, the Holder of each Warrant shall have the right to purchase from the Company (and the Company shall issue and sell to such Holder of a Warrant) one fully paid and nonassessable Common Share per Warrant held upon (i) surrender of the Warrant Certificate evidencing such Warrant, with a purchase form substantially in the form attached hereto as Exhibit C duly completed and signed, to the Company at its principal office or at such other address as the Company may specify in writing to the then registered Holders, and (ii) payment of the Exercise Price. Payment of the Exercise Price shall be made at the option of the Holder by (i) cash or certified or official bank check, (ii) by surrendering additional Warrants or shares of Common Stock for cancellation to the extent the Company may lawfully accept shares of Common Stock, with the value of such shares of 9 11 Common Stock for such purpose to equal the average Current Price of the Common Stock during the ten Trading Days immediately preceding the date of surrender, and the value of such additional Warrants to equal the difference between the aggregate value of the Warrant Shares issuable on the exercise of such Warrants, calculated as set forth in this clause 7(b)(ii), and the aggregate Exercise Price, or (iii) any combination thereof, duly endorsed by or accompanied by appropriate instruments of transfer duly executed by Holder or by Holder's attorney duly authorized in writing. (c) Upon such surrender of the Warrant Certificate evidencing any Warrants and payment of the Exercise Price, the Company shall, as promptly as practicable, and in any event within five Business Days thereafter, issue and cause to be delivered to, or upon the written order of, the Holder of such Warrants and in such name or names as such Holder may designate, a certificate for the Warrant Shares issued upon such exercise of such Warrants. Any Person(s) so designated to be named therein shall be deemed to have become the Holder of record of the Warrant Shares as of the Date of Exercise of such Warrants. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as such Holder shall request. (d) The Warrants evidenced by a Warrant Certificate are exercisable, from time to time, either in whole or in part for any number of Warrant Shares up to the number of Warrant Shares evidenced by the Warrant Certificate. If fewer than all of the Warrants evidenced by a Warrant Certificate are exercised at any time, a new Warrant Certificate or Certificates shall be issued as promptly as practicable (and in any event within five Business Days), at the Company's expense, for the remaining number of Warrants evidenced by such Warrant Certificate. All Warrant Certificates surrendered upon exercise of Warrants shall be cancelled. Section 8. Payment of Expenses and Taxes. The Company shall pay all expenses in connection with, and all taxes and other governmental charges (other than any corporate, personal or other income taxes of the Holder) that may be imposed with respect to, the issue or delivery of Warrant Shares, unless such tax or charge is imposed by law upon the Holder, in which case such taxes or charges shall be paid by the Holder. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Warrant Shares in any name other than that of the Holder. Section 9. Mutilated or Missing Warrant Certificates. Upon receipt by the Company from any Holder of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of a Warrant Certificate and indemnity reasonably satisfactory to it (it being understood that the written indemnity agreement of PSI, without posting of a bond, shall be sufficient indemnity), and in case of mutilation upon surrender and cancellation of the mutilated Warrant Certificate, the Company will execute and deliver in lieu thereof a new Warrant Certificate of like tenor to such Holder; provided, in the case of mutilation, no indemnity shall be required if the mutilated Warrant Certificate in identifiable form is surrendered to Company for cancellation. 10 12 Section 10. Reservation and Issuance of Warrant Shares. The Company will at all times authorize, reserve and have available, free from preemptive rights, solely for the purpose of enabling it to satisfy any obligation to issue and deliver Warrant Shares upon the exercise of the Warrants, the number of Common Shares that is equal to the total number of Warrant Shares issuable upon the exercise of the Warrants, as such number shall vary from time to time in accordance with Section 14, and, if necessary, will amend its Declaration of Trust to provide sufficient reserves of Common Shares issuable upon exercise of the Warrants. The transfer agent for the Common Shares and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the Warrants shall be irrevocably authorized and directed at all times to reserve the maximum number of authorized shares as shall be required for such purpose. The Company shall keep a copy of this Agreement on file with the transfer agent for the Common Shares and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the Warrants. Section 11. No Registration under the Act; Legend. None of the Subject Securities has been registered under the Act. Assuming the accuracy of the representations of PSI contained in Section 2(c) hereof, but based on the Company's analysis of the applicable securities laws, the Company represents and warrants that the offer, sale and issuance of the Warrants qualifies for the exemption from registration provided by Section 4(2) of the Act on the ground that Warrants are to be issued in transactions by an issuer not involving any Public Offering. A copy of this Agreement shall be filed with the Secretary of the Company and kept at its principal office. The Warrant Certificates shall contain a legend substantially in the following form: THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON SHARES ISSUABLE PURSUANT TO THE TERMS HEREOF HAVE THE BENEFIT AND ARE SUBJECT TO THE TERMS AND CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT DATED AS OF MAY 4, 1999, BETWEEN THE COMPANY AND THE INITIAL HOLDER OF THE WARRANTS THEREIN NAMED, AS FROM TIME TO TIME AMENDED, A COMPLETE AND CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER OF THIS WARRANT UPON WRITTEN REQUEST AND WITHOUT CHARGE. THE WARRANTS AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE OR OTHER SECURITIES LAW AND MAY NOT BE TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR (ii) UPON FIRST FURNISHING TO THE COMPANY AN OPINION OF COUNSEL THAT SUCH TRANSFER IS NOT IN VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE TRUST'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("THE CODE"). PURSUANT TO THE TRUST'S DECLARATION OF TRUST, AND 11 13 EXCEPT AS OTHERWISE PROVIDED THEREIN, NO PERSON MAY (1) BENEFICIALLY OWN SHARES IN EXCESS OF 9.8% (IN VALUE OR NUMBER OF SHARES) OF ALL OUTSTANDING SHARES OF ANY CLASS, OR (2) BENEFICIALLY OWN SHARES THAT WOULD RESULT IN THE TRUST BEING "CLOSELY HELD" UNDER SECTION 856(h) OF THE CODE OR OTHERWISE CAUSE THE TRUST TO FAIL TO QUALIFY AS A REIT. IF THE RESTRICTIONS ON OWNERSHIP OR TRANSFER ARE VIOLATED BY THE HOLDER HEREOF, THE EXCESS SHARES REPRESENTED HEREBY WILL BE AUTOMATICALLY TRANSFERRED TO A TRUSTEE OF A CHARITABLE TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE BENEFICIARIES. IN ADDITION, UPON THE OCCURRENCE OF CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE ABOVE RESTRICTIONS MAY BE VOID. ALL TERMS IN THIS LEGEND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS ASCRIBED THERETO IN THE TRUST'S DECLARATION OF TRUST, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON OWNERSHIP OR TRANSFER, WILL BE SENT WITHOUT CHARGE TO THE RECORD HOLDER OF THE CERTIFICATE UPON WRITTEN REQUEST TO THE TRUST AT ITS PRINCIPAL PLACE OF BUSINESS. IN ADDITION, THE COMPANY WILL FURNISH TO ANY SHAREHOLDER ON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OR SUMMARY OF THE DESIGNATIONS AND PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE SHARES OF EACH CLASS WHICH THE COMPANY IS AUTHORIZED TO ISSUE AND THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN SUCH SHARES OF EACH SERIES, IF ANY, TO THE EXTENT THEY HAVE BEEN SET, AND OF THE AUTHORITY OF THE BOARD OF TRUST MANAGERS TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE COMPANY. The Common Share Certificates shall contain a legend which is substantially similar to the legend on the Company's current Common Share Certificates and which also contains provisions substantially in the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE OR OTHER SECURITIES LAW AND MAY NOT BE TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR (ii) UPON FIRST FURNISHING TO THE COMPANY AN OPINION OF COUNSEL THAT SUCH TRANSFER IS NOT IN VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT. 12 14 THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE TRUST'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("THE CODE"). PURSUANT TO THE TRUST'S DECLARATION OF TRUST, AND EXCEPT AS OTHERWISE PROVIDED THEREIN, NO PERSON MAY (1) BENEFICIALLY OWN SHARES IN EXCESS OF 9.8% (IN VALUE OR NUMBER OF SHARES) OF ALL OUTSTANDING SHARES OF ANY CLASS, OR (2) BENEFICIALLY OWN SHARES THAT WOULD RESULT IN THE TRUST BEING "CLOSELY HELD" UNDER SECTION 856(h) OF THE CODE OR OTHERWISE CAUSE THE TRUST TO FAIL TO QUALIFY AS A REIT. IF THE RESTRICTIONS ON OWNERSHIP OR TRANSFER ARE VIOLATED BY THE HOLDER HEREOF, THE EXCESS SHARES REPRESENTED HEREBY WILL BE AUTOMATICALLY TRANSFERRED TO A TRUSTEE OF A CHARITABLE TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE BENEFICIARIES. IN ADDITION, UPON THE OCCURRENCE OF CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE ABOVE RESTRICTIONS MAY BE VOID. ALL TERMS IN THIS LEGEND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS ASCRIBED THERETO IN THE TRUST'S DECLARATION OF TRUST, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON OWNERSHIP OR TRANSFER, WILL BE SENT WITHOUT CHARGE TO THE RECORD HOLDER OF THE CERTIFICATE UPON WRITTEN REQUEST TO THE TRUST AT ITS PRINCIPAL PLACE OF BUSINESS. Any opinion of counsel obtained in connection with a transfer or delegending of the Subject Securities will be at the expense of the relevant Holder. At such time as a legend stated above (or any part thereof) is no longer applicable for any reason, including, without limitation, the operation of Section 12 or Rule 144(k), the Company will, upon receipt of an opinion of counsel to the relevant Holder to such effect, issue new Warrant Certificates or Common Stock Certificates which do not contain such legend. Section 12. Registration Rights. (a) Piggyback Registration. (i) If (and on each occasion that) the Company proposes to register any of its securities under the Act in connection with a Public Offering or effect an underwritten Public Offering under an effective Registration Statement, either for the Company's own account and/or for the account of any of its securityholders, other than any such registration described in the last sentence of clause (ii) below (each such registration being herein called a "Piggyback Registration"), then the Company will give written notice to all Holders who then hold Registrable Securities of the Company's intention to effect such Piggyback Registration not later than the earlier to occur of (A) thirty days prior to the anticipated initial filing date of such Piggyback Registration if such registration is on Form S-3, and (B) forty-five days prior to such date if the registration is on any other form. 13 15 (ii) Subject to the provisions contained in Section 12(b) and in the last sentence of this clause (ii), in connection with any registration subject to the provisions of this Section 12(a), if within twenty days after the date of the Company notice pursuant to clause (i) above Holders of Registrable Securities request the inclusion of some or all of the Registrable Securities owned by them in such registration (in the form of shares of Common Stock to be obtained upon exercise of the Warrants then held by them), the Company will use commercially reasonable efforts to effect the registration under the Act of all Registrable Securities which such Holders request to be registered. Holders of Registrable Securities shall be permitted to withdraw all or any part of the Registrable Securities of such Holders from any Piggyback Registration at any time prior to the final filing (which has been made by and in the discretion of the Company) of such Piggyback Registration. Notwithstanding anything herein to the contrary, the Company will not be obligated or required to include any Registrable Securities in any registration effected on Form S-4 (or any similar successor form); on Form S-8 (or any similar successor form) solely to implement an employee benefit plan (including any option plan) or a transaction of the type to which Rule 145 of the Commission or any successor provision is applicable, or in connection with a dividend reinvestment or direct stock purchase plan for the benefit of the Company's stockholders. (b) Allocation on Piggyback Registrations. In connection with an underwritten Public Offering, if the managing underwriter or underwriters in connection with a Piggyback Registration shall advise the Company in writing that, in the reasonable opinion of such managing underwriter or underwriters, the inclusion of all Registrable Securities for which registration is requested pursuant to Section 12(a) hereof would materially and adversely affect the success of such offering, then registration of the Company's securities shall be cut-back in the following order: (i) First, the registration for the Other Registrable Securities shall be cut-back such that no holder of Other Registrable Securities shall be entitled to participate in such underwritten Public Offering unless all Registrable Securities and all Common Shares proposed to be sold by the Company for its own account or for the account of the parties for which the underwritten Public Offering was commenced as a result of the exercise of demand registration rights ("Demanding Parties") have been included in such underwritten Public Offering. If the managing underwriter or underwriters of the Public Offering reasonably determine that the Holders of the Registrable Securities can include all of their Registrable Securities in such Public Offering, then the holders of the Other Registrable Securities shall be entitled to include their Other Registrable Securities in an amount up to the amount that such managing underwriter or underwriters advise may be included therein (as allocated among the holders of the Other Registrable Securities, pro rata on the basis of the number of Other Registrable Securities requested to be included therein by such holders). (ii) Second, the registration for the Registrable Securities shall be cut-back such that no Holder of Registrable Securities shall be entitled to participate in such underwritten Public Offering unless all Common Shares proposed to be sold by the Company for its own account and for the account of the Demanding Parties have been included in such underwritten Public Offering. If the managing underwriter or 14 16 underwriters of the Public Offering reasonably determine that all Common Shares proposed to be sold by the Company for its own account and for the account of the Demanding Parties can be included in such Public Offering, then the Holders of the Registrable Securities shall be entitled to include their Registrable Securities in an amount up to the amount that such managing underwriter or underwriters advise may be included therein (as allocated among the Holders of the Registrable Securities, pro rata on the basis of the number of Registrable Securities requested to be included therein by such holders). (c) Demand Registration. (i) The Company shall cause to be filed with the Commission as promptly as practicable, but in no event later than August 15, 1999, a shelf Registration Statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration Statement") on Form S-3 (or other appropriate form) to cover sales of the Registrable Securities (in the form of shares of Common Stock to be obtained upon exercise of the Warrants then held by them). In connection with the Shelf Registration Statement, the Company shall also register the offer and sale of the Warrant Shares issuable upon exercise of the Warrants as a primary registration. The Company shall use commercially reasonable efforts to cause such Shelf Registration Statement to be declared effective by the Commission as soon as practicable thereafter. The Company shall use commercially reasonable efforts to keep such Shelf Registration Statement continuously effective until the earlier to occur of two years following the Date of Exercise of the last Warrant issued pursuant to this Agreement or such time as, in the written opinion of counsel to the Company, which opinion is reasonably acceptable to such Holders, such registration is not required for the unrestricted resale under Rule 144 (k) of Registrable Securities entitled to registration rights under this Agreement. If Holders of a majority of the Registrable Securities to be registered for resale in the Shelf Registration Statement so elect, an offering of Registrable Securities pursuant to the Shelf Registration Statement may be effected in the form of an underwritten offering. Upon the receipt of a notice of election by a majority of the Registrable Securities to effect an underwritten offering, the Company will notify in writing all Holders whose names are not included in such notice and such non-electing Holders may, within five business days of receipt of such notice, elect to be included with, and treated as, an electing Holder. If the managing underwriter or underwriters advises the Company and the Holders of such Registrable Securities that in its opinion the amount of Registrable Securities proposed to be sold in such offering exceeds the amount of Registrable Securities which can be sold in such offering, there shall be included in such underwritten offering the amount of such Registrable Securities which in the opinion of such underwriter(s) can be sold, and such amount or number of shares of such Registrable Securities shall be allocated pro rata among the Holders electing to participate in such underwritten offering. (ii) In addition to their rights under Sections 12(a), (b) and (c)(i) hereof, following the expiration of the Shelf Registration Statement, Holders collectively holding at least 75,000 shares of the then outstanding Registrable Securities (or if less than 75,000 shares of the Registrable Securities are then outstanding, then such lesser amount) shall have the right to request and have effected registrations of Registrable Securities for a 15 17 Public Offering of Registrable Securities unless, in the written opinion of counsel to the Company, which opinion is reasonably acceptable to such Holders, such registration is not necessary for such Holders to sell their Registrable Securities in the manner contemplated in compliance with applicable securities laws. Such requests shall be in writing and shall state the number of Registrable Securities to be disposed of and the intended method of disposition of such Registrable Securities by such Holders. The Company shall give notice to all of the Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 12(c)(ii) and shall provide a reasonable opportunity for such Persons to participate in such a registration provided they elect to do so in writing to the Company within fifteen days after the date of the Company's notice. Subject to the foregoing, the Company will use commercially reasonable efforts to effect promptly the registration of all Registrable Securities to the extent requested by the Holder or Holders thereof, and to keep such registration effective for thirty-six months or until all such Holder's Registrable Securities registered thereunder are sold, whichever is shorter. If so requested by any Holder in connection with a registration under this Section 12(c)(ii), and if the Company is then eligible to use Form S-11 or Form S-3, the Company shall take such steps as are required to register such Holder's Registrable Securities for sale on a delayed or continuous basis (the "Supplemental Shelf Registration") under Rule 415 of the Act or any successor provision (if applicable). (iii) The Company further agrees to use commercially reasonable efforts to prevent the happening of any event that would cause a Registration Statement to contain a material misstatement or omission or to be not effective and usable for resale of the Registrable Securities during the period that such Registration Statement is required to be effective and usable. Upon the occurrence of any event that would cause a Registration Statement (1) to contain a material misstatement or omission, or (2) to be not effective and usable for resale of Registrable Securities during the period that such Registration Statement is required to be effective and usable, the Company shall as promptly as reasonably practicable file an amendment to the Registration Statement, in the case of clause (1) immediately above, correcting any such misstatement or omission, and in the case of either clause (1) or (2) immediately above, use commercially reasonable efforts to cause such amendment to be declared effective and such Registration Statement to become usable as soon as reasonably practicable thereafter. If the majority-in-interest of the Holders selling Registrable Securities so elect, an offering of Registrable Securities may be effected in the form of an underwritten offering, and if so, the Company's management shall cooperate in roadshow presentations to assist such Holders in selling their Registrable Securities and shall otherwise work in good faith with any managing underwriter(s) in connection with taking all actions necessary to successfully consummate the Public Offering. If any demand registration pursuant to this Section 12(c) involves an underwritten public offering, the underwriter(s) to be used in connection with such registration shall be selected by a majority-in-interest of the Holders of Registrable Securities to be sold in such registration, subject to the approval of the Company (which shall not be unreasonably withheld or delayed). (iv) The Company agrees that without the written consent of the managing underwriter or underwriters in an underwritten offering of Registrable Securities pursuant to Sections 12(a) and 12(c) hereof, it will not effect any public sale or distribution of its 16 18 equity securities (except (i) pursuant to registrations on Form S-4 or Form S-8 or any successor form or pursuant to any dividend reinvestment or direct stock purchase plan of the Company, (ii) in connection with an exchange offer, or (iii) in connection with the acquisition of assets by the Company or its subsidiaries) from the date the Company receives a notice of election to effect an underwritten offering under Section 12(c) (i) or a demand for registration under Section 12(c) (ii) until the earlier of (A) the abandonment of such underwritten offering, or (B) ninety days after the effective date of the registration statement for such previously proposed Public Offering or, in the case of a previously proposed Public Offering pursuant to an effective Shelf Registration Statement, seventy-five days after the first day on which sales to the public commence pursuant to such offering, in either case unless a shorter time period is agreed upon by the managing underwriter or underwriters. (d) Other Provisions Relating to Registration Rights. In connection with the Company's registration obligations pursuant to this Section 12, the Company shall as expeditiously as possible: (i) Prepare and file with the Commission, as soon as practicable, a Registration Statement or Registration Statements on such form as shall be available for the sale of the Registrable Securities by the Holders thereof in accordance with the intended method or methods of distribution thereof, and use commercially reasonable efforts to cause such Registration Statement to become effective and to remain effective as provided herein; provided, however, that before filing a Registration Statement or Prospectus or any amendments or supplements thereto (including documents that would be incorporated or deemed to be incorporated therein by reference), the Company shall notify the Holders of the Registrable Securities covered by such Registration Statement, their counsel and the managing underwriters, if any, of its intention to file such documents, and upon written request shall furnish to such parties so requesting copies of all such documents proposed to be filed, which documents will be subject to the reasonably prompt review of such Holders, their counsel and such underwriters, if any. (ii) Prepare and file with the Commission such amendments and post- effective amendments to each Registration Statement as may be necessary to keep such Registration Statement continuously effective during the period provided in this Agreement with respect to the disposition of all securities covered by such Registration Statement, and cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) under the Act. (iii) Notify the selling Holders of the Registrable Securities, their counsel and the managing underwriters, if any, promptly, and (if requested in writing by any such Person), confirm such notice in writing: (1) when a Registration Statement or any amendment thereto has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (2) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information; (3) of the issuance by the Commission of any stop order suspending the 17 19 effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (4) if at any time the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated by Section 12(d)(xiv) below cease to be true and correct; (5) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threat in writing of any proceeding for such purpose; and (6) of the happening of any event that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes to such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (iv) Use commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction. (v) If requested by the managing underwriters, if any, or the Holders of a majority-in-interest of the Registrable Securities being sold in connection with an underwritten offering, promptly include in a Prospectus supplement or post-effective amendment such information as the managing underwriters, if any, and such Holders may reasonably request in order to permit the intended method of distribution of such securities and make all required filings of such Prospectus supplement or such post- effective amendment as soon as practicable after the Company has received such request. (vi) Furnish to each selling Holder of Registrable Securities, their counsel and each managing underwriter, if any, without charge, at least one conformed copy of the Registration Statement and each post-effective amendment thereto, including financial statements (including schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits). (vii) Deliver to each selling Holder, their counsel, and the underwriters, if any, without charge, as many copies of the Prospectus or Prospectuses (including each form of Prospectus) and each amendment or supplement thereto as such Persons may reasonably request in connection with the distribution of the Registrable Securities; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any such amendment or supplement thereto. 18 20 (viii) Use commercially reasonable efforts to register or qualify, or obtain an exemption therefrom (or cooperate with the selling Holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification)) of such Registrable Securities for offer and sale under the securities or Blue Sky Laws of such jurisdictions within the United States as any selling Holder (or underwriter) reasonably requests in writing and to keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective; provided, however, that the Company will not be required to (1) qualify generally to do business in any jurisdiction where it is not then so qualified, or (2) take any action that would subject it to general service of process in any jurisdiction where it is not then so subject, other than as to matters and transactions related to such Registration Statement. (ix) Cooperate with the selling Holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall be in a form eligible for deposit with The Depository Trust Company; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters, if any, or Holders may request in writing at least two business days prior to any sale of Registrable Securities. (x) Use commercially reasonable efforts to cause the Registrable Securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities within the United States as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities. (xi) Upon the occurrence of any event contemplated by Section 12(d)(iii)(6) above, prepare a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus will not 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, in light of the circumstances under which they were made, not misleading. (xii) Prior to the effective date of the Registration Statement relating to the Registrable Securities, provide a CUSIP number for the Registrable Securities. (xiii) Use commercially reasonable efforts to cause the Common Shares covered by such Registration Statement to be listed on the Nasdaq Stock Market (or on such other exchange or trading system on which the Common Shares are then listed or authorized to be quoted), and to cause all Registrable Securities other than Common Shares that are covered by such Registration Statement to be authorized to be quoted on the Nasdaq Stock Market (or on such other exchange or trading system on which the Common Shares are then listed or authorized to be quoted and to the extent eligible therefor under the rules of the Nasdaq Stock Market or such national securities exchange). 19 21 (xiv) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other actions reasonably requested by the Holders of a majority-in-interest of the Registrable Securities being sold in connection therewith (including those reasonably requested by the managing underwriters, if any) in order to expedite or facilitate the disposition of such Registrable Securities, and in such connection, whether or not an underwriting agreement is entered into, (1) make such representations and warranties to the Holders of such Registrable Securities and the underwriters, if any, with respect to the business of the Company and its Affiliates, and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings, and, if true, confirm the same if and when requested in writing to do so, (2) if an underwritten offering or if any Holder or its counsel reasonably concludes that such Holder may be deemed an "affiliate" of the Company for purposes of the Act, obtain opinions of counsel to the Company and updates thereof (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the managing underwriters, if any, and counsel to the Holders of Registrable Securities being sold), addressed to each selling Holder and each of the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested in writing by such counsel and underwriters, (3) if an underwritten offering or if any Holder or its counsel reasonably concludes that such Holder may be deemed an "affiliate" of the Company for purposes of the Act, obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of Affiliates of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder (unless such accountants shall be prohibited from so addressing such letters by applicable standards of the accounting profession) and each of the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings, (4) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures substantially to the effect set forth in Section 12(f) hereof with respect to all parties to be indemnified pursuant to Section 12(f), and (5) deliver such additional documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their counsel and the managing underwriters, if any, to evidence the continued validity of the representations and warranties made pursuant to Section 12(d)(xiv)(1) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement, and as and to the extent required thereunder. (xv) Make available for inspection by a representative of the Holders of Registrable Securities being sold, each underwriter participating in any such disposition of Registrable Securities, if any, and any attorney or accountant retained by such selling Holder or underwriter, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the 20 22 Company and its Affiliates as may be reasonably requested, and cause the officers, directors and employees of the Company and its Affiliates to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement; provided, however, that any information that is designated by the Company in writing as confidential at the time of delivery of such information shall be kept confidential by such Persons unless (1) disclosure of such information is required by court or administrative order, (2) disclosure of such information, in the opinion of counsel to such Person, is required by law, or (3) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person. Without limiting the foregoing, no such information shall be used by such Person as the basis for any market transactions in securities of the Company or its Affiliates in violation of law. (xvi) Comply with all applicable rules and regulations of the Commission and make generally available to its security Holders earning statements satisfying the provisions of Section 11(a) of the Act and Rule 158 thereunder, or any similar rule promulgated under the Act, no later than forty-five days after the end of any twelve month period (or ninety days after the end of any twelve month period if such period is a fiscal year) (A) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering, and (B) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover such twelve month periods. (xvii) Make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible moment. (xviii) Cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD). (e) Registration Expenses. All fees and expenses incident to the Company's performance of or compliance with this Section 12 will be borne by the Company, regardless of whether a Registration Statement filed pursuant to this Section 12 becomes effective and whether or not any securities are sold pursuant to such Registration Statement, including without limitation: (i) all registration and filing fees and expenses associated therewith including, without limitation, fees and expenses with respect to filings required to be made with the Commission and the NASD; (ii) fees and expenses of compliance with federal securities or state Blue Sky Laws (including fees and disbursements of counsel for the underwriters or selling Holders in connection with Blue Sky qualifications of the Registrable Securities pursuant to Section 12(d)(viii) hereof); 21 23 (iii) expenses of printing (including, without limitation, expenses of printing or engraving certificates for the Registrable Securities in a form eligible for deposit with The Depositary Trust Company and of printing Prospectuses), messenger and delivery services and telephone; (iv) reasonable fees and disbursements of counsel for the Company and of not more than one counsel for the Holders of Registrable Securities (chosen by a majority of the Holders of the Registrable Securities to be included in the Registration Statement); (v) fees and disbursements of all independent certified public accountants of the Company (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance); (vi) fees and expenses associated with any NASD filing required to be made in connection with a Registration Statement, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained in accordance with the rules and regulations of the NASD; and (vii) fees and expenses of listing the Registrable Securities on any securities exchange or quotation system in accordance with Section 12(d)(xii) hereof. The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company. The Holders of Registrable Securities shall bear the expense of any broker's commission or underwriters' discount or commission. (f) Indemnification; Contribution. (i) Subject to applicable law, the Company will indemnify and hold harmless each Holder of Registrable Securities (and each underwriter for such Holder (if any and if retained by the Holder)) being registered, each of its officers, directors, employees and partners and each person who controls any of them within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each, an "Indemnified Person"), to the full extent lawful, from and against any and all losses, claims, damages, judgments, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in any settlement (if approved by the Company in the exercise of its good faith and reasonable discretion) of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, judgments, expenses or liabilities arise out of or are based on (A) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement (including any related preliminary or definitive Prospectus, or any amendment or supplement to such Registration Statement or Prospectus), (B) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (C) any violation by the Company of the Act, the 22 24 Exchange Act, any Blue Sky Laws or any rule or regulation thereunder in connection with such registration; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, judgment, expense or liability arises from and is based on a material untrue statement or omission or alleged material untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such Holder expressly for use in such Registration Statement or otherwise arises from the sole and willful misconduct of such Holder. Each Holder of Registrable Securities will indemnify and hold harmless the Company, each other Holder of Registrable Securities and each Person who controls any of them within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, judgments, expenses and liabilities, joint or several, to which they, or any of them, may become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise insofar as such losses, claims, damages, judgments, expenses and liabilities arise solely by reason of a material untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such Holder for express use in such Registration Statement. The obligations of any Holder under this clause (i) shall be limited to the net proceeds to such Holder of the Registrable Securities sold pursuant to the Registration Statement to which the loss, claim, damage, judgment, expense or liability relates. (ii) If the indemnification provided for in clause (i) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, judgments, expenses or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, judgments, expenses or liabilities in such proportion as is appropriate to reflect the relative fault, if any, of the Company and the other selling Holders in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the selling Holders shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the selling Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Holders, and the underwriters agree that it would not be just or equitable if contribution pursuant to this clause (ii) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding sentence. The obligations of any Holder under this clause (ii) are several, not joint, and shall be limited to an amount equal to the net proceeds to such Holder of Registrable Securities sold pursuant to the Registration Statement to which the loss, claim, damage, judgment expense or liability relates. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 23 25 (iii) If any claim is brought or asserted against PSI or another Indemnified Person, the Company shall be promptly notified of such in writing. The failure to give such notice shall not relieve the Company of any liability hereunder, except to the extent that the Company can demonstrate that it has been materially prejudiced thereby. If the Company and one or more Indemnified Persons are subject to such claim, upon notice by the Company to such Indemnified Person(s), the Company may elect to assume such defense. Upon such election, the Company shall not be liable hereunder for fees and disbursements of counsel to any such Indemnified Person subsequently incurred, other than reasonable costs of investigation and other than as provided herein, and such election shall be deemed an acknowledgment by the Company that it is liable for indemnification and contribution for any such claims and costs, subject to the terms of this Agreement. PSI and any other Indemnified Person may participate in the defense of such claim with their own counsel at their own expense. Notwithstanding the assumption of such defense by the Company, each Indemnified Person shall have the right to employ separate counsel and to participate in such defense, and the Company shall bear the reasonable fees and disbursements of such counsel (which shall be promptly paid as incurred) if: (i) the Company has agreed to the retention of such counsel; (ii) the defendants in, or targets of, any such claim include more than one Indemnified Person or the Company and an Indemnified Person, and such Indemnified Person shall have reasonably concluded, based upon advice of such Indemnified Person's counsel, that representation of such Indemnified Person by the same counsel (a) would present such counsel with a conflict of interest, or (b) would be inappropriate due to actual or potential differing interests between them in the conduct of the defense of the claim, or (c) would be inappropriate because there may be legal defenses available to such Indemnified Person that are different from, or in addition to, those available to any other Indemnified Person or the Company; or (iii) the Company fails to employ counsel reasonably satisfactory to PSI or such Indemnified Person(s), as the case may be, within a reasonable period of time after receipt by the Company of the notice of the institution of such claim, as provided above. In no event shall the Company be liable under this paragraph for more than two counsel, in addition to local counsel, if appropriate. Regardless of whether the Company elects to assume the defense of a claim against an Indemnified Person, such Indemnified Person may not, without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed, settle or compromise or consent to the entry of any judgment with respect to such claim. The Company also agrees that the Company will not, without the prior written consent of PSI, which consent shall not be unreasonably withheld or delayed, settle or compromise or consent to the entry of any judgment in any pending or threatened claim in respect of which indemnification may be sought hereunder (whether or not PSI or any Indemnified Person is an actual or potential party to such claim). Such prior written consent of PSI shall be required only with respect to PSI determining that such settlement, compromise or consent complies with the terms of the following sentence and does not impose any material obligation on PSI or any other Indemnified Person or contain any admission of culpability on the part of PSI or any Indemnified Person. Such settlement, compromise or consent shall include an unconditional release of PSI and each other Indemnified Person from all liability arising out of such claim, and the Company shall furnish PSI with a copy of such settlement reasonably in advance of entering into such settlement. 24 26 (g) Survival. The provisions of this Section 12 shall survive the termination or expiration of this Agreement. Section 13. Fair Market Value. In order to determine Fair Market Value for property other than publicly traded securities for purposes of this Agreement, the Company and a representative (the "Representative") designated in writing to the Company by the Holders shall attempt to agree upon such Fair Market Value. If the Company and the Representative are unable to agree upon the Fair Market Value within twenty days after notification of the event requiring such a determination, the Company and the Representative shall agree on an Appraiser to be appointed by the Company to determine the Fair Market Value. In the event that the parties cannot agree upon an Appraiser in the foregoing period, then the determination of Fair Market Value shall be conducted by two Appraisers, one of whom shall be selected by the Company, and one of whom shall be selected by the Representative. If either of such two determinations of Fair Market Value is within 10% of the other determination of Fair Market Value, then the Fair Market Value shall be the average of such two determinations. The Company shall pay the expenses of each such Appraiser. If neither of such two determinations of Fair Market Value is within 10% of the other determination of Fair Market Value, a third Appraiser shall be selected by the other two Appraisers. The third Appraiser shall make its own independent final determination of Fair Market Value. The Company shall pay the expenses of such third Appraiser. All appraisal reports shall be in writing, shall be signed by the Appraisers and shall be delivered to the Company and the Holders. The Fair Market Value determined pursuant to this Section 13 shall be final and binding upon the Company and the Holders. Section 14. Adjustment of Exercise Price and Number of Shares of Common Stock Purchasable or Number of Warrants. In addition to any reduction in the Exercise Price required pursuant to Section 2(b)(vi) above, prior to the Expiration Date, the Exercise Price, the number of Common Shares purchasable upon the exercise of each Warrant and the number of Warrants outstanding are subject to adjustment from time to time upon the occurrence of any of the events enumerated in this Section 14. (a) In case the Company shall at any time after the date of this Agreement (i) make a distribution to holders of Common Shares of additional Common Shares or of Other Securities, (ii) subdivide the outstanding Common Shares, (iii) combine the outstanding Common Shares into a smaller number of Common Shares, or (iv) issue any Other Securities by reclassification of the Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing entity), then (1) the number and kind of Common Shares and/or Other Securities issuable, at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Holder(s) after such time shall be entitled to receive upon exercise of the Warrants the aggregate number and kind of Common Shares and/or Other Securities which, if the Warrants had been exercised immediately prior to such time, it would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification and (2) the Exercise Price shall be proportionately adjusted. Such adjustment shall be made successively whenever any event listed above shall occur. 25 27 (b) (i) In case the Company shall issue any Common Shares or any class or series of capital stock that is not Preferred Shares at a price per share less than the greater of (i) $9.83 and (ii) the Fair Market Value per share of such security (such greater amount being hereinafter referred to as the "Base Rate"), then the Exercise Price in effect immediately following such issuance shall be adjusted to equal the price determined by multiplying (A) the Exercise Price in effect immediately prior to the opening of business on the day next following such issuance by (B) a fraction, the numerator of which shall be the -- sum of (x) the number of Common Shares of all classes and series of capital stock (other than Preferred Shares) outstanding immediately prior to such issuance and (y) the number of Common Shares that could be purchased at the Base Rate from the aggregate proceeds to the Company from the issuance of such new Common Shares, and the denominator of which shall be the sum of (xx) the number of Common Shares of all classes and series of capital stock (other than Preferred Stock) outstanding immediately prior to such issuance and (yy) the number of additional Common Shares being issued. For purposes of this Section, "Fair Market Value" shall mean, as to any class or series of capital stock that is not publicly traded, the Fair Market Value of the shares of such class or series as determined in accordance with Section 13 hereof and, as to publicly-traded securities, shall mean the average of the daily Current Prices of a share of such capital stock during the ten Trading Days immediately preceding the effective day of the Exercise Price adjustment pursuant to this subsection. Upon each adjustment of the Exercise Price, the number of Warrant Shares that a Holder of a Warrant shall be entitled to receive upon exercise shall be adjusted by multiplying the number of Warrant Shares issuable upon exercise immediately prior to such adjustment by a fraction, the numerator of which is $9.83 and the denominator of which is the Exercise Price after such adjustment. (ii) If at any time Company shall issue or sell any Options (other than Options granted under Benefit Plans after the Closing Date which entitle all of the holders thereof to purchase not more that 1,000,000 shares of Common Stock of the Company and any Options granted under the Benefit Plans prior to the Closing Date) or any Convertible Securities, whether or not the rights to exercise, exchange or convert thereunder are immediately exercisable, and the price per Common Share which is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities shall be less than the Base Rate in effect immediately prior to the time of such issue or sale, then the number of shares for which a Warrant is exercisable and the Exercise Price shall be adjusted as provided in Section 12(b)(i) above on the basis that the maximum number of additional Common Shares issuable pursuant to all such Options or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and Company shall be deemed to have received all of the consideration payable therefor, if any, as of the date of the issuance of such Options and Convertible Securities. No further adjustments of the Exercise Price shall be made upon the actual issue of such Common Shares or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities or upon the expiration or termination of such Options or Convertible Securities. In the event that any such Options or the right to convert any such Convertible Securities permanently and unconditionally expire without having been exercised or converted, as applicable, the 26 28 number of shares for which a Warrant is exercisable and the Exercise Price shall be re-adjusted as provided in Section 12(b)(i) above to the extent and to give effect to the fact that all or a portion of such Options are not exercised or such Convertible Securities have not been converted or exchanged. If the number of shares for which any Option is exercisable or the rate at which any Convertible Securities are convertible into or exchangeable for shares of Common Stock shall increase, the number of shares of Common Stock purchasable upon the exercise of the Warrants in effect at the time of such event shall promptly be readjusted to the number of shares of Common Stock which would have been so purchasable at such time had such Options or Convertible Securities initially been exercisable or convertible into such changed number of shares of Common Stock and the Exercise Price shall be adjusted accordingly. The provisions of this Section 14(b) shall not apply to any issuance of shares of Common Stock upon exercise of any Warrants or issuances covered by subsections (a), (c) or (f) of this Section 14. (c) In case the Company shall fix a record date for making a distribution to any holders of Common Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of shares of stock other than Common Shares, other securities, evidences of its indebtedness or assets or property of whatever nature (excluding cash dividends consistent with past practice or in connection with dividend equivalent rights or other similar rights under any Benefit Plans), (i) the number of Common Shares for which a Warrant is exercisable shall be adjusted to equal the product of the number of Common Shares for which a Warrant is exercisable immediately prior to such adjustment multiplied by a fraction (A) the numerator of which shall be the Fair Market Value per Common Share immediately prior to such record date, and (B) the denominator of which shall be such Fair Market Value per Common Share minus the amount allocable to one Common Share of any such cash so distributable and of the Fair Market Value of any and all such shares of stock, other securities, evidences of indebtedness, or assets or property so distributable, and (ii) the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the current Fair Market Value per Common Share immediately prior to such record date minus the amount allocable to one Common Share of any such cash so distributable and of the Fair Market Value of any and all such shares of stock, other securities, evidences of indebtedness, or assets or property so distributable, and of which the denominator shall be such current Fair Market Value per Common Share immediately prior to such record date. Such adjustment shall be made successively whenever such a record date is fixed; and, if such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed. (d) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided that any adjustments which by reason of this subsection (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 14 shall be made to the nearest hundredth of a cent or to the nearest Common Share, as the case may be. (e) If at any time, as a result of an adjustment made pursuant to subsection (a) of this Section 14, a Holder shall become entitled to receive any Other Securities, thereafter the number of such Other Securities so receivable shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained in this Section 14. 27 29 (f) In the case of any capital reorganization of the Company, or of any reclassification of the Common Shares, or in case of the consolidation of the Company with or the merger of the Company with or into any other corporation (where the Company is not the surviving corporation) or of the sale of the properties and assets of the Company as, or substantially as, an entirety to any other company, each Warrant shall, after such capital reorganization, reclassification of Common Shares, consolidation, merger or sale, be exercisable, upon the terms and conditions specified in this Agreement, for the number of shares of stock and the cash or other securities or property of any nature whatsoever that is receivable upon or as a result of the reorganization, reclassification, consolidation, merger or sale by a holder of the number of Common Shares (or Other Securities) for which a Warrant is exercisable immediately prior to such event; and in any such case, if necessary, the provisions set forth in this Section 14 with respect to the rights thereafter of the Holders shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable on the exercise of the Warrants. The subdivision or combination of the Common Shares at any time outstanding into a greater or lesser number of units or any other event covered by subsection (a) of this Section 14 shall not be deemed to be a reclassification of the Common Shares for the purposes of this subsection (f). The Company shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to each Holder the shares of stock, cash, other securities or assets to which, in accordance with the foregoing provisions, each Holder may be entitled to and all other obligations of the Company under this Agreement. (g) In case of any adjustment or readjustment in the Warrants, Warrant Shares or Exercise Price in accordance with this Section 14, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms of this Agreement and cause independent public accountants of recognized national standing selected by the Company to verify such computation; and the Company will prepare a report, certified by the principal financial officer of the Company, setting forth such adjustment or readjustment and showing, in detail, the facts upon which such adjustment or readjustment is based, and all calculations relating to any adjustments made in accordance with this Section 14. The Company will forthwith mail a copy of each such report to each Holder, and will, upon the written request at any time of any Holder, furnish to such Holder a report setting forth such information as may be requested by such Holder, including any calculations with respect thereto in order that such Holder may verify such calculations. Section 15. Fractional Warrants and Fractional Warrant Shares. The Company shall not be required to issue a fractional Common Share upon exercise of any Warrant. As to any fraction of a share which the Holder of one or more Warrants, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the Current Market Price per Common Share on the date of exercise. 28 30 Section 16. Financial Information. (a) The Company will furnish to the Holders the reports and information that is required to be delivered to the Company's shareholders under the Exchange Act. (b) Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Company's independent public accountants) with the most recent audited consolidated financial statements of the Company. Section 17. No Rights or Liabilities as Shareholder. Nothing contained in this Agreement shall be construed as conferring upon the Holder any rights as a shareholder of the Company or as imposing any liabilities on the Holder as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors or shareholders of the Company or otherwise. Section 18. Decisions of Holders. All decisions to be made and actions to be taken by the Holders as a group pursuant to this Agreement will be made or taken by a majority-in-interest of the Holders (each Warrant counting as the number of Warrant Shares obtainable upon the exercise of the Warrant at such time). Section 19. Notices to Holders. In case: (a) the Company shall authorize the issuance to any holders of Common Shares of Options (other than Options granted under Benefit Plans after the Closing Date which entitle all of the holders thereof to purchase not more that 1,000,000 shares of Common Stock of the Company and any Options granted under the Benefit Plans prior to the Closing Date) to purchase Common Shares or any other similar subscription rights; or (b) the Company shall authorize a dividend or the distribution to all holders of Common Shares of evidences of its indebtedness or assets (including distributions payable in Common Shares and cash dividends or distributions, other than cash dividends consistent with past practice); or (c) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of all or substantially all of the properties and assets of the Company, or of a capital reorganization or reclassification or change of the Common Shares; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company proposes to take any other action which would require an adjustment of the number of Warrant Shares issuable upon exercise of the Warrants or an adjustment of the Exercise Price pursuant to Section 14; 29 31 then the Company shall cause notice to be given to each holder of the Warrants at its address appearing on the Register, at least thirty calendar days prior to the applicable record or effective date specified. Such notice shall state (i) the date as of which the holders of record of Common Shares to be entitled to receive any such dividend, rights, warrants or distribution are to be determined, or (ii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation, winding up or other action is expected to become effective, and, if applicable, the date as of which it is expected that holders of record of Common Shares shall be entitled to exchange their Common Shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. Section 20. Amendments and Waivers. Any provision of this Agreement or the Warrant Certificates may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and two-thirds of the Holders; provided that this Agreement and the Warrant Certificate may not be modified or amended to reduce the number of Common Shares for which a Warrant is exercisable or to increase the price at which such shares may be purchased upon exercise of a Warrant without the prior written consent of the Holder thereof. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders of Registrable Securities shall be valid only with the written consent of Holders of at least two-thirds of the Registrable Securities being sold. Section 21. Survival. The provisions of this Agreement shall survive the exercise of any Warrant in whole or part and, in event of such exercise, the term "Holder" shall refer to the holder of any Warrant Shares issued upon exercise hereunder. Section 22. Indemnification. Company agrees to indemnify and hold harmless the Holders from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, reasonable attorneys' fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against the Holders in any manner relating to or arising out of any litigation to which a Holder is made a party in its capacity as a stockholder or warrantholder of Company to the extent such Holder acquired its status as a stockholder or warrantholder pursuant to the terms of this Agreement; provided, however, that the Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements are found in a final non-appealable judgment by a court to have resulted from a Holder's sole and willful misconduct or gross negligence in its capacity as a stockholder or warrantholder of the Company. Section 23. Expenses. Except as provided herein, the Company shall pay all reasonable legal and other professional fees (and related disbursements) of PSI in connection with this Agreement and the transactions contemplated hereby. Section 24. Notices. Any notice or demand authorized by this Warrant Agreement to be given shall be in writing and shall be delivered in person, sent by telecopy, mailed (registered or certified, return receipt requested), postage prepaid, or sent by overnight delivery service 30 32 addressed to the Company or the Holders at their respective addresses specified above or in the Register or, as to any such party, at such other address as may be designated by it in a notice to the other parties hereto. All notices shall be deemed to be properly given or made upon the earlier to occur of (i) actual delivery, (ii) five days after being deposited in the mail addressed as aforesaid, or (iii) one Business Day after being sent by facsimile (with answer back confirmed) or overnight delivery service. Section 25. Binding Effect. This Agreement shall be binding upon and inure to the sole and exclusive benefit of the Company, and its permitted successors and each registered Holder from time to time of the Subject Securities and each of its respective permitted successors. Section 26. Termination. Except for Section 22 of this Agreement which shall survive the termination or expiration of this Agreement and except as otherwise provided herein, this Agreement shall terminate and be of no further force and effect at the close of business on the Expiration Date unless, prior to such Expiration Date, there shall no longer be any Holders in which event this Agreement shall terminate as of such date except with respect to the provisions hereof which are intended to survive. Section 27. Severability. In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. Notwithstanding the foregoing, if any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. Section 28. Counterparts. This Agreement may be executed by one or more of the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Section 29. Governing Law; Remedies. (a) This Agreement and each Warrant Certificate shall be construed in accordance with and governed by the laws of the State of Texas (without giving effect to its conflicts of law principles). (b) Each holder of a Subject Security, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 31 33 Section 30. No Impairment. If any event occurs as to which the provisions of this Agreement or the Subject Securities are strictly applicable and the application thereof would not fairly protect the rights of the Holders in accordance with the essential intent and principles of such provisions, then the Company shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary to protect such rights as aforesaid. Section 31. Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, THE COMPANY IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 24 OF THIS AGREEMENT; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER THE COMPANY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT THE HOLDER RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST THE COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 31 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. Section 32. Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all 32 34 disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 32 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. [Signature Page Follows] 33 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers, as of the date and year first above written. "COMPANY" AMRESCO CAPITAL TRUST, a Texas real estate investment trust By: -------------------------------------- Name: Jonathan S. Pettee Title: President By: -------------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President "PSI" PRUDENTIAL SECURITIES INCORPORATED, a Delaware corporation By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-1 36 EXHIBIT A DECLARATION OF TRUST AND BYLAWS OF THE COMPANY Reference is made to the following documents filed with the Securities and Exchange Commission: Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-11 (Registration No. 333-45543), which exhibit is incorporated herein by reference). First Amendment to Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated May 12, 1998, which exhibit is incorporated herein by reference). Second Amendment to Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated May 12, 1998, which exhibit is incorporated herein by reference). Form of Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-11 (Registration No. 333-45543), which exhibit is incorporated herein by reference). A-1 37 EXHIBIT B WARRANT CERTIFICATE No. 1 250,002 Warrants VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON MAY 4, 2006 THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON SHARES ISSUABLE PURSUANT TO THE TERMS HEREOF HAVE THE BENEFIT AND ARE SUBJECT TO THE TERMS AND CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT, DATED AS OF MAY 4, 1999, BETWEEN THE COMPANY AND THE INITIAL HOLDER OF THE WARRANTS THEREIN NAMED, AS FROM TIME TO TIME AMENDED, A COMPLETE AND CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED TO THE HOLDER OF THIS WARRANT UPON WRITTEN REQUEST AND WITHOUT CHARGE. THE WARRANTS AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE OR OTHER SECURITIES LAW AND MAY NOT BE TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR (ii) UPON FIRST FURNISHING TO THE COMPANY AN OPINION OF COUNSEL THAT SUCH TRANSFER IS NOT IN VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE TRUST'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED ("THE CODE"). PURSUANT TO THE TRUST'S DECLARATION OF TRUST, AND EXCEPT AS OTHERWISE PROVIDED THEREIN, NO PERSON MAY (1) BENEFICIALLY OWN SHARES IN EXCESS OF 9.8% (IN VALUE OR NUMBER OF SHARES) OF ALL OUTSTANDING SHARES OF ANY CLASS, OR (2) BENEFICIALLY OWN SHARES THAT WOULD RESULT IN THE TRUST BEING "CLOSELY HELD" UNDER SECTION 856(h) OF THE CODE OR OTHERWISE CAUSE THE TRUST TO FAIL TO QUALIFY AS A REIT. IF THE RESTRICTIONS ON OWNERSHIP OR TRANSFER ARE VIOLATED BY THE HOLDER HEREOF, THE EXCESS SHARES REPRESENTED HEREBY WILL BE AUTOMATICALLY TRANSFERRED TO A TRUSTEE OF A CHARITABLE TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE BENEFICIARIES. IN ADDITION, UPON THE OCCURRENCE OF CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE ABOVE RESTRICTIONS MAY BE VOID. ALL TERMS IN THIS LEGEND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS ASCRIBED THERETO IN THE TRUST'S DECLARATION OF TRUST, AS THE SAME MAY BE B-1 38 AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON OWNERSHIP OR TRANSFER, WILL BE SENT WITHOUT CHARGE TO THE RECORD HOLDER OF THE CERTIFICATE UPON WRITTEN REQUEST TO THE TRUST AT ITS PRINCIPAL PLACE OF BUSINESS. IN ADDITION, THE COMPANY WILL FURNISH TO ANY SHAREHOLDER ON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OR SUMMARY OF THE DESIGNATIONS AND PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE SHARES OF EACH CLASS WHICH THE COMPANY IS AUTHORIZED TO ISSUE AND THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN SUCH SHARES OF EACH SERIES, IF ANY, TO THE EXTENT THEY HAVE BEEN SET, AND OF THE AUTHORITY OF THE BOARD OF TRUST MANAGERS TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE COMPANY. THIS CERTIFIES THAT for value received the registered holder hereof or registered assign (the "Holder"), is the owner of the number of Warrants set forth above, each of which entitles the owner thereof to purchase at any time on or before 5:00 P.M., New York City time, on May 4, 2006, one fully paid and nonassessable Common Share of AMRESCO CAPITAL TRUST, a Texas real estate investment trust (the "Company"), at the purchase price of $9.83 per Common Share (the "Exercise Price"). As provided in the Warrant Agreement referred to below, the Exercise Price and the number or kind of Common Shares which may be purchased upon the exercise of the Warrants evidenced by this Warrant Certificate are, upon the happening of certain events, subject to modification and adjustment. This Warrant Certificate is subject to and entitled to the benefits of all of the terms, provisions and conditions of that certain agreement dated as of May 4, 1999 (the "Warrant Agreement") by and between the Company and PRUDENTIAL SECURITIES INCORPORATED, which Warrant Agreement is hereby incorporated herein by reference and made a part hereof and to which Warrant Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Company and the Holders of the Warrant Certificates. Copies of the Warrant Agreement are on file at the principal office of the Company. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding, and until such transfer on such books, the Company may treat the Holder hereof as the owner for all purposes. This Warrant Certificate, with or without other Warrant Certificates, upon surrender at the principal office of the Company, may be exchanged for another Warrant Certificate or Warrant Certificates of like tenor and date evidencing Warrants entitling the Holder to purchase a like aggregate number of Common Shares as the Warrants evidenced by the Warrant Certificate or Warrant Certificates surrendered. B-2 39 If this Warrant Certificate shall be exercised in part, the Holder shall be entitled to receive upon surrender hereof, another Warrant Certificate or Warrant Certificates for the number of whole Warrants not exercised. No fractional Common Share will be issued upon the exercise of any Warrant or Warrants evidenced hereby, as provided in the Warrant Agreement. B-3 40 IN WITNESS WHEREOF, the Company has executed this Warrant Certificate. AMRESCO CAPITAL TRUST, a Texas real estate investment trust By: ---------------------------------- Name: Jonathan S. Pettee Title: President By: ---------------------------------- Name: Rebecca A. Kuban Title: Executive Vice President Attest: - ---------------------------- Name: Michael L. McCoy Title: Secretary B-4 41 EXHIBIT C PURCHASE FORM (To be signed only upon exercise of Warrant) To: AMRESCO CAPITAL TRUST The undersigned, the holder of the within Warrant Certificate, hereby irrevocably elects to exercise the purchase right represented by such Warrant Certificate for, and to purchase thereunder, * Common Shares of AMRESCO CAPITAL TRUST, and herewith makes payment of $ therefor, and requests that the certificates for such Common Shares be issued in the name of, and delivered to, _______________________, whose address is: __________________________________. Dated: --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant certificate) -------------------------- (Address) -------------------------- -------------------------- -------------------------- - -------- * Insert here the number of Common Shares called for on the face of the Warrant Certificate (or, in the case of a partial exercise, the portion thereof as to which Warrants are being exercised), in either case without making any adjustment for additional Common Shares or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant Agreement, may be deliverable upon exercise. C-1 42 EXHIBIT D ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of the Warrants represented by this Warrant Certificate, hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned with respect to the number of Warrants set forth below: Name and Address of Assignee No. of Warrants and does hereby irrevocably constitute and appoint _______ ________________ attorney-in-fact to register such transfer on the books of AMRESCO CAPITAL TRUST maintained for the purpose, with full power of substitution in the premises. Dated: Print Name: ---------------------------- ----------------------------- Signature: ----------------------------- Witness: ----------------------------- NOTICE: The signature on this assignment must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or any change whatsoever. D-1 43 EXHIBIT E FORM OF COMMERCIAL LOAN/ASSET SCHEDULE AMRESCO CAPITAL TRUST PRUDENTIAL SCHEDULE OF APPROVED ASSETS $300 MILLION LINE OF CREDIT - SUBLIMIT REPORT DATE
NO. LOAN NAME ACT COMMITMENT COLLATERAL COST COLLATERAL VALUE ACT OUTSTANDING BALANCE MAXIMUM PRIOR LIEN BALANCE - ---------------------------------------------------------------------------------------------------------------------------------- 1 2 - ---------------------------------------------------------------------------------------------------------------------------------- 3 4 - ---------------------------------------------------------------------------------------------------------------------------------- 5 6 - ---------------------------------------------------------------------------------------------------------------------------------- 7 8 - ---------------------------------------------------------------------------------------------------------------------------------- 9 10 - ---------------------------------------------------------------------------------------------------------------------------------- 11 12 - ---------------------------------------------------------------------------------------------------------------------------------- 13 14 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- NO. PRUDENTIAL ADVANCE RATE PRUDENTIAL COMMITMENT PRUDENTIAL OUTSTANDING BALANCE TOTAL HAIRCUT AMOUNT 90% OF TOTAL HAIRCUT - ---------------------------------------------------------------------------------------------------------------------------------- 1 2 - ---------------------------------------------------------------------------------------------------------------------------------- 3 4 - ---------------------------------------------------------------------------------------------------------------------------------- 5 6 - ---------------------------------------------------------------------------------------------------------------------------------- 7 8 - ---------------------------------------------------------------------------------------------------------------------------------- 9 10 - ---------------------------------------------------------------------------------------------------------------------------------- 11 12 - ---------------------------------------------------------------------------------------------------------------------------------- 13 14 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- $300 MILLION LINE OF CREDIT --------------------------------------------------------------------------------------------------------------- MAX. $115MM CONSTRUCTION ------------------------------------------------- MAX. $50MM CONSTRUCTION CONSTRUCTION NO. 1ST LIEN UNLIMITED LESS THAN 70% GREATER THAN 70% MAX. $40MM 2ND LIEN OR MEZZ OR EQUITY - --------------------------------------------------------------------------------------------------------------------- 1 2 - --------------------------------------------------------------------------------------------------------------------- 3 4 - --------------------------------------------------------------------------------------------------------------------- 5 6 - --------------------------------------------------------------------------------------------------------------------- 7 8 - --------------------------------------------------------------------------------------------------------------------- 9 10 - --------------------------------------------------------------------------------------------------------------------- 11 12 - --------------------------------------------------------------------------------------------------------------------- 13 14 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- TOTAL - ---------------------------------------------------------------------------------------------------------------------
E-1 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 6,846 27,842 3,716 0 0 0 32,919 187 185,041 1,001 0 0 0 100 131,797 185,041 0 4,473 0 0 1,382 742 589 2,344 0 2,344 0 0 0 2,344 0.23 0.23
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