-----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, En08GyQT2UZNVM8aMKIVk95nKU9UaMGyxmV9g//jVSIAWITQfKNECksfHPUQXz7H DWudAxwecUKQpQjiHGfxJA== 0001116679-01-000733.txt : 20010409 0001116679-01-000733.hdr.sgml : 20010409 ACCESSION NUMBER: 0001116679-01-000733 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14788 FILM NUMBER: 1591898 BUSINESS ADDRESS: STREET 1: 605 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: BATTLE FOWLER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 0001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 ----------------- [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _____________ to _______________ Commission File Number 1-14788 ------- Capital Trust, Inc. ------------------- (Exact name of registrant as specified in its charter) Maryland 94-6181186 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 410 Park Avenue, 14th Floor, New York, NY 10022 - ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 655-0220 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Class A Common Stock, New York Stock Exchange $0.01 par value ("Class A Common Stock") Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / MARKET VALUE Based on the closing sales price of $4.40 per share, the aggregate market value of the outstanding Class A Common Stock held by non-affiliates of the registrant as of March 30, 2001 was $44,947,000. OUTSTANDING STOCK As of March 30, 2001 there were 19,580,654 outstanding shares of Class A Common Stock. The Class A Common Stock is listed on the New York Stock Exchange (trading symbol "CT"). Trading is reported in many newspapers as "CapTr". DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the Registrant's definitive proxy statement to be filed with the Commission within 120 days after the close of the Registrant's fiscal year.
- ------------------------------------------------------------------------------ CAPITAL TRUST, INC. - ------------------------------------------------------------------------------ PAGE Explanatory Note Regarding Forward-Looking Statements Safe Harbor ii - ------------------------------------------------------------------------------ PART I - ------------------------------------------------------------------------------ Item 1. Business 1 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 13 - ------------------------------------------------------------------------------ PART II - ------------------------------------------------------------------------------ Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26 Item 8. Financial Statements and Supplementary Data 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 - ------------------------------------------------------------------------------ PART III - ------------------------------------------------------------------------------ Item 10. Directors and Executive Officers of the Registrant 28 Item 11. Executive Compensation 28 Item 12. Security Ownership of Certain Beneficial Owners and Management 28 Item 13. Certain Relationships and Related Transactions 28 - ------------------------------------------------------------------------------ PART IV - ------------------------------------------------------------------------------ Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 29 - ------------------------------------------------------------------------------ Signatures 33 Index to Consolidated Financial Statements F-1
-i- EXPLANATORY NOTE REGARDING FORWARD-LOOKING STATEMENTS SAFE HARBOR Except for historical information contained herein, this annual report on Form 10-K contains forward-looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward-looking statements are included with respect to, among other things, the Company's current business plan, business strategy and portfolio management. The Company's actual results or outcomes may differ materially from those anticipated. Important factors that the Company believes might cause such differences are discussed in the cautionary statements presented under the caption "Factors which may Affect the Company's Business Strategy" in Item 1 of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-K. -ii- PART I - ------------------------------------------------------------------------------ Item 1. Business - ------------------------------------------------------------------------------ General - ------- Capital Trust, Inc. (the "Company") is an investment management and real estate finance company designed to take advantage of high-yielding lending and investment opportunities in commercial real estate and related assets. The Company, for its own account and as an investment manager, makes investments in various types of commercial real estate and related assets and its current investment program emphasizes senior and junior commercial mortgage loans, corporate mezzanine loans, certificated mezzanine investments, subordinated interests in commercial mortgage-backed securities ("CMBS") and direct equity investments. Pursuant to the Company's business strategy, the Company seeks to originate and manage, either for its own account or for funds under management, a portfolio of loans and other assets such that a majority of its investments are subordinate to third-party financing but senior to the owner/operator's equity position and therefore represent "mezzanine" capital. On March 8, 2000, the Company entered into a strategic relationship with Citigroup Investments Inc. ("Citigroup"), pursuant to which, among other things, affiliates of the parties will co-sponsor, commit to invest capital in and manage a series of high-yield commercial real estate mezzanine investment opportunity funds (collectively, "Mezzanine Funds"). This venture represents a new strategic direction for the Company as it transitions itself from primarily a "balance sheet" lender to an investment management firm engaged in originating, structuring and managing high-yield real estate financial assets for third party investment funds. During 2000, the Company has invested in the first of these funds, which it manages, and intends to continue to invest in and manage these funds in the future along with continuing to manage its existing investment portfolio and to selectively add investments to its portfolio that do not conflict with its role as exclusive investment manager to the Mezzanine Funds. In this regard, the Company remains positioned opportunistically to invest on balance sheet in a diverse array of real estate and finance-related assets and enterprises, including operating companies, which satisfy its investment criteria. Strategic Relationship with Citigroup On March 8, 2000, the Company entered into a strategic relationship with Citigroup in connection with the commencement of its new investment management business. Together, the strategic partners have agreed, among other things, to co-sponsor, commit to invest capital in, and manage a series of Mezzanine Funds. In connection with this relationship, Citigroup and the Company have made capital commitments to the Mezzanine Funds of up to an aggregate of $400.0 million and $112.5 million, respectively, subject to certain terms and conditions. The strategic relationship is governed by a venture agreement, dated as of March 8, 2000 (the "Venture Agreement"), pursuant to which Citigroup and the Company have created CT Mezzanine Partners I LLC ("Fund I"), to which they have made capital commitments of $150 million and $50 million, respectively, subject to identification of suitable investments acceptable to Citigroup and the Company. CT Investment Management Co. LLC ("CTIMCO"), a wholly owned subsidiary of the Company, serves as the exclusive investment manager to Fund I, which is currently identifying and negotiating suitable investments for the fund. Additionally, Citigroup and the Company have agreed to additional capital commitments of up to $250.0 million and $62.5 million, respectively, to future co-sponsored Mezzanine Funds that close prior to December 31, 2001, subject to third-party capital commitments and other conditions contained in the Venture Agreement. Pursuant to the Venture Agreement, CTIMCO will serve as the exclusive investment manager to the Mezzanine Funds. Further, each party has agreed to certain exclusivity obligations with respect to the origination of assets suitable for the Mezzanine Funds and the Company granted Citigroup the right of first refusal to co-sponsor future Mezzanine Funds. The Company has also agreed, as soon as practicable, to take the steps necessary for it to be treated as a REIT for tax purposes subject to changes in law, or good faith inability to meet the requisite qualifications. Unless the Company can find a suitable "reverse merger" 1 REIT candidate, the earliest that the Company can qualify for re-election to REIT status will be upon filing its tax return for the year ended December 31, 2002. The Company believes that its strategic venture with Citigroup emphasizes its strengths and provides it with the building blocks for a scalable platform for high quality earnings growth. It also shifts the Company's focus from that of a "balance sheet" lender to that of an investment manager making substantial co-investments with other investors in funds under management. The investment management business, as structured with Citigroup, also allows the Company to access the private equity markets as a source of capital to fund its business. The venture further provides the potential for significant operating leverage allowing the Company to grow earnings and to increase return on equity without simply incurring additional financial risk. Developments During Fiscal Year 2000 - ------------------------------------ Fiscal year 2000 was a transition year for the Company as it shifted its focus from that of a "balance sheet" lender to that of an investment manager. The Company made no direct investments in 2000, but rather originated investments through Fund I, its first co-sponsored Mezzanine Fund. In order to concentrate its efforts on the new business, in April 2000, the Company increased its level of resources devoted to its new investment management business and significantly reduced resources devoted to its investment banking and advisory operations. As a result, advisory and investment banking revenues have decreased significantly, and are expected to cease, while revenues from the new investment management business have been generated and are expected to increase as the Company sponsors additional funds and invests the equity capital committed to the funds. The transition related steps taken by the Company resulted in significantly lower net income in 2000 as compared to 1999. During the year, the Company's total asset base decreased from $827.8 million at December 31, 1999 to $644.4 million. The Company's reduction in assets was primarily the result of significant loan satisfactions, the proceeds from which were utilized to repay debt, repurchase outstanding common stock and invest in Fund I. Through December 31, 2000, the Company has made equity contributions to Fund I of $33,214,000 of which Fund I has returned $13,107,000 for net equity contributions of $20,107,000. The Company's portion of Fund I's net income (based upon its 25% interest in the fund) amounted to $1,530,000. The Company has capitalized costs totaling $4,752,000 that will be amortized over the anticipated lives of the Mezzanine Funds. As of December 31, 2000, Fund I has loans outstanding totaling $119,622,000, all of which are performing in accordance with the terms of the loan agreements. The Company believes that its Credit Facilities (as hereinafter defined) and the proceeds from loan repayments provide the Company with the capital necessary to meet its capital commitments to the Mezzanine Funds, and as permitted under the Venture Agreement, to expand and diversify its portfolio of loans and other investments enabling the Company to compete for and consummate larger transactions meeting the Company's target risk/return profile. In addition to traditional capital sources, the Company has explored, and will continue to explore, diversified capital sources to fund its investment activities including, but not limited to, other joint-ventures, strategic alliances and money management ventures. Since December 31, 1999, the Company funded, for its own account, $14.2 million of commitments and additional borrowings under three existing loans. The Company received full satisfaction of seven loans and a certificated mezzanine investment totaling $147.2 million and partial repayments on nine loans and a certificated mezzanine investment totaling $45.1 million. At December 31, 2000, the Company had outstanding loans, certificated mezzanine investments and investments in commercial mortgage-backed securities totaling approximately $600 million and additional commitments for fundings on outstanding loans and certificated mezzanine investments of approximately $5.1 million. As of December 31, 2000, the Company's portfolio of financial assets consisted of six Mortgage Loans (as hereinafter defined), eight Mezzanine Loans (as hereinafter defined), one Certificated Mezzanine Investment (as hereinafter defined), two other loans (collectively the "Loan Portfolio"), and 18 classes of CMBS Subordinated Interests (as hereinafter defined) (together with the Loan Portfolio, the "Investment Portfolio"). 2 At December 31, 2000, one Mezzanine Loan with a principal balance of $13,018,000 was in default due to the loan maturing on December 1, 2000; at December 31, 2000, the loan was earning a variable interest rate of LIBOR + 9.00% and was repaid in full with interest on March 21, 2001. One senior Mortgage Loan receivable with a principal balance of $8,000,000 reached maturity on July 15, 2000 and has not been repaid with respect to principal and interest. In accordance with the Company's policy for revenue recognition, income recognition has been suspended on this loan and through December 31, 2000, $791,000 of potential interest income has not been recorded. During the year ended December 31, 2000, one other loan receivable, originated by the former management of the Company's predecessor REIT operations, with a net investment of $136,000 was past-due more than 90 days and was written-off. There were no other delinquencies or losses on such assets as of December 31, 2000 and for the year then ended. The table set forth below details the composition of the Investment Portfolio at December 31, 2000.
Underlying Number Type of Loan/ Property of Loans / Original Outstanding Unfunded Current Investment Type Investments Commitment Face Amount(1) Commitment Maturity Interest Rate - ---------- ---- ----------- ---------- -------------- ---------- -------- ------------- Senior Mortage Retail/ 4 $ 81,000,000 $ 63,800,000 $ - 2000 to Variable: LIBOR + 3.20% Loans Hotel 2001 to LIBOR + 10.00% Subordinate Office/Hotel 2 89,000,000 71,851,000 5,149,000 2001 Variable: LIBOR + 5.55% Mortgage to LIBOR + 7.00% Loans Mezzanine Loans Office / 8 201,045,000 179,356,000 - 2000 to Fixed: 11.62% to 12.00% Retail / 2009 Variable: LIBOR + 5.25% Hotel to LIBOR + 9.00% Certificated Office 1 32,467,000 22,379,000 - 2001 Variable: LIBOR + 3.95% Mezzanine Investment CMBS (1) Various 18 282,526,000 282,526,000 - 2003 to Fixed: 7.00% to 9.16% 2113 Variable: LIBOR + 2.75% to LIBOR + 7.00% Other Loans Retail/ 2 63,960,000 47,029,000 - 2002 to Fixed: 9.50% Commercial/ 2017 Variable: LIBOR + 5.27% Corporate -- ------------ ------------- ------------ Total 35 $749,998,000 $666,941,000 $ 5,149,000 == ============ ============= ============
(1) With respect to the CMBS, in 1998, the Company purchased $36.5 million face amount of interests in three classes of CMBS Subordinated Interests issued by a financial asset securitization investment trust for $36.3 million. In April 2000, the Company received $1.4 million of additional discount from the issuer of the securities in settlement of a dispute with the issuer. At December 31, 2000, the CMBS had an amortized cost of $35.4 million and a market value of $34.4 million. In March 1999, the Company purchased 15 "BB" rated CMBS subordinated interest securities from 11 separate issues (the "BB CMBS Portfolio") with an aggregate face amount of $246.0 million for $196.9 million. In connection with the transaction, an affiliate of the seller provided three-year term financing for 70% of the purchase price at a floating rate above the London Interbank Offered Rate ("LIBOR") and entered into an interest rate swap with the Company for the full duration of the BB CMBS Portfolio thereby providing a hedge for interest rate risk. The financing was provided at a rate that was below the current market for similar financings. In order to adjust the yield on the debt to current market terms, the carrying amount of the assets and the related debt were reduced by $10.9 million. At December 31, 2000, the portfolio had an amortized carrying value of $190.3 million and a market value of $182.1 million. 3 Real Estate Lending and Investment Market - ----------------------------------------- The Company believes that the continued strength of commercial real estate property values, coupled with fundamental structural changes in the real estate capital markets, primarily related to the growth in CMBS issuance and the financing parameters related thereto, creates significant opportunities for companies specializing in commercial real estate lending and investing. Such opportunities develop from: o Scale and Rollover. The U.S. commercial mortgage market--a market that is comparable in size to the corporate and municipal bond markets--has approximately $1.5 trillion in total mortgage debt outstanding, primarily held privately. In addition, significant amounts of commercial mortgage loans held by U.S. financial institutions mature on an annual basis. o Rapid Growth of Securitization. With U.S. issuance volume of approximately $49 billion in 2000, the total estimated CMBS market capitalization has grown to $300 billion from approximately $6 billion in 1990. To date, the CMBS market expansion has been fueled in large part by "conduits" that originate whole loans primarily for resale to financial intermediaries, which in turn package the loans as securities for distribution to public and private investors. The Company believes that as the underwriting criteria utilized by securitized lenders becomes accepted as the market standard, borrowers are left constrained by relatively inflexible securitization/rating agency standards, including lower loan-to-value ratios, thereby creating significant demand for mezzanine financing (typically between 60% and 90% of total capitalization). In addition, since many high quality loans may not immediately qualify for securitization, due primarily to rating agency guidelines, or other factors, significant opportunities are created for shorter-maturity bridge and transition mortgage financings. o Consolidation. As the real estate market continues to evolve, the Company expects that consolidation will occur and efficiency will increase. Over time, the Company believes that the market leaders in the real estate finance sector will be fully integrated investors capable of originating, underwriting, structuring, managing and retaining real estate risk, whether as a principal or as an investment manager. The Company believes that significant fundamental and structural changes in the commercial real estate debt capital markets are creating the need for mezzanine investment capital. The Company seeks to capitalize on this market opportunity. Business Strategy - ----------------- Whether as a principal or through its investment management business, the Company seeks to generate returns from a portfolio of leveraged investments. As it develops its investment management business, the Company will further seek to generate additional revenue from investment management fees and incentive compensation that will be tied to a portfolio of leveraged investments held by the managed funds. In its role as investment manager for the Mezzanine Funds or for its own account, the Company currently pursues investment and lending opportunities designed to capitalize on inefficiencies in the real estate capital, mortgage and finance markets. The Company believes that it is well positioned to capitalize on the market opportunities, which, if carefully underwritten, structured and monitored, represent attractive investments that pose potentially less risk than direct equity ownership of real property. Further, the Company believes that the rapid growth of the CMBS market has given rise to opportunities for the Company to selectively acquire non-investment grade classes of such securities, which the Company believes can be priced inefficiently in terms of their risk/reward profile. During 2000, the Company dedicated significant resources to implement its strategic venture with Citigroup primarily by investing the capital committed to Fund I and by organizing CT Mezzanine Partners II, LP ("Fund II"), the Company's second Mezzanine Fund which will be capitalized with third party institutional private equity. Fund II is expected to have its initial closing in April 2, 2001. 4 During 2000, the Company's new investment efforts focused on originating assets on behalf of Fund I ($156.9 million of assets originated in seven separate transactions) and in managing the Company's existing portfolio of investments. Upon satisfaction, the proceeds from repayments on the Company's existing portfolio of investments were used primarily to repay indebtedness, repurchase the company's stock and to fund the Company's commitment to Fund I. The Company believes that by allowing its investment portfolio to repay in the normal course, it will have sufficient sources of liquidity to fulfill its obligations to Fund I and Fund II, when closed, as well as facilitate other potential strategic acquisitions and/or joint ventures. Whether as a principal or through its investment management business, the Company's investment program emphasizes, but is not limited to, the following general categories of real estate and finance-related assets, all of which are suitable investments for the Mezzanine Funds: o Mortgage Loans. The Company pursues opportunities to originate and fund senior and junior mortgage loans ("Mortgage Loans") to commercial real estate owners and property developers who require interim financing until permanent financing can be obtained. The Company's Mortgage Loans are generally not intended to be permanent in nature, but rather are intended to be relatively short-term in duration, with extension options as deemed appropriate, and typically require a balloon payment of principal at maturity. The Company may also originate and fund permanent Mortgage Loans in which the Company intends to sell the senior tranche, thereby creating a Mezzanine Loan. o Mezzanine Loans. The Company originates high-yielding loans that are subordinate to first lien mortgage loans on commercial real estate and are secured either by a second lien mortgage or a pledge of the ownership interests in the borrowing property owner ("Mezzanine Loans"). Generally, the Company's Mezzanine Loans have a longer anticipated duration than its Mortgage Loans and are not intended to serve as transitional mortgage financing and can represent subordinated investments in real estate operating companies which may take the form of secured or unsecured debt, preferred stock and other hybrid investments. o Certificated Mezzanine Investments. The Company purchases high-yielding investments that are subordinate to senior secured loans on commercial real estate. Such investments represent interests in debt service from loans or property cash flow and are issued in certificate form. These certificated investments carry substantially similar terms and risks as the Company's Mezzanine Loans ("Certificated Mezzanine Investments"). o Subordinated Interests. The Company pursues rated and unrated investments in public and private subordinated interests ("Subordinated Interests") in commercial collateralized mortgage obligations ("CMOs") and other CMBS. o Other Investments. The Company remains positioned to develop an investment portfolio of commercial real estate and finance-related assets meeting the Company's target risk/return profile. Except as limited by its role as exclusive investment manager to the Mezzanine Funds, the Company is not limited in the kinds of commercial real estate and finance-related assets in which it can invest on balance sheet and believes that it is positioned to expand opportunistically its financing business. The Company may pursue investments in, among other assets, construction loans, distressed mortgages, foreign real estate and finance-related assets, operating companies, including loan origination and loan servicing companies, and fee interests in real property (collectively, "Other Investments"). During the investment periods for the Mezzanine Funds, the Company may directly originate or acquire for its own account Mortgage Loans, Mezzanine Loans, Certificated Mezzanine Investments, and investments in Subordinated Interests (collectively "Business Assets") only after such investments are first presented to the Mezzanine Funds and not accepted for origination or acquisition by the Mezzanine Funds. In this regard, during the respective investment periods of the Mezzanine Funds, the majority of the Company's investment activity in Business Assets will be conducted through and for the Mezzanine Funds, although the Company may continue to invest in Other Investments and other assets which fulfill the Company's risk/reward characteristics and do not otherwise conflict with its duties as an investment manager. The Company seeks to maximize yield through the use of leverage, consistent with maintaining an acceptable level of risk. Although there may be limits to the leverage that can be applied to certain of the 5 Company's assets, the Company does not intend to exceed a debt-to-equity ratio of 5:1. At December 31, 2000, the Company's debt-to-equity ratio (treating the Convertible Trust Preferred Securities as a component of equity) was 1.07:1. Other than restrictions which result from the Company's intent to avoid regulation under the Investment Company Act of 1940, as amended (the "Investment Company Act"), the Company is not subject to any restrictions on the particular percentage of its portfolio invested in any of the above-referenced asset classes, nor is it limited in the kinds of assets in which it can invest except that prospective Business Assets must first be presented to the Mezzanine Funds for origination or acquisition. The Company has no predetermined limitations or targets for concentration of asset type or geographic location. Instead of adhering to any prescribed limits or targets, the Company makes acquisition decisions through asset and collateral analysis, evaluating investment risks on a case-by-case basis. To the extent that the Company's assets become concentrated in a few states or a particular region, the Company's return on investment will become more dependent on the economy of such states or region. Until appropriate investments are made, cash available for investment may be invested in readily marketable securities or in interest-bearing deposit accounts. Principal Investment Categories - ------------------------------- Set forth below is a further description of the characteristics of the Business Assets and Other Investments emphasized in the Company's current business plan, either as a principal or as an investment manager. Mortgage Loans. The Company actively pursues opportunities to originate and fund Mortgage Loans to real estate owners and property developers who need interim financing until permanent financing can be obtained. The Company's Mortgage Loans generally are not intended to be "permanent" in nature, but rather are intended to be of a relatively short-term duration, with extension options as deemed appropriate, and generally require a balloon payment at maturity. These types of loans are intended to be higher-yielding loans with higher interest rates and commitment fees. Property owners or developers in the market for these types of loans include, but are not limited to, property owners who are completing a transition of their commercial real property such as an asset repositioning or an asset lease-up, traditional property owners and operators who desire to acquire a property before it has received a commitment for a long-term mortgage from a traditional commercial mortgage lender, or a property owner or investor who has an opportunity to purchase its existing mortgage debt or third party mortgage debt at a discount; in each instance, the Company's loan would be secured by a Mortgage Loan. The Company may also originate traditional, long-term mortgage loans and, in doing so, would compete with traditional commercial mortgage lenders. In pursuing such a strategy, the Company generally intends to sell or refinance the senior portion of the mortgage loan, individually or in a pool, and retain a Mezzanine Loan. In addition, the Company believes that, as a result of the recent increase in commercial real estate securitizations, there are attractive opportunities to originate short-term bridge loans to owners of mortgaged properties that are temporarily prevented as a result of timing and structural reasons from securing long-term mortgage financing through securitization. Mezzanine Loans. The Company seeks to take advantage of opportunities to provide mezzanine financing on commercial property that is subject to first lien mortgage debt. The Company believes that there is a growing need for mezzanine capital (i.e., capital representing the level between 60% and 90% of property value) as a result of current commercial mortgage lending practices setting loan-to-value targets as low as 60%. The Company's mezzanine financing takes the form of subordinated loans, commonly known as second mortgages, or, in the case of loans originated for securitization, partnership loans (also known as pledge loans) or can represent subordinated investments in real estate operating companies which may take the form of secured or unsecured debt, preferred stock and other hybrid investments. For example, on a commercial property subject to a first lien mortgage loan with a principal balance equal to 60% of the value of the property, the Company could lend the owner of the property (typically a partnership) an additional 20% of the value of the property. The Company believes that as a result of (i) the significant changes in the lending practices of traditional commercial real estate lenders, primarily relating to more conservative loan-to-value ratios, and (ii) the significant increase in securitized lending with strict loan-to-value ratios imposed by the rating agencies, there will continue to be an increasing demand for mezzanine capital by property owners. 6 Typically in a Mezzanine Loan, as security for its debt to the Company, the property owner would pledge to the Company either the property subject to the first lien (giving the Company a second lien position typically subject to an inter-creditor agreement) or the limited partnership and/or general partnership interest in the owner. If the owner's general partnership interest were pledged, then the Company would be in a position to take over the operation of the property in the event of a default by the owner. By borrowing against the additional value in their properties, the property owners obtain an additional level of liquidity to apply to property improvements or alternative uses. Mezzanine Loans generally provide the Company with the right to receive a stated interest rate on the loan balance plus various commitment and/or exit fees. In certain instances, the Company may negotiate to receive a percentage of net operating income or gross revenues from the property, payable to the Company on an ongoing basis, and a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan, or the Company will otherwise seek terms to allow the Company to charge an interest rate that would provide an attractive risk-adjusted return. Certificated Mezzanine Investments. Certificated Mezzanine Investments have substantially similar terms and risks as the Company's Mezzanine Loans but are evidenced by certificates representing interests in property debt service or cash flow rather than by a note. Typically in a Certificated Mezzanine Investment, the Company obtains, as security for the mezzanine capital provided, an interest in the debt service provided by the loans that are secured by the underlying property or in the cash flows generated by the property (held through a trust and evidenced by trust certificates) that is subject to the senior lien or liens encumbering the underlying property. This structure provides the Company with a subordinate investment position typically subject to an inter-creditor agreement with the senior creditor. By borrowing through such a mezzanine structure against the additional value in its assets, the property owner obtains, with the proceeds of the Certificated Mezzanine Investment, an additional level of liquidity to apply to property improvements or alternative uses. Certificated Mezzanine Investments generally provide the Company with the right to receive a stated rate of return on its investment basis plus various commitment, extension and/or other fees. Generally the terms and conditions on these investments are the same as those on a Mezzanine Loan. Subordinated Interests. The Company acquires rated and unrated Subordinated Interests in CMBS issued in public or private transactions. CMBS typically are divided into two or more classes, sometimes called "tranches." The senior classes are higher "rated" securities, which are rated from low investment grade ("BBB") to higher investment grade ("AA" or "AAA"). The junior, subordinated classes typically include a lower rated, non-investment grade "BB" and "B" class, and an unrated, high yielding, credit support class (which generally is required to absorb the first losses on the underlying mortgage loans). The Company currently invests in the non-investment grade tranches of Subordinated Interests. The Company may acquire performing and non-performing (i.e., defaulted) Subordinated Interests. CMBS generally are issued either as CMOs or pass-through certificates that are not guaranteed by an entity having the credit status of a governmental agency or instrumentality, although they generally are structured with one or more of the types of credit enhancement arrangements to reduce credit risk. In addition, CMBS may be illiquid. The credit quality of CMBS depends on the credit quality of the underlying mortgage loans forming the collateral for the securities. CMBS are backed generally by a limited number of commercial or multifamily mortgage loans with larger principal balances than those of single-family mortgage loans. As a result, a loss on a single mortgage loan underlying a CMBS will have a greater negative effect on the yield of such CMBS, especially the Subordinated Interests in such CMBS. Before acquiring Subordinated Interests, the Company performs certain credit underwriting and stress testing to attempt to evaluate future performance of the mortgage collateral supporting such CMBS, including (i) a review of the underwriting criteria used in making mortgage loans comprising the Mortgage Collateral for the CMBS, (ii) a review of the relative principal amounts of the loans, their loan-to-value ratios as well as the mortgage loans' purpose and documentation, (iii) where available, a review of the historical performance of the loans originated by the particular originator and (iv) some level of re-underwriting the underlying mortgage loans, including, selected site visits. Unlike the owner of mortgage loans, the owner of Subordinated Interests in CMBS ordinarily does not control the servicing of the underlying mortgage loans. In this regard, the Company attempts to negotiate for the right to cure any defaults on senior CMBS classes and for the right to acquire such senior classes in the event of a default or for other similar arrangements. The Company may also seek to acquire rights to service defaulted mortgage loans, including rights to control the oversight and management of the resolution of 7 such mortgage loans by workout or modification of loan provisions, foreclosure, deed in lieu of foreclosure or otherwise, and to control decisions with respect to the preservation of the collateral generally, including property management and maintenance decisions ("Special Servicing Rights") with respect to the mortgage loans underlying CMBS in which the Company owns a Subordinated Interest. Such rights to cure defaults and Special Servicing Rights may give the Company, for example, some control over the timing of foreclosures on such mortgage loans and, thus, may enable the Company to reduce losses on such mortgage loans. The Company has in the past served as a special servicer with respect to a Subordinated Interest investment, but is not currently a rated special servicer. The Company may seek to become rated as a special servicer, or acquire a rated special servicer. Until the Company can act as a rated special servicer, it will be difficult to obtain Special Servicing Rights with respect to the mortgage loans underlying Subordinated Interests. Although the Company's strategy is to purchase Subordinated Interests at a price designed to return the Company's investment and generate a profit thereon, there can be no assurance that such goal will be met or, indeed, that the Company's investment in a Subordinated Interest will be returned in full or at all. The Company believes that it will not be, and intends to conduct its operations so as not to become, regulated as an investment company under the Investment Company Act. The Investment Company Act generally exempts entities that are "primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" ("Qualifying Interests"). The Company intends to rely on current interpretations by the staff of the Commission in an effort to qualify for this exemption. To comply with the foregoing guidance, the Company, among other things, must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. Generally, the Mortgage Loans and certain of the Mezzanine Loans and Certificated Mezzanine Investments in which the Company may invest constitute Qualifying Interests. While Subordinated Interests generally do not constitute Qualifying Interests, the Company may seek to structure such investments in a manner where the Company believes such Subordinated Interests may constitute Qualifying Interests. The Company may seek, where appropriate, (i) to obtain foreclosure rights or other similar arrangements (including obtaining Special Servicing Rights before or after acquiring or becoming a rated special servicer) with respect to the underlying mortgage loans, although there can be no assurance that it will be able to do so on acceptable terms or (ii) to acquire Subordinated Interests collateralized by whole pools of mortgage loans. As a result of obtaining such rights or whole pools of mortgage loans as collateral, the Company believes that the related Subordinated Interests will constitute Qualifying Interests for purposes of the Investment Company Act. The Company may, however, seek an exemptive order, no-action letter or other form of interpretive guidance from the Commission or its staff on this position. Any decision by the Commission or its staff advancing a position with respect to whether such Subordinated Interests constitute Qualifying Interests that differs from the position taken by the Company could have a material adverse effect on the Company. Other Investments. The Company may also pursue a variety of complementary commercial real estate and finance-related businesses and investments in furtherance of executing its current business plan. Such activities include, but are not limited to, investments in other classes of mortgage-backed securities, distressed investing in non-performing and sub-performing loans and fee owned commercial real property, whole loan acquisition programs, foreign real estate-related asset investments, note financings, environmentally hazardous lending, operating company investing/lending, construction and rehabilitation lending and other types of financing activity. Any lending with regard to the foregoing may be on a secured or an unsecured basis and will be subject to risks similar to those attendant to investing in Mortgage Loans, Mezzanine Loans, Certificated Mezzanine Investments and Subordinated Interests. The Company seeks to maximize yield by managing credit risk by employing its credit underwriting procedures, although there can be no assurance that the Company will be successful in this regard. The Company is investigating potential business acquisition opportunities that it believes will complement the Company's operations including equity and mortgage REITS (in order to facilitate and/or accelerate the Company electing REIT status for tax purposes), and other firms engaged in commercial loan origination, loan servicing, mortgage banking, financing activities, real estate loan and property acquisitions and real estate investment banking and advisory services similar to or related to the services provided by the Company. No assurance can be given that any such transactions will be negotiated or completed or that any business acquired can be efficiently integrated with the Company's ongoing operations. 8 Portfolio Management - -------------------- As a principal or through its investment management business, the following describes certain of the portfolio management practices that the Company may employ from time to time to earn income, facilitate portfolio management (including managing the effect of maturity or interest rate sensitivity) and mitigate risk (such as the risk of changes in interest rates). There can be no assurance that the Company will not amend or deviate from these policies or adopt other policies in the future. Leverage and Borrowing. The success of the Company's current business plan is dependent upon the Company's ability to use leverage to finance its portfolio of invested assets and make future investments in Mezzanine Funds. The Company believes that its investment management business strategy will reduce the Company's dependence on financial leverage since the Mezzanine Funds do not currently intend to employ leverage to the same extent historically utilized by the Company. The Company leverages its assets through the use of, among other things, bank credit facilities including the Credit Facilities, secured and unsecured borrowings, repurchase agreements and other borrowings. When there is an expectation that such leverage will benefit the Company, such borrowings may have recourse to the Company in the form of guarantees or other obligations. If changes in market conditions cause the cost of such financing to increase relative to the income that can be derived from investments made with the proceeds thereof, the Company may reduce the amount of leverage it utilizes. Obtaining the leverage required to execute the current business plan requires the Company to maintain interest coverage ratios and other covenants meeting market underwriting standards. In leveraging its portfolio, the Company plans not to exceed a debt-to-equity ratio of 5:1. The Company has also agreed it will not incur any indebtedness if the Company's debt-to-equity ratio would exceed 5:1 without the prior written consent of the holders of a majority of the outstanding Preferred Stock (as hereinafter defined). Leverage creates an opportunity for increased income, but at the same time creates special risks. For example, leveraging magnifies changes in the net worth of the Company. Although the amount owed will be fixed, the Company's assets may change in value during the time the debt is outstanding. Leverage creates interest expense for the Company that can exceed the revenues from the assets retained. To the extent the revenues derived from assets acquired with borrowed funds exceed the interest expense incurred by the Company, the Company's net income will be greater than if borrowed funds had not been used. Conversely, if the revenues from the assets acquired with borrowed funds are not sufficient to cover the cost of borrowing, the Company's net income will be less than if borrowed funds had not been used. In order to grow and enhance its return on equity, the Company currently utilizes three primary sources of leverage: the Credit Facilities, the Term Redeemable Securities Contract and repurchase agreements. Credit Facilities. The Company has two Credit Facilities (as hereinafter defined) under which it can borrow funds to finance the origination or acquisition of loan and investment assets. At December 31, 2000, the Company had $173.6 million of outstanding borrowings under the Credit Facilities. On December 31, 2000, the unused portion of the Credit Facilities amounted to $474.8 million providing the Company with adequate liquidity for its short-term needs. Term Redeemable Securities Contract. In connection with the Company's purchase of the BB CMBS Portfolio as discussed earlier, an affiliate of the seller provided financing for 70% of the purchase price, or $137.8 million, at a floating rate of LIBOR plus 50 basis points pursuant to a term redeemable securities contract. This rate was below the market rate for similar financings, and, as such, a discount on the term redeemable securities contract was recorded to reduce the carrying amount by $10.9 million, which had the effect of adjusting the yield to current market terms. The debt has a three-year term that expires in February 2002. Repurchase Agreements. At December 31, 2000, the Company had one existing repurchase agreement and may enter into other such agreements under which the Company would sell assets to a third party with the commitment that the Company repurchase such assets from the purchaser at a fixed price on an agreed date. Repurchase agreements may be characterized as loans to the Company from the other party as the underlying assets secure them. The repurchase price reflects the purchase price plus an agreed market rate of interest, which is generally paid on a monthly basis. 9 Interest Rate Management Techniques - ----------------------------------- The Company has engaged in and will continue to engage in a variety of interest rate management techniques for the purpose of managing the effective interest rate of its assets and/or liabilities. These techniques also may be used to attempt to protect against declines in the market value of the Company's assets resulting from general trends in debt markets. Any such transaction is subject to risks and may limit the potential earnings on the Company's loans and investments in real estate-related assets. Such techniques include interest rate swaps (the exchange of fixed-rate payments and floating-rate payments) and interest rate caps. The Company employs the use of correlated hedging strategies to limit the effects of changes in interest rates on its operations, including engaging in interest rate swaps and interest rate caps to minimize its exposure to changes in interest rates. Amounts arising from the differential are recognized as an adjustment to the interest income related to the earning asset. In June 1998, the FASB issued Statement of Financial Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") which, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000, although earlier application is permitted. The Company plans to adopt SFAS No. 133 effective January 1, 2001. Based upon the Company's derivative positions, which are considered effective hedges, the Company estimates that had it adopted the statement on January 1, 2000, it would have reported accumulated other comprehensive loss of $10,705,000 at December 31, 2000, and net income and other comprehensive income of $9,761,000 and $5,383,000, respectively, for the year then ended. Factors that may Affect the Company's Business Strategy - ------------------------------------------------------- The success of the Company's business strategy depends in part on important factors, many of which are not within the control of the Company. Both the Company's principal business and its investment management business will be affected by, among other things: the availability of desirable loan and investment opportunities, the amount of available capital, the level and volatility of interest rates and credit spreads, the ability to grow its portfolio of invested assets through the use of leverage, conditions in the financial markets and general economic conditions. There can also be no assurances as to the effects of unanticipated changes in any of the foregoing. There can be no assurance that the Company will be able to obtain and maintain targeted levels of leverage or that the cost of debt financing will increase relative to the income generated from the assets acquired with such financing and cause the Company to reduce the amount of leverage it utilizes. The Company risks the loss of some or all of its assets or a financial loss if the Company is required to liquidate assets at a commercially inopportune time. The Company confronts the prospect that competition from other providers of mezzanine capital may lead to a lowering of the interest rates earned on the Company's interest-earning assets that may not be offset by lower borrowing costs. Changes in interest rates are also affected by the rate of inflation prevailing in the economy. A significant reduction in interest rates could increase prepayment rates and thereby reduce the projected average life of the Company's interest-bearing asset portfolio. While the Company may employ various hedging strategies, there can be no assurance that the Company would not be adversely affected during any period of changing interest rates. In addition, many of the Company's assets will be at risk to the deterioration in or total losses of the underlying real property securing the assets, which may not be adequately covered by insurance necessary to restore the Company's economic position with respect to the affected property. Further, the Company has recently commenced its investment management operation and therefore confronts risks associated with any start-up operation as well as risks specifically related to the investment management business, including but not limited to, the portfolio risks discussed above, the Company's ability to raise private equity capital, successfully manage and invest the capital raised and obtain the desired leverage for such funds. Adverse changes in national and regional economic conditions can have an effect on real estate values increasing the risk of undercollateralization to the extent that the fair market value of properties serving as collateral security for the Company's assets are reduced. Numerous factors, such as adverse changes in local market conditions, competition, increases in operating expenses and uninsured losses, can affect a property owner's ability to maintain or increase revenues to cover operating expenses and the debt service on the property's financing and, consequently, lead to a deterioration in credit quality or a loan default and reduce the value of the Company's asset. In addition, the yield to maturity on the Company's CMBS assets is subject to default and loss experience on the underlying mortgage loans, as well as interest rate changes 10 caused by pre-payments of principal. If there are realized losses on the underlying loans, the Company may not recover the full amount, or possibly, any of its initial investment in the affected CMBS asset. To the extent there are prepayments on the underlying mortgage loans as a result of refinancing at lower rates, the Company's CMBS assets may be retired substantially earlier than their stated maturities leading to reinvestment in lower yielding assets. Competition - ----------- The Company is engaged in a highly competitive business. The Company competes for loan and investment opportunities with numerous public and private real estate investment vehicles, including financial institutions (such as mortgage banks, pension funds, opportunity funds and REITs) and other institutional investors, as well as individuals. Many competitors are significantly larger than the Company, have well established operating histories and may have access to greater capital and other resources. In addition, the real estate, advisory and investment management services industries are highly competitive and there are numerous well-established competitors possessing substantially greater financial, marketing, personnel and other resources than the Company. The Company competes with other investment management companies in attracting capital for its co-sponsored Mezzanine Funds. Government Regulation - --------------------- The Company's activities, including the financing of its operations, are subject to a variety of federal and state regulations such as those imposed by the Federal Trade Commission and the Equal Credit Opportunity Act. In addition, a majority of states have ceilings on interest rates chargeable to customers in financing transactions. Employees - --------- As of December 31, 2000, the Company employed 15 full-time professionals, one part-time professional and five other full-time employees. None of the Company's employees are covered by a collective bargaining agreement and management considers the relationship with its employees to be good. 11 - ------------------------------------------------------------------------------ Item 2. Properties - ------------------------------------------------------------------------------ The Company's principal executive and administrative offices are located in approximately 11,885 square feet of office space leased at 410 Park Avenue, 14th Floor, New York, New York 10022 and its telephone number is (212) 655-0220. The lease for such space expires in June 2008. The Company believes that this office space is suitable for its current operations for the foreseeable future. - ------------------------------------------------------------------------------ Item 3. Legal Proceedings - ------------------------------------------------------------------------------ The Company is not a party to any material litigation or legal proceedings, or to the best of its knowledge, any threatened litigation or legal proceedings, which, in the opinion of management, individually or in the aggregate, would have a material adverse effect on its results of operations or financial condition. 12 - ------------------------------------------------------------------------------ Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------------------------ (a). The Company held its 2000 annual meeting of stockholders on December 14, 2000. (b) and (c). Stockholders acted on the following proposals: 1. To elect twelve directors (identified in the table below) to serve until the next annual meeting of stockholders or until such directors' successors are elected and shall have been duly qualified ("Proposal 1"); and 2. To ratify the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2000 ("Proposal 2"). The following table sets forth the number of votes in favor, the number of votes opposed, the number of abstentions (or votes withheld in the case of the election of trustees) and broker non-votes with respect to each of the foregoing proposals. Proposal Votes in Favor Votes Opposed Abstentions Broker (Withheld) Non-Votes Proposal 1 Samuel Zell 14,590,354 -- 47,129 -- Jeffrey A. Altman 14,590,354 -- 47,129 -- Thomas E. Dobrowski 14,590,354 -- 47,129 -- Martin L. Edelman 14,590,354 -- 47,129 -- Gary R. Garrabrant 14,590,354 -- 47,129 -- Craig M. Hatkoff 14,590,354 -- 47,129 -- John R. Klopp 14,541,401 -- 96,082 -- Susan M. Lewis 14,590,354 -- 47,129 -- Sheli Z. Rosenberg 14,590,354 -- 47,129 -- Steven Roth 14,590,354 -- 47,129 -- Lynne B. Sagalyn 14,590,354 -- 47,129 -- Michael Watson 14,590,354 -- 47,129 -- Proposal 2 14,621,061 4,881 11,541 -- 13 PART II - ------------------------------------------------------------------------------ Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters - ------------------------------------------------------------------------------ The Company's class A common stock, par value $0.01 per share ("Class A Common Stock") is listed on the New York Stock Exchange ("NYSE"). The trading symbol for the Class A Common Stock is "CT". The Company had approximately 1,500 stockholders-of-record at March 30, 2001. The table below sets forth, for the calendar quarters indicated, the reported high and low sale prices of the Class A Common Stock, and prior to the Reorganization (as hereinafter defined) in 1998, of the Predecessor's Class A Common Shares (as hereinafter defined) as reported on the NYSE based on published financial sources. High Low 1998 First Quarter......................... 11 1/4 9 Second Quarter........................ 11 7/8 9 1/16 Third Quarter......................... 9 9/16 4 7/16 Fourth Quarter........................ 7 3/8 4 3/8 1999 First Quarter......................... 6 4 Second Quarter........................ 5 7/8 3 3/4 Third Quarter......................... 4 15/16 3 5/8 Fourth Quarter........................ 5 3 7/8 2000 First Quarter......................... 4 9/16 3 5/8 Second Quarter........................ 4 3 1/4 Third Quarter......................... 4 5/8 3 3/4 Fourth Quarter........................ 4 15/16 4 1/8 No dividends were paid on the Company's Class A Common Stock, Class B Common Stock (as hereinafter defined) or on the Predecessor's Class A Common Shares in 1998, 1999 or 2000 and the Company does not expect to declare or pay dividends on its Common Stock in the foreseeable future. The Company's current policy with respect to dividends is to reinvest earnings to the extent that such earnings are in excess of the dividend requirements on the Class A Preferred Stock and Class B Preferred Stock (as hereinafter defined). Unless all accrued dividends and other amounts then accrued through the end of the last dividend period and unpaid with respect to preferred stock have been paid in full, the Company may not declare or pay or set apart for payment any dividends on common stock. The Company's charter provides for a semi-annual dividend of $0.1278 per share on the Preferred Stock based on a dividend rate of 9.5% or $1,615,000 annually based upon the stock outstanding at March 30, 2001. 14 - ------------------------------------------------------------------------------ Item 6. Selected Financial Data - ------------------------------------------------------------------------------ Prior to July 1997, the Company operated as a real estate investment trust ("REIT") originating, acquiring, operating and holding income-producing real property and mortgage-related investments. The following selected financial data relating to the Company have been derived from the historical financial statements as of and for the years ended December 31, 2000, 1999, 1998, 1997, and 1996. Other than the data for the years ended December 31, 2000, 1999 and 1998, the following data does not reflect the results of the acquisition of Victor Capital (as hereinafter defined) and the Predecessor's issuance of 12,267,658 Preferred Shares (as hereinafter defined) for $33 million, both of which occurred on July 15, 1997, or the Predecessor's public securities offering of 9,000,000 new Class A Common Shares completed in December 1997. Prior to March 8, 2000, the Company did not serve as investment manager for any Mezzanine Funds and only the Company's historical financial information, as of and for the year ended December 31, 2000 reflects any operating results from its investment management business. For these reasons, the Company believes that except for the information for the year ended December 31, 2000, the following information is not indicative of the Company's current business.
Years Ended December 31, ------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- -------- ------- STATEMENT OF OPERATIONS DATA: (in thousands, except for per share data) REVENUES: Interest and investment income............................ $88,433 $89,839 $63,954 $ 6,445 $ 1,136 Income from equity investments in Fund I.................. 1,530 -- -- -- -- Advisory and investment banking fees...................... 3,920 17,772 10,311 1,698 -- Management fees from Fund I............................... 373 -- -- -- -- Rental income............................................. -- -- -- 307 2,019 Gain (loss) on sale of fixed assets and investments....... (64) 35 -- (432) 1,069 --------- -------- -------- -------- ------- Total revenues.......................................... 94,192 107,646 74,265 8,018 4,224 --------- -------- -------- -------- ------- OPERATING EXPENSES: Interest.................................................. 36,931 39,791 27,665 2,379 547 General and administrative................................ 15,439 17,345 17,045 9,463 1,503 Rental property expenses.................................. -- -- -- 124 781 Provision for possible credit losses...................... 5,478 4,103 3,555 462 1,743 Depreciation and amortization............................. 902 345 249 92 64 --------- -------- -------- -------- ------- Total operating expenses................................ 58,750 61,584 48,514 12,520 4,638 --------- -------- ------- -------- ------- Income (loss) before income tax expense and distributions and amortization on Convertible Trust Preferred Securities.............................. 35,442 46,062 25,751 (4,502) (414) Income tax expense........................................ 17,760 22,020 9,367 55 -- --------- -------- ------- -------- ------- Income (loss) before distributions and amortization on Convertible Trust Preferred Securities.................................... 17,682 24,042 16,384 (4,557) (414) Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit......... 7,921 6,966 2,941 -- -- -------- --------- ------- -------- ------- NET INCOME (LOSS)......................................... 9,761 17,076 13,443 (4,557) (414) Less: Preferred Stock dividend and dividend requirement.................................... 1,615 2,375 3,135 1,471 -- --------- -------- ------- --------- ------- Net income (loss) allocable to Common Stock............................................ $8,146 $14,701 $10,308 $ (6,028) $ (414) ========= ======== ======= ========= ======= PER SHARE INFORMATION: Net income (loss) per share of Common Stock: Basic.................................................. $ 0.35 $ 0.69 $ 0.57 $ (0.63) $(0.05) ========= ======== ======== ========= ======= Diluted................................................ $ 0.33 $ 0.55 $ 0.44 $ (0.63) $(0.05) ========= ======== ======= ========= ======= Weighted average shares of Common Stock outstanding: Basic................................................. 23,171 21,334 18,209 9,527 9,157 ========= ======== ======== ======== ======= Diluted............................................... 29,692 43,725 30,625 9,527 9,157 ========= ======== ======== ======== ======= As of December 31, ----------------------------------------------- 2000 1999 1998 1997 1996 ------- -------- -------- ---------- ------- BALANCE SHEET DATA: Total assets............................................ $644,392 $827,808 $766,438 $317,366 $30,036 Total liabilities....................................... 338,584 522,925 472,207 174,077 5,565 Convertible Trust Preferred Securities............................................ 147,142 146,343 145,544 -- -- Stockholders' equity.................................... 158,666 158,540 148,687 143,289 24,471
15 - ------------------------------------------------------------------------------ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------ Overview - -------- Prior to July 1997, the Company operated as a REIT, originating, acquiring, operating and holding income-producing real property and mortgage-related investments. Since July 1997, the Company has pursued a new strategic direction operating as a finance company designed primarily to take advantage of high-yielding mezzanine investments and other real estate asset and finance opportunities in commercial real estate. At that time, the Company elected to no longer qualify for treatment as a REIT for federal income tax purposes. Consequently, the results for the year ended December 31, 1998 reflect partial year real estate finance and advisory operations. The results for the years ended December 31, 2000 and 1999 reflect full year real estate finance and advisory operations. The Company is successor to Capital Trust, a California business trust (the "Predecessor"), following consummation of the reorganization on January 28, 1999, whereby the Predecessor ultimately merged with and into the Company, which thereafter continued as the surviving Maryland corporation (the "Reorganization"). Unless the context otherwise requires, hereinafter references to the business, assets, liabilities, capital structure, operations and affairs of the Company include those of the Predecessor prior to the Reorganization. Ownership and Capital Changes - ----------------------------- On January 3, 1997, CalREIT Investors Limited Partnership ("CRIL"), an affiliate of EGI and Samuel Zell, purchased from the Predecessor's former parent 6,959,593 common shares of beneficial interest, $1.00 par value ("Common Shares") in the Predecessor (representing approximately 76% of the then-outstanding Common Shares) for an aggregate purchase price of $20,222,011. In July 1997, the Predecessor consummated the sale of 12,267,658 class A 9.5% cumulative convertible preferred shares of beneficial interest, $1.00 par value ("Class A Preferred Shares"), in the Predecessor, to Veqtor Finance Company, L.L.C. ("Veqtor"), a then affiliate of Samuel Zell and the then principals of Victor Capital, for an aggregate purchase price of $33,000,000 (the "Investment"). Concurrently with the foregoing transaction, Veqtor purchased the 6,959,593 Common Shares (which were reclassified at that time as class A common shares of beneficial interest, $1.00 par value ("Class A Common Shares")) held by CRIL for an aggregate purchase price of approximately $21.3 million. Concurrently with the foregoing transactions, the Predecessor consummated the acquisition of the real estate services businesses of Victor Capital and appointed a new management team from among the ranks of Victor Capital's professional team and elsewhere. The Predecessor thereafter immediately commenced full implementation of its operations as a finance and advisory company under the direction of its newly elected board of trustees and new management team. In December 1997, the Predecessor completed a public securities offering of 9,000,000 new Class A Common Shares in the Company at $11.00 per share raising approximately $91.4 million in net proceeds (the "Offering"). In July 1998, the Company completed a private placement of $150 million of Convertible Trust Preferred Securities that are convertible into Class A Common Stock (as hereinafter defined) at a conversion price of $11.70 per share. The Company raised approximately $145.2 million in net proceeds from the private placement transaction. In the Reorganization, the Predecessor merged with and into Captrust Limited Partnership, a Maryland limited partnership ("CTLP"), with CTLP continuing as the surviving entity, and CTLP merged with and into the Company, with the Company continuing as the surviving Maryland corporation. Each outstanding Class A Common Share was converted into one share of class A common stock, par value $0.01 per share ("Class A Common Stock"), and each outstanding Class A Preferred Share was converted into one share of class A 9.5% cumulative convertible preferred stock, par value $0.01 per share ("Class A Preferred Stock"), of the Company. As a result, all of the Predecessor's previously issued Class A Common Shares have been reclassified as shares of Class A Common Stock and all of the Predecessor's previously issued Class A Preferred Shares have been reclassified as shares of Class A Preferred Stock. 16 As of December 31, 1998, there were 12,267,658 shares of Class A Preferred Stock issued and outstanding, no shares of Class B Preferred Stock (as defined below) were issued and outstanding, 18,158,816 shares of Class A Common Stock were issued and outstanding and no shares of Class B Common Stock issued and outstanding. The 12,267,658 shares of Class A Preferred Stock outstanding at December 31, 1998 were originally issued and purchased by Veqtor on July 15, 1997 for an aggregate purchase price of approximately $33 million (see Note 1). Until August 10, 1999 (the "Conversion Date"), Veqtor owned 6,959,593 of the outstanding shares of Class A Common Stock and all 12,267,658 of the outstanding shares of Class A Preferred Stock. Veqtor was then controlled by the chairman of the board, the vice chairman and chief executive officer and the then vice chairman and chairman of the executive committee of the board of directors of the Company in their capacities as the persons controlling the common members of Veqtor. Prior to the Conversion Date, the common members owned approximately 48% of the equity ownership of Veqtor and three commercial banks, as preferred members of Veqtor, owned the remaining 52% of the equity ownership of Veqtor. On the Conversion Date, in accordance with a commitment made by Veqtor and its common members, Veqtor redeemed the outstanding preferred units in Veqtor held by its preferred members in exchange for their pro rata share of the Company's stock owned by Veqtor. Due to the regulatory status of the redeemed preferred members as bank holding companies or affiliates thereof, prior to effecting the transfer of stock upon the redemption, Veqtor was obligated to convert 2,293,784 shares of Class A Common Stock into an equal number of shares of class B common stock, par value $0.01 per share ("Class B Common Stock") and 4,043,248 shares of Class A Preferred Stock into an equal number of shares of class B 9.5% cumulative convertible preferred stock, par value $0.01 per share ("Class B Preferred Stock"). Pursuant to provisions of the Company's charter relating to compliance with the Bank Holding Company Act of 1956, as amended ("BHCA"), bank holding companies or their affiliates can own no more than 4.9% of the voting stock of the Company. Therefore, in connection with the redemption, the redeemed preferred members received 1,292,103 shares of Class A Common Stock, 2,293,784 shares of non-voting Class B Common Stock, 2,277,585 shares of Class A Preferred Stock and 4,043,248 shares of non-voting Class B Preferred Stock. After the Conversion Date, until the Separation Transaction (as defined below), the common members of Veqtor owned 100% of the equity ownership of Veqtor. On September 30, 1999, in accordance with a commitment made by Veqtor and its common members, all 5,946,825 shares of Class A Preferred Stock held by Veqtor were, upon exercise of existing conversion rights, converted into an equal number of shares of Class A Common Stock. As a result of the foregoing redemption and subsequent conversion transactions, as of September 30, 1999, Veqtor owned 9,320,531 (or approximately 42.4%) of the outstanding shares of Class A Common Stock and the Company's annual dividend on Preferred Stock has been reduced from $3,135,000 to $1,615,000. In December 1999, a series of coordinated transactions (the "Separation Transaction") were effected in which beneficial ownership of an aggregate of 6,128,243 shares of the 9,320,531 shares of Class A Common Stock previously owned by Veqtor prior to the Separation Transaction were transferred to partnerships controlled by the then vice chairman and chief executive officer of the Company (the "Klopp LP"), the vice chairman and chairman of the executive committee of the board of directors of the Company (the "Hatkoff LP") and certain of the former partners of CTILP (the "Other Partnerships"). Each of partnerships acquired direct beneficial ownership of such number of shares of Class A Common Stock equal to the number of shares in which the persons currently controlling such partnerships held an indirect pecuniary interest prior to the Separation Transaction. Veqtor retained direct beneficial ownership of 3,192,888 shares of Class A Common Stock, which represents the number of shares in which the persons then controlling Veqtor held an indirect pecuniary interest prior to the Separation Transaction. Upon consummation of the Separation Transaction by means of the foregoing transactions, Hatkoff LP, Klopp LP, Veqtor and the Other Partnerships acquired (or, in the case of Veqtor, retained) direct beneficial ownership of 2,330,132, 2,330,132, 3,192,288 and 1,467,979 shares of Class A Common Stock, respectively. On January 1, 2000, ownership and control of Veqtor was transferred to a trust for the benefit of the family of the Company's chairman of the board. 17 Strategic Venture with Citigroup - -------------------------------- On March 8, 2000, the Company and certain of its wholly owned subsidiaries entered into a strategic venture with affiliates of Citigroup, following which it commenced its new investment management business. The venture parties have agreed, among other things, to co-sponsor, commit to invest capital in, and manage a series of high-yield commercial real estate mezzanine investment funds (collectively, the "Mezzanine Funds"). Citigroup and the Company have made capital commitments to the Mezzanine Funds of up to an aggregate of $400.0 million and $112.5 million, respectively, subject to certain terms and conditions. The strategic venture is governed by a venture agreement, dated as of March 8, 2000 (the "Venture Agreement"), pursuant to which the parties have created CT Mezzanine Partners I LLC ("Fund I"), to which a Citigroup affiliate and a wholly owned subsidiary of the Company, as members thereof, have made capital commitments of $150 million and $50 million, respectively, to be invested in stages upon approval by both members of each investment to be made by Fund I. A wholly owned subsidiary of the Company, CTIMCO, serves as the exclusive investment manager to Fund I and is currently identifying and negotiating suitable investments for the fund. Additionally, Citigroup affiliates and subsidiaries of the Company have agreed to make additional capital commitments of up to $250.0 million and $62.5 million, respectively, to fund future Mezzanine Funds sponsored pursuant to the Venture Agreement that close prior to December 31, 2001. These commitments are subject to the amount of third-party capital commitments and other conditions contained in the Venture Agreement. In consideration of, among other things, Citigroup's $400 million aggregate capital commitment to the Mezzanine Funds, the Company agreed in the Venture Agreement to issue affiliates of Citigroup warrants to purchase shares of Class A Common Stock. In connection with the organization of Fund I, the Company issued a warrant to purchase 4.25 million shares of Class A Common Stock at $5.00 per share. The foregoing warrant has a term of five years that expires on March 8, 2005 and became exercisable on March 8, 2001, either for cash or pursuant to a cash-less exercise feature. In connection with the organization of subsequent Mezzanine Funds that close before December 31, 2001, the Company agreed, subject to stockholder approval, which was received on June 21, 2000, to issue additional warrants to purchase up to 5.25 million shares of Class A Common Stock on the same terms as the initial warrant; the number of shares subject to such warrants to be determined pursuant to a formula based on the aggregate dollar amount of capital commitments made by affiliates of Citigroup and clients of Citibank's private bank. Pursuant to the Venture Agreement, CTIMCO has been named the exclusive investment manager to the Mezzanine Funds. Further, each party has agreed to certain exclusivity obligations with respect to the origination of assets suitable for the Mezzanine Funds and the Company granted Citigroup the right of first refusal to co-sponsor future Mezzanine Funds. The Company has also agreed, as soon as practicable, to take the steps necessary for it to be treated as a REIT for tax purposes on terms mutually satisfactory to the Company and affiliates of Citigroup, subject to changes in law, or good faith inability to meet the requisite qualifications. Unless the Company can find a suitable "reverse merger" REIT candidate, the earliest that the Company can qualify for re-election to REIT status will be upon filing its tax return for the year ended December 31, 2002. On May 10, 2000, in order to be able to fulfill the terms of the strategic venture with Citigroup, the Company modified the terms of the $150 million aggregate liquidation amount Convertible Trust Preferred Securities. The Convertible Trust Preferred Securities were issued by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the "Trust") in July 1998. The Convertible Trust Preferred Securities represented an undivided beneficial interest in the assets of the Trust that consisted solely of the Company's $154,650,000 aggregate principal amount 8.25% step up convertible junior subordinated debentures ("Convertible Debentures") that were concurrently issued and sold to the Trust. 18 In connection with the modification, the then outstanding Convertible Trust Preferred Securities were canceled and new variable step up convertible trust preferred securities with an aggregate liquidation amount of $150,000,000 (the "New Convertible Trust Preferred Securities") were issued to the holders of the canceled securities in exchange therefore, and the Convertible Debentures were canceled and new 8.25% step up convertible junior subordinated debentures in the aggregate principal amount of $92,524,000 (the "New Convertible Debentures") and new 13% step up non-convertible junior subordinated debentures in the aggregate principal amount of $62,126,000 (the "New Non-Convertible Debentures" and together with the New Convertible Debentures, the "New Debentures") were issued to the Trust, as the holder of the canceled bonds, in exchange therefore. The liquidation amount of the New Convertible Trust Preferred Securities is divided into $89,742,000 of convertible amount (the "Convertible Amount") and $60,258,000 of non-convertible amount (the "Non-Convertible Amount"), the distribution, redemption and, as applicable, conversion terms of which, mirror the interest, redemption and, as applicable, the conversion terms of the New Convertible Debentures and the New Non-Convertible Debentures, respectively, held by the Trust. Distributions on the New Convertible Trust Preferred Securities are payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the New Debentures, the sole assets of the Trust. Distributions are payable only to the extent payments are made in respect to the New Debentures. The New Convertible Trust Preferred Securities initially bear a blended coupon rate of 10.16% per annum which rate will vary as the proportion of the outstanding Convertible Amount to the outstanding Non-Convertible Amount changes and will step up in accordance with the coupon rate step up terms applicable to the Convertible Amount and the Non-Convertible Amount. The Convertible Amount bears a coupon rate of 8.25% per annum through March 31, 2002 and increases on April 1, 2002 to the greater of (i) 10.00% per annum, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter or (ii) a percentage per annum equal to the quarterly dividend paid on a common share multiplied by four and divided by $7.00. The Convertible Amount is convertible into shares of Class A Common Stock, in increments of $1,000 in liquidation amount, at a conversion price of $7.00 per share. The Convertible Amount is redeemable by the Company, in whole or in part, on or after September 30, 2004. The Non-Convertible Amount bears a coupon rate of 13.00% per annum through September 30, 2004, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter. The Non-Convertible Amount is redeemable by the Company, in whole or in part, at any time. The Company believes that its new business venture with Citigroup emphasizes its strengths and provides it with the building blocks for a scalable platform for high quality earnings growth. It also shifts the Company's focus from that of a "balance sheet" lender to that of an investment manager. The investment management business, as structured with Citigroup, also allows the Company to access the private equity markets as a source of fresh capital to fund its business. The venture further provides the potential for significant operating leverage allowing the Company to grow earnings and to increase return on equity without incurring substantial portfolio risk. Overview of Financial Condition - ------------------------------- In 2000, the Company funded $14.2 million of commitments and additional borrowings under three existing loans. The Company received full satisfaction of seven loans and a Certificated Mezzanine Investment totaling $147.2 million and partial repayments on nine loans and a Certificated Mezzanine Investment totaling $45.1 million. At December 31, 2000, the Company had outstanding loans, Certificated Mezzanine Investments and CMBS totaling approximately $600 million and additional commitments for fundings on outstanding loans of approximately $5.1 million. The Company believes that its loans and investments provide investment yields within the Company's target range of 500 to 700 basis points above LIBOR. The Company maximizes its return on equity by utilizing its existing cash on hand and then employing leverage on its investments. The Company may make loans and investments with yields that fall outside of the investment range set forth above, but that correspond with the level of risk perceived by the Company to be inherent in such investments. 19 The Company's assets are subject to various risks that can affect results, including the level and volatility of prevailing interest rates and credit spreads, adverse changes in general economic conditions and real estate markets, the deterioration of credit quality of borrowers and the risks associated with the ownership and operation of real estate. Any significant compression of the spreads of the interest rates earned on interest-earning assets over the interest rates paid on interest-bearing liabilities could have a material adverse effect on the Company's operating results as could adverse developments in the availability of desirable loan and investment opportunities and the ability to obtain and maintain targeted levels of leverage and borrowing costs. Adverse changes in national and regional economic conditions can have an effect on real estate values increasing the risk of undercollateralization to the extent that the fair market value of properties serving as collateral security for the Company's assets are reduced. Numerous factors, such as adverse changes in local market conditions, competition, increases in operating expenses and uninsured losses, can affect a property owner's ability to maintain or increase revenues to cover operating expenses and the debt service on the property's financing and, consequently, lead to a deterioration in credit quality or a loan default and reduce the value of the Company's asset. In addition, the yield to maturity on the Company's CMBS assets is subject to default and loss experience on the underlying mortgage loans, as well as interest rate changes caused by pre-payments of principal. If there are realized losses on the underlying loans, the Company may not recover the full amount, or possibly, any of its initial investment in the affected CMBS asset. To the extent there are prepayments on the underlying mortgage loans as a result of refinancing at lower rates, the Company's CMBS assets may be retired substantially earlier than their stated maturities leading to reinvestment in lower yielding assets. There can be no assurance that the Company's assets will not experience any of the foregoing risks or that, as a result of any such experience, the Company will not suffer a reduced return on investment or an investment loss. Through December 31, 2000, the Company has made equity contributions to Fund I of $33,214,000 of which Fund I has returned $13,107,000 for net equity contributions of $20,107,000. The Company's portion of Fund I's net income amounted to $1,530,000. The Company has capitalized costs totaling $4,752,000 that will be amortized over the anticipated lives of the Mezzanine Funds. As of December 31, 2000, Fund I has loans outstanding totaling $119,622,000, all of which are performing in accordance with the terms of the loan agreements. In April 2000, the Company increased its level of resources devoted to its new investment management business and reduced resources devoted to its investment banking and advisory operations. As a result, the Company determined that there has been a decline in the value of the acquired enterprise and the Company wrote off the remaining value of the excess of purchase price over net tangible assets acquired. This additional $275,000 write-off was recorded as additional amortization expense in the year ended December 31, 2000. The Company is party to two credit agreements with commercial lenders (the "First Credit Facility" and the "Second Credit Facility", (together the "Credit Facilities")) that after amendments provide for $655 million of credit. The First Credit Facility provides for a $355 million line of credit with maturity in February 2002 with an automatic one-year amortizing extension option, if not otherwise extended. The Second Credit Facility provides for a $300 million line of credit. Effective June 30, 2000, the expiration of such credit facility was extended from June 2000 to June 2001, with an automatic nine-month amortizing extension option, if not otherwise extended. The Credit Facilities provide for advances to fund lender-approved loans and investments made by the Company ("Funded Portfolio Assets"). The obligations of the Company under the Credit Facilities are secured by pledges of the Funded Portfolio Assets acquired with advances under the Credit Facilities. Borrowings under the Credit Facilities bear interest at specified rates over LIBOR, which rates may fluctuate, based upon the credit quality of the Funded Portfolio Assets. Future repayments and redrawdowns of amounts previously subject to the drawdown fee will not require the Company to pay any additional fees. The Credit Facilities provide for margin calls on asset-specific borrowings in the event of asset quality and/or market value deterioration as determined under the Credit Facilities. The Credit Facilities contain customary representations and warranties, covenants and conditions and events of default. The Credit Facilities also contain a covenant obligating the Company to avoid undergoing an ownership change that results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer retaining their senior offices and directorships with the Company and practical control of the Company's business and operations. The providers of the Credit Facilities have notified the Company that the resignation of Craig M. Hatkoff on December 29, 2000 is not an event of non-compliance with the foregoing covenant. 20 At December 31, 2000, the Company had $173.6 million of outstanding borrowings under the Credit Facilities as compared to $343.3 million at December 31, 1999. The decrease of $169.7 million in the amount outstanding under the Credit Facilities from the amount outstanding at December 31, 1999 was due to the significant loan repayments received. A $10.9 million repurchase obligation outstanding at December 31, 1999 that matured in March 2000 and was extended to May 2000 was satisfied in May 2000 when the Certificated Mezzanine Investment was satisfied by the borrower. During the second quarter of 2000, the remaining repurchase obligation's maturity was extended to May 2001. This repurchase obligation relates to an asset sold by the Company with a carrying amount of $22.4 million, which approximates the asset's market value, for which, the Company has a liability to repurchase the asset for $16.6 million. The interest rate in effect for the repurchase obligation at September 30, 2000 was 8.32%. At December 31, 2000, the Company has entered into interest rate swap agreements for notional amounts totaling approximately $233.0 million with two investment grade financial institution counterparties whereby the Company swapped fixed rate instruments, which averaged approximately 6.02% at December 31, 2000, for floating rate instruments equal to LIBOR which averaged approximately 6.73% at December 31, 2000. During the year ended December 31, 2000, the Company terminated a swap in connection with the payoff of a loan resulting in a receipt of $322,000, which was recorded as an increase in interest income for the year. The agreements mature at varying times from September 2001 to December 2014 with a remaining average term of 118 months. The Company is exposed to credit loss in the event of non-performance by the counterparties (banks whose securities are rated investment grade) to the interest rate swap and cap agreements, although it does not anticipate such non-performance. The counterparties would bear the interest rate risk of such transactions as market interest rates increase. If an interest rate swap or interest rate cap is sold or terminated and cash is received or paid, the gain or loss is deferred and recognized when the hedged asset is sold or matures. During March 2000, the Company announced a share repurchase program under which the Company may purchase, from time to time, up to two million shares of the Company's Class A Common Stock. In May 2000, the Company announced an increase in the number of shares in its share repurchase program to four million shares. As of December 31, 2000, the Company had purchased and retired 2,564,400 shares of the Company's Class A Common Stock at an average price of $4.14 per share (including commissions) pursuant to the repurchase program. The Company has and will continue to fund share repurchases with available cash. Now that the Company's new investment management business has commenced and Fund I's asset origination and acquisition activities are ongoing under the management of CTIMCO, the Company will not reinvest directly for its own portfolio the working capital derived from maturing loans and investments, unless otherwise approved or permitted by the Mezzanine Funds. Pursuant to the Venture Agreement, the Company will source potential investment opportunities to Fund I or Fund II, when closed, and will use such working capital to make its contributions to the funds as and when required. Therefore, if the amount of the Company's maturing loans and investments increases significantly before excess capital is invested in the funds, or otherwise accretively deployed, the Company may experience temporary shortfalls in revenues and lower earnings until offsetting revenues are derived from the funds. 21 Results of Operations for the Years Ended December 31, 2000 and 1999 - -------------------------------------------------------------------- The Company reported net income allocable to shares of Common Stock of $8,146,000 for the year ended December 31, 2000, a decrease of $6,555,000 from the net income allocable to shares of Common Stock of $14,701,000 for the year ended December 31, 1999. This change was primarily the result of a decrease in advisory and investment banking fees, partially offset by the additional revenue generated from the investment in and management of Fund I. Interest and related income from loans and other investments amounted to $87,685,000 for the year ended December 31, 2000, a decrease of $905,000 from the $88,590,000 amount for the year ended December 31, 1999. While average interest earning assets decreased from approximately $749.7 million for the year ended December 31, 1999 to approximately $681.5 million for the year ended December 31, 2000, the interest rate earned on such assets increased from 11.8% in 1999 to 12.8% in 2000. During the year ended December 31, 2000, the Company recognized an additional $4,726,000 on the early repayment of seven loans, while during the year ended December 31, 1999, the Company recognized an additional $3,976,000 on the early repayment of five loans. Also in 2000, two loans were in non-accrual status, which reduced interest income by $867,000 for the year ended December 31, 2000. Without this additional interest income (offset by the forgone interest on the non-accrual loans in 2000), the earning rate for 2000 would have been 12.3% versus 11.3% for 1999. This increase is due primarily to an increase in the average LIBOR rate from 5.25% for 1999 to 6.41% for 2000. During the second quarter of 2000, Fund I commenced operations and for the year ended December 31, 2000, the Company earned $1,530,000 on its equity investment in the fund. Interest and related expenses amounted to $36,712,000 for the year ended December 31, 2000, a decrease of $2,742,000 over the $39,454,000 amount for the year ended December 31, 1999. The decrease in expense was due to a decrease in the amount of average interest bearing liabilities outstanding from approximately $471.8 million for the year ended December 31, 1999 to approximately $393.2 million for the year ended December 31, 2000, offset by an increase in the average rate paid on interest bearing liabilities from 8.3% to 9.3% for the same periods. The increase in the average rate is consistent with the increase in the average LIBOR rate for the Company's variable rate liabilities for the same periods. In addition, the Company also utilized proceeds from the $150.0 million of Convertible Trust Preferred Securities, which were issued on July 28, 1998 to finance its interest earning assets. As previously discussed, the terms of the Convertible Trust Preferred Securities were modified effective May 10, 2000. As a result, the blended rate on the securities increased from 8.25% to 10.16% on that date. During the years ended December 31, 2000 and 1999, the Company recognized $7,921,000 and $6,966,000, respectively, of net expenses related to the Convertible Trust Preferred Securities. This amount consisted of distributions to the holders totaling $14,246,000 and $12,375,000, respectively, and amortization of discount and origination costs totaling $799,000 and $799,000, respectively, during the years ended December 31, 2000 and 1999. This was partially offset by a tax benefit of $7,124,000 and $6,208,000 during the years ended December 31, 2000 and 1999, respectively. During the year ended December 31, 2000, other revenues decreased $14,079,000 to $4,977,000 from $19,056,000 in the same period of 1999. This decrease was primarily due to the reduction in advisory and investment banking fees generated by Victor Capital and its related subsidiaries. The significant reduction in resources devoted to the Company's investment banking and advisory operations following the transition to its new investment management business, which generated $373,000 of investment management fees in 2000, is expected to eliminate advisory and investment banking fee earning opportunities in the future. Other expenses decreased from $22,130,000 for the year ended December 31, 1999 to $22,038,000 for year ended December 31, 2000. As the Company transitioned to its new investment management business, it incurred one-time expenses of $2.1 million that were included in general and administrative expenses and wrote-off the remaining $275,000 of the excess of purchase price for Victor Capital over net tangible assets acquired, net. When these special one-time expenses are removed from other expenses, recurring other expenses for the year ended December 31, 2000 decreased $2.5 million from the same period in the prior year. During March 1999, to reduce general and administrative expenses to a level in line with budgeted business activity, the Company reduced its workforce by approximately 30% and recorded a restructuring charge of $650,000. This, along with a decrease in average staffing levels, primarily accounted for the 22 decrease in recurring general and administrative expenses. During the period ended December 31, 2000, the Company had an average of 24 full time employees as compared to an average of 34 during the period ended December 31, 1999. The Company had 20 full time employees and one part time employee at December 31, 2000. The Company anticipates adding additional personnel to its staff in 2001 to support the investment management of future funds. The increase in the provision for possible credit losses from $4,103,000 for the year ended December 31, 1999 to $5,478,000 for the year ended December 31, 2000 was due to additional reserves taken for non-performing loans at December 31, 2000. Management believes that the reserve for possible credit losses is adequate. For the years ended December 31, 2000 and 1999, the Company accrued income tax expense of $17,760,000 and $22,020,000, respectively, for federal, state and local income taxes. The increase in the effective tax rate (from 47.8% to 50.1%) was primarily due to higher levels of compensation in excess of deductible limits. The preferred stock dividend and dividend requirement arose in 1997 as a result of the Company's issuance of $33 million of Class A Preferred Stock on July 15, 1997. Dividends accrued on these shares at a rate of 9.5% per annum on a per share price of $2.69 for the 12,267,658 shares outstanding or $3,135,000 per annum through the second quarter of 1999. As discussed above, 5,946,825 shares of Preferred Stock were converted into an equal number of shares of Common Stock during the third quarter of 1999 thereby reducing the number of outstanding shares of Preferred Stock to 6,320,833 and the dividend requirement to $1,615,000 per annum. Results of Operations for the Years Ended December 31, 1999 and 1998 - -------------------------------------------------------------------- The Company reported net income allocable to shares of Common Stock of $14,701,000 for the year ended December 31, 1999, an increase of $4,393,000 from the net income allocable to shares of Common Stock of $10,308,000 for the year ended December 31, 1998. This change was primarily the result of an increase in advisory and investment banking fees and an increase in income from loans and other investments, net, partially offset by an increase in the distributions on the Convertible Trust Preferred Securities and an increase in the provision for income taxes. Income from loans and other investments, net, amounted to $49,136,000 for the year ended December 31, 1999, an increase of $14,072,000 over the $35,064,000 amount for the year ended December 31, 1998. This increase was due primarily to an increase in average earning assets of $223.4 million while interest bearing liabilities only increased by $133.5 million. The approximately $90 million difference was financed with proceeds from the Convertible Trust Preferred Securities. The increase in interest and related income was primarily due to the increase in the amount of average interest earning assets from approximately $526.3 million for the year ended December 31, 1998 to approximately $749.7 million for the year ended December 31, 1999. The average interest rate in effect for both years was 11.8%. The increase in interest and related expenses was due to an increase in the amount of average interest bearing liabilities from approximately $338.3 million at an average rate of 8.1% for the year ended December 31, 1998 to approximately $471.8 million at an average rate of 8.4% for the year ended December 31, 1999. The increase in rate was due primarily to the Company utilizing its Credit Facilities for a higher percentage of its borrowing needs at rates generally higher than it had previously enjoyed through repurchase agreements. The Company also utilized the net proceeds from the $150.0 million of Convertible Trust Preferred Securities that were issued on July 28, 1998 to finance its interest earning assets. During the year ended December 31, 1999, the Company recognized $6,966,000 of net expenses related to these securities. During the year ended December 31, 1998, the Company recognized $2,941,000 of net expenses related to these securities. Distributions to the holders totaled $12,375,000 for the year ended December 31, 1999, and $5,225,000 for the year ended December 31, 1998. Amortization of discount and origination costs totaled $799,000 during the year ended December 31, 1999 and $337,000 for the year ended December 31, 1998. These expenses were partially offset by a tax benefit of $6,208,000 during the year ended December 31, 1999 and $2,621,000 for the year ended December 31, 1998. 23 During the year ended December 31, 1999, other revenues increased $7,107,000 to $19,056,000 over the same period in 1998. The changes for the year ended December 31, 1999 were primarily due to an increase in advisory and investment banking fees generated by Victor Capital and its related subsidiaries. Other expenses increased from $21,262,000 for the year ended December 31, 1998 to $22,130,000 for year ended December 31, 1999. The largest components of other expenses are employee salaries and related costs and the provision for possible credit losses. In March 1999, to reduce general and administrative expenses to a level in line with budgeted business activity, the Company reduced its workforce by approximately 30% and recorded a restructuring charge of $650,000. This charge along with increases in compensation for the remaining employees, offset by a decrease in professional fees, accounted for the increase in general and administrative expenses for the year ended December 31, 1999 as compared to 1998. The Company had 29 full time employees at December 31, 1999. The increase in the provision for possible credit losses from $3,555,000 for the year ended December 31, 1998 to $4,103,000 for the year ended December 31, 1999 was due to the increase in average earning assets as previously described. For the years ended December 31, 1999 and 1998, the Company accrued income tax expense of $22,020,000 and $9,367,000, respectively, for federal, state and local income taxes. The increase in the effective tax rate (from 36.4% to 47.8%) was primarily due to a decrease in the net operating loss carryforwards utilized to offset taxable income. For the year ended December 31, 1998, net operating loss carryforwards reduced the effective tax rate by 10.7% due to significant losses generated in 1997 that were not limited for utilization in 1998. For the year ended December 31, 1999, the reduction was only 1.1% as all of the losses generated in 1997 were utilized in 1998. The preferred stock dividend and dividend requirement arose in 1997 as a result of the Company's issuance of $33 million of Class A Preferred Stock on July 15, 1997. Dividends accrued on these shares at a rate of 9.5% per annum on a per share price of $2.69 for the 12,267,658 shares outstanding or $3,135,000 per annum through the second quarter of 1999. As discussed above, 5,946,825 shares of Preferred Stock were converted into an equal number of shares of Common Stock during the third quarter of 1999 thereby reducing the number of outstanding shares of Preferred Stock to 6,320,833 and the dividend requirement to $1,615,000 per annum. 24 Liquidity and Capital Resources - ------------------------------- At December 31, 2000, the Company had $11,388,000 in cash. The primary sources of liquidity for the Company for 2001, will be cash on hand, cash generated from operations, principal and interest payments received on investments (including loan repayments), loans and securities, and additional borrowings under its Credit Facilities. The Company believes these sources of capital will adequately meet future cash requirements. The Company expects that during 2001, it will use a significant amount of its available capital resources to satisfy its capital contributions required in connection with the previously discussed strategic venture with Citigroup and to repurchase Common and Preferred Stock. In connection with the existing portfolio investment and loan business, the Company intends to employ leverage up to a maximum 5:1 debt-to-equity ratio to enhance its return on equity. The Company experienced a net decrease in cash of $27,394,000 for the year ended December 31, 2000, compared to the net decrease of $7,841,000 for the year ended December 31, 1999. The use of cash in 2000 was primarily to reduce liabilities while the use of cash in 1999 was primarily to purchase the BB CMBS Portfolio (net of the proceeds from the Term Redeemable Securities Contract). Cash provided by operating activities during the year ended December 31, 2000 was $11,878,000, a reduction of $12,284,000 from cash provided by operating activities of $24,162,000 during the same period of 1999. This reduction was primarily due to the decrease in net income in 2000. For the year ended December 31, 2000, cash provided by investing activities was $155,552,000, an increase of $232,104,000 from $76,552,000 used during the same period in 1999, primarily as a result of significant repayments received on loans since December 31, 1999 and a reduced level of loan origination from that of the prior year. The Company utilized the cash received on loan repayments to reduce outstanding borrowings under its credit facilities, which accounted for the majority of the $194,824,000 use of cash in financing activities in the first quarter of 2000, a $239,373,000 decrease from the $44,549,000 cash provided by financing activities in the same period of 1999, which included a significant increase in borrowing from the issuance of the term redeemable securities contract. At December 31, 2000, the Company has two outstanding notes payable totaling $2,647,000, outstanding borrowings under its credit facilities of $173,641,000, outstanding borrowings on the term redeemable securities contract of $133,235,000 and an outstanding repurchase obligation of $16,569,000. At December 31, 2000, the Company had $474,788,000 of borrowing capacity available under the credit facilities. Impact of Inflation - ------------------- The Company's operating results depend in part on the difference between the interest income earned on its interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities. Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation or otherwise can affect the Company's income by affecting the spread between the Company's interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of the Company's interest-earning assets and its ability to realize gains from the sale of assets and the average life of the Company's interest-earning assets. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond the control of the Company. The Company employs the use of correlated hedging strategies to limit the effects of changes in interest rates on its operations, including engaging in interest rate swaps and interest rate caps to minimize its exposure to changes in interest rates. There can be no assurance that the Company will be able to adequately protect against the foregoing risks or that the Company will ultimately realize an economic benefit from any hedging contract into which it enters. 25 - -------------------------------------------------------------------------------- Item 7A. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------------------- The principal objective of the Company's asset/liability management activities is to maximize net interest income, while minimizing levels of interest rate risk. Net interest income and interest expense are subject to the risk of interest rate fluctuations. To mitigate the impact of fluctuations in interest rates, the Company uses interest rate swaps to effectively convert fixed rate assets to variable rate assets for proper matching with variable rate liabilities. Each derivative used as a hedge is matched with an asset with which it has a high correlation. The swap agreements are generally held to maturity and the Company does not use derivative financial instruments for trading purposes. The Company uses interest rate swaps to reduce the Company's exposure to interest rate fluctuations on certain fixed rate loans and investments and to provide more stable spreads between rates received on loans and investments and the rates paid on their financing sources. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates at December 31, 2000. For financial assets and debt obligations, the table presents cash flows to the expected maturity and weighted average interest rates based upon the current carrying values. For interest rate swaps, the table presents notional amounts and weighted average fixed pay and variable receive interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted-average variable rates are based on rates in effect as of the reporting date.
Expected Maturity Dates ----------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (dollars in thousands) Assets: CMBS Fixed Rate - $196,874 - - - - $196,874 $182,112 Average interest rate - 11.99% - - - - 11.99% Variable Rate - - $ 36,509 - - - $ 36,509 $ 34,375 Average interest rate - - 13.67% - - - 13.67% Certificated Mezzanine Investments Variable Rate $ 22,379 - - - - - $ 22,379 $ 22,379 Average interest rate 11.38% - - - - - 11.38% Loans receivable Fixed Rate $ 28,779 - - - - $ 89,691 $118,470 $115,130 Average interest rate 12.25% - - - - 11.47% 11.66% Variable Rate $172,066 $ 46,250 - - $ 14,500 $ 10,000 $242,816 $240,263 Average interest rate 12.70% 13.80% - - 12.87% 12.20% 12.90% Liabilities: Credit Facilities Variable Rate - $ 72,970 $100,671 - - - $173,641 $173,641 Average interest rate - 9.68% 9.52% - - - 9.59 Term Redeemable Securities Contract Variable Rate - $137,812 - - - - $137,812 $133,235 Average interest rate - 9.58% - - - - 9.58 Repurchase obligations Variable Rate $16,569 - - - - - $ 16,569 $ 16,569 Average interest rate 8.32% - - - - - 8.32% Convertible Trust Preferred Securities Fixed Rate - - - - - $150,000 $150,000 $147,142 Average interest rate - - - - - 10.90% 10.90% Interest rate swaps $ 28,000 $137,812 $ 18,838 - - $48,375 $233,025 $(1,545) Average fixed pay rate 5.79% 6.05% 6.04% - - 6.06% 6.02% Average variable receive rate 6.82% 6.66% 6.82% - - 6.82% 6.73%
26 - ------------------------------------------------------------------------------ Item 8. Financial Statements and Supplementary Data - ------------------------------------------------------------------------------ The financial statements required by this item and the reports of the independent accountants thereon required by Item 14(a)(2) appear on pages F-2 to F-38. See accompanying Index to the Consolidated Financial Statements on page F-1. The supplementary financial data required by Item 302 of Regulation S-K appears in Note 25 to the consolidated financial statements. ------------------------------------------------------------------------------ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------------ None 27 PART III - ------------------------------------------------------------------------------ Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------------------------ The information regarding the Company's trustees is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 29, 2001, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. - ------------------------------------------------------------------------------ Item 11. Executive Compensation - ------------------------------------------------------------------------------ The information required by Item 402 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 29, 2001, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. - ------------------------------------------------------------------------------ Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------------ The information required by Item 403 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 29, 2001, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. - ------------------------------------------------------------------------------ Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------------------------------ The information required by Item 404 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement to be filed not later than April 29, 2001, with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act. 28 PART IV - ------------------------------------------------------------------------------ Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (a) (1) Financial Statements - ------- -------------------- See the accompanying Index to Financial Statement Schedule on page F-1. (a) (2) Consolidated Financial Statement Schedules - ------- ------------------------------------------ None. All schedules have been omitted because they are not applicable or because the required information is shown in the consolidated financial statements or notes thereto. (a) (3) Exhibits - ------- -------- EXHIBIT INDEX Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger, by and among Capital Trust, Capital Trust, Inc. and the Captrust Limited Partnership, dated as of November 12, 1999 (filed as Exhibit 2.1 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 3.1 Charter of the Capital Trust, Inc. (comprised of Articles of Amendment and Restatement of Charter and amendments thereof by Articles Supplementary with respect to Class A 9.5% Cumulative Convertible Preferred Stock and Articles Supplementary with respect to Class B 9.5% Cumulative Convertible Non-Voting Preferred Stock) (filed as Exhibit 3.1 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 3.2 Amended and Restated By-Laws of Capital Trust, Inc. (filed as Exhibit 3.2 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 4.1 Articles Supplementary with respect to Class A 9.5% Cumulative Convertible Preferred Stock of Capital Trust, Inc. and Articles Supplementary with respect to Class B 9.5% Cumulative Convertible Non-Voting Preferred Stock of Capital Trust, Inc (included in Exhibit 3.1). 10.1 Preferred Share Purchase Agreement dated as of June 16, 1997, by and between Capital Trust and Veqtor Finance Company, LLC (filed as Exhibit 10.1 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on July 30, 1997 and incorporated herein by reference). 10.2 Non-Negotiable Notes of Capital Trust payable to John R. Klopp, Craig M. Hatkoff and Valentine Wildove & Company, Inc. (filed as Exhibit 10.2 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on July 30, 1997 and incorporated herein by reference). +10.3.a Capital Trust, Inc. Amended and Restated 1997 Long-Term Incentive Stock Plan ("LTIP") (filed as Exhibit 10.1 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 29 Exhibit Number Description - ------ ----------- o+10.3.b Amendment No. 1 to LTIP +10.4 Capital Trust, Inc. Amended and Restated 1997 Non-Employee Director Stock Plan (filed as Exhibit 10.2 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.5 Capital Trust, Inc. 1998 Employee Stock Purchase Plan (filed as Exhibit 10.3 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.6 Capital Trust, Inc. 1998 Non-Employee Stock Purchase Plan (filed as Exhibit 10.4 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.7 Capital Trust, Inc. Stock Purchase Loan Plan (filed as Exhibit 10.5 to Capital Trust, Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). +10.8 Employment Agreement, dated as of July 15, 1997, by and between Capital Trust and John R. Klopp (filed as Exhibit 10.5 to Capital Trust's Registration Statement on Form S-1 (File No. 333-37271) filed on October 6, 1997 and incorporated herein by reference). o+10.9 Termination Agreement, dated as of December 29, 2000, by and between Capital Trust, Inc. and Craig M. Hatkoff o+10.10 Consulting Services Agreement, dated as of January 1, 2001, by and between Capital Trust, Inc. and Craig M. Hatkoff. o10.11 Agreement of Lease dated as of May 3, 2000, between 410 Park Avenue Associates, L.P., owner, and Capital Trust, Inc., tenant. 10.12 Amended and Restated Credit Agreement, dated as of January 1, 1998, between Capital Trust and German American Capital Corporation ("GACC") (filed as Exhibit 10.1 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on March 18, 1998 and incorporated herein by reference), as amended by First Amendment to Amended and Restated Credit Agreement, dated as of June 22, 1998, between Capital Trust and GACC (filed as Exhibit 10.3 to Capital Trust's Quarterly Report on Form 10-Q (File No. 1-8063) filed on August 14, 1998 and incorporated herein by reference), as amended by Second Amendment to Amended and Restated Credit Agreement, dated as of July 23, 1998, between Capital Trust and GACC (filed as Exhibit 10.10 to Capital Trust, Inc.'s Amendment No. 2 to Registration Statement on Form S-4 (File No. 333-52619) filed on October 23, 1998 and incorporated herein by reference) as amended by the Third Amendment to Amended and Restated Credit Agreement, dated as of July 23, 1998, between Capital Trust, Inc. and GACC (filed as Exhibit 10.12b to Capital Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on March 31, 1999 and incorporated herein by reference). +10.13 Employment Agreement, dated as of August 15, 1998, by and between Capital Trust and Stephen D. Plavin (filed as Exhibit 10.15 to Capital Trust, Inc.'s Amendment No. 2 to Registration Statement on Form S-4 (File No. 333-37271) filed on October 23, 1998 and incorporated herein by reference). o10.14 Amended and Restated Master Loan and Security Agreement, dated as of February 8, 2001, between Capital Trust, Inc. and Morgan Stanley Dean Witter Mortgage Capital Inc. o10.15 Amended and Restated CMBS Loan Agreement, dated as of February 8, 2001, between Capital Trust, Inc. and Morgan Stanley & Co. International Limited. 30 Exhibit Number Description - ------ ----------- o+10.16 Consulting Agreement, dated as of January 1, 1999, by and between Capital Trust, Inc. and Martin L. Edelman. 10.17 Venture Agreement amongst Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers General Real Estate Mezzanine Investments II, LLC, Travelers Limited Real Estate Mezzanine Investments II, LLC, CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC, CT Investment Management Co., LLC and Capital Trust, Inc., dated as of March 8, 2000 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.18 Limited Liability Company Agreement of CT Mezzanine Partners I LLC, by and among Travelers Limited Real Estate Mezzanine Investments I, LLC and CT-F1, LLC, dated as of March 8, 2000 (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.19 Limited Liability Company Agreement of CT MP II LLC, by and among Travelers General Real Estate Mezzanine Investments II, LLC and CT-F2-GP, LLC, dated as of March 8, 2000 (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.20 Fund I Class A Common Stock Warrant Agreement, by Capital Trust, Inc. granting warrant to Travelers Limited Real Estate Mezzanine Investment I, LLC, dated as of March 8, 2000 (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.21 Guaranty of Payment, by Capital Trust, Inc. in favor of Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers General Real Estate Mezzanine Investments II, LLC and Travelers Limited Real Estate Mezzanine Investments II, LLC, dated as of March 8, 2000 (filed as Exhibit 10.6 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.22 Guaranty of Payment, by The Travelers Insurance Company in favor of Capital Trust, Inc., CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC and CT Investment Management Co., LLC, dated as of March 8, 2000 (filed as Exhibit 10.8 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.23 Investment Management Agreement, by and among CT Investment Management Co., LLC, CT MP II LLC and CT Mezzanine Partners II L.P., dated as of March 8, 2000 (filed as Exhibit 10.9 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.24 Registration Rights Agreement, by and among Capital Trust, Inc., Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers General Real Estate Mezzanine Investments II, LLC and Travelers Limited Real Estate Mezzanine Investments II, LLC, dated as of March 8, 2000 (filed as Exhibit 10.10 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on March 23, 2000 and incorporated herein by reference). 10.25 Modification Agreement, dated as of May 10, 2000, by and among Capital Trust, Inc., John R. Klopp and Sheli Z. Rosenberg, as Regular Trustees for CT Convertible Trust I, Vornado Realty L.P., Vornado Realty Trust, EOP Operating Limited Partnership, Equity Office Properties Trust, and State Street Bank and Trust Company, as trustee for General Motors Employes Global Group Pension Trust (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.26 Certificate of Trust of CT Convertible Trust I (filed as Exhibit 4.1 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on August 6, 1998 and incorporated herein by reference). 31 Exhibit Number Description - ------ ----------- 10.27 Amended and Restated Indenture, dated as of May 10, 2000, between Capital Trust, Inc. and Wilmington Trust Company (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.28 Amended and Restated Declaration of Trust, dated and effective as of May 10, 2000, by the Trustees (as defined therein), the Sponsor (as defined therein) and by the holders, from time to time, of undivided beneficial interests in the Trust (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.29 Amended and Restated Preferred Securities Guarantee Agreement, dated as of May 10, 2000, by Capital Trust, Inc. and Wilmington Trust Company, as trustee, for the benefit of the Holders (as defined therein) from time to time of the Preferred Securities (as defined therein) of CT Convertible Trust I (filed as Exhibit 10.5 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.30 Guarantee Agreement, dated as of May 10, 2000, executed and delivered by Capital Trust, Inc., for the benefit of the Holders (as defined therein) from time to time of the Common Securities (as defined therein) of CT Convertible Trust I (filed as Exhibit 10.6 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 18, 2000 and incorporated herein by reference). 10.31 Registration Rights Agreement, dated as of July 28, 1998, among Capital Trust, Vornado Realty L.P., EOP Limited Partnership, Mellon Bank N.A., as trustee for General Motors Hourly-Rate Employes Pension Trust, and Mellon Bank N.A., as trustee for General Motors Salaried Employes Pension Trust (filed as Exhibit 10.2 to Capital Trust's Current Report on Form 8-K (File No. 1-8063) filed on August 6, 1998 and incorporated herein by reference). 21.1 Subsidiaries of Capital Trust, Inc. o23.1 Consent of Ernst & Young LLP - -------- + Represents a management contract or compensatory plan or arrangement. o Filed herewith. (a) (4) Report on Form 8-K ------- ------------------ During the fiscal quarter ended December 31, 2000, the Registrant filed the following Current Report on Form 8-K: None 32 SIGNATURES ---------- Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. April 2, 2001 /s/ John R. Klopp - ------------------ ----------------- Date John R. Klopp Vice Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. April 2, 2001 /s/ Samuel Zell - ------------- --------------- Date Samuel Zell Chairman of the Board of Directors April 2, 2001 /s/ John R. Klopp - ---------------------- ----------------- Date John R. Klopp Vice Chairman and Chief Executive Officer and Director April 2, 2001 /s/ Edward L. Shugrue III - ----------------------- ------------------------- Date Edward L. Shugrue III Managing Director and Chief Financial Officer April 2, 2001 /s/ Brian H. Oswald - ----------------------- ------------------- Date Brian H. Oswald, Chief Accounting Officer April 2, 2001 /s/ Jeffrey A. Altman - ----------------------- --------------------- Date Jeffrey A. Altman, Director April 2, 2001 /s/ Thomas E. Dobrowski - ----------------------- ----------------------- Date Thomas E. Dobrowski, Director April 2, 2001 /s/ Martin L. Edelman - ----------------------- --------------------- Date Martin L. Edelman, Director April 2, 2001 /s/ Gary R. Garrabrant - ----------------------- ---------------------- Date Gary R. Garrabrant, Director April 2, 2001 /s/ Craig M. Hatkoff - ----------------------- -------------------- Date Craig M. Hatkoff, Director April 2, 2001 /s/ Susan W. Lewis - ----------------------- ------------------ Date Susan W. Lewis, Director - April 2, 2001 /s/ Sheli Z. Rosenberg - ----------------------- ---------------------- Date Sheli Z. Rosenberg, Director April 2, 2001 /s/ Steven Roth - ------------- --------------- Date Steven Roth, Director April 2, 2001 /s/ Lynne B. Sagalyn - ----------------------- -------------------- Date Lynne B. Sagalyn, Director April 2, 2001 /s/ Michael D. Watson - ----------------------- --------------------- Date Michael Watson, Director 33 Index to Consolidated Financial Statements Report of Independent Auditors..........................................F-2 Audited Financial Statements Consolidated Balance Sheets as of December 31, 2000 and 1999....................................................................F-3 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998........................................F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998....................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998........................................F-6 Notes to Consolidated Financial Statements..............................F-7 F-1 Report of Independent Auditors The Board of Directors Capital Trust, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Capital Trust, Inc. and Subsidiaries (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 9, 2001, except for note 7, as to which the date is March 21, 2001 F-2 Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2000 and 1999 (in thousands)
2000 1999 -------------- -------------- Assets Cash and cash equivalents $ 11,388 $ 38,782 Commercial mortgage-backed securities available-for-sale, at fair value 215,516 214,058 Certificated mezzanine investments available-for-sale, at fair value 22,379 45,432 Loans receivable, net of $12,947 and $7,605 reserve for possible credit losses at December 31, 2000 and December 31, 1999, respectively 349,089 509,811 Equity investment in CT Mezzanine Partners I LLC ("Fund I") 26,011 - Excess of purchase price over net tangible assets acquired, net - 286 Deposits and other receivables 211 533 Accrued interest receivable 7,241 9,528 Deferred income taxes 8,719 5,368 Prepaid and other assets 3,838 4,010 -------------- -------------- Total assets $ 644,392 $ 827,808 ============== ============== Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued expenses $ 10,329 $ 14,432 Notes payable 2,647 3,474 Credit facilities 173,641 343,263 Term redeemable securities contract 133,235 129,642 Repurchase obligations 16,569 28,703 Deferred origination fees and other revenue 2,163 3,411 -------------- -------------- Total liabilities 338,584 522,925 -------------- -------------- Company-obligated, mandatory redeemable, convertible preferred securities of CT Convertible Trust I, holding $89,742,000 of convertible 8.25% junior subordinated debentures and $60,258,000 of non-convertible 13.00% junior subordinated debentures of Capital Trust, Inc. at December 31, 2000 and holding solely 8.25% junior subordinated debentures of Capital Trust, Inc. at December 31, 1999 ("Convertible Trust Preferred Securities") 147,142 146,343 -------------- -------------- Stockholders' equity: Class A 9.5% cumulative convertible preferred stock, $0.01 par value, $0.26 cumulative annual dividend, 100,000 shares authorized, 2,278 shares issued and outstanding at December 31, 2000 and December 31, 1999 (liquidation preference of $6,127) ("Class A Preferred Stock") 23 23 Class B 9.5% cumulative convertible non-voting preferred stock, $0.01 par value, $0.26 cumulative annual dividend, 100,000 shares authorized, 4,043 shares issued and outstanding at December 31, 2000 and December 31, 1999 (liquidation preference of $10,876) ("Class B Preferred Stock" and together with Class A Preferred Stock, "Preferred Stock") 40 40 Class A common stock, $0.01 par value, 100,000 shares authorized, 18,967 and 21,862 shares issued and outstanding at December 31, 2000 and December 31, 1999, respectively 190 219 Class B common stock, $0.01 par value, 100,000 shares authorized, 2,755 and 2,294 shares issued and outstanding at December 31, 2000 and December 31, 1999, respectively ("Class B Common Stock") 28 23 Restricted Class A Common Stock, $0.01 par value, 264 and 127 shares issued and outstanding at December 31, 2000 and December 31, 1999, respectively ("Restricted Class A Common Stock" and together with Class A Common Stock and Class B Common Stock, "Common Stock") 3 1 Additional paid-in capital 181,507 189,456 Unearned compensation (468) (407) Accumulated other comprehensive loss (10,152) (10,164) Accumulated deficit (12,505) (20,651) -------------- -------------- Total stockholders' equity 158,666 158,540 -------------- -------------- Total liabilities and stockholders' equity $ 644,392 $ 827,808 ============== ==============
F-3 See accompanying notes to consolidated financial statements. Capital Trust, Inc. and Subsidiaries Consolidated Statements of Operations For the Years Ended December 31, 2000, 1999 and 1998 (in thousands, except per share data)
2000 1999 1998 ------------ ------------ ------------ Income from loans and other investments: Interest and related income $ 87,685 $ 88,590 $ 62,316 Income from equity investments in Fund I 1,530 - - Less: Interest and related expenses (36,712) (39,454) (27,252) ------------ ------------ ------------ Income from loans and other investments, net 52,503 49,136 35,064 ------------ ------------ ------------ Other revenues: Advisory and investment banking fees 3,920 17,772 10,311 Management fees from Fund I 373 - - Other interest income 748 1,249 1,638 Gain (loss) on sale of fixed assets and investments (64) 35 - ------------ ------------ ------------ Total other revenues 4,977 19,056 11,949 ------------ ------------ ------------ Other expenses: General and administrative 15,439 17,345 17,045 Other interest expense 219 337 413 Depreciation and amortization 902 345 249 Provision for possible credit losses 5,478 4,103 3,555 ------------ ------------ ------------ Total other expenses 22,038 22,130 21,262 ------------ ------------ ------------ Income before income taxes and distributions and amortization on Convertible Trust Preferred Securities 35,442 46,062 25,751 Provision for income taxes 17,760 22,020 9,367 ------------ ------------ ------------ Income before distributions and amortization on Convertible Trust Preferred Securities 17,682 24,042 16,384 Distributions and amortization on Convertible Trust Preferred Securities, net of income tax benefit of $7,124 and $6,208 for the years ended December 31, 2000 and 1999, respectively 7,921 6,966 2,941 ------------ ------------ ------------ Net income 9,761 17,076 13,443 Less: Preferred Stock dividend 1,615 2,375 3,135 ------------ ------------ ------------ Net income allocable to Common Stock $ 8,146 $ 14,701 $ 10,308 ============ ============ ============ Per share information: Net earnings per share of Common Stock Basic $ 0.35 $ 0.69 $ 0.57 ============ ============ ============ Diluted $ 0.33 $ 0.55 $ 0.44 ============ ============ ============ Weighted average shares of Common Stock outstanding Basic 23,171,057 21,334,412 18,208,812 ============ ============ ============ Diluted 29,691,927 43,724,731 30,625,459 ============ ============ ============ See accompanying notes to consolidated financial statements.
F-4 Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 2000, 1999 and 1998 (in thousands)
Restricted Class A Class B Class A Class B Class A Comprehensive Preferred Preferred Common Common Common Income/(Loss) Stock Stock Stock Stock Stock ------------ ----------------------------------------------------- Balance at January 1, 1998 $ - $ 123 $ - $ 182 $ - $ - Net income 13,443 - - - - - Change in unrealized loss on available-for-sale securities, net of related income taxes (5,052) - - - - - Issuance of Class A Common Stock under stock option plan - - - - - - Issuance of restricted Class A Common Stock - - - - - 1 Cancellation of previously issued restricted Class A Common Stock - - - - - - Restricted Class A Common Stock earned - - - - - - Dividends paid on Preferred Stock - - - - - - ------------ ---------------------------------------------------------- Balance at December 31, 1998 $ 8,391 $ 123 $ - $ 182 $ - $ 1 ============ Net income 17,076 - - - - - Change in unrealized loss on available-for-sale securities, net of related income taxes (5,499) - - - - - Conversion of Class A Common and Preferred Stock to Class B Common and Preferred Stock - (40) 40 (23) 23 - Conversion of Class A Preferred Stock to Class A Common Stock - (60) - 60 - - Issuance of Class A Common Stock unit awards - - - - - - Cancellation of previously issued restricted Class A Common Stock - - - - - (1) Issuance of restricted Class A Common Stock - - - - - 1 Restricted Class A Common Stock earned - - - - - - Dividends paid on Preferred Stock - - - - - - ------------ ---------------------------------------------------------- Balance at December 31, 1999 $ 11,577 $ 23 $ 40 $ 219 $ 23 $ 1 ============ Net income 9,761 - - - - - Change in unrealized loss on available-for-sale securities, net of related income taxes 12 - - - - - Conversion of Class A Common Stock to Class B Common Stock - - - (5) 5 - Issuance of warrants to purchase shares of Class A Common Stock - - - - - - Issuance of Class A Common Stock unit awards - - - 1 - - Cancellation of previously issued restricted Class A Common Stock - - - - - (1) Issuance of restricted Class A Common Stock - - - - - 3 Restricted Class A Common Stock which vested and was issued as unrestricted Class A Common Stock - - - - - - Restricted Class A Common Stock earned - - - - - - Dividends paid on Preferred Stock - - - - - - Repurchase and retirement of shares of Class A Common Stock previously outstanding - - - (25) - - ------------ ---------------------------------------------------------- Balance at December 31, 2000 $ 9,773 $ 23 $ 40 $ 190 $ 28 $ 3 ============ ========================================================== See accompanying notes to consolidated financial statements.
Accumulated Additional Other Paid-In Unearned Comprehensive Accumulated Capital Compensation Income/(Loss) Deficit Total --------------------------------------------------------------------- Balance at January 1, 1998 $ 188,257 $ - $ 387 $ (45,660) $ 143,289 Net income - - - 13,443 13,443 Change in unrealized loss on available-for-sale securities, net of related income taxes - - (5,052) - (5,052) Issuance of Class A Common Stock under stock option plan 10 - - - 10 Issuance of restricted Class A Common Stock 724 (725) - - - Cancellation of previously issued restricted Class A Common Stock (175) 156 - - (19) Restricted Class A Common Stock earned - 151 - - 151 Dividends paid on Preferred Stock - - - (3,135) (3,135) --------------------------------------------------------------------- Balance at December 31, 1998 $ 188,816 $ (418) $ (4,665) $ (35,352) $ 148,687 Net income - - - 17,076 17,076 Change in unrealized loss on available-for-sale securities, net of related income taxes - - (5,499) - (5,499) Conversion of Class A Common and Preferred Stock to Class B Common and Preferred Stock - - - - - Conversion of Class A Preferred Stock to Class A Common Stock - - - - - Issuance of Class A Common Stock unit awards 312 - - - 312 Cancellation of previously issued restricted Class A Common Stock (271) 180 - - (92) Issuance of restricted Class A Common Stock 599 (600) - - - Restricted Class A Common Stock earned - 431 - - 431 Dividends paid on Preferred Stock - - - (2,375) (2,375) ---------------------------------------------------------------------------- Balance at December 31, 1999 $ 189,456 $(407) $ (10,164) $ (20,651) $ 158,540 Net income - - - 9,761 9,761 Change in unrealized loss on available-for-sale securities, net of related income taxes - - 12 - 12 Conversion of Class A Common Stock to Class B Common Stock - - - - - Issuance of warrants to purchase shares of Class A Common Stock 1,360 - - - 1,360 Issuance of Class A Common Stock unit awards 624 - - - 625 Cancellation of previously issued restricted Class A Common Stock (279) 182 - - (98) Issuance of restricted Class A Common Stock 947 (950) - - - Restricted Class A Common Stock which vested and was issued as unrestricted Class A Common Stock - - - - - Restricted Class A Common Stock earned - 707 - - 707 Dividends paid on Preferred Stock - - - (1,615) (1,615) Repurchase and retirement of shares of Class A Common Stock previously outstanding (10,601) - - - (10,626) -------------------------------------------------------------------------- Balance at December 31, 2000 $181,507 $ (468) $ (10,152) $ (12,505) $ 158,666 ========================================================================== See accompanying notes to consolidated financial statements.
F-5 Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999 and 1998 (in thousands)
2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 9,761 $ 17,076 $ 13,443 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes (3,351) (2,339) (3,029) Provision for credit losses 5,478 4,103 3,555 Depreciation and amortization 902 345 249 Income from equity investments in Fund I (1,530) - - Restricted Class A Common Stock earned 707 431 151 Amortization of premiums and accretion of discounts on loans and investments, net (2,683) (1,032) 1,250 Accretion of discount on term redeemable securities contract 3,593 2,757 - Accretion of discounts and fees on Convertible Trust Preferred Securities, net 799 799 337 Gain on sale of investments - (35) - Loss on sale of fixed assets 64 - - Expenses reversed on cancellation of restricted stock previously issued (98) (92) (19) Changes in assets and liabilities: Deposits and other receivables 322 (132) (117) Accrued interest receivable 2,287 (1,487) (7,223) Prepaid and other assets 353 2,417 (3,545) Deferred origination fees and other revenue (1,248) (1,037) 3,079 Accounts payable and accrued expenses (3,478) 2,388 6,638 ------------ ------------ ------------ Net cash provided by operating activities 11,878 24,162 14,769 ------------ ------------ ------------ Cash flows from investing activities: Purchases of commercial mortgage-backed securities - (185,947) (36,334) Cash received on commercial mortgage-backed securities recorded as discount 1,446 - - Principal collections on and proceeds from sale of commercial mortgage-backed securities - - 49,490 Advances on and purchases of certificated mezzanine investments - (985) (23,947) Principal collections on certificated mezzanine investments 23,053 1,033 465 Origination and purchase of loans receivable (14,192) (103,732) (515,449) Principal collections on and proceeds from sales of loans receivable 169,227 209,792 70,405 Equity investments in Fund I (36,606) - - Return of capital from Fund I 13,107 - - Purchases of fixed assets (495) (57) (496) Proceeds from sale of fixed assets 12 - - Principal collections and proceeds from sales of available-for-sale securities - 3,344 7,957 ------------ ------------ ------------ Net cash provided by (used in) investing 155,552 (76,552) (447,909) activities ------------ ------------ ------------ Cash flows from financing activities: Proceeds from repurchase obligations - 3,929 41,837 Repayment of repurchase obligations (12,134) (54,626) (44,608) Proceeds from credit facilities 56,000 214,246 618,686 Repayment of credit facilities (225,622) (242,737) (326,796) Proceeds from notes payable - - 10,000 Repayment of notes payable (827) (773) (10,706) Net proceeds from issuance of Convertible Trust Preferred Securities - - 145,207 Net proceeds from issuance of term redeemable securities contract - 126,885 - Dividends paid on Class A Preferred Stock (1,615) (2,375) (3,135) Net proceeds from issuance of Class A Common Stock under stock Option Plan - - 10 Repurchase and retirement of shares of Class A Common Stock previously outstanding (10,626) - - ------------ ------------ ------------ Net cash provided by (used in) financing activities (194,824) 44,549 430,495 ------------ ------------ ------------ Net decrease in cash and cash equivalents (27,394) (7,841) (2,645) Cash and cash equivalents at beginning of year 38,782 46,623 49,268 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 11,388 $ 38,782 $ 46,623 ============ ============ ============ See accompanying notes to consolidated financial statements.
F-6 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2000, 1998 and 1997 1. Organization Capital Trust, Inc. (the "Company") is an investment management and real estate finance company designed to take advantage of high-yielding lending and investment opportunities in commercial real estate and related assets. The Company, for its own account and as an investment manager, makes investments in various types of income-producing commercial real estate and its current investment program emphasizes senior and junior commercial mortgage loans, certificated mezzanine investments, direct equity investments and subordinated interests in commercial mortgage-backed securities ("CMBS"). The Company is the successor to Capital Trust (f/k/a California Real Estate Investment Trust), a business trust organized under the laws of the State of California pursuant to a declaration of trust dated September 15, 1966 (the "Predecessor"), following the consummation of the Reorganization (as defined and described below). On December 31, 1996, 76% of the Predecessor's then-outstanding common shares of beneficial interest, $1.00 par value ("Common Shares") were held by the Predecessor's former parent ("Former Parent"). On January 3, 1997, the Former Parent sold its entire 76% ownership interest in the Predecessor (consisting of 6,959,593 Common Shares) to CalREIT Investors Limited Partnership ("CRIL"), an affiliate of Equity Group Investments, L.L.C. ("EGI") and Samuel Zell, the Company's current chairman of the board of directors, for an aggregate price of approximately $20.2 million. Prior to the purchase, which was approved by the Predecessor's then-incumbent board of trustees, EGI and Victor Capital Group, L.P. ("Victor Capital"), a then privately held company owned by two of the current directors of the Company, presented to the Predecessor's then-incumbent board of trustees a proposed new business plan in which the Predecessor would cease to be a real estate investment trust ("REIT") and instead become a finance company as discussed above. EGI and Victor Capital also proposed that they provide the Predecessor with a new management team to implement the business plan and invest, through an affiliate, a minimum of $30 million in a new class of preferred equity to be issued by the Predecessor. In connection with the foregoing, the Predecessor subsequently agreed that, concurrently with the consummation of the proposed preferred equity investment, it would acquire for $5.0 million Victor Capital's real estate investment banking, advisory and asset management businesses, including the services of its experienced management team. On July 15, 1997, the proposed preferred equity investment was consummated and 12,267,658 class A 9.5% cumulative convertible preferred shares of beneficial interest, $1.00 par value ("Class A Preferred Shares"), in the Predecessor were sold to Veqtor Finance Company, L.L.C. ("Veqtor"), a then affiliate of Samuel Zell and the then principals of Victor Capital, for an aggregate purchase price of $33.0 million. Concurrently with the foregoing transaction, Veqtor purchased from CRIL the 6,959,593 Common Shares held by it for an aggregate purchase price of approximately $21.3 million (which shares were reclassified on that date as class A common shares of beneficial interest, $1.00 par value ("Class A Common Shares"), in the Predecessor pursuant to the terms of an amended and restated declaration of trust, dated July 15, 1997, adopted on that date (the "Amended and Restated Declaration of Trust")). (See Note 15). At the Predecessor's 1998 annual meeting of shareholders (held on January 28, 1999), the Predecessor's shareholders approved the reorganization of the Predecessor into a Maryland corporation (the "Reorganization"). In the Reorganization, which was consummated on January 28, 1999, the Predecessor merged with and into Captrust Limited Partnership, a Maryland limited partnership ("CTLP"), with CTLP continuing as the surviving entity, and CTLP merged with and into the Company, with the Company continuing as the surviving Maryland corporation. Each outstanding Class A Common Share was converted into one share of class A common stock, par value $0.01 per share ("Class A Common Stock"), and each outstanding Class A Preferred Share was converted into one share of class A 9.5% cumulative convertible preferred stock, par value $0.01 per share ("Class A Preferred Stock"), of the Company. The Company assumed all outstanding obligations to issue shares of Class A Common Stock under the Incentive Stock Plan and Director Stock Plan (as defined and described in Note 19). Unless the context otherwise requires, hereinafter references to the business, assets, liabilities, capital structure, operations and affairs of "the Company" shall include those of "the Predecessor" prior to the Reorganization. F-7 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Strategic Business Venture with Citigroup Investments Inc. On March 8, 2000, the Company and certain of its wholly owned subsidiaries entered into a strategic venture with affiliates of Citigroup Investments Inc. ("Citigroup"), following which it commenced its new investment management business. The venture parties have agreed, among other things, to co-sponsor, commit to invest capital in, and manage a series of high-yield commercial real estate mezzanine investment opportunity funds (collectively, the "Mezzanine Funds"). Citigroup and the Company have made capital commitments to the Mezzanine Funds of up to an aggregate of $400.0 million and $112.5 million, respectively, subject to certain terms and conditions. The strategic venture is governed by a venture agreement, dated as of March 8, 2000 (the "Venture Agreement"), pursuant to which the parties have created CT Mezzanine Partners I LLC ("Fund I"), to which a Citigroup affiliate and a wholly owned subsidiary of the Company, as members thereof, have made capital commitments of $150 million and $50 million, respectively, to be invested in stages upon approval by both members of each investment to be made by Fund I. A wholly owned subsidiary of the Company, CT Investment Management Co., LLC ("CTIMCO"), serves as the exclusive investment manager to Fund I and is currently identifying and negotiating suitable investments for the fund. Additionally, Citigroup affiliates and subsidiaries of the Company have agreed to make additional capital commitments of up to $250.0 million and $62.5 million, respectively, to fund future Mezzanine Funds sponsored pursuant to the Venture Agreement and close prior to December 31, 2001. These commitments are subject to the amount of third-party capital commitments and other conditions contained in the Venture Agreement. In consideration of, among other things, Citigroup's $400 million aggregate capital commitment to the Mezzanine Funds, the Company agreed in the Venture Agreement to issue affiliates of Citigroup warrants to purchase shares of Class A Common Stock. In connection with the organization of Fund I, the Company issued a warrant to purchase 4.25 million shares of Class A Common Stock at $5.00 per share. The foregoing warrant has a term of five years that expires on March 8, 2005 and became exercisable on March 8, 2001, either for cash or pursuant to a cash-less exercise feature. In connection with the organization of subsequent Mezzanine Funds that close before December 31, 2001, the Company agreed, subject to stockholder approval, which was received on June 21, 2000, to issue additional warrants to purchase up to 5.25 million shares of Class A Common Stock on the same terms as the initial warrant; the number of shares subject to such warrants to be determined pursuant to a formula based on the aggregate dollar amount of capital commitments made by affiliates of Citigroup and clients of Citibank's private bank. Pursuant to the Venture Agreement, CTIMCO has been named the exclusive investment manager to the Mezzanine Funds. Further, each party has agreed to certain exclusivity obligations with respect to the origination of assets suitable for the Mezzanine Funds and the Company granted Citigroup the right of first refusal to co-sponsor future Mezzanine Funds. The Company has also agreed, as soon as practicable, to take the steps necessary for it to be treated as a REIT for tax purposes on terms mutually satisfactory to the Company and affiliates of Citigroup, subject to changes in law, or good faith inability to meet the requisite qualifications. Unless the Company can find a suitable "reverse merger" REIT candidate, the earliest that the Company can qualify for re-election to REIT status will be upon filing its tax return for the year ended December 31, 2002. Pursuant to the Venture Agreement, the Company increased the size of its board of directors by two and appointed directors Marc Weill and Michael Watson, chief executive officer and senior vice president, respectively, of Citigroup Investments Inc. Effective June 1, 2000, Mr. Weill resigned from the board of directors and was replaced by Susan Lewis, executive vice president of Citigroup Investments Inc. As a condition to the Venture Agreement and in order to facilitate its conversion to REIT status as soon as practicable, the Company and the holders of the Convertible Trust Preferred Securities agreed in principle on March 8, 2000, to terminate their co-investment agreement with the Company and to amend the terms of such securities. Such termination and amendment were completed as of May 10, 2000. The revised terms are fully described in Note 14. F-8 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company, CTIMCO (as described in Note 2) CT-F1, LLC (a wholly owned subsidiary and direct member and equity owner of Fund I), CT-BB Funding Corp. (a wholly owned subsidiary which purchased fifteen CMBS securities as described in Note 5), CT Convertible Trust I (as described in Note 14), Natrest Funding I, Inc. (a wholly owned single purpose subsidiary which held one Mortgage Loan) and VIC, Inc., which together with the Company wholly owns Victor Capital and other related subsidiaries including: VCG Montreal Management, Inc., Victor Asset Management Partners, L.L.C., VP Metropolis Services, L.L.C., and 970 Management, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. During the year ended December 31, 2000, the Company dissolved the following subsidiaries: Natrest Funding I, Inc., Victor Asset Management Partners, L.L.C., VP Metropolis Services, L.L.C., and 970 Management, LLC. Revenue Recognition Interest income for the Company's mortgage and other loans and investments is recognized over the life of the investment using the effective interest method and recognized on the accrual basis. Fees received in connection with loan commitments, net of direct expenses, are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. Anticipated exit fees are also recognized over the term of the loan as an adjustment to yield. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Fees from investment management services are recognized when earned on an accrual basis. Fees from professional advisory services are generally recognized at the point at which all Company services have been performed and no significant contingencies exist with respect to entitlement to payment. Fees from asset management services are recognized as services are rendered. Reserve for Possible Credit Losses The provision for possible credit losses is the charge to income to increase the reserve for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions. Based upon these factors, the Company establishes the provision for possible credit losses by category of asset. When it is probable that the Company will be unable to collect all amounts contractually due, the account is considered impaired. Where impairment is indicated, a valuation write-down or write-off is measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the reserve for credit losses. F-9 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Cash and Cash Equivalents The Company classifies highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. At December 31, 2000 and 1999, cash equivalents of approximately $11.4 million and $37.1 million, respectively, consisted of an investment in a money market fund that invests in U.S. Treasury bills. Bank balances in excess of federally insured amounts totaled approximately zero and $1.5 million as of December 31, 2000 and 1999, respectively. The Company has not experienced any losses on its demand deposits or money market investments. Other Available-for-Sale Securities Other available-for-sale securities are reported on the consolidated balance sheet at fair value with any corresponding temporary change in value reported as an unrealized gain or loss (if assessed to be temporary), as a component of comprehensive income in stockholders' equity, net of related income taxes. See Note 4. Commercial Mortgage-Backed Securities At December 31, 1997, the Company had the intent and ability to hold its subordinated investment in a commercial mortgage-backed security ("CMBS") until maturity. Consequently, this investment was classified as held-to-maturity and was carried at amortized cost. During 1998, due to prepayments made on underlying securities that reduced the interest rate/risk profile and maturity of a CMBS, the Company concluded that it no longer anticipated holding the asset to maturity. Due to the decision to sell this held-to-maturity security, the Company has transferred all of its investments in CMBS from held-to-maturity securities to available-for-sale and they are recorded as such at December 31, 2000 and 1999. Income from CMBS is recognized based on the effective interest method using the anticipated yield over the expected life of the investments. Changes in yield resulting from prepayments are recognized over the remaining life of the investment. The Company recognizes impairment on its CMBS whenever it determines that the impact of expected future credit losses, as currently projected, exceeds the impact of the expected future credit losses as originally projected. Impairment losses are determined by comparing the current fair value of a CMBS to its existing carrying amount, the difference being recognized as a loss in the current period in the consolidated statements of operations of the period in which the loss is identified. Reduced estimates of credit losses are recognized as an adjustment to yield over the remaining life of the portfolio. Certificated Mezzanine Investments Certificated mezzanine investments available-for-sale are reported on the consolidated balance sheets at fair value with any corresponding temporary change in value resulting in an unrealized gain (loss) being reported as a component of comprehensive income in the stockholders' equity section of the balance sheet, net of related income taxes. See Note 6. Equity investment in CT Mezzanine Partners I LLC ("Fund I") As Fund I is not majority owned or controlled by the Company, the Company does not consolidate Fund I in its consolidated financial statements. The Company accounts for its 25% interest in Fund I on the equity method of accounting. As such, the Company reports 25% of the earnings of Fund I on a single line item in the consolidated statement of operations as income from equity investments in Fund I. F-10 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Derivative Financial Instruments The Company uses interest rate swaps to effectively convert the financed portion of fixed rate assets to variable rate assets for proper matching with the corresponding variable rate liabilities. The differential to be paid or received on these agreements is recognized as an adjustment to the interest income related to the earning asset and is recognized on the accrual basis. These swaps are highly effective in reducing the Company's risk of changes in LIBOR as they effectively convert the financed portion of an asset to a variable rate for which the financing cost is also at a variable rate. The swaps that relate to assets that are accounted for on an amortized cost basis are accounted for as off-balance sheet assets. The swaps that relate to assets that are accounted for on an available for sale basis (mark-to-market), the value of the swaps is included as an adjustment to the carrying value. The Company also uses interest rate caps to reduce its exposure to interest rate changes on investments. The Company will receive payments on an interest rate cap should the variable rate for which the cap was purchased exceed a specified threshold level and will be recorded as an adjustment to the interest income related to the related earning asset. Each derivative used as a hedge is matched with an asset or liability with which it has a high correlation. The swap agreements are generally held to maturity and the Company does not use derivative financial instruments for trading purposes. In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Subsequently, SFAS No. 137, "Deferral of the Effective Date of FASB No. 133" deferred the adoption of SFAS No. 133 to years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value, if any, will be immediately recognized in earnings. The Company plans to adopt SFAS No. 133 effective January 1, 2001. Based upon the Company's derivative positions, which are considered effective hedges, the Company estimates that had it adopted the statement on January 1, 2000, it would have reported accumulated other comprehensive loss of $10,705,000 at December 31, 2000, and net income and other comprehensive income of $9,761,000 and $5,383,000, respectively, for the year then ended. Equipment and Leasehold Improvements, Net Equipment and leasehold improvements, net, are stated at original cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method based on the estimated lives of the depreciable assets. Amortization is computed over the remaining terms of the related leases. Expenditures for maintenance and repairs are charged directly to expense at the time incurred. Expenditures determined to represent additions and betterments are capitalized. Cost of assets sold or retired and the related amounts of accumulated depreciation are eliminated from the accounts in the year of sale or retirement. Any resulting profit or loss is reflected in the consolidated statement of operations. F-11 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Sales of Real Estate The Company complies with the provisions of the FASB's Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate." Accordingly, the recognition of gains is deferred until such transactions have complied with the criteria for full profit recognition under the statement. The Company had deferred gains of $239,000 at December 31, 1999, which were written off during the year ended December 31, 2000 when the related loan was determined to be uncollectible. See Note 7. Deferred Debt Issuance Costs The Company capitalizes costs incurred related to the issuance of long-term debt. These costs are deferred and amortized on a straight-line basis over the life of the related debt, which approximates the level-yield method, and recognized as a component of interest expense. Income Taxes The Company records its income taxes in accordance with the FASB's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying statutory tax rates for future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years and for carryforwards that are useable in future years. A valuation allowance is recognized if it is more likely than not that some portion of the deferred asset will not be recognized. When evaluating whether a valuation allowance is appropriate, SFAS No. 109 requires a company to consider such factors as previous operating results, future earning potential, tax planning strategies and future reversals of existing temporary differences. The valuation allowance is increased or decreased in future years based on changes in these criteria. Amortization of the Excess of Purchase Price Over Net Tangible Assets Acquired The Company recognized the excess of purchase price over net tangible assets acquired in a business combination accounted for as a purchase transaction and is amortizing it on a straight-line basis over a period of 15 years. The carrying value of the excess of purchase price over net tangible assets acquired is analyzed quarterly by the Company based upon the expected revenue and profitability levels of the acquired enterprise to determine whether the value and future benefit may indicate a decline in value. If the Company determines that there has been a decline in the value of the acquired enterprise, the Company will write down the value of the excess of purchase price over net tangible assets acquired to the revised fair value. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued Comprehensive Income Effective January 1, 1998, the Company adopted the FASB's Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The statement changes the reporting of certain items currently reported in the stockholders' equity section of the balance sheet and establishes standards for reporting of comprehensive income and its components in a full set of general-purpose financial statements. Total comprehensive income was $9,773,000, $11,577,000 and $8,391,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The primary component of comprehensive income other than net income was the unrealized gain (loss) on available-for-sale securities, net of related income taxes. Earnings per Share of Common Stock Earnings per share of Common Stock are presented based on the requirements of the FASB's Statement of Accounting Standards No. 128 ("SFAS No. 128"). Basic EPS is computed based on the income applicable to Common Stock (which is net income or loss reduced by the dividends on the Preferred Stock) divided by the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS is based on the net earnings applicable to Common Stock plus, if dilutive, dividends on the Preferred Stock and interest paid on Convertible Trust Preferred Securities, net of tax benefit, divided by the weighted average number of shares of Common Stock and potentially dilutive shares of Common Stock that were outstanding during the period. At December 31, 2000, potentially dilutive shares of Common Stock include the convertible Preferred Stock, dilutive Common Stock options and future commitments for stock unit awards. At December 31, 1999, potentially dilutive shares of Common Stock include the convertible Preferred Stock, Convertible Trust Preferred Securities and future commitments for stock unit awards. At December 31, 1998, potentially dilutive shares of Common Stock include the convertible Preferred Stock and dilutive Common Stock options. Reclassifications Certain reclassifications have been made in the presentation of the 1999 and 1998 consolidated financial statements to conform to the 2000 presentation. Segment Reporting In 1998, the Company adopted the FASB's Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires disclosures about segments of an enterprise and related information regarding the different types of business activities in which an enterprise engages and the different economic environments in which it operates. In 1998, the Company operated as two segments: Lending/Investment and Advisory for which the disclosures required by SFAS No. 131 for the year ended December 31, 1998 are presented in Note 23. During the first quarter of 1999, the Company reorganized the structure of its internal organization by merging its Lending/Investment and Advisory segments and thereby no longer managing its operations as separate segments. As such, separate segment reporting is not presented for 1999 as there is only one segment and the financial information for that segment is the same as the information in the consolidated financial statements. The accounting policies of the reportable segments in 1998 are the same as those described within this summary of significant accounting policies. F-13 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies, continued New Accounting Pronouncements In December 1999, the SEC staff issued Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"). SAB 101 discusses the SEC staff views on certain revenue recognition transactions. The Company adopted SAB 101 in the fourth quarter of 2000. The adoption of SAB 101 did not have a material effect on the consolidated financial position or results of operations of the Company. On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" an interpretation of APB Opinion No. 25. The interpretation clarifies guidance of certain issues that arose in the application of APB Opinion 25, "Accounting for Stock Issued to Employees". The interpretation is primarily applied prospectively to all new awards, modifications to outstanding awards, and changes in employee status after July 1, 2000. Management has adopted the Interpretation on July 1, 2000. The adoption of interpretation did not have a material effect on the consolidated financial position or results of operations of the Company as of and for the year ended December 31, 2000. 4. Other Available-for-Sale Securities During the year ended December 31, 1999, the Company sold its entire portfolio of other available-for sale securities at a gain of $35,000 over their amortized cost. 85,600 shares of common stock were received as partial payment for advisory services rendered by Victor Capital to an advisory client. This stock was restricted from sale by the Company for a period of one year from the date of issuance or until August 20, 1998. The stock was sold in December 1998 for $1,798,000 with no resulting realized gain or loss. The cost of securities sold was determined using the specific identification method. 5. Commercial Mortgage-Backed Securities ("CMBS") The Company pursues rated and unrated investments in public and private subordinated interests ("Subordinated Interests") in CMBS. In 1997, the Company completed an investment for the entire junior subordinated class of CMBS that provided for both interest payments and principal repayments. The CMBS investment consisted of a security with a face value of $49,592,000 that was purchased at a discount for $49,174,000 plus accrued interest. At the time of acquisition, the investment was subordinated to approximately $351.3 million of senior securities. At December 31, 1997, the CMBS investment (including interest receivable) was $49,471,000 and had a yield of 8.96%. During 1998, due to prepayments made on underlying securities that reduced the interest rate/risk profile and maturity of this CMBS, the Company concluded that it no longer anticipated holding this security to maturity. The security was sold during 1998 at a gain of approximately $100,000. Because of this decision to sell a held-to-maturity security, the Company transferred all of its investments in commercial mortgage-backed securities from held-to-maturity securities to available-for-sale and continues to classify the CMBS as such. F-14 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Commercial Mortgage-Backed Securities ("CMBS"), continued In connection with the CMBS investment above, the Company was named "special servicer" for the entire $413 million loan portfolio in which capacity the Company earned fee income for management of the collection process when any of the loans became non-performing. During the year ended December 31, 1998, fees totaling $43,000 were earned relating to the special servicing arrangement. No fees were earned during the years ended December 31, 2000 and 1999. During the year ended December 31, 1998, the Company purchased $36,509,000 face amount of interests in three subordinated CMBS issued by a financial asset securitization investment trust for $36,335,000. In April 2000, the Company received $1.4 million of additional discount from the issuer of the securities in settlement of a dispute with the issuer. At December 31, 2000, the securities had cost an amortized cost of $35,361,000 and a market value of $34,375,000. These securities bear interest at floating rates, for which the weighted average interest rate in effect, after fair value adjustment at December 31, 2000, is 13.67%, and mature in January 2003. In connection with the aforementioned investments, at December 31, 2000, the Company has deferred acquisition costs of $34,000 that are being amortized as a reduction of interest income on a basis to realize a level yield over the life of the investment. On March 3, 1999, the Company, through its then newly formed wholly owned subsidiary, CT-BB Funding Corp., acquired a portfolio of fixed-rate "BB" rated CMBS (the "BB CMBS Portfolio") from an affiliate of the Company's credit provider under the First Credit Facility (as hereinafter defined). The portfolio, which is comprised of 11 separate issues with an aggregate face amount of $246.0 million, was purchased for $196.9 million. In connection with the transaction, an affiliate of the seller provided three-year term financing for 70% of the purchase price at a floating rate above the London Interbank Offered Rate ("LIBOR") and entered into an interest rate swap with the Company for the full duration of the BB CMBS Portfolio securities thereby providing a hedge for interest rate risk. The financing was provided at a rate that was below the current market for similar financings and, as such, the carrying amount of the assets and the debt were reduced by $10.9 million to adjust the yield on the debt to current market terms. The BB CMBS Portfolio securities bear interest at fixed rates that have an average face rate of 7.74% on the face amount and mature at various dates from March 2005 to January 2013. After giving effect to the discounted purchase price, the fair value adjustment and the adjustment of the carrying amount of the assets to bring the debt to current market terms, the weighted average interest rate in effect for the BB CMBS Portfolio at December 31, 2000 was 12.29%. 6. Certificated Mezzanine Investments The Company purchases high-yielding mezzanine investments that are subordinate to senior secured loans on commercial real estate. Such investments represent interests in debt service from loans or property cash flow and are issued in certificate form. These certificated investments carry substantially similar terms and risks as the Company's Mezzanine Loans. The certificated mezzanine investments are floating rate securities that are carried at market value of $22,379,000 and $45,432,000 on December 31, 2000 and 1999, respectively. As the market value and amortized cost were the same on December 31, 2000 and 1999, no unrealized gains or losses have been recorded. One of the certificated mezzanine investments outstanding at December 31, 1999 was settled in May 2000. The remaining certificated mezzanine investment has a remaining term of five months with 12 months of additional extensions available. The interest rate in effect for the certificated mezzanine investment is 11.38% at December 31, 2000. In connection with the remaining investment, at December 31, 2000, the Company has deferred origination fees, net of direct costs of $40,000 that are being amortized into interest income on a basis to realize a level yield over the life of the investment. F-15 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans Receivable The Company currently pursues lending opportunities designed to capitalize on inefficiencies in the real estate capital, mortgage and finance markets. The Company has classified its loans receivable into the following general categories: o Mortgage Loans. The Company originates and funds senior and junior mortgage loans ("Mortgage Loans") to commercial real estate owners and property developers who require interim financing until permanent financing can be obtained. The Company's Mortgage Loans are generally not intended to be permanent in nature, but rather are intended to be of a relatively short-term duration, with extension options as deemed appropriate, and typically require a balloon payment of principal at maturity. The Company may also originate and fund permanent Mortgage Loans in which the Company intends to sell the senior tranche, thereby creating a Mezzanine Loan (as defined below). o Mezzanine Loans. The Company originates high-yielding loans that are subordinate to first lien mortgage loans on commercial real estate and are secured either by a second lien mortgage or a pledge of the ownership interests in the borrowing property owner ("Mezzanine Loans"). Generally, the Company's Mezzanine Loans have a longer anticipated duration than its Mortgage Loans and are not intended to serve as transitional mortgage financing and can represent subordinated investments in real estate operating companies which may take the form of secured or unsecured debt, preferred stock and other hybrid investments. o Other Loans Receivable. This classification includes loans originated during the Company's prior operations as a REIT and other loans and investments not meeting the above criteria. At December 31, 2000 and 1999, the Company's loans receivable consisted of the following (in thousands): 2000 1999 -------------------------- Mortgage Loans $ 135,651 $ 270,332 Mezzanine Loans 179,356 192,613 Other loans receivable 47,029 54,471 -------------------------- 362,036 517,416 Less: reserve for possible credit losses (12,947) (7,605) -------------------------- Total loans $ 349,089 $ 509,811 ========================== One Mortgage Loan receivable with a principal balance of $8,000,000 reached maturity on July 15, 2000 and has not been repaid with respect to principal and interest. In accordance with the Company's policy for revenue recognition, income recognition has been suspended on this loan and through December 31, 2000, $791,000 of potential interest income has not been recorded. During the year ended December 31, 2000, one other loan receivable, originated by the former management of the Company's predecessor REIT operations, with a net investment of $136,000, was past-due more than 90 days and was written-off. The net investment prior to the write-off included the loan balance of $915,000 offset by $779,000 of non-recourse financing of the asset. After the write-off, both the loan receivable and the non-recourse financing are carried at $779,000 until the non-recourse note payable is foreclosed upon (which occurred on January 17, 2001 (see note 12)). The loan was originated during the Company's prior operations as a REIT to facilitate the disposal of a previously foreclosed-upon asset. In accordance with the Company's policy for revenue recognition, income recognition was suspended on this loan and through December 31, 2000, $76,000 of potential interest income has not been recorded. At December 31, 2000, one Mezzanine Loan with a principal balance of $13,018,000 was in default as the loan matured on December 1, 2000. At December 31, 2000, the loan was earning a variable interest rate of LIBOR + 9.00%. The loan was repaid in full with interest on March 21, 2001 F-16 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans, continued During the year ended December 31, 2000, the Company provided $14,192,000 of additional fundings on three loans originated in prior periods and has remaining outstanding commitments at December 31, 2000 totaling $5,149,000. At December 31, 2000, the weighted average interest rate in effect, after giving effect to interest rate swaps and including amortization of fees and premiums, for the Company's performing loans receivable was as follows: Mortgage Loans 12.97% Mezzanine Loans 12.62% Other loans receivable 13.80% Total Loans 12.92% At December 31, 2000, $221,799,000 (65%) of the aforementioned performing loans bear interest at floating rates ranging from LIBOR plus 320 basis points to LIBOR plus 700 basis points. The remaining $118,440,000 (35%) of loans were financed at fixed rates ranging from 11.62% to 12.00%. The range of maturity dates and weighted average maturity at December 31, 2000 of the Company's performing loans receivable was as follows: Weighted Average Range of Maturity Dates Maturity --------------------------- --------- Mortgage Loans February 2001 to June 2001 4 Months Mezzanine Loans May 2001 to July 2009 62 Months Other loans receivable September 2002 21 Months Total Loans February 2001 to July 2009 35 Months In addition, one of the loans for $44,851,000 has borrower extension rights for an additional year and another loan for $28,000,000 has borrower extension rights for an additional two years. At December 31, 2000, there are two loans to a related group of borrowers totaling $75.1 million or approximately 13% of total assets. There are no other loans to a single borrower or to related groups of borrowers that exceed ten percent of total assets. Approximately 42% and 14% of all loans are secured by properties in New York and Texas, respectively. Approximately 41% of all loans are secured by office buildings, approximately 24% are secured by office/hotel properties and approximately 13% are secured by corporate pledges. These credit concentrations are adequately collateralized as of December 31, 2000. In connection with the aforementioned loans, at December 31, 2000 and 1999, the Company has deferred origination fees, net of direct costs of $2,157,000 and $3,330,000, respectively, that are being amortized into income over the life of the loan. At December 31, 2000 and 1999, the Company has also recorded $2,017,000 and $3,479,000, respectively, of exit fees, which will be collected at the loan pay-off. These fees are recorded as interest income on a basis to realize a level yield over the life of the loans. As of December 31, 2000, loans totaling $340,239,000 are pledged as collateral for borrowings on the Credit Facilities (as defined below). F-17 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Loans, continued The Company has established a reserve for possible credit losses on loans receivable as follows (in thousands): 2000 1999 1998 ---------- ---------- ---------- Beginning balance $7,605 $4,017 $ 462 Provision for possible credit losses 5,478 4,103 3,555 Amounts charged against reserve for possible credit losses (136) (515) - ---------- ---------- ---------- Ending balance $12,947 $7,605 $4,017 ========== ========== ========== 8. Equity investment in CT Mezzanine Partners I LLC ("Fund I") As part of the strategic business venture with Citigroup, as described in Note 2, the Company made equity investments in Fund I during the year ended December 31, 2000. The activity for the equity investment in Fund I is as follows: Beginning balance $ - Capital contributions to Fund I 33,214 Company portion of Fund I income 1,530 Costs capitalized for investment in Fund I 4,752 Amortization of capitalized costs (378) Distributions from Fund I (13,107) --------- Ending balance $26,011 ========= As of December 31, 2000, Fund I has loans outstanding totaling $119,622,000, all of which are performing in accordance with the terms of the loan agreements. In addition, the Company received $373,000 of fees for management of Fund I. 9. Risk Factors The Company's assets are subject to various risks that can affect results, including the level and volatility of prevailing interest rates and credit spreads, adverse changes in general economic conditions and real estate markets, the deterioration of credit quality of borrowers and the risks associated with the ownership and operation of real estate. Any significant compression of the spreads of the interest rates earned on interest-earning assets over the interest rates paid on interest-bearing liabilities could have a material adverse effect on the Company's operating results as could adverse developments in the availability of desirable loan and investment opportunities and the ability to obtain and maintain targeted levels of leverage and borrowing costs. Adverse changes in national and regional economic conditions can have an effect on real estate values increasing the risk of undercollateralization to the extent that the fair market value of properties serving as collateral security for the Company's assets are reduced. Numerous factors, such as adverse changes in local market conditions, competition, increases in operating expenses and uninsured losses, can affect a property owner's ability to maintain or increase revenues to cover operating expenses and the debt service on the property's financing and, consequently, lead to a deterioration in credit quality or a loan default and reduce the value of the Company's assets. In addition, the yield to maturity on the Company's CMBS assets are subject to the default and loss experience on the underlying mortgage loans, as well as by the rate and timing of payments of principal. If there are realized losses on the underlying loans, the Company may not recover the full amount, or possibly, any of its initial investment in the affected CMBS asset. To the extent there are prepayments on the underlying mortgage loans as a result of refinancing at lower rates, the Company's CMBS assets may be retired substantially earlier than their stated maturities leading to reinvestment in lower yielding assets. There can be no assurance that the Company's assets will not experience any of the foregoing risks or that, as a result of any such experience, the Company will not suffer a reduced return on investment or an investment loss. F-18 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Excess of Purchase Price Over Net Tangible Assets Acquired On July 15, 1997, the Company consummated the acquisition of the real estate investment banking, advisory and asset management businesses of Victor Capital and certain affiliated entities. The acquisition has been accounted for under the purchase method of accounting. The excess of the purchase price of the acquisition in excess of net tangible assets acquired approximated $342,000. The Company recognized the excess of purchase price over net tangible assets acquired in a business combination accounted for as a purchase transaction and has been amortizing it on a straight-line basis over a period of 15 years. The carrying value of the excess of purchase price over net tangible assets acquired was analyzed quarterly by the Company based upon the expected revenue and profitability levels of the acquired enterprise to determine whether the value and future benefit may indicate a decline in value. In April 2000, the Company increased its level of resources devoted to its new investment management business and reduced resources devoted to its investment banking and advisory operations. As a result, the Company determined that there has been a decline in the value of the acquired enterprise and the Company wrote off the remaining value of the excess of purchase price over net tangible assets acquired. This additional $275,000 write-off was recorded as additional amortization expense in the year ended December 31, 2000. 11. Equipment and Leasehold Improvements At December 31, 2000 and 1999, equipment and leasehold improvements, net, are summarized as follows (in thousands): Period of Depreciation or Amortization 2000 1999 ------------------ ---------- ----------- Office and computer equipment 1 to 3 years $ 492 $ 571 Furniture and fixtures 5 years 143 188 Leasehold improvements Term of leases 297 245 ---------- ----------- 932 1,004 Less: accumulated depreciation (389) (642) ---------- ----------- $ 543 $ 362 ========== =========== Depreciation and amortization expense on equipment and leasehold improvements, which are computed on a straight-line basis totaled $238,000, $322,000 and $227,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Equipment and leasehold improvements are included at their depreciated cost in prepaid and other assets in the consolidated balance sheets. 12. Notes Payable At December 31, 2000 and 1999, the Company has notes payable aggregating $2,647,000 and $3,474,000, respectively. In connection with the acquisition of Victor Capital and affiliated entities, the Company issued $5.0 million of non-interest bearing unsecured notes ("Acquisition Notes") to the sellers, who are directors and the current vice chairman and chief executive officer and chairman of the executive committee of the board of directors of the Company, payable in ten semi-annual payments of $500,000. The Acquisition Notes were originally discounted to $3,908,000 based on an imputed interest rate of 9.5%. F-19 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. Notes Payable, continued At December 31, 2000, the Acquisition Notes have four remaining semi-annual payments maturing July 1, 2002. The net present value of the remaining payments on the Acquisition Notes at December 31, 2000 and 1999, amounted to $1,868,000 and $2,680,000, respectively. The Company is also indebted under a non-recourse note payable due to a life insurance company. This note is secured by a loan receivable for a property that was sold in 1997. The note bears interest at 9.50% per annum with principal and interest payable monthly until August 7, 2017, when the entire unpaid principal balance and any unpaid interest are due. The life insurance company has the right to call the entire note due and payable upon ninety days prior written notice. At December 31, 2000 and 1999, the balance of the note payable amounted to $779,000 and $794,000, respectively. The Company's borrower defaulted on its payment obligation under the loan receivable securing the note payable in June 2000. As the note payable is non-recourse, the Company terminated its payments to the life insurance company and is in default on the note payable at December 31, 2000. The Company determined not to pursue foreclosure on the defaulted loan receivable and allowed the loan receivable to be foreclosed upon on January 17, 2001, whereupon the non-recourse debt was extinguished. 13. Long-Term Debt Credit Facilities Effective September 30, 1997, the Company entered into a credit agreement with a commercial lender that provided for a three-year $150 million line of credit (the "First Credit Facility"). Effective January 1, 1998, pursuant to an amended and restated credit agreement, the Company increased its First Credit Facility to $250 million and subsequently further amended the credit agreement to increase the facility to $300 million effective June 22, 1998 and $355 million effective July 23, 1998. The Company incurred an initial commitment fee upon the signing of the credit agreement and the credit agreement calls for additional commitment fees when the total borrowing under the Credit Facility exceeds $75 million, $150 million, $250 million and $300 million. Effective February 26, 1999, pursuant to an amended and restated credit agreement, the Company extended the expiration of such credit facility from December 2001 to February 2002 with an automatic one-year amortizing extension option, if not otherwise extended. On June 8, 1998, the Company entered into a second credit agreement with another commercial lender that provides for a $300 million line of credit with an original expiration date in December 1999 (the "Second Credit Facility" together with the First Credit Facility, the "Credit Facilities"). The Company incurred an initial commitment fee upon the signing of the Second Credit Facility and will pay an additional commitment fee when borrowings exceed $250 million. Effective March 30, 1999, pursuant to an amended and restated credit agreement, the Company extended the expiration of such credit facility from December 1999 to June 2000 with an automatic nine-month amortizing extension option, if not otherwise extended. Effective June 30, 2000, pursuant to an amended and restated credit agreement, the Company extended the expiration of such credit facility from June 2000 to June 2001 with an automatic nine-month amortizing extension option, if not otherwise extended. F-20 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. Long-Term Debt, continued Credit Facilities, continued The Credit Facilities provide for advances to fund lender-approved loans and investments made by the Company ("Funded Portfolio Assets"). The obligations of the Company under the Credit Facilities are secured by pledges of the Funded Portfolio Assets acquired with advances under the Credit Facilities. Borrowings under the Credit Facilities bear interest at specified rates over LIBOR, which rates may fluctuate, based upon the credit quality of the Funded Portfolio Assets. Future repayments and redrawdowns of amounts previously subject to the drawdown fee will not require the Company to pay any additional fees. The Credit Facilities provide for margin calls on asset-specific borrowings in the event of asset quality and/or market value deterioration as determined under the Credit Facilities. The Credit Facilities contain customary representations and warranties, covenants and conditions and events of default. The Credit Facilities also contain a covenant obligating the Company to avoid undergoing an ownership change that results in Craig M. Hatkoff, John R. Klopp or Samuel Zell no longer retaining their senior offices and directorships with the Company and practical control of the Company's business and operations. The providers of the Credit Facilities have notified the Company that the resignation of Craig M. Hatkoff on December 29, 2000 is not an event of non-compliance with the foregoing covenant. At December 31, 2000, the Company has borrowed $100,670,000 against the First Credit Facility at an average borrowing rate (including amortization of fees incurred and capitalized) of 9.52%. The Company has pledged assets of $156,573,000 as collateral for the borrowing against the First Credit Facility. At December 31, 2000, the Company has borrowed $72,970,000 against the Second Credit Facility at an average borrowing rate (including amortization of fees incurred and capitalized) of 9.68%. The Company has pledged assets of $218,041,000 as collateral for the borrowing against the Second Credit Facility. On December 31, 2000, the unused amounts available under the Credit Facilities were $474,788,000. Repurchase Obligations During 2000, the Company had entered into two repurchase agreements. One repurchase agreement was satisfied during the year ended December 31, 2000 and the other was extended. The first repurchase agreement, with a securities dealer, arose in connection with the purchase of a Certificated Mezzanine Investment. At December 31, 1999, the Company has sold such asset totaling $21,839,000, which approximates market value, and has a liability to repurchase this asset for $10,919,000. The liability balance bore interest at a specified rate over LIBOR and was settled in May 2000 when the Certificated Mezzanine Investment was satisfied. The other repurchase agreement, with another securities dealer, arose in connection with the purchase of a Certificated Mezzanine Investment. At December 31, 1999, the Company has sold such asset with a book value of $23,594,000, which approximates market value, and has a liability to repurchase this asset for $17,784,000. This repurchase agreement was extended to May 2001 during the year ended December 31, 2000 and at December 31, 2000, the Company has sold such asset with a book value of $22,379,000, which approximates market value, and has a liability to repurchase this asset for $16,569,000. The liability balance bears interest at a specified rate over LIBOR. The average interest rate in effect for both variable rate Repurchase Obligations at December 31, 1999 was 7.76% and the interest rate in effect for the remaining Repurchase Obligation at December 31, 2000 was 8.32%. F-21 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. Long-Term Debt, continued Term Redeemable Securities Contract In connection with the purchase of the BB CMBS Portfolio described in Note 5, an affiliate of the seller provided financing for 70% of the purchase price, or $137.8 million, at a floating rate of LIBOR plus 50 basis points pursuant to a term redeemable securities contract. This rate was below the market rate for similar financings, and, as such, a discount on the term redeemable securities contract was recorded to reduce the carrying amount by $10.9 million (which has been amortized to $4.6 million), which had the effect of adjusting the yield to current market terms. The debt has a three-year term that expires in February 2002. An affiliate of the seller also entered into an interest rate swap with the Company for the full duration of the BB CMBS Portfolio thereby providing a hedge for interest rate risk. The notional values of the swaps were tied to the amount of debt for the term of the debt and then to the assets for the remaining terms of the assets. The swaps had a negative value at December 31, 2000 of $971,000. By entering into interest rate swaps, the Company has effectively converted the term redeemable securities contract to a fixed interest rate of 6.55%. After adjusting the carrying amount and yield to current market terms, the term redeemable securities contract bears interest at a fixed interest rate of 9.58%. 14. Convertible Trust Preferred Securities On July 28, 1998, the Company privately placed 150,000 8.25% Step Up Convertible Trust Preferred Securities (liquidation amount $1,000 per security) with an aggregate liquidation amount of $150 million (the "Original Convertible Trust Preferred Securities"). The Original Convertible Trust Preferred Securities were issued by the Company's consolidated statutory trust subsidiary, CT Convertible Trust I (the "Trust"). The Original Convertible Trust Preferred Securities represented an undivided beneficial interest in the assets of the Trust that consisted solely of the Company's Original Convertible Debentures (as hereafter defined). This private placement transaction was completed concurrently with the related issuance and sale to the Trust of the Company's 8.25% Step Up Convertible Junior Subordinated Debentures in the aggregate principal amount of $154,650,000 (the "Original Convertible Debentures"). Distributions on the Original Convertible Trust Preferred Securities were payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the Original Convertible Debentures, the sole assets of the Trust. Distributions were payable only to the extent payments were made in respect to the Original Convertible Debentures. The Company received $145,207,000 in net proceeds, after original issue discount of 3% from the liquidation amount of the Original Convertible Trust Preferred Securities and transaction expenses, pursuant to the above transactions. The proceeds were used to pay down the Company's Credit Facilities. The Original Convertible Trust Preferred Securities were convertible into shares of Class A Common Stock, at the direction of the holders of the Original Convertible Trust Preferred Securities made to the conversion agent to exchange such Original Convertible Trust Preferred Securities for a portion of the Original Convertible Debentures held by the Trust on the basis of one security for each $1,000 principal amount of Original Convertible Debentures, and immediately convert such amount of Original Convertible Debentures into Class A Common Stock at an initial rate of 85.47 shares of Class A Common Stock per $1,000 principal amount of the Original Convertible Debentures (which is equivalent to a conversion price of $11.70 per share of Class A Common Stock). The Original Convertible Debentures had a 20-year maturity and were non-callable for five years. Upon repayment of the Original Convertible Debentures at maturity or upon redemption, the proceeds of such repayment or payment would have been simultaneously paid and applied to redeem, among other things, the Original Convertible Trust Preferred Securities. If the securities were not redeemed by September 30, 2004, the distribution rate would have stepped up by 0.75% per annum for each annual period thereafter. The 3% ($4,500,000) discount and transaction fees on the issuance were amortized over the expected life of the Original Convertible Trust Preferred Securities. F-22 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. Convertible Trust Preferred Securities, continued On May 10, 2000, the Company modified the terms of the $150 million aggregate liquidation amount Convertible Trust Preferred Securities. In connection with the modification, the then outstanding Convertible Trust Preferred Securities were canceled and new variable step up convertible trust preferred securities with an aggregate liquidation amount of $150,000,000 (the "New Convertible Trust Preferred Securities") were issued to the holders of the canceled securities in exchange therefore, and the Convertible Debentures were canceled and new 8.25% step up convertible junior subordinated debentures in the aggregate principal amount of $92,524,000 (the "New Convertible Debentures") and new 13% step up non-convertible junior subordinated debentures in the aggregate principal amount of $62,126,000 (the "New Non-Convertible Debentures" and together with the New Convertible Debentures, the "New Debentures") were issued to the Trust, as the holder of the canceled bonds, in exchange therefore. The liquidation amount of the New Convertible Trust Preferred Securities is divided into $89,742,000 of convertible amount (the "Convertible Amount") and $60,258,000 of non-convertible amount (the "Non-Convertible Amount"), the distribution, redemption and, as applicable, conversion terms of which, mirror the interest, redemption and, as applicable, conversion terms of the New Convertible Debentures and the New Non-Convertible Debentures, respectively, held by the Trust. Distributions on the New Convertible Trust Preferred Securities are payable quarterly in arrears on each calendar quarter-end and correspond to the payments of interest made on the New Debentures, the sole assets of the Trust. Distributions are payable only to the extent payments are made in respect to the New Debentures. The New Convertible Trust Preferred Securities initially bear a blended coupon rate of 10.16% per annum which rate will vary as the proportion of outstanding Convertible Amount to the outstanding Non-Convertible Amount changes and will step up in accordance with the coupon rate step up terms applicable to the Convertible Amount and the Non-Convertible Amount. The Convertible Amount bears a coupon rate of 8.25% per annum through March 31, 2002 and increases on April 1, 2002 to the greater of (i) 10.00% per annum, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter or (ii) a percentage per annum equal to the quarterly dividend paid on a common share multiplied by four and divided by $7.00. The Convertible Amount is convertible into shares of Class A Common Stock, in increments of $1,000 in liquidation amount, at a conversion price of $7.00 per share. The Convertible Amount is redeemable by the Company, in whole or in part, on or after September 30, 2004. The Non-Convertible Amount bears a coupon rate of 13.00% per annum through September 30, 2004, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter. The Non-Convertible Amount is redeemable by the Company, in whole or in part, at any time. For financial reporting purposes, the Trust is treated as a subsidiary of the Company and, accordingly, the accounts of the Trust are included in the consolidated financial statements of the Company. Intercompany transactions between the Trust and the Company, including the Original Convertible and New Debentures, have been eliminated in the consolidated financial statements of the Company. The Original Convertible Trust Preferred Securities and the New Convertible Trust Preferred Securities are presented as a separate caption between liabilities and stockholders' equity ("Convertible Trust Preferred Securities") in the consolidated balance sheet of the Company. Distributions on the Original Convertible Trust Preferred Securities and the New Convertible Trust Preferred Securities are recorded, net of the tax benefit, in a separate caption immediately following the provision for income taxes in the consolidated statements of income of the Company. F-23 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity Authorized Capital Upon consummation of the Reorganization (see Note 1), each outstanding Class A Common Share of the Predecessor was converted into one share of Class A Common Stock of the Company, and each outstanding Class A Preferred Share of the Predecessor was converted into one share of Class A Preferred Stock of the Company. As a result, all of the Predecessor's previously issued Class A Common Shares have been reclassified as shares of Class A Common Stock and all of the Predecessor's previously issued Class A Preferred Shares have been reclassified as shares of Class A Preferred Stock. The Company has the authority to issue up to 300,000,000 shares of stock, consisting of (i) 100,000,000 shares of Class A Common Stock, (ii) 100,000,000 shares of Class B Common Stock, and (iii) 100,000,000 shares of Preferred Stock. The board of directors is generally authorized to issue additional shares of authorized stock without stockholders' approval. Common Stock Except as described herein or as required by law, all shares of Class A Common Stock and shares of Class B Common Stock are identical and entitled to the same dividend, distribution, liquidation and other rights. The Class A Common Stock are voting shares entitled to vote on all matters presented to a vote of stockholders, except as provided by law or subject to the voting rights of any outstanding Preferred Stock. The shares of Class B Common Stock do not have voting rights and are not counted in determining the presence of a quorum for the transaction of business at any meeting of the stockholders of the Company. Holders of record of shares of Class A Common Stock and shares of Class B Common Stock on the record date fixed by the Company's board of directors are entitled to receive such dividends as may be declared by the board of directors subject to the rights of the holders of any outstanding Preferred Stock. Each share of Class A Common Stock is convertible at the option of the holder thereof into one share of Class B Common Stock and, subject to certain conditions; each share of Class B Common Stock is convertible at the option of the holder thereof into one share of Class A Common Stock. The Company is restricted from declaring or paying any dividends on its Class A Common Stock or Class B Common Stock unless all accrued and unpaid dividends with respect to any outstanding Preferred Stock have been paid in full. Preferred Stock In connection with the Reorganization, the Company created two classes of Preferred Stock, Class A Preferred Stock and the Class B Preferred Stock. As described above, upon consummation of the Reorganization, the Predecessor's outstanding Class A Preferred Shares were converted into shares of the Company's Class A Preferred Stock. F-24 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity, continued Except as described herein or as required by law, both classes of Preferred Stock are identical and entitled to the same dividend, distribution, liquidation and other rights. The holders of the Class A Preferred Stock are entitled to vote together with the holders of the Class A Common Stock as a single class on all matters submitted to a vote of stockholders. Each share of Class A Preferred Stock entitles the holder thereof to a number of votes per share equal to the number of shares of Class A Common Stock into which such shares of Class A Preferred Stock is then convertible. Except as described herein, the holders of Class B Preferred Stock do not have voting rights and are not counted in determining the presence of a quorum for the transaction of business at a stockholders' meeting. The affirmative vote of the holders of a majority of the outstanding Preferred Stock, voting together as a separate single class, except in certain circumstances, have the right to approve any merger, consolidation or transfer of all or substantially all of the assets of the Company. Holders of the Preferred Stock are entitled to receive, when and as declared by the board of directors, cash dividends per share at the rate of 9.5% per annum on a per share price of $2.69. Such dividends shall accrue (whether or not declared) and, to the extent not paid for any dividend period, will be cumulative. Dividends on the authorized Preferred Stock are payable, when and as declared, semi-annually, in arrears, on December 26 and June 25 of each year. Each share of Class A Preferred Stock is convertible at the option of the holder thereof into an equal number of shares of Class B Preferred Stock, or into a number of shares Class A Common Stock equal to the ratio of (x) $2.69 plus an amount equal to all dividends per share accrued and unpaid thereon as of the date of such conversion to (y) the conversion price in effect as of the date of such conversion. Each share of Class B Preferred Stock is convertible at the option of the holder thereof, subject to certain conditions, into an equal number of shares of Class A Preferred Stock or into a number of shares of Class B Common Stock equal to the ratio of (x) $2.69 plus an amount equal to all dividends per share accrued and unpaid thereon as of the date of such conversion to (y) the conversion price in effect as of the date of such conversion. The conversion price in effect as of December 31, 2000 is $2.69 and therefore the outstanding shares of Preferred Stock are convertible into an equal number of shares of Common Stock. Common and Preferred Stock Outstanding As of December 31, 1998, there were 12,267,658 shares of Class A Preferred Stock issued and outstanding, no shares of Class B Preferred Stock were issued and outstanding, 18,158,816 shares of Class A Common Stock were issued and outstanding and no shares of Class B Common Stock were issued and outstanding. The 12,267,658 shares of Class A Preferred Stock outstanding at December 31, 1998 were originally issued and purchased by Veqtor on July 15, 1997 for an aggregate purchase price of approximately $33 million (see Note 1). Until August 10, 1999 (the "Conversion Date"), Veqtor owned 6,959,593 of the outstanding shares of Class A Common Stock and all 12,267,658 of the outstanding shares of Class A Preferred Stock. Veqtor was then controlled by the chairman of the board, the vice chairman and chief executive officer and the then vice chairman and chairman of the executive committee of the board of directors of the Company in their capacities as the persons controlling the common members of Veqtor. Prior to the Conversion Date, the common members owned approximately 48% of the equity ownership of Veqtor and three commercial banks, as preferred members of Veqtor, owned the remaining 52% of the equity ownership of Veqtor. F-25 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity, continued On the Conversion Date, in accordance with a commitment made by Veqtor and its common members, Veqtor redeemed the outstanding preferred units in Veqtor held by its preferred members in exchange for their pro rata portion of the Company's stock owned by Veqtor. Due to the regulatory status of the redeemed preferred members as bank holding companies or affiliates thereof, prior to effecting the transfer of stock upon the redemption, Veqtor was obligated to convert 2,293,784 shares of Class A Common Stock into an equal number of shares of Class B Common Stock and 4,043,248 shares of Class A Preferred Stock into an equal number of shares of Class B Preferred Stock. Pursuant to provisions of the Company's charter relating to compliance with the Bank Holding Company Act of 1956, as amended ("BHCA"), bank holding companies or their affiliates can own no more than 4.9% of the voting stock of the Company. Therefore, in connection with the redemption, the redeemed preferred members received 1,292,103 shares of Class A Common Stock, 2,293,784 shares of non-voting Class B Common Stock, 2,277,585 shares of Class A Preferred Stock and 4,043,248 shares of non-voting Class B Preferred Stock. After the Conversion Date until the Separation Transaction (as defined below), the common members of Veqtor owned 100% of the equity ownership of Veqtor. On September 30, 1999, in accordance with a commitment made by Veqtor and its common members, all 5,946,825 shares of Class A Preferred Stock were, upon exercise of existing conversion rights, converted into an equal number of shares of Class A Common Stock. As a result of the foregoing redemption and subsequent conversion transactions, as of September 30, 1999, Veqtor owned 9,320,531 (or approximately 42.4%) of the outstanding shares of Class A Common Stock and the Company's annual dividend on Preferred Stock had been reduced from $3,135,000 to $1,615,000. In December 1999, a series of coordinated transactions (the "Separation Transaction") were effected in which beneficial ownership of an aggregate of 6,128,243 shares of the 9,320,531 shares of Class A Common Stock previously owned by Veqtor prior to the Separation Transaction were transferred to partnerships controlled by the vice chairman and chief executive officer of the Company (the "Klopp LP"), the then vice chairman and chairman of the executive committee of the board of directors of the Company (the "Hatkoff LP") and certain of the former partners of CTILP (the "Other Partnerships"). Each of the partnerships acquired direct beneficial ownership of such number of shares of Class A Common Stock equal to the number of shares in which the persons then controlling such partnerships held an indirect pecuniary interest prior to the Separation Transaction. Veqtor retained direct beneficial ownership of 3,192,288 shares of Class A Common Stock, which represents the number of shares in which the persons then controlling Veqtor held an indirect pecuniary interest prior to the Separation Transaction. Upon consummation of the Separation Transaction by means of the foregoing transactions, Hatkoff LP, Klopp LP, Veqtor and the Other Partnerships acquired (or, in the case of Veqtor, retained) direct beneficial ownership of 2,330,132, 2,330,132, 3,192,288 and 1,467,979 shares of Class A Common Stock, respectively. On January 1, 2000, ownership and control of Veqtor was transferred to a trust for the benefit of the family of the Company's chairman of the board. During March 2000, the Company commenced an open market share repurchase program under which the Company was authorized to purchase, from time to time, up to two million shares of Class A Common Stock. In May 2000, the Company announced an increase in the number of shares purchasable pursuant to its share repurchase program to four million shares. As of December 31, 2000, the Company had purchased and retired 2,564,400 shares of Class A Common Stock at an average price of $4.14 per share (including commissions). F-26 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity, continued In consideration of, among other things, Citigroup's $400 million capital commitment to the Mezzanine Funds, the Company agreed in the Venture Agreement to issue affiliates of Citigroup warrants to purchase shares of Class A Common Stock. The Company issued an initial warrant to purchase 4.25 million shares of Class A Common Stock and has agreed, under certain circumstances, to issue additional warrants to purchase up to 5.25 million shares of Class A Common Stock. See Note 2 for a description of the terms of the warrants and the circumstances under which the additional warrants may be issued. The value of the warrants at issuance date, $1,360,000, was capitalized and will be amortized over the anticipated lives of the Mezzanine Funds. During 2000, the Company agreed to repurchase 630,701 shares of Class A Common Stock, 1,520,831 shares of Class B Common Stock, 1,518,390 shares of Class A Preferred Stock and 2,274,110 shares of Class B Preferred Stock for approximately $29.1 million concurrent with the closing of the Company's second Mezzanine Fund in 2001. The seller has agreed to invest the proceeds received in the second Mezzanine Fund. Earnings per Share The following table sets forth the calculation of Basic and Diluted EPS for the years ended December 31, 2000 and 1999:
Year Ended December 31, 2000 Year Ended December 31, 1999 --------------------------------- ------------------------------------ Per Share Per Amount Net Income Shares Amount Net Income Shares Amount ---------- ------ ------ ---------- ------ ------ Basic EPS: Net earnings per share of Common Stock $8,146,000 23,171,057 $ 0.35 $14,701,000 21,334,412 $ 0.69 ======== ======== Effect of Dilutive Securities: Options outstanding for the purchase of Common Stock -- 37 -- -- Future commitments for stock unit awards for the issuance of Common Stock -- 200,000 -- 300,000 Convertible Trust Preferred Securities exchangeable for shares of Common Stock -- -- 6,966,000 12,820,513 Convertible Preferred Stock 1,615,000 6,320,833 2,375,000 9,269,806 ---------- --------- ---------- ---------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $9,761,000 29,691,927 $ 0.33 $24,042,000 43,724,731 $ 0.55 =========== ========== ====== =========== ========== ========
F-27 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Stockholders' Equity, continued The following table sets forth the calculation of Basic and Diluted EPS for the year ended December 31, 1998: Year Ended December 31, 1998 ---------------------------------- Net Income Shares Per Share Amount ----------- ---------- --------- Basic EPS: Net earnings per share of Common Stock $10,308,000 18,208,812 $ 0.57 ========= Effect of Dilutive Securities: Options outstanding for the purchase of Common Stock -- 148,989 Convertible Preferred Stock 3,135,000 12,267,658 ----------- ----------- Diluted EPS: Net earnings per share of Common Stock and Assumed Conversions $13,443,000 30,625,459 $ 0.44 =========== =========== ========= 16. General and Administrative Expenses General and administrative expenses for the years ended December 31, 2000, 1999 and 1998 consist of (in thousands): 2000 1999 1998 ------------- ------------- ------------- Salaries and benefits $11,280 $12,914 $11,311 Professional services 1,170 2,352 3,138 Other 2,989 2,079 2,596 ------------- ------------- ------------- Total $15,439 $17,345 $17,045 ============= ============= ============= 17. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The provision for income taxes for the years ended December 31, 2000 and 1999 is comprised as follows (in thousands): 2000 1999 1998 ----------- ----------- ----------- Current Federal $12,561 $14,538 $7,226 State 4,493 5,176 2,740 Local 4,057 4,673 2,480 Deferred Federal (2,025) (1,430) (2,282) State (697) (492) (419) Local (629) (445) (378) ----------- ----------- ----------- Provision for income taxes $17,760 $22,020 $9,367 =========== =========== =========== F-28 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 17. Income Taxes, continued The Company has federal net operating loss carryforwards ("NOLs") as of December 31, 2000 of approximately $9.4 million. Such NOLs expire through 2012. Due to CRIL's purchase of 6,959,593 Common Shares from the Predecessor's former parent in January 1997 and another prior ownership change, a substantial portion of the NOLs are limited for federal income tax purposes to approximately $1.4 million annually. Any unused portion of such annual limitation can be carried forward to future periods. The reconciliation of income tax computed at the U.S. federal statutory tax rate (35%) to the effective income tax rate for the years ended December 31, 2000, 1999 and 1998 are as follows (in thousands): 2000 1999 1998 ---------------- ---------------- ----------------- $ % $ % $ % -------- ------ -------- ------ ------- -------- Federal income tax at statutory rate $12,405 35.0% $16,122 35.0% $ 9,013 35.0% State and local taxes, net of federal tax benefit 4,696 13.3% 5,793 12.6% 2,874 11.2% Utilization of net operating loss carryforwards (490) (1.4)% (495) (1.1)% (2,755) (10.7)% Compensation in excess of deductible limits 851 2.4% 566 1.2% 221 0.9% Other 298 0.8% 34 0.1% 14 0.0% -------- ------ -------- ------ ------- -------- $17,760 50.1% $22,020 47.8% $9,367 36.4% ======== ====== ======== ====== ======= ======== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax reporting purposes. The components of the net deferred tax assets are as follows (in thousands): December 31, ----------------------- 2000 1999 ----------- ----------- Net operating loss carryforward $3,298 $3,889 Reserves on other assets and for possible credit losses 9,047 6,312 Other 1,411 795 ----------- ----------- Deferred tax assets 13,756 10,966 Valuation allowance (5,037) (5,628) ----------- ----------- $8,719 $5,368 =========== =========== The Company recorded a valuation allowance to reserve a portion of its net deferred assets in accordance with SFAS No. 109. Under SFAS No. 109, this valuation allowance will be adjusted in future years, as appropriate. However, the timing and extent of such future adjustments cannot presently be determined. 18. Interest Rate Risk Management The Company uses interest rate swaps and interest rate caps to reduce the Company's exposure to interest rate fluctuations on certain loans and investments and to provide more stable spreads between investment yields and the rates on their financing sources. In connection with the purchase of the BB CMBS Portfolio described in Note 5 and the related term redeemable securities contract, an affiliate of the seller entered into interest rate swaps with the Company for the full duration of the BB CMBS Portfolio securities thereby providing a hedge for interest rate risk. The notional values of the swaps were tied to the amount of debt for the term of the debt and then to the assets for the remaining terms of the assets. F-29 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 18. Interest Rate Risk Management, continued In 2000, the Company terminated a swap that was outstanding at December 31, 1999, in connection with the payoff of a loan resulting in a gain of $322,000. In 1999, the Company terminated two swaps and partially terminated a third swap that was outstanding at December 31, 1998, in connection with the payoff of a loan and the sale of a loan resulting in a payment of $323,000. At December 31, 2000, the Company has entered into interest rate swap agreements for notional amounts totaling approximately $233,025,000 with two investment grade financial institution counterparties whereby the Company swapped fixed rate instruments, which averaged approximately 6.02% at December 31, 2000 and 6.11% for the year then ended, for floating rate instruments equal to LIBOR which averaged approximately 6.73% at December 31, 2000 and 6.51% for the year then ended. Amounts arising from the differential are recognized as an adjustment to interest income related to the earning asset. If an interest rate swap or interest rate cap is sold or terminated and cash is received or paid, the gain or loss is deferred and recognized when the hedged asset is sold or matures. The agreements mature at varying times from September 2001 to December 2014 with a remaining average term of 118 months. The Company purchased an interest rate cap with a notional amount of $18.75 million at a cost of approximately $71,000. The interest rate cap provides for payments to the Company if LIBOR exceeds 11.25% during the period from November 2003 to November 2007. The Company is exposed to credit loss in the event of non-performance by the counterparties (which are banks whose securities are rated investment grade) to the interest rate swap and cap agreements, although it does not anticipate such non-performance. The counterparties would bear the interest rate risk of such transactions as market interest rates increase. 19. Employee Benefit Plans Employee 401(k) and Profit Sharing Plan In 1999, the Company instituted a 401(k) and profit sharing plan that allows eligible employees to contribute up to 15% of their salary into the plan on a pre-tax basis, subject to annual limits. The Company has committed to make contributions to the plan equal to 3% of all eligible employees' compensation subject to annual limits and may make additional contributions based upon earnings. The Company's contribution expense for the years ended December 31, 2000 and 1999, was $187,000 and $191,000, respectively. 1997 Long-Term Incentive Stock Plan In May 1997, the board of trustees of the Predecessor adopted the original 1997 long-term incentive share plan, which was approved by the Predecessor's shareholders, and thereafter amended to reflect the Predecessor's name change, in July 1997. In May 1998, the Predecessor's board of trustees originally adopted, subject to shareholder approval, the original form of an amended and restated 1997 long-term incentive share plan, which was subsequently approved at the Predecessor's 1998 annual meeting of shareholders on January 28, 1999 (the "1998 Annual Meeting"). Upon consummation of the Reorganization, the Company succeeded to and assumed the amended and restated plan which has been amended to reflect the succession of the Company (the plan is hereinafter referred to as the "Incentive Stock Plan"). The Incentive Stock Plan permits the grant of nonqualified stock option ("NQSO"), incentive stock option ("ISO"), restricted stock, stock appreciation right ("SAR"), performance unit, performance stock and stock unit awards. A maximum of 2,294,751 shares of Class A Common Stock may be issued during the fiscal year 2001 pursuant to awards under the Incentive Stock Plan and the Director Stock Plan (as defined below) in addition to the shares subject to awards outstanding under the two plans at December 31, 2000. The maximum number of shares that may be subject to awards to any employee during the term of the plan may not exceed 500,000 shares and the maximum amount payable in cash to any employee with respect to any performance period pursuant to any performance unit or performance stock award is $1.0 million. F-30 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Employee Benefit Plans, continued The ISOs shall be exercisable no more than ten years after their date of grant and five years after the grant in the case of a 10% stockholder and vest over a period of three years with one-third vesting at each anniversary date. Payment of an option may be made with cash, with previously owned Class A Common Stock, by foregoing compensation in accordance with performance compensation committee or compensation committee rules or by a combination of these. Restricted stock may be granted under the Incentive Stock Plan with performance goals and periods of restriction as the board of directors may designate. The performance goals may be based on the attainment of certain objective and/or subjective measures. In 2000, 1999 and 1998, the Company issued 230,304 shares, 104,167 shares and 72,500 shares, respectively, of restricted stock, of which 62,374 shares, 32,500 shares and 17,500 shares, respectively, were canceled upon the resignation of employees prior to vesting. The shares of restricted stock issued in 2000 vest one-third on each of the following dates: February 1, 2001, February 1, 2002 and February 1, 2003. The shares of restricted stock issued in 1999 vest one-third on each of the following dates: February 2, 2000, February 2, 2001 and February 2, 2002. The shares of restricted stock issued in 1998 vest one-third on each of the following dates: January 30, 2001, January 30, 2002 and January 30, 2003. The Company also granted 52,083 shares of performance based restricted stock for which none of the performance goals have been met and the shares have not been issued. The Incentive Stock Plan also authorizes the grant of stock units at any time and from time to time on such terms as shall be determined by the board of directors or administering compensation committee. Stock units shall be payable in Class A Common Stock upon the occurrence of certain trigger events. The terms and conditions of the trigger events may vary by stock unit award, by the participant, or both. The following table summarizes the activity under the Incentive Stock Plan for the years ended December 31, 2000, 1999 and 1998: Weighted Average Options Exercise Price Exercise Outstanding per Share Price per Share ---------- ------------------ ---------------- Outstanding at January 1, 1998 607,000 $6.00 $ 6.00 Granted in 1998 907,250 $9.00 - $11.38 9.93 Exercised in 1998 (1,666) $6.00 6.00 Canceled in 1998 (243,500) $6.00 - $10.00 7.81 ---------- ------------- Outstanding at December 31, 1998 1,269,084 $6.00 - $11.38 8.46 Granted in 1999 352,000 $6.00 6.00 Canceled in 1999 (387,167) $6.00 - $11.38 8.06 ---------- ------------- Outstanding at December 31, 1999 1,233,917 $6.00 - $11.38 7.89 Granted in 2000 467,250 $4.125 - $6.00 4.94 Canceled in 2000 (281,667) $4.125 - $10.00 7.34 ---------- ------------- Outstanding at December 31, 2000 1,419,500 $4.125 - $10.00 $ 7.04 ========== ============= At December 31, 2000, 1999 and 1998, 745,505, 487,761 and 272,834, respectively, of the options were exercisable. At December 31, 2000, the outstanding options have various remaining contractual lives ranging from 6.54 to 9.72 years with a weighted average life of 7.74 years. F-31 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Employee Benefit Plans, continued 1997 Non-Employee Director Stock Plan In May 1997, the board of trustees of the Predecessor adopted the original 1997 non-employee trustee share plan, which was approved by the Predecessor's shareholders, and thereafter amended to reflect the Predecessor's name change, in July 1997. In May 1998, the Predecessor's board of trustees originally adopted, subject to shareholder approval, the original form of an amended and restated 1997 non-employee trustee share plan which was subsequently approved at the Predecessor's 1998 Annual Meeting. Upon consummation of the Reorganization, the Company succeeded to and assumed the amended and restated plan, which has been amended to reflect the succession of the Company (the plan is hereinafter referred to as the "Director Stock Plan"). The Director Stock Plan permits the grant of NQSO, restricted stock, SAR, performance unit, stock and stock unit awards. A maximum of 2,294,751 shares of Class A Common Stock may be issued during the fiscal year 2001 pursuant to awards under the Director Stock Plan and the Incentive Stock Plan, in addition to the shares subject to awards outstanding under the two plans at December 31, 2000. The board of directors shall determine the purchase price per share of Class A Common Stock covered by a NQSO granted under the Director Stock Plan. Payment of a NQSO may be made with cash, with previously owned shares of Class A Common Stock, by foregoing compensation in accordance with board rules or by a combination of these payment methods. SARs may be granted under the plan in lieu of NQSOs, in addition to NQSOs, independent of NQSOs or as a combination of the foregoing. A holder of a SAR is entitled upon exercise to receive shares of Class A Common Stock, or cash or a combination of both, as the board of directors may determine, equal in value on the date of exercise to the amount by which the fair market value of one share of Class A Common Stock on the date of exercise exceeds the exercise price fixed by the board on the date of grant (which price shall not be less than 100% of the market price of a share of Class A Common Stock on the date of grant) multiplied by the number of shares in respect to which the SARs are exercised. Restricted stock may be granted under the Director Stock Plan with performance goals and periods of restriction as the board of directors may designate. The performance goals may be based on the attainment of certain objective and/or subjective measures. The Director Stock Plan also authorizes the grant of stock units at any time and from time to time on such terms as shall be determined by the board of directors. Stock units shall be payable in shares of Class A Common Stock upon the occurrence of certain trigger events. The terms and conditions of the trigger events may vary by stock unit award, by the participant, or both. The following table summarizes the activity under the Director Stock Plan for the years ended December 31, 2000, 1999 and 1998: Weighted Options Exercise Price Average Outstanding per Share Exercise Price per Share ---------- ------------------ ---------------- Outstanding at January 1, 1998 50,000 $6.00 6.00 Granted in 1998 205,000 $10.00 10.00 ---------- ------------- Outstanding at December 31, 1998 255,000 $6.00-$10.00 9.22 Granted in 1999 - $ - - ------------- ---------- Outstanding at December 31, 1999 255,000 $6.00-$10.00 9.22 Granted in 2000 - $ - - ---------- ------------- Outstanding at December 31, 2000 255,000 $6.00-$10.00 $ 9.22 ========== ============= At December 31, 2000, 1999 and 1998, 186,668, 101,688 and 16,666, respectively, of the options were exercisable. At December 31, 2000, the outstanding options have a remaining contractual life of 6.54 years to 7.09 years with a weighted average life of 6.98 years. F-32 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 19. Employee Benefit Plans, continued Accounting for Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the FASB in October 1996. SFAS No. 123 encourages the adoption of a new fair-value based accounting method for employee stock-based compensation plans. SFAS No. 123 also permits companies to continue accounting for stock-based compensation plans as prescribed by APB Opinion No. 25. However, companies electing to continue accounting for stock-based compensation plans under APB Opinion No. 25, must make pro forma disclosures as if the company adopted the cost recognition requirements under SFAS No. 123. The Company has continued to account for stock-based compensation under APB Opinion No. 25. Accordingly, no compensation cost has been recognized for the Incentive Stock Plan or the Director Stock Plan in the accompanying consolidated statements of operations as the exercise price of the stock options granted thereunder equaled the market price of the underlying stock on the date of the grant. Pro forma information regarding net income and net earnings per common share has been estimated at the date of the grant using the Black-Scholes option-pricing model based on the following assumptions: 2000 1999 1998 ------------- ------------- ------------- Risk-free interest rate 6.65% 5.2% 5.2% Volatility 40.0% 40.0% 40.0% Dividend yield 0.0% 0.0% 0.0% Expected life (years) 5.0 5.0 5.0 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the Company's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted average fair value of each stock option granted during the years ended December 31, 2000, 1999 and 1998 were $1.58, $2.41and $4.44, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended December 31, 2000, 1999 and 1998 is as follows (in thousands, except for net earnings (loss) per share of common stock):
2000 1999 1998 ------------------- ----------------- ------------------- As As As reported Pro forma reported Pro forma reported Pro forma -------- ---------- --------- --------- --------- --------- Net income (loss) $9,761 $9,287 $17,076 $16,274 $13,443 $12,214 Net earnings (loss) per share of common stock: Basic $ 0.35 $ 0.33 $ 0.69 $ 0.62 $ 0.57 $ 0.50 Diluted $ 0.33 $ 0.31 $ 0.55 $ 0.53 $ 0.44 $ 0.40
The pro forma information presented above is not representative of the effect stock options will have on pro forma net income or earnings per share for future years. F-33 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 20. Fair Values of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount of cash on hand and money market funds is considered to be a reasonable estimate of fair value. Other available-for-sale securities: The fair value was determined based upon the market value of the securities. Commercial mortgage-backed securities: The fair value was obtained by obtaining quotes from a market maker in the security. Certificated mezzanine investments: The fair value was obtained by obtaining a quote from a market maker in the security. Loans receivable, net: The fair values were estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics. Interest rate cap agreement: The fair value was estimated based upon the amount at which similar financial instruments would be valued. Credit Facilities: The Credit Facilities are at floating rates of interest for which the spread over LIBOR is at rates that are similar to those in the market currently. Therefore, the carrying value is a reasonable estimate of fair value. Repurchase obligations: The repurchase obligations, which are generally short term in nature, bear interest at a floating rate and the book value is a reasonable estimate of fair value. Term redeemable securities contract: The fair value was estimated based upon the amount at which similar privately placed financial instruments would be valued. Convertible Trust Preferred Securities: The fair value was estimated based upon the amount at which similar privately placed financial instruments would be valued. Interest rate swap agreements: The fair values were estimated based upon the amount at which similar financial instruments would be valued. F-34 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 20. Fair Values of Financial Instruments, continued The carrying amounts of all assets and liabilities approximate the fair value except as follows (in thousands): December 31, 2000 December 31, 1999 ---------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Financial Assets: Loans receivable, net $ 349,089 $ 342,446 $ 509,811 $ 494,302 CMBS 215,516 216,487 214,058 200,726 Interest Rate Swap Agreements - (971) - 13,332 Interest rate cap agreement 36 57 48 46 Unrecognized Financial Instruments: Interest Rate Swap Agreements - (574) - 3,839 21. Supplemental Schedule of Non-Cash and Financing Activities Interest paid on the Company's outstanding debt for 2000, 1999 and 1998 was $48,531,000, $49,103,000 and $25,184,000, respectively. Income taxes paid by the Company in 2000, 1999 and 1998 were $15,612,000, $17,165,000 and $7,866,000, respectively. 22. Transactions with Related Parties The Company entered into a consulting agreement, dated as of July 15, 1997, with a director of the Company. The consulting agreement had an initial term of one year that was extended to December 31, 1998 and terminated at that date. Pursuant to the agreement, the director provided consulting services for the Company including strategic planning, identifying and negotiating mergers, acquisitions, joint ventures and strategic alliances, and advising as to capital structure matters. During the year ended December 31, 1998, the Company incurred expenses of $165,000 in connection with this agreement. The Company entered into a consulting agreement, dated as of January 1, 1998, with another director of the Company. The consulting agreement had an initial term of one year and has been extended to December 31, 2000. Pursuant to the agreement, the director provides consulting services for the Company including new business identification, strategic planning and identifying and negotiating mergers, acquisitions, joint ventures and strategic alliances. During each of the years ended December 31, 2000, 1999 and 1998, the Company incurred expenses of $96,000 in connection with this agreement. The Company pays EGI, an affiliate under common control of the chairman of the board of directors, for certain corporate services provided to the Company. These services include consulting on legal matters, tax matters, risk management, investor relations and investment banking. During the years ended December 31, 2000, 1999 and 1998, the Company incurred $85,000, $86,000 and $216,000, respectively, of expenses in connection with these services. During the year ended December 31, 1999, the Company, through two of its acquired subsidiaries, earned asset management fees pursuant to agreements with entities in which two of the executive officers and directors of the Company have an equity interest and serve as officers, members or as a general partner thereof. During the years ended December 31, 2000, 1999 and 1998, the Company earned $16,000, $391,000 and $1,682,000, respectively, from such agreements, which have been included in the consolidated statements of operations. F-35 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 23. Commitments and Contingencies Leases The Company leases premises and equipment under operating leases with various expiration dates. Minimum annual rental payments at December 31, 2000 are as follows (in thousands): Years ending December 31: - ------------------------- 2001 $ 806 2002 806 2003 780 2004 870 2005 899 Thereafter 2,248 ----------- $6,409 =========== Rent expense for office space and equipment amounted to $1,017,000, $470,000 and $530,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Litigation In the normal course of business, the Company is subject to various legal proceedings and claims, the resolution of which, in management's opinion, will not have a material adverse effect on the consolidated financial position or the results of operations of the Company. Employment Agreements The Company had employment agreements with three of its executive officers, one of which was terminated on December 29, 2000. The employment agreements with two of the executive officers provide for five-year terms of employment commencing as of July 15, 1997. Such agreements contain extension options that extend such agreements automatically unless terminated by notice, as defined, by either party. The employment agreements provide for base annual salaries of $500,000, which has been increased to $600,000, and will be increased each calendar year to reflect increases in the cost of living and will otherwise be subject to increase at the discretion of the board of directors. Such executive officers are also entitled to annual incentive cash bonuses to be determined by the board of directors based on individual performance and the profitability of the Company and are participants in the Incentive Stock Plan and other employee benefit plans of the Company. One of the employment agreements was mutually terminated upon resignation of one executive officer effective December 29, 2000. Under the terms of the separation agreement, the Company made no payments under the terms of the employment agreement above. F-36 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 23. Commitments and Contingencies, continued The employment agreement with one executive officer provides for a term of employment commencing as of August 15, 1998 and expiring on January 2, 2002, which shall be automatically extended until December 31, 2002 unless, prior to April 7, 2001, either party shall have delivered to the other a non-renewal notice. The employment agreement provides for a base annual salary of $350,000, which will be increased each calendar year to reflect increases in the cost of living and may otherwise be further increased at the discretion of the board of directors. The employment agreement also provides for annual incentive cash bonuses for calendar years 1999 through 2001 to be determined by the board of directors based on individual performance and the profitability of the Company, provided that the minimum of each of said three annual incentive bonuses shall be no less than $750,000. In addition to the base salary and incentive bonus, the executive received during calendar year 1999, a special cash payment of $1,200,000 of which $850,000 was expensed in 1998. The executive is entitled to participate in employee benefit plans of the Company at levels determined by the board of directors and commensurate with his position and receives Company provided life and disability insurance. In accordance with the agreement, the executive was granted, pursuant to the Incentive Stock Plan, options to purchase 100,000 shares of Class A Common Stock with an exercise price of $9.00 immediately vested and exercisable as of the date of the agreement. The Company also agreed to grant, pursuant to the Incentive Stock Plan, fully vested shares of Class A Common Stock, 50,000 shares on January 1, 1999 and 100,000 shares on each of the three successive anniversaries thereof. 24. Segment Reporting In 1998, the Company adopted a new accounting pronouncement requiring disclosure about the Company's segments based on a management approach. In 1998, the Company operated as two segments: Lending/Investment and Advisory and had an internal information system that produced performance and asset data for its two segments along service lines. During the first quarter of 1999, the Company reorganized the structure of its internal organization by merging its Lending/Investment and Advisory segments and thereby no longer managing its operations as separate segments. The Company has only one reportable segment that includes operations, lending/investment and advisory activities. As such, separate segment reporting is not presented for 1999 as there is only one segment and the financial information for that segment is the same as the information in the consolidated financial statements. The restatement of the 1998 segment information for the change in the reportable segments is not presented as again it is the same as the information in the consolidated financial statements. In 1998, the Lending and Investment segment included all of the Company's activities related to the loan and investment portfolio and the financing thereof. In 1998, the Advisory segment included all of the Company's activities related to fee services provided to real estate investors, owners, developers and financial institutions in connection with mortgage financings, securitizations, joint ventures, debt and equity investments, mergers and acquisitions, portfolio evaluations, restructurings and disposition programs. The segment also provided asset management and advisory services relating to various mortgage pools and real estate properties. F-37 Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 25. Summary of Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2000, 1999 and 1998 (in thousands except per share data): March 31 June 30 September December 31 30 --------- --------- ----------- -------------- 2000 - ---- Revenues $24,220 $23,722 $22,553 $23,697 Net income $ 2,919 $ 1,154 $ 2,417 $ 3,271 Preferred Stock dividends $ 404 $ 404 $ 404 $ 403 Net income per share of Common Stock: Basic $ 0.10 $ 0.03 $ 0.09 $ 0.13 Diluted $ 0.09 $ 0.03 $ 0.08 $ 0.10 1999 - ---- Revenues $25,865 $22,930 $24,338 $34,513 Net income $ 3,792 $ 3,025 $ 3,050 $ 7,209 Preferred Stock dividends $ 784 $ 784 $ 403 $ 404 Net income per share of Common Stock: Basic $ 0.16 $ 0.12 $ 0.11 $ 0.28 Diluted $ 0.12 $ 0.10 $ 0.10 $ 0.20 1998 - ---- Revenues $11,207 $20,166 $21,872 $21,020 Net income $ 2,673 $ 5,024 $ 3,144 $ 2,602 Preferred Stock dividends $ 784 $ 784 $ 783 $ 784 Net income per share of Common Stock: Basic $ 0.10 $ 0.24 $ 0.13 $ 0.10 Diluted $ 0.09 $ 0.16 $ 0.10 $ 0.09 26. Subsequent Event Effective January 1, 2001, the Company entered into a consulting agreement with Craig M. Hatkoff. The consulting agreement has an initial term of two years and is terminable by either party with 30 days notice. Under the agreement, the consultant is to be paid $15,000 per month for which the consultant provides services for the Company including serving on the management committees for Fund I and any subsequent funds and any other tasks and assignments requested by the chief executive officer. F-38 EX-10.3B 2 0002.txt INCENTIVE STOCK PLAN Exhibit 10.3.b CAPITAL TRUST, INC. 1997 LONG-TERM INCENTIVE STOCK PLAN ---------------------------------------- 2001 First Amendment ---------------------------------------- WHEREAS, Capital Trust, Inc., a Maryland corporation (the "Company") adopted its 1997 Long-Term Incentive Stock Plan (the "Plan") on July 15, 1997 and amended it on January 28, 1999, and Section 13.1 of the Plan authorizes the Company's Board of Directors to unilaterally amend the Plan, subject to stockholder approval to the extent required by law, and WHEREAS, the Company's Board of Directors has determined that it is in the best interests of the Company and its stockholders to increase the maximum number of shares available for Plan awards to eligible individuals during a calendar year to 1,000,000. NOW, THEREFORE, BE IT RESOLVED: That the Plan be and is amended as follows, effective immediately. 1. Section 4.1 of the Plan is amended by replacing the phrase: "the maximum number of shares of Stock that may be the subject of Awards granted to any Eligible Individual during any calendar year may not exceed 500,000 shares of Stock" with the phrase: "the maximum number of shares of Stock that may be the subject of Awards granted to any Eligible Individual during any calendar year may not exceed 1,000,000 shares of Stock." 2. Each and every other provision of the Plan shall remain in full force and effect, subject only to the change set forth above. WHEREFORE, the undersigned, being a duly authorized officer of the Company, hereby adopts and approves this 2001 First Amendment to the Plan, effective February 1, 2001. Capital Trust, Inc. By: /s/ John R. Klopp ----------------- A duly authorized Officer EX-10.9 3 0003.txt HATKOFF TERMINATION AGREEMENT Exhibit 10.9 December 29, 2000 Mr. Craig M. Hatkoff One West 72nd Street, Apt. 84 New York, New York 10023 Dear Craig: This letter agreement confirms our understanding with regard to your resignation from employment with Capital Trust, Inc. a Maryland corporation and successor to Capital Trust, a California business trust (the "Company"). Our understanding and agreement with respect to your resignation is as follows: 1. All of your duties, responsibilities and obligations as an employee of the Company will cease as of December 29, 2000 (the "Termination Date"). As of the Termination Date, neither you nor the Company will have any obligations or duties toward the other, nor will you be entitled to any privilege or benefit of employment, except as specifically set forth in this agreement. 2. You will resign your position as Vice Chairman of the Company and all other positions you hold as an officer of the Company or any of its subsidiaries or affiliates effective as of the Termination Date by executing a resignation letter in the form of Attachment A, and will no longer be an officer of the Company or any of its subsidiaries or affiliates. You will, however, remain a director of the Company after the Termination Date and will become eligible to earn compensation for service as a director as of January 1, 2001 in accordance with the Company non-employee director compensation plan in effect from time to time. 3. The Company will cooperate with you and will use commercially reasonable efforts to cause Travelers General Real Estate Mezzanine Investments II, LLC to assist you in obtaining a release from the stockholder lock-up provisions contained in that certain Stockholder Voting and Lock-Up Agreement between you and Travelers Real Estate Mezzanine Investments II, LLC dated March 8, 2000 (the "Stockholder Lock Up Agreement"). The Company's obligation pursuant to this Paragraph 3, however, shall not extend to any other provisions of the Stockholder Lock-Up Agreement. 4. On July 16, 1997, January 30, 1998 and February 24, 2000 the Company granted you certain options to purchase class A common shares of beneficial interest in the Company (now exercisable for shares of class A common stock) (the "Options") pursuant to the Capital Trust 1997 Long-Term Incentive Share Plan (the "Plan") and subject to the terms and conditions set forth in the letter agreements between you and the Company dated, July 16, 1997, February 2, 1998, and February 24, 2000 respectively (the "Option Agreements"). As of the Termination Date you will have vested in and will have the right to purchase 75,000 and 66,667 shares of class A common stock pursuant to the Options at $6.00 and $10.00 per share, respectively. Pursuant to the Plan and the Option Agreements the Options are scheduled to expire 90 days after the Termination Date. The Company, however, hereby agrees to extend your rights to exercise your options to the extent vested as of the Termination for a period of five years after the Termination Date (i.e. until December 31, 2005), provided however, such extension shall immediately terminate if (i) you commit any act of theft, fraud or embezzlement, or engage in any other willful misconduct or dishonest behavior in connection with the performance of your services under your proposed consulting services agreement with the Company (the "Consulting Agreement"), (ii) there is a continuing and willful failure or refusal by you to perform the services required under the Consulting Agreement (other than due to your incapacity your illness or injury), (iii) you breach this Agreement (including as determined in the Company's sole discretion a breach of the restrictive covenants contained in the restrictive covenants agreement attached hereto as Attachment C prior to the end of the Restricted Period as defined therein, (iv) you have been convicted of any crime constituting a felony under the laws of the jurisdiction in which such crime was committed or (v) you resign from the board of directors of the Company. The foregoing notwithstanding, as of the Termination Date, all of your rights under the Options to purchase shares in which you have not vested will terminate pursuant to the Plan and Option Agreements and you will have no further rights with regard to such unvested shares. 5. Your short term disability, long term disability, group health, dental, vision and life insurance coverages will cease as of the Termination Date. However, you may be eligible to continue your group health and dental insurance coverages at your own expense pursuant to federal law (COBRA). Your rights and obligations with regard to such continued coverage will be governed by the requirements of COBRA and the terms of the insurance plan and will be explained to you in a separate letter. Your coverage and cost levels are subject to adjustment in accordance with the terms of the documents governing the plan. 6. After the Termination Date you will no longer be eligible to contribute to the Company's 401k plan. Your rights and obligations with regard to the 401k plan will be fully explained to you at that time in a separate letter. 7. You hereby acknowledge that you have used all of the vacation days you had accrued as of the Termination Date. 8. Other than as set forth in this Agreement, you will not receive in connection with your employment and the termination thereof any compensation, payments or benefits of any kind from the Company, its stockholders, members, partners, employees, agents or affiliated or related entities and you expressly acknowledge and agree that you are not entitled to any such compensation, payment or benefit. 9. You understand and agree that the compensation and benefits set forth herein are being provided to you in consideration of your contribution to the Company through the Termination Date and your acceptance and execution of this Agreement and Release and the attachments hereto. 10. a. You agree to accept the compensation and benefits provided for herein in full resolution and satisfaction of, and hereby IRREVOCABLY AND UNCONDITIONALLY RELEASE, REMISE AND FOREVER DISCHARGE the Company and Releasees (as that term is defined in paragraph 10. b. below) from any and all agreements, promises, liabilities, claims and demands of any kind whatsoever ("Claims"), in law or equity, whether known or unknown, suspected or not suspected, fixed or contingent, apparent or concealed, which you, your heirs, executors, administrators or assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason of any matter, cause or thing whatsoever, to the day of the date you execute this Agreement and Release, including, without limitation, any and all claims whether for breach of contract or under any federal, state or municipal wage payment, discrimination or fair employment practices law, statute or regulation, including but not limited to Claims under the Americans with Disabilities Act ("ADA"), the Age Discrimination in Employment Act ("ADEA"), the Older Workers Benefit Protection Act, Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Family and Medical Leave Act of 1993 ("FMLA"), the Employee Retirement Income Security Act of 1974, the New York State Human Rights Law and the New York City Human Rights Law, and any and all claims arising out of or relating to your employment, compensation and benefits with the Company and/or the termination thereof and claims for costs, expenses and attorneys' fees with respect thereto. b. For purposes of the Agreement and Release, the term "Company and Releasees" includes the Company, past, present and future partners, stockholders, members, directors, officers, agents, representatives, attorneys, employees and principals, their past, present and future direct and indirect parents, subsidiaries (whether or not wholly-owned), affiliates, related entities, divisions, predecessors, successors and assigns, and the past, present and future stockholders, partners, members, directors, officers, agents, representatives, attorneys, employees, and principals thereof, jointly and individually, and this Agreement and Release shall inure to the benefit of and shall be binding upon and obligate such individuals and entities. 11. You must return to the Company your Company keys and your building security ID. After the Termination Date you will have the option of maintaining the following items at your own expense by transferring them to your personal accounts: Cellular Telephone, Internet and Palmnet access, and your personal Life Insurance Policy. Please notify Brian Oswald prior to the Termination Date of whether you wish to retain any of these items. 12. You hereby acknowledge that by reason of your employment with the Company you have had substantial access to the Company's proprietary information and have developed relationships with the Company's clients and key employees. Therefore, simultaneously with the execution and delivery of this Agreement and Release you agree that you will deliver to the Company an executed original of the Restrictive Covenants Agreement attached hereto as Attachment C. 13. You will not issue any communication, written or otherwise, nor respond to any inquiry from any person, in a way that disparages, criticizes, or otherwise reflects adversely or encourages any adverse action against the Company or the individuals or entities that are owners, stockholders, agent, directors, officers, members, principals, employees, representatives, attorneys, divisions, parents, subsidiaries, predecessors, successors or assigns of the Company. Notwithstanding the foregoing, of course, the Company expects you to testify truthfully under oath pursuant to subpoena or otherwise. You agree to cooperate, as the Company may reasonably request, in any pending or future legal matters which have arisen or may arise over matters of which you may have had knowledge during your employment with the Company. If either party are served with a subpoena, such party will notify the other within a reasonable time not to exceed five (5) days. 14. All notices or other communications under this Agreement shall be sufficient if in writing and delivered by hand or sent by telecopy, or sent, postage prepaid by registered, certified or express mail, or by recognized overnight air courier service and shall be deemed given when so delivered by hand or telecopied, or if mailed or sent by overnight courier service, on the third (3rd) business day after mailing (one business day in the case of express mail or overnight courier service) to the parties at the following addresses: If to the Company: Capital Trust, Inc. 410 Park Avenue, 14th Floor New York, N.Y. 10022 Attention: John R. Klopp Chief Executive Officer Tel. No. 212-655-0220 Fax. No.212-655-0044 and with a copy to: Paul, Hastings, Janofsky & Walker LLP 399 Park Avenue 31st Floor New York, NY 10022 Attention: Michael L. Zuppone Tel. No. 212-318-6000 Fax. No. 212-319-4090 If to Consultant: Mr. Craig M. Hatkoff One West 72nd Street, Apt. 84 New York, New York 10023 15. This Agreement and Release may not be amended, modified or terminated except by an express written agreement between the parties. 16. This Agreement and Release shall be subject to, governed by and interpreted in accordance with the laws of the State of New York. 17. The parties agree that any dispute between the parties, including but not limited to any claims of discrimination under federal or state law, claims of other statutory violations, and those regarding any aspect of this Agreement and Release or any act which allegedly has or would violate any provision of this Agreement and Release other than the provisions of the restricted covenant agreement attached hereto as Attachment C ("Arbitrable Dispute") will be submitted to final and binding arbitration in New York, New York, before the American Arbitration Association ("AAA") and an experienced employment law arbitrator licensed to practice law and in accordance with the Model Employment Arbitration Procedures of the AAA. Each party shall pay the fees of its respective attorneys, the expenses of its witnesses and any other expenses connected with presenting its claim. Other costs of the arbitration, including the fees of the arbitrator, costs of any record or transcript of the arbitration, administrative fees, and other fees and costs shall be borne equally by the parties, one-half by you, on the one hand, and one-half by the Company, on the other hand, provided however, the arbitrator may award the prevailing party its reasonable legal fees and expenses in pursuing such action if the arbitrator finds the non-prevailing party acted in bad faith with gross negligence or without reasonable basis to believe that her/its conduct was in conformity with the terms hereof. Whether or not a party is the prevailing party in any such action shall be determined by the arbitrator. Should any party to this Agreement pursue any Arbitrable Dispute by any method other than said arbitration, the responding party shall be entitled to recover from the initiating party all damages, costs, expenses and attorneys' fees incurred as a result of such action. 18. This Agreement and Release will be kept confidential except that it may be divulged by you to your attorneys, tax advisors and members of your immediate family and disclosed by the Company in accordance with applicable rules and regulations of the U.S. Securities and Exchange Commission. 19. This Agreement and Release contains the entire agreement between us and supersedes and terminates any and all previous agreements between us whether written or oral, including without limitation your employment agreement, dated July 15, 1997, with the Company, but excluding the Plan and Option Agreements which shall continue in full force and effect as modified pursuant to paragraph 4 above All prior and contemporaneous discussions and negotiations have been and are merged and integrated into, and superseded by, this Agreement and Release. 20. If this Agreement and Release conform to our understanding and are acceptable to you, please indicate your agreement by signing and dating the enclosed copies of this Agreement and Release and returning them to me. In the event you fail to execute and return this Agreement and Release by December 29, 2000 this Agreement and Release will be of no further force and effect, and neither you nor the Company will have any further rights or obligations thereunder. Very truly yours, CAPITAL TRUST, INC. By:/s/ John R. Klopp ----------------------------- Name: John R. Klopp Title: Chief Executive Office Accepted and Agreed this 29th day of December 2000: /s/Craig M. Hatkoff - ------------------------- Craig M. Hatkoff ATTACHMENT A December 29, 2000 Board of Directors Capital Trust, Inc. 410 Park Avenue, 14th Floor New York, N.Y. 10022 I, Craig M. Hatkoff, hereby resign, effective as of the date hereof, from the position of vice chairman of Capital Trust, Inc. and as an officer of all other subsidiaries of Capital Trust, Inc. Craig M Hatkoff ----------------------------- ATTACHMENT B RELEASE BY SIGNING THIS AGREEMENT AND RELEASE, YOU ACKNOWLEDGE AND AFFIRM THAT YOU ARE COMPETENT, THAT YOU WERE AFFORDED A REASONABLE TIME PERIOD TO REVIEW AND CONSIDER THIS AGREEMENT AND RELEASE, THAT YOU HAVE READ AND UNDERSTAND AND ACCEPT THESE DOCUMENTS AS FULLY AND FINALLY WAIVING AND RELEASING ANY AND ALL CLAIMS WHICH YOU MAY HAVE AGAINST THE COMPANY, ITS PAST, PRESENT AND FUTURE STOCKHOLDERS, EMPLOYEES, MEMBERS AND AGENTS, THAT NO PROMISES OR INDUCEMENTS HAVE BEEN MADE TO YOU EXCEPT AS SET FORTH IN THIS AGREEMENT AND RELEASE, AND THAT YOU HAVE SIGNED THIS AGREEMENT AND RELEASE FREELY AND VOLUNTARILY, INTENDING TO BE LEGALLY BOUND BY ITS TERMS. ACCEPTED AND AGREED: - ------------------------ Craig M. Hatkoff DATE: December 29, 2000 ATTACHMENT C RESTRICTIVE COVENANTS AGREEMENT You hereby acknowledge that by reason of your employment with the Company you have developed and cultivated unique close working relationships with the Company's clients, which relationships will be or have been established through the Company's efforts and at the Company's expense. You further acknowledge that the Company has a material interest in protecting the relationships it has developed with its clients. You further acknowledge that the business conducted by the Company is, and is expected to continue to be conducted throughout the world and that, therefore, any geographic limitation of any nature on these restrictive covenants is not appropriate. Confidentiality During the course of your employment with the Company you have had substantial access to Proprietary Information (as defined below) of the Company, the disclosure of which to competitors of the Company or the public at large would cause the Company to suffer substantial and irreparable damage. Your recognize, therefore, that it is in the Company's legitimate business interest to restrict your disclosure or use of any Proprietary Information for any purposes other than the services provided by you to the Company and to limit potential appropriation of such Proprietary Information by you for the benefit of the Company's competitors and to the detriment of the Company. Unless you shall first secure the written consent of the Company you shall not directly or indirectly publish, disclose, market or use, or authorize, advise, hire, counsel or otherwise procure any other person or entity, directly or indirectly, to publish, disclose, market or use any secret, confidential or proprietary information of the Company or the Releasees ("Proprietary Information"), of which you became aware or informed during your employment with the Company, whether such Proprietary Information is in your memory or embodied in writing or other form. Such Proprietary Information is and shall continue to be the exclusive property of the Company and the Releasees whether or not it was disclosed to or developed in whole or in part by you but shall exclude any information or material which is generally known or available to the public through means other than yourself. Non-Solicitation For a period of twelve (12) months from December 31, 2000 (the "Termination Date") (i.e. through December 31, 2001) (the "Restricted Period") neither you nor any Controlled Person (defined below) shall directly or indirectly, by or for yourself, or as the employee of another, or through another as your employee, solicit for employment or employ or induce or advise to leave the Company's employ any Company employee, or any individual who was an employee of the Company within the six month period preceding the termination of your employment and you shall not assist others to do so. During the Restricted Period neither you nor any Controlled Person shall, directly or indirectly, perform services for, solicit in any way, aid in such solicitation or entice away from the Company any person, partnership, corporation or other entity who was a client or prospective client of the Company during the twelve (12) month period preceding the Termination Date. For the purposes of this Agreement the term prospective client means any company with which the Company was in the process of or had concluded a contract for services or contemplated or consummated a lending relationship with during the twelve (12) month period preceding the Termination Date. As used in this Agreement the term "Controlled Person" shall mean any corporation, partnership, firm or other entity as to which you possess, directly or indirectly, the powers to direct or cause th direction of the management and policies of such entity whether through ownership or voting securities, by contract or otherwise. Non-Competition During the Restricted Period you shall not render any services, directly or indirectly, as an employee, officer, consultant or in any other capacity, to any individual, firm corporation or partnership which provides financing to the owners and operators of real estate or investment management or real estate advisory services or other services which are competitive with financing activities or services undertaken or provided by the Company or with financing activities or services under development by the Company within the twelve (12) month period preceding the Termination Date (the "Competitive Business"). During the Restricted Period, you shall not, without the prior written consent of the board of directors of the Company, hold an equity interest in any firm, partnership or corporation which engages in Competitive Business, except that beneficial ownership by you (including ownership by any one or more members of your immediate family and any entity under your direct or indirect control) of less than five (5%) percent of the outstanding shares of capital stock of any corporation which may be engaged in Competitive Business, if such stock is listed on a national securities exchange or publicly traded in the over-the-counter market, shall not constitute a breach of the covenants contained in this Agreement. Nothing in this Agreement, however, shall prohibit you from becoming employed by, or otherwise rendering services to, an entity which has one or more divisions or operating units which engages in a Competitive Business so long as you do not, during the Restricted Period, have any involvement with, or authority or responsibility for, the unit or operating division which engages in the Competitive Business. Remedies The provisions contained in this Agreement as to the time periods, scope of activities, persons or entities affected, and territories restricted shall be deemed divisible so that, if any provision contained in this Agreement is determined to be invalid or unenforceable, such provisions shall be deemed modified so as to be valid and enforceable to the full extent lawfully permitted. You agree that the provisions of the Restrictive Covenants set forth herein are reasonable and necessary for the protection of the Company and that they may not be adequately enforced by an action for damages and that, in the event of a breach thereof by you, the Company shall be entitled to apply for and obtain injunctive relief in any court of competent jurisdiction to restrain the breach or threatened breach of such violation or otherwise to enforce specifically such provisions against such violation, without the necessity of the posting of any bond by the Company and you shall reimburse the Company for the reasonable attorney's fees and expenses that the Company might incur in enforcing this Agreement. In the event the Company shall obtain a money damage award against you, the Company shall have the right to offset against any such award all amounts of principal and interest due under that certain purchase money note, dated July [15], 1997, issued to you by the Company in connection with the acquisition of Victor Capital Group, L.P. and its affiliates. Choice of Law This Restrictive Covenant Agreement shall be governed by the laws of the State of New York, without giving effect to its conflicts of law rules. The parties further agree that any legal action with respect to any claim under this Agreement will be brought exclusively in the courts of the State of New York or of the United States of America for the Southern District of New York, and by the execution of this Agreement, the parties hereto accept and consent to the personal jurisdiction of the aforesaid courts. The Company and you each hereto waive, in connection with such action or proceeding, any objection which the Company or you might now or hereafter have to the bringing of such action or proceeding in such respective jurisdictions, including, without limitation, any objection that the Company or you are not personally subject to the jurisdiction of the above-named courts, that the action or proceeding is brought in an inconvenient forum, that venue is improper or that this Restrictive Covenants Agreement cannot be enforced in or by such courts. You hereby consent to the service of process of any of the aforementioned courts in such action or proceeding by the mailing of copies thereof by registered or certified mail to you at the above listed address. Dated: December 29, 2000 -------------------------- Craig M. Hatkoff EX-10.10 4 0004.txt HATKOFF CONSULTING AGREEMENT Exhibit 10.10 CONSULTING SERVICES AGREEMENT Consulting Services Agreement ("Agreement"), dated as of January 1, 2001, by and between Craig M. Hatkoff ("Consultant") and Capital Trust, Inc., a Maryland corporation (the "Company"). PRELIMINARY STATEMENT WHEREAS, Consultant has previously served as an executive officer of the Company and therefore has the training, expertise and prior experience in areas related to the business or needs of the Company and the investment funds cosponsored by it, CT Mezzanine Partners I, LLC, a Delaware limited liability company ("Fund I"), and CT Mezzanine Partners II, LP, a Delaware limited partnership ("Fund II"); WHEREAS, the Company desires to retain the services of Consultant; and WHEREAS, Consultant desires to provide consulting services for the benefit of the Company using his knowledge, skills, experience and abilities; NOW THEREFORE, in consideration of the mutual promises contained herein, and other good and valuable consideration, the parties hereto agree as follows: ARTICLE I SERVICES TO BE PROVIDED Section 1.1 Nature of Services. (a) Consultant shall provide advice and suggestions, and perform such tasks and assignments as requested, orally or in writing, from time to time, by the chief executive officer of the Company. (b) The Consultant shall be designated by the Company and serve as a member of the Management Committee of each of Fund I and CT MP II LLC, a Delaware limited liability company which serves as general partner of Fund II. The Company may remove Consultant as a member of the foregoing committees for any reason or no reason at any time and the Consultant may resign from such committee for any reason or no reason at any time. (c) The Consultant agrees to cooperate at the reasonable request of the Company with any advisory assignments, transactions or litigation or claims involving the Company about which Consultant has knowledge. Said cooperation includes but is not limited to: providing information, reviewing and assisting in the preparation of statements, affidavits or pleadings, giving sworn statements or depositions and testifying in court or at arbitration. The Company will reimburse Consultant for reasonable expenses related to assistance requested by Company. Section 1.2 Right of Control. Consultant shall have exclusive control over the means and manner by which the services called for by this Agreement are performed. Section 1.3 Non-Exclusive Services. Consultant shall devote so much of his productive time, ability and attention as is necessary to performing consulting services as requested or assigned by the Company. Consultant may render services of a business or commercial nature to other persons or entities during the term of this Agreement. ARTICLE II COMPENSATION FOR SERVICES Section 2.1 Fee. As payment and consideration for the services to be provided and promises made herein by Consultant, the Company agrees to pay Consultant the total sum of Fifteen Thousand Dollars ($15,000) per month ("Fee"). The Fee shall be paid once a month on the last day of the month in which services are provided. Section 2.2 Independent Contractor. Consultant understands and agrees that in performing the services to be provided pursuant to this Agreement, Consultant is acting as an independent contractor with respect to the Company and not as an employee, agent, partner or joint venturer of the Company. Consultant, in his capacity as such, shall be free to undertake other assignments or activities on his own account or on the account of third parties, provided such activities or assignments do not violate the restrictive covenant agreement contained in that certain letter agreement entered into between the parties on December 29, 2000 (the "Separation Agreement"). Consultant agrees and understands that he shall not be authorized to, nor shall he, enter into any commitments, agreements or undertakings or assume any responsibilities on behalf of the Company. Section 2.3 Tax Obligations. Consultant understands and agrees that he is solely responsible for all income and/or other employment tax obligations, if any, including but not limited to all reporting and payment obligations, if any, which may arise as a consequence of any payment under this Agreement. Consultant agrees to indemnify and hold the Company harmless in respect of all such payments claimed or assessed by any taxing authority. Section 2.4 No Benefits. Consultant understands and agrees that since he is not an employee of the Company, he shall not be entitled to, and hereby waives any claim to any of the benefits provided to employees of the Company, including, but not 2 limited to holidays off with pay; vacation time off with pay, paid leaves of absence of any kind; and insurance coverage of any kind, specifically including, but not limited to, medical and dental insurance, unemployment insurance, workers' compensation insurance and state disability insurance. ARTICLE III TERM AND TERMINATION Section 3.1 Effective Date of Agreement. This Agreement shall become effective upon the date hereof. Section 3.2 Term of Agreement. This Agreement shall continue in full force and effect for a period of two (2) years. Section 3.3 Termination Prior to Expiration of Term. Either party may terminate this Agreement prior to the expiration of the term hereof for any or no reason on fourteen (14) calendar days' advance written notice to the other party. In the event of such termination, Consultant shall be promptly paid the portion of the monthly Fee owed based on services performed prior to the effective date of termination and no further payment shall be due. Section 3.4 Termination for Cause. The Company also may terminate this Agreement for "Cause" before the expiration of the term hereof without any prior notice. "Cause" shall mean (i) any act of theft, fraud or embezzlement, or any other willful misconduct or dishonest behavior by Consultant in connection with the performance of Consultant's services hereunder, (ii) Consultant's continuing and willful failure or refusal to perform the services required under this Agreement (other than due to his incapacity due to illness or injury, (iii) conviction of Consultant for any crime constituting a felony under the laws of the jurisdiction in which such crime was committed, or (iv) material breach of the provisions of the Separation Agreement. ARTICLE IV PROPRIETARY RIGHTS Section 4.1 Confidential Information. (a) Consultant understands and agrees that during the term of this Agreement, he may become aware of information concerning the operations, budgets, future business plans and methods of doing business on the part of the Company and/or its affiliates, which information is hereby designated "Confidential Information." (b) Consultant understands and agrees that he shall not disclose any Confidential Information directly or indirectly, to anyone outside of the Company, either 3 during the term of this Agreement, or at any time after the expiration or termination hereof, without the prior written consent of the Company. (c) Consultant understands and agrees that he shall be subject to and comply with the Company's insider trading policy in accordance with the terms thereof. Section 4.2 Return of Company Property. Consultant understands and agrees that all written information, documents, and materials prepared by or at the request of the Company, or provided to Consultant, in the course of providing the services called for by this Agreement shall be the sole and exclusive property of the Company and will be delivered to the Company, if requested, on the expiration or termination of this Agreement. ARTICLE V MISCELLANEOUS PROVISIONS Section 5.1 Severability. the provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other paragraphs shall remain fully valid and enforceable. Section 5.2 Arbitration. This Agreement shall in all respects be interpreted and governed by and under the laws of the State of New York, without regard to principles of conflict of laws. Any dispute regarding any aspect of this Agreement or any act which allegedly has or would violate any provision of this Agreement or any law (hereinafter "Arbitrable Dispute") shall be submitted to arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, as the exclusive remedy for any such claim or Arbitrable Dispute. The decision of the arbitrator shall be final, conclusive and binding upon the parties. Each party shall pay the fees of its respective attorneys, the expenses of its witnesses and any other expenses connected with presenting its claim. Other costs of the arbitration, including the fees of the arbitrator, costs of any record or transcript of the arbitration, administrative fees, and other fees and costs shall be borne equally by the parties, one-half by Consultant, on the one hand, and one-half by the Company, on the other hand, provided however, the arbitrator may award the prevailing party its reasonable legal fees and expenses in pursuing such action if the arbitrator finds the non-prevailing party acted in bad faith with gross negligence or without reasonable basis to believe that her/its conduct was in conformity with the terms hereof. Whether or not a party is the prevailing party in any such action shall be determined by the arbitrator. Should any party to this Agreement pursue any Arbitrable Dispute by any method other than said arbitration, the responding party shall be entitled to recover from the initiating party all damages, costs, expenses and attorneys' fees incurred as a result of such action. Section 5.3 Sole and Entire Agreement. This Agreement sets forth the entire agreement between the parties hereto and fully supersedes any and all prior 4 agreements or understandings between the parties hereto, whether written or oral, pertaining to the subject matter hereof and does not bind the parties with respect to the subject matter of the Separation Agreement which shall be interpreted and enforced without regard to the provisions of this Agreement. No change in, modification of, or addition, amendment or supplement to this Agreement shall be valid unless set forth in writing. Section 5.4 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] 5 IN WITNESS WHEREOF, the parties hereto executed this Agreement effective as of the date first set forth above. CAPITAL TRUST, INC. By: /s/ John R. Klopp ---------------------------- Name: John R. Klopp Title: Chief Executive Officer CRAIG M. HATKOFF /s/ Craig M. Hatkoff -------------------------------- 6 EX-10.11 5 0005.txt AGREEMENT OF LEASE Exhibit 10.11 - -------------------------------------------------------------------------------- AGREEMENT OF LEASE BETWEEN 410 PARK AVENUE ASSOCIATES, L.P. OWNER - AND - CAPITAL TRUST, INC. TENANT Premises: Entire Fourteenth (14th) Floor 410 Park Avenue New York, New York - -------------------------------------------------------------------------------- AGREEMENT OF LEASE (this "Lease" or "this lease"), dated as of this 3rd day of May 2000, between 410 PARK AVENUE ASSOCIATES, L.P., a New York limited partnership, having an office at 410 Park Avenue, New York, New York, 10022, party of the first part, hereinafter referred to as OWNER, and CAPITAL TRUST, INC., a New York corporation, having an office at 605 Third Avenue,.New York, New York, party of the second part, hereinafter referred to as TENANT, WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner, the entire fourteenth (14th) floor, as shown on the rental plan annexed hereto and made a part hereof as Exhibit A (the "Demised Premises" or "demised premises," whether capitalized or not), which the parties hereto agree, without representation, contain 11,885 rentable square feet in the building known as 410 Park Avenue, New York, New York (the "building" or "Building"), for the term of approximately ninety seven (97) months (or until such term shall sooner cease and expire as hereinafter provided) to commence subject to Articles 24 and 46 hereof on June 1, 2000 (the "Commencement Date"), and to end nevertheless on June 30, 2008 (the "Expiration Date"), both dates inclusive at an annual rental rate as set forth in Article 1 hereof which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each calendar month during said term, at the office of Owner or such other place as Owner may designate, without any set off, counterclaim or deduction whatsoever (except as expressly permitted pursuant to the terms and provisions of this Lease), except that the first (1st) monthly installment shall be paid upon execution hereof. No easement for light or air is included in the Demised Premises. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: 1. RENT A. Basic Annual Rent. ----------------- (i) Tenant shall pay fixed rent ("Basic Annual Rent") at the annual rental rates of SEVEN HUNDRED SEVENTY TWO THOUSAND FIVE HUNDRED TWENTY FIVE AND 00/100 ($772,525.00) DOLLARS per annum ($64,377.08) per month for the first forty six (46) months following the Commencement Date and EIGHT HUNDRED NINETY ONE THOUSAND THREE HUNDRED SEVENTY FIVE AND 00/100 ($891,375.00) DOLLARS per annum ($74,281.25 per month) for the balance of the term of this lease. (ii) In the event that this Lease shall commence (or terminate) on a day other than the first (or last) day of a calendar month, Tenant shall pay Owner with respect to such partial month an amount equal to one monthly installment of Basic Annual Rent multiplied by a fraction, the numerator of which is the number of days remaining in said month (or remaining during the lease term) (including the day of termination) and the denominator of which is the total number of days in said month. (iii) If Owner receives from Tenant any payment less than the sum of the Basic Annual Rent, additional rent and other charges then due and owing pursuant to the terms of this lease ("Partial Payment"), Owner, in its sole discretion, without any liability to Tenant, may allocate such Partial Payment in whole or in part to any Basic Annual Rent, any additional rent and/or any other charges or to any combination thereof. (iv) Provided Tenant is not then in default beyond the expiration of applicable notice, grace and cure periods under the terms, covenants and conditions of this lease on Tenant's part to be observed and performed, Tenant shall have the right to use and occupy the Demised Premises free of Basic Annual Rent only for the first three (3) months following the Commencement Date (the day thereafter hereinafter called the "Rent Commencement Date"), except that Tenant shall pay to the Utility (as defined in Article 12) all sums due under Article 12 for electric current. Except for the free Basic Annual Rent allowance as herein provided, Tenant shall use and occupy the Demised Premises pursuant to all of the other terms, covenants and conditions of this lease. B. Escalations. ------------ (i) It is understood that the Basic Annual Rent specified in Paragraph 1A above does not include provision for any increase in the amount of real estate taxes on the Building and the land ("Land") or in the cost of operations and maintenance thereof. Therefore, in order that the rental payable throughout the term of the Lease shall reflect any such increase the parties agree as hereinafter provided. The additional rent payable pursuant hereto is hereinafter called the "Rent". Owner shall have the same remedies with respect to a default in payment of additional rent as Owner has with respect to a default in payment of Basic Annual Rent. Certain terms herein are defined as follows: (a) Tenant's Percentage: The amount of Tenant's pro rata share of the increase in Taxes over the Base Tax Year. Tenant's Percentage is agreed to be 6.02% of such increase. (b) Wage Rate Amount: The Wage Rate payable for the calendar year ending December 31, 2000 (the "Wage Rate Amount"). (c) Tax Year: a Tax Year shall be any fiscal year or portion thereof occurring during the term of this lease, commencing on July 1 and ending on the next June 30. If the City of New York should amend its fiscal period, then the term Tax Year shall mean the twelve (12) month fiscal year adopted by the City of New York. (d) Base Tax: shall mean the average of Taxes for the Tax Years 1999/2000 and 2000/2001, i.e., the amount determined by adding the Taxes imposed during the Tax Years 1999/2000 and 2000/2001 and dividing by the number two (2) (the "Base Tax Year"). (e) Taxes: All real estate taxes, including the New York State equalization factor if any, payable (adjusted after protest or litigation, if any) for any part of the term of this lease, exclusive of penalties or discounts, on the Building and/or the Land, (i) any taxes which shall be levied in lieu of any such taxes including which shall be levied on the gross rentals of the Building and/or the Land, (ii) any special assessments against the Building and/or the Land (including any business improvement district assessments) which shall be required to be paid during the fiscal year in respect to which taxes are being determined (as to assessments which are payable over a period of time extending beyond the term of this Lease, only a portion thereof covering the unexpired portion of the term of this Lease at the time of such imposition shall be included in Taxes), and (iii) the expense of contesting the amount or validity of any such taxes, charges or assessments, such expense to be applicable to the period of the item contested. Taxes shall exclude real property transfer taxes, mortgage recording taxes and interest and penalties on Owner's late tax payments. Taxes shall also exclude income taxes, franchise taxes, estate taxes, profit taxes, inheritance taxes, capital levy taxes and gift taxes. In the event Owner successfully contests the Taxes with a resulting decrease therein, Owner shall promptly after such reduction refund or credit to Tenant, as the case may be, Tenant's Percentage of such decrease, less Tenant's Percentage of the out-of-pocket expenses incurred in contesting the Taxes pursuant to subdivision (iii) without duplication of the certiorari expenses payable pursuant to subdivision (iii) above. The obligation of Owner to refund or credit Tenant with the amount of any overpayment and the obligation of Tenant to pay any underpayment shall survive the expiration or sooner termination of this Lease. The Owner reserves the right to recompute the Rent due hereunder in the event of a reduction of Taxes for the Base Tax Year and the Tenant agrees to pay such Rent when billed. (f) "Wage Rate" shall mean the minimum regular hourly rate of wages, excluding, however, all fringe benefits, computed as paid over a forty-hour week to Porters in Class A office buildings pursuant to an Agreement between the Realty Advisory Board on Labor Relations, Incorporated, or any successor thereto, and Local 32B-32J of the Building Service Employees International Union, AFL-CIO, or any successor thereto; and provided, however, that if there is no such agreement in effect on any January 1, prescribing a wage rate for Porters, computations and payments shall thereupon be made upon the basis of the regular hourly wage rate actually payable to Porters by Owner or by Owner's service contractors over a forty hour week, in effect from time to time during the term of this Lease, and provided, however, that if in any year during the term the regular employment of Porters shall occur on days or during hours which overtime or other premium pay rates are in effect pursuant to said Agreement, then the term "hourly rate of wages" as used herein shall be deemed to mean the average hourly rate for the hours in a calendar week during which Porters are regularly employed (e.g., if pursuant to an agreement between Realty Advisory Board and the Local the regular employment of Porters for forty hours during a calendar week is at a regular hourly wage rate of $3.00 for the first thirty hours, and premium or overtime hourly wage rate of $4.50 for the remaining ten hours, then the hourly rate of wages under this Article during such period shall be the total weekly rate of $135.00 divided by the total number of regular hours of employment, forty or $3.375). For purposes hereof, "Class A office buildings" shall mean the class of office buildings defined as such under the current agreement with said Local 32B-32J. (g) "Base Wage Rate" shall mean the Wage Rate in effect December 31, 2000. (h) The term "Porters" shall mean that classification of non-supervisory employees employed in and about the Building who devote a major portion of their time to general cleaning, maintenance and miscellaneous services essentially of a non-technical and non-mechanical nature and are the type of employees who are presently included in the classification of "Class A-Others" in the Commercial Building Agreement between the Realty Advisory Board and Local 32B-32J. (i) "Multiplication Factor" shall mean 11,885. (j) If the Wage Rate for any calendar year during the term hereof shall be increased above the Base Wage Rate, then Tenant shall pay to Owner as Additional Rent, an amount (the "Wage Increase Charge") equal to the product obtained by multiplying the Multiplication Factor by the number of cents (including any fraction of a cent) by which the Wage Rate is greater than the Base Wage Rate, such payment to be made in equal monthly installments of fixed rent falling due on or after the effective date of such increase in Wage Rate (payable retroactive from said effective date forward) and continuing thereafter until a new adjustment shall have become effective in accordance with the provisions of this Article. Owner shall give Tenant notice of each change in Wage Rate (the "Wage Rate Statement") that will be effective to create or change Tenant's obligation to pay the Wage Increase Charge pursuant to the provisions of this Article, which notice shall contain Owner's calculation of the Wage Increase Charge payable resulting from such increase in Wage Rate. In the event that any increase in the wage rate shall be retroactive or apply to a period prior to the issuance of the notice by Owner of Owner's calculation, Tenant shall pay to Owner within twenty (20) days of notice, the amount of any retroactive adjustment. The Wage Increase Charge shall be prorated, if necessary, to correspond with that portion of a calendar year occurring within the term hereof. The Wage Rate and Base Wage Rate shall be calculated in accordance with such practices and procedures as and generally applied in such calculations by Owners of comparable office buildings in Manhattan. (k) Nothing contained in this paragraph shall be construed so as to reduce the Basic Annual Rent. (l) In order to provide for current payments on account of an increase in the Taxes over the Base Tax Year, Tenant agrees, at Owner's request, to pay, in advance, as additional rent, Tenant's Percentage for the ensuing twelve (12) months, as estimated by Owner from time to time, pursuant to a written statement setting forth Owner's estimate in twelve (12) monthly installments, each in an amount equal to 1/12th of Tenant's Percentage so 2 estimated by Owner (which amount Tenant agrees shall, notwithstanding anything herein set forth to the contrary, be paid at such times and in such amounts as may from time to time be required to be escrowed with any mortgagee escrowing for Taxes, provided, however, that pursuant to the existing mortgage, no such escrow deposit is currently required) commencing on the first day of the month following the month in which Owner notifies Tenant of the amount of such estimated Tenant's Percentage. If, as finally determined, Tenant's Percentage shall be greater than or less than the aggregate of all installments so paid on account to the Owner for such twelve (12) month period, then Tenant shall within twenty (20) days after being billed therefor, pay to Owner the amount of such underpayment, or the Owner shall within thirty (30) days refund or credit Tenant for the amount of such overpayment, as the case may be. It is the intention hereunder to estimate the amount of Taxes for each year and then to adjust such estimate in the following year based on actual Taxes incurred and/or paid by Owner. The obligation of the Tenant with respect to the payment of Rent or Owner's obligation to refund or credit Tenant any overpayment shall survive the expiration or sooner termination of this Lease. Any payment, refund, or credit made pursuant to this Paragraph shall be made without prejudice to any right of the Tenant to dispute, or of the Owner to correct, any item(s) as billed pursuant to the provisions hereof. (m) Notwithstanding anything herein contained to the contrary, Tenant shall pay Owner one hundred (100%) percent of any increase in Taxes (the "Capital Improvement Increase") resulting from any increase in the assessment of the Building or any portion thereof by reason of capital improvements made by or at the request of Tenant or any party claiming through or under Tenant and such Capital Improvement Increase shall be otherwise excluded from Taxes in determining Tenant's Percentage of the increase thereof as hereinbefore stated, provided that the taxes allocable to the Capital Improvement Increase are separately assessed or otherwise readily determinable from the tax bills. (n) No subsequent decrease or correction in favor of Tenant in the calculation of Taxes and/or the Wage Increase Charge (whether as a result of challenge or otherwise) shall reduce the Basic Annual Rent, provided, however, that Taxes and the Wage Rate Increase Charge may increase or decrease periodically but never so as to reduce the Basic Annual Rent. (o) The computation under this Article is intended to constitute a formula for agreed rental escalation and may or may not constitute an actual reimbursement to Owner for the costs and expenses paid with respect to the Land and Building. (p) Owner shall not be obligated to contest the levy or assessment of any Taxes, and it shall be at Owner's sole discretion whether any such contest shall be undertaken. Owner hereby reserves the exclusive right to take and prosecute all such proceedings, including any such proceedings for the Base Year, and if so taken, Owner may proceed without notice to Tenant and may prosecute the proceeding, including settlement and discontinuance, in such manner as Owner may determine. (q) If the Commencement Date or the Expiration Date shall occur on a date other than the first day of the calendar month, then all Basic Annual Rent and additional rent shall be pro-rated based upon a 30-day calendar month and the number of days elapsed or remaining in any particular calendar year. C. Late Payment. ------------ If more than once in any twelve (12) month period occurring during the term of this Lease any installment of Basic Annual Rent or additional rent due hereunder is not paid on or before the tenth day of the month during which such installment is due, Tenant shall pay to Owner as additional rent, on or before the first day of the following month four ($.04) cents for each dollar so overdue (but in no event greater than the maximum interest rate permitted by law) in order to defray Owner's administrative and other costs in connection with such late payment. The additional rent attributable to Tenant's late payment of rent pursuant to this paragraph (C) shall be in addition to and not in lieu of any and all of Owner's rights and remedies granted under this lease and by law in the event of a default in payment of Rent by Tenant beyond applicable grace and cure periods. 2. OCCUPANCY: Tenant shall use and occupy the Demised Premises for general and ancillary uses incidental thereto and executive offices and for no other purpose. 3. TENANT ALTERATIONS AND TENANT'S WORK: A. Tenant Alterations. ------------------- (i) Tenant shall make no changes in or to the Demised Premises of any nature without Owner's prior written consent, except that Tenant may make purely decorative changes to the Demised Premises such as painting and carpeting without Owner's prior consent, but upon prior written notice to Owner. Tenant may make any Non-Material Alteration (hereinafter defined) subject to Owner's prior approval, such approval not to be unreasonably withheld or delayed. All of Tenant's Work shall be performed utilizing contractors and subcontractors approved by Owner (Owner hereby approves Anchor Construction, Barbara Kayovit, Principal, in connection with Tenant's Work), provided however, that with respect to all of Tenant's initial work and any subsequent work, Tenant shall use Owner's designated mechanical 3 engineer, M. Chetrit Consulting Engineers, Inc., ("Chetrit") for the preparation and design of all HVAC and electrical work and for the supervision required in connection therewith, provided that the fees charged by such Chetrit shall be reasonable and competitive with other third parties providing comparable services to comparable office buildings in the City of New York. Any "Material Alteration" (hereinafter defined) shall be made only with Owner's absolute prior approval in each instance. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner and Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may reasonably require and is otherwise consistent with requirements mandated by other office buildings in New York City which are of comparable quality and character as the Building. As used herein, a "Non-Material Alteration" is an alteration, installation, addition or improvement which (i) is limited to the interior of the Demised Premises or which does not affect the exterior (including the appearance) of the Building, (ii) is not structural and does not affect the strength of the Building, and/or (iii) does not affect the usage or functioning of the mechanical, electrical, sanitary, plumbing, heating, ventilating, air-conditioning or other service system of the Building and/or (iv) costs $100,000 or less in each instance. A "Material Alteration" is any alteration not constituting a Non-Material Alteration or a purely decorative alteration (such as painting or carpeting). (ii) If any mechanic's lien is filed against the Demised Premises, or the Building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be bonded against or discharged by Tenant within forty five (45) days after Tenant receives notice thereof, at Tenant's expense, by filing the bond required by law. (iii) All fixtures and all paneling, partitions, railings and like installations, installed in the Demised Premises at any time, either by Tenant or Owner in Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the Demised Premises unless Owner, at the time Owner approves Tenant's Plan (hereinafter defined), elects to relinquish Owner's right to any non-Building standard installations such as, without limitation, raised flooring, supplementary air conditioning etc. and to have them removed by Tenant, in which event the same shall be removed from the Demised Premises by Tenant prior to the expiration of the Lease, at Tenant's expense. Nothing in this Article shall be construed to (a) require Tenant to remove any Building standard installations such as, without limitation, painting, carpeting and partitioning or (b) give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the Demised Premises or upon removal of other installations as may be required by Owner, Tenant shall immediately and at its expense, repair and restore the Demised Premises to the condition existing prior to the installation (ordinary wear and tear and damage due to the elements excepted) and repair any damage to the Demised Premises or the Building due to such removal. All property permitted or required to be removed, by Tenant at the end of the term remaining in the Demised Premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or may be removed from the Demised Premises by Owner, at Tenant's expense. Notwithstanding the foregoing, Tenant shall not be required to remove any Building standard installations (such as, without limitation, painting, carpeting and partitions). B. Tenant's Work. ------------- (i) Prior to Tenant's commencing any work in the Demised Premises, Tenant shall submit to Owner for Owner's written approval, plans and specifications (herein collectively referred to as "Tenant's Plan") for or in connection with the improvements and installations to be made by Tenant (herein collectively referred to as "Tenant's Work"). Tenant's Plan shall be fully detailed, shall show complete dimensions, shall not require any changes in the structure of the Building and shall not be in violation of any laws, orders, rules or regulations of any governmental department or bureau having jurisdiction of the premises. (ii) Within fifteen (15) business days after submission to Owner of Tenant's Plan, Owner shall either approve same or shall set forth in writing the particulars in which Owner does not approve same, in which latter case Tenant shall, if Tenant wishes to proceed with such work, within fifteen (15) days after Owner's notification, return to Owner appropriate corrections thereto. Such corrections shall be subject to Owner's approval which shall be granted or withheld in accordance with the provisions of paragraph 3A above. Tenant shall pay to Owner, promptly upon being billed, any reasonable out-of-pocket charges or expenses Owner may reasonably incur in reviewing Tenant's Plan and/or insuring compliance therewith. (iii) Tenant further agrees that Tenant shall not make any changes (other than in a de minimus manner) in Tenant's Plan subsequent to approval by Owner unless Owner reasonably consents to such changes (such approval to be granted or withheld pursuant to the provisions of paragraph 3A above). Provided that Owner shall have advised Tenant of Owner's reasonable estimate thereof (to the extent then reasonably known to Owner), Tenant shall pay to Owner all out-of-pocket costs and expenses caused by such changes which Owner may incur or sustain in the performance by Owner of any construction or work it is performing in the Building. Any charges payable under this subparagraph shall be paid by Tenant as additional rent within twenty (20) days after rendition of a statement by Owner. 4 (iv) Following compliance by Tenant with its obligations under the foregoing subparagraphs and approval of Tenant's Plan by Owner, Tenant shall commence Tenant's Work and it shall proceed diligently with same until completion. (v) Tenant agrees that in the performance of Tenant's Work (i) neither Tenant nor its agents or employees shall interfere with any work being done by Owner and its contractors, agents and employees, (ii) that Tenant shall comply with any reasonable work schedule, rules and regulations proposed by Owner, its agents, contractors or employees, (iii) that the labor employed by Tenant shall be harmonious and compatible with the labor employed by Owner in the Building, it being agreed that if in Owner's judgment the labor is incompatible Tenant shall forthwith upon Owner's demand withdraw such labor from the premises, (iv) prior to commencing Tenant's Work, Tenant shall procure and deliver to Owner worker's compensation, public liability and property damage and such other insurance policies, in such amounts as shall be reasonably acceptable to Owner in connection with Tenant's Work, but, with respect to public liability and property damage, in no event less than the amounts set forth in Article 8, and shall upon Owner's request cause Owner and, except for public liability insurance, any mortgagee of the Building to be named as an insured thereunder, (v) that Tenant shall hold Owner harmless from and against any and all claims arising from or in connection with any act or omission of Tenant or its agents, contractors and employees, (vi) that Tenant's Work shall be performed in accordance with the approved Tenant's Plan and in compliance with the laws, orders, rules and regulations of any governmental departments or bureau having jurisdiction of the Demised Premises (including, but not limited to, The Americans With Disabilities Act of 1990 and regulations promulgated thereunder) and Tenant shall immediately correct any non- conforming work, and (vii) that Tenant shall promptly pay for Tenant's Work in full to the extent that such payment is not the responsibility of Owner, and shall not permit any lien to attach to the Demised Premises or the land and/or Building. (vi) In the event that (i) the cost ( inclusive of "hard" and "soft" costs) of any Tenant's Work exceeds SEVENTY FIVE THOUSAND ($75,000) DOLLARS, in addition to complying with all other provisions hereof, Tenant shall provide, or cause its contractor to provide to Owner with a surety bond for the payment for and performance of Tenant's Work, including a dual obligee rider, covering the construction or so-called "hard" costs, which bond or guaranty shall be in form reasonably satisfactory to Owner and shall be signed by a surety or sureties or guarantor, as the case may be, reasonably acceptable to Owner and otherwise licensed to transact business in New York State or (b) provide Owner with reasonable proof otherwise satisfactory to Owner of Tenant's ability to pay up to 125% of the estimated cost of Tenant's Work. Notwithstanding the foregoing, the requirement for the issuance of a surety bond shall be waived solely to the extent that Capital Trust, Inc. is the Tenant under this Lease, it being agreed that any subtenant or assignee or any party other than Tenant named herein shall be obligated to deliver a surety bond as hereinbefore provided. (vii) Owner may, at any time and from time to time, at Owner's expense (except same shall be at Tenant's expense if Tenant shall be or shall be determined to be in default under this Paragraph B) upon reasonable prior notice to Tenant written or oral (except in emergency cases when no prior notice, written or oral, shall be necessary), in addition to any other right of access given to Owner pursuant to the terms of this lease, enter upon the Demised Premises with one or more engineers and/or architects of Owner's selection ("Owner's Architect") to determine the course and degree of completion of Tenant's Work and its compliance with Tenant's Plan and the terms and conditions of this lease. (viii) Anything hereinabove contained to the contrary notwithstanding, nothing contained herein shall be construed to be a consent by Owner to any lien against the fee interest in the Demised Premises or land or the Building. (ix) All Work done by Tenant shall be subject to the provisions of Paragraph 3 hereof unless specifically stated to the contrary in this lease. (x) As there presently exists in the Demised Premises a sprinkler system, if such system or any of its appliances shall be damaged or injured or not in proper working order on account of Tenant's work or otherwise caused by the acts or omissions of Tenant or any party claiming through or under Tenant (other than Owner or any party claiming through or under Owner), the Tenant shall forthwith restore the same to good working condition at its own expense; and if the Board of Fire Underwriters or Fire Insurance Exchange or any bureau, department or official of the state or city government, require or recommend that any changes, modifications, alterations or additional sprinkler heads or other equipment be made or supplied by reason of the Tenant's business, or the location of partitions, trade fixtures, or other contents of the Demised Premises, Tenant shall, at the Tenant's expense, promptly make and supply such changes, modifications, alterations, additional sprinkler heads or other equipment. 4. MAINTENANCE AND REPAIRS: Tenant shall, throughout the term of this Lease, take good care of the Demised Premises and the fixtures and appurtenances therein. To the extent that Tenant elects to install any supplementary air conditioning units or units as hereinafter provided, Tenant shall assume sole responsibility for the repair, maintenance and replacement of said unit(s). Tenant shall be responsible for all damage or injury to the Demised Premises or any other part of the Building and the systems and equipment thereof, whether requiring structural or nonstructural repairs caused by or resulting from carelessness, omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents, employees, invitees or licensees (other than Owner or any party claiming through or under Owner), or which arise out of any work, labor, service or equipment done for or supplied to Tenant or any subtenant (other than Owner, or any party claiming through or under Owner) or arising out of the installation, use or operation of the property or equipment of Tenant or any subtenant reasonable wear and tear and casualty excepted. Except to the extent caused by Owner or any party claiming through or under Owner, Tenant shall also repair all damage to the Building and the Demised Premises caused by the moving of Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at Tenant's expense, all repairs in and to the Demised Premises for which Tenant is responsible, using only the contractor for the trade or trades in question, selected 5 from a list of at least three (3) contractors per trade submitted by Owner provided that the prices of all contractors shown on Owner's list shall be industry competitive. Any other repairs in or to the Building or the facilities and systems thereof for which Tenant is responsible shall be performed by Owner at the Tenant's reasonable expense. Tenant shall have the right to request additional contractors and subcontractors be added to the list for Owner's prior approval. Owner shall maintain in good working order and repair the exterior and the structural portions of the Building, including the structural portions of its Demised Premises, and the public portions of the Building interior and Building plumbing, electrical, heating and ventilating systems ( to the extent such systems presently exist) serving the Demised Premises. Tenant agrees to give prompt notice of any defective condition in the premises for which Owner may be responsible hereunder. Except as expressly provided in Article 9 hereof, there shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or others making repairs, alterations, additions or improvements in or to any portion of the Building or the Demised Premises or in and to the fixtures, appurtenances or equipment thereof. Except as set forth in the second (2nd) paragraph of Article 27 hereof, it is specifically agreed that Tenant shall not be entitled to any setoff or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this Lease. 5. WINDOW CLEANING: Tenant will not clean nor require, permit, suffer or allow any window in the Demised Premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable law or of the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. 6. REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS: After the commencement of the lease term, Tenant, at Tenant's sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the Demised Premises, solely when arising out of Tenant's specific manner of use thereof (including any Tenant alterations), or, with respect to the Building solely when arising out of Tenant's manner of use of the premises or the Building. Nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of use of the Demised Premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant may, after securing Owner to Owner's satisfaction against all damages, interest, penalties and expenses, including, but not limited to, reasonable attorney's fees, by cash deposit or by surety bond in an amount and in a company reasonably satisfactory to Owner, contest and appeal any such laws, ordinances, orders rules, regulations or requirements provided same is done with all reasonable promptness and provided such appeal shall not subject Owner to prosecution for a criminal offense or constitute a default under any lease or mortgage under which Owner may be obligated, or cause the Demised Premises or any part thereof to be condemned or vacated. Tenant shall not do or permit any act or thing to be done in or to the Demised Premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner with respect to the Demised Premises or the Building of which the Demised Premises form a part, or which shall or might subject Owner to any liability or responsibility to any person or for property damage. Tenant shall not keep anything in the Demised Premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization or other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the Building (unless Tenant pays such increased rate), nor use the premises in a manner (other than the permitted use pursuant to Article 2) which will increase the insurance rate for the Building (unless Tenant pays such increased rate) or any property located therein over that in effect prior to the commencement of Tenant's occupancy. Tenant shall pay all reasonable costs, expenses, fines, penalties, or damages, which may be imposed upon Owner by reason of Tenant's failure to comply with the provisions of this article and if by reason of such failure the fire insurance rate shall, at the beginning of this Lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" of rate for the Building or Demised Premises issued by the New York Fire Insurance Exchange, or other body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the Demised Premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to reasonably prescribe the weight and position of all safes, business machines (other than personal and desk top computers) and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's reasonable judgement, to absorb and prevent vibration, noise and annoyance. 7. SUBORDINATION ATTORNMENT AND REQUEST FOR NON-DISTURBANCE: A. Subordination. This Lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which Demised Premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the Demised Premises are a part. B. Attornment. If at any time or times during the term of this Lease, the Building and/or Land shall be encumbered by a mortgage or mortgages and/or if the Owner of the Demised Premises shall be the holder under a ground or other underlying lease of a leasehold estate covering premises of which the Demised Premises are a part, and if such mortgagee or ground or underlying lessor shall so require or if such leasehold estate shall expire or terminate for any 6 reason, Tenant shall, at the election and upon demand of any owner of the premises of which the Demised Premises are a part, or of any mortgagee in possession thereof, attorn to any such owner or mortgagee upon the terms and conditions set forth herein for the remainder of the term of this Lease. The foregoing provisions shall inure to the benefit of any such owner or mortgagee and shall, in the event of any such election and demand, be self-operative without the necessity of the execution of any further instruments; but Tenant agrees upon the demand of any such owner or mortgagee to execute, acknowledge and deliver any commercially reasonable instrument or instruments confirming such attornment. The foregoing provisions shall not be construed to limit or preclude any other rights which such owner or mortgagee may then have under law or otherwise. Owner agrees that it shall use reasonable efforts (at no cost or expense to Owner) to obtain and deliver to Tenant, from the existing mortgagee only, a non-disturbance agreement from the then holder of such existing mortgage, providing in substance that provided Tenant shall have entered into possession and occupancy of the Demised Premises and commenced payment of Basic Annual Rent and additional rent hereunder, and so long as Tenant is not in default after applicable grace, notice and/or cure periods in its obligations for the payment of Basic Annual Rent and additional rent and in the performance of the other terms, covenants and conditions to be performed on its part under this Lease, its possession of the Demised Premises will not be disturbed during the term hereof, notwithstanding the foreclosure of any such mortgage, and Tenant will not be named as a party defendant in any foreclosure proceedings brought for the recovery of possession, it being hereby covenanted and agreed to by Tenant that the holder of any such mortgage, or anyone claiming by, through or under said holder shall not be: (a) liable for any act or omission for any prior Owner (including Owner) except to the extent any such act or omission continues after such recovery of possession and such act or omission is susceptible to cure, or (b) subject to any offsets or defenses which Tenant might have against any prior Owner (including Owner), or (c) bound by any fixed rent or additional rent or other charges which Tenant might have paid for more than the current month to a prior Owner (including Owner), or (d) bound by any modification of this Lease made without the consent of such mortgagee. The inability of Owner to obtain such agreement shall not be deemed a default on Owner's part of its obligations hereunder, or impose any claim in favor of Tenant against Owner by reason thereof, or affect the validity of this Lease. Tenant agrees to (i) execute and deliver to such existing mortgagee a nondisturbance and attornment agreement in form and substance customarily adopted by such mortgagee and (ii) reimburse Owner for all reasonable expenses incurred by Owner in connection therewith, including legal expenses. 8. PROPERTY LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY: A. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the intentional acts, omissions or the negligence of Owner, its agents, servants or employees. Owner or its agents will not be liable for any such damage caused by other tenants or persons in, upon or about said Building or caused by operations in construction of any private, public or quasi public work. B. If at any time any windows of the Demised Premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up, if required by law) for any reason whatsoever, Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Other than if same arises out of the act, omission or negligence of Owner or any party claiming through or under Owner, Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Owner shall not be reimbursed by insurance, including reasonable out-of-pocket attorneys fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this Lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this Lease extends to the acts and omissions of any sub-tenant, other than Owner or any party claiming through or under Owner, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Owner by reason of any such claim. Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel reasonably approved by Owner in writing, such approval not to be unreasonably withheld or delayed. 9. DESTRUCTION, FIRE AND OTHER CASUALTY: A. If the Demised Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this Lease shall continue in full force and effect except as hereinafter set forth. B. If the Demised Premises are partially damaged or rendered partially unusable or inaccessible by Tenant in the ordinary course of Tenant's business by fire or other casualty, the damages thereto shall be promptly repaired by and at the expense of Owner and the Basic Annual Rent, Rent and Additional Rent, shall abate until five (5) days after written notice that such repair are substantially completed (which shall be limited to the core and structural shell only with 7 access available to the Demised Premises and all Building systems servicing the Demised Premises operable), shall be apportioned from the day following the casualty according to the part of the premises which is usable; provided that the apportionment shall take into account the extent that the use of the undamaged portion of the Demised Premises by Tenant in the ordinary course of its business is adversely affected by the damage to the damaged portion of the Demised Premises. C. If the Demised Premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner, subject to Owner's right to elect not to restore the same as hereinafter provided. D. If the Demised Premises are rendered wholly unusable or inaccessible by Tenant in the ordinary course of Tenant's business or (whether or not the Demised Premises are damaged in whole or in part) if the Building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, all rent will fully abate from the date of such casualty Owner may elect to terminate this lease by written notice to Tenant, given within 60 days after such fire or casualty, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Owner's and Tenant's rights and remedies against the other under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (B) and (C) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume ten (10) days after written notice from Owner that the premises are substantially completed and ready for Tenant's occupancy. E. Notwithstanding the foregoing, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery against the other or any one claiming through or under each of them by way of subrogation or otherwise. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, then the party benefitting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and/or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. F. If the Building or the Demised Premises shall be so damaged by fire or other casualty and it shall have been determined by Owner or its architect, no later than sixty (60) days from the occurrence of the event, that such damage can not be repaired within twelve (12) months from the date of the occurrence of the event (subject to reasonable delays for insurance adjustment not to exceed an additional sixty (60) days), then Tenant shall have the right, by giving written notice to Owner to such effect within thirty (30) days after the giving of written notice to Tenant that it has been determined that the damage can not be restored or repaired within the aforesaid period, to terminate this Lease and its obligations hereunder, in which event the fixed rent and additional rent shall be prorated to the date of the occurrence of such damage. If Tenant shall fail to serve such notice as aforesaid, then this Lease shall continue in full force and effect subject, however, to Owner's right of termination as set forth in this Article 9. G. Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. 10. EMINENT DOMAIN: If the whole or any material part (i.e. 50% or more of the rentable area of the Demised Premises) of the Demised Premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease and assigns to Owner, Tenant's entire interest in any such award. In the event of a taking of a portion of the Demised Premises not constituting a material portion thereof, this lease shall continue in full force and effect, except that all the Basic Annual Rent and additional rent shall be abated in proportion to the area of the Demised Premises so taken. Nothing contained in this Article 10 shall prohibit Tenant from making a separate claim with the condemning authority for (a) the value of the property owned by Tenant, (b) any moving expenses incurred by Tenant as a result of such condemnation and (c) any other separate claim which Tenant may hereafter be permitted to make provided, however, that such separate claim shall not reduce or adversely affect Owner's award. 11. ASSIGNMENT, MORTGAGE, ETC.: Except as hereinafter expressly provided Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this 8 agreement, nor underlet, or suffer or permit the Demised Premises or any part thereof to be used by others, without the prior written consent of Owner in each instance. Any transfer (other than any transfer effectuated on a recognized public exchange), by operation of law or otherwise of a fifty percent (50%) or greater interest in Tenant (whether stock, partnership interest or otherwise), shall be deemed an assignment of this lease within the meaning of this Article 11. Other than with respect to any stock traded on a nationally recognized stock exchange, issuance of shares of stock to other than the existing shareholders is deemed to be a transfer of that stock for the purposes of this Paragraph.) If during the term of this lease there has been a previous transfer or transfers of less than a fifty percent (50%) interest in Tenant, singly or in the aggregate, then any other transfer of an interest in Tenant which, when added to the total percentage interest previously transferred, totals a transfer of greater than a fifty percent (50%) in Tenant, shall be deemed assignment of Tenant's interest in this lease within the meaning of this Paragraph. If this lease be assigned, or if the Demised Premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. A. Tenant shall not request Owner's written consent to an assignment of its interest in this lease or subletting of the entire Demised Premises unless Tenant shall first have notified Owner in writing of its desire to assign its interest in this lease or sublet the Demised Premises in accordance with the provisions of paragraphs B and C below. B. Except as provided in paragraphs F and G hereof, Tenant shall notify Owner in writing of its desire to assign its interest in this lease or sublet the entire Demised Premises (which notification shall be accompanied by a fully executed copy of the sublease or assignment instrument), and Owner shall have the option to notify Tenant in writing, within thirty (30) days after Tenant's notification, that Owner elects to cancel this lease, in which event Tenant shall enter into a written agreement with Owner canceling this lease as of the date thirty (30) days following Tenant's notification. In lieu of notifying Tenant that Owner elects to cancel this lease, as herein provided, Owner shall have the right, at its option, during said 30-day period, to notify Tenant that Owner or Owner's designee desires to sublet the space for the remainder of the unexpired term of this lease on the same terms and conditions on which the Demised Premises so affected are leased by Owner to Tenant, but without any restrictions whatsoever on the right of Owner or Owner's designee to sub-sublease the Demised Premises so affected or to alter, renovate or otherwise use, employ or occupy the Demised Premises so affected; and if Owner so notifies Tenant, Tenant shall enter into such a sublease with Owner or Owner's designee, which sublease shall commence on the proposed commencement date of the proposed sublet or assignment Tenant's aforesaid notification. To the extent that Owner or Owner's designee defaults under such sublease beyond the applicable grace period, then until cure thereof shall have been effectuated, Tenant shall be excused from performing its particular corresponding obligation under this lease. Cure of a non-monetary default by Owner or Owner's designee shall be deemed cure by Tenant under this lease. Tenant shall have no right to sublet less than the entire Demised Premises , except as provided in paragraphs F and G of this Article 11. C. If Tenant shall have notified Owner of Tenant's desire to assign this lease or sublet the entire Demised Premises and if Owner declines to exercise its right to cause the cancellation of this lease (or to cause Tenant to enter into a sublease with Owner or Owner's designee) within said thirty (30) day period, Owner shall not unreasonably withhold or delay its consent to an assignment of this lease or a subletting of the entire Demised Premises, provided that (i) the proposed use of the Demised Premises by the proposed assignee or subtenant shall not violate the terms of this lease or the terms of any existing lease in the Building, including any applicable restrictive covenants, or of any applicable law; (ii) the proposed assignee or subtenant and its proposed use of the Demised Premises shall be in keeping with the character of the Building; (iii) Tenant is not then in default in the performance of any of the terms and conditions of this lease after the expiration of all applicable grace, notice and/or cure periods; (iv) Tenant shall furnish Owner with the name and business address of the proposed assignee or subtenant, a counterpart of the proposed assignment or subleasing agreement, and satisfactory information with respect to the nature and character of the business of the proposed assignee or subtenant, together with current financial information and references reasonably satisfactory to Owner so that in the reasonable judgment of the Owner, Owner may determine that the proposed assignee or subtenant is financially responsible with respect to the proposed assignment or sublease obligations; (v) the proposed assignee or subtenant is not then an occupant, a tenant or sublessee of the Owner; (vi) the assignment or subletting be effected pursuant to a written instrument in form and content reasonably satisfactory to Owner or its counsel and that a duplicate original thereof be delivered to Owner within ten (10) days following the date of its execution or not less than five (5) days prior to its effective date, whichever may be sooner; (vii) Tenant covenants and agrees that notwithstanding any assignment or subletting and/or acceptance of rent or additional rent by Owner from any assignee or subtenant (other than in the event of a "recapture") as hereinbefore provided, Tenant shall and will remain fully liable for the payment of the Basic Annual Rent and additional rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this lease on the part of Tenant to be performed and upon the occurrence of a default hereunder, Owner may proceed to collect rental and other payments to be made by such subtenant directly from such subtenant without prior notice to Tenant; (viii) the liability of Tenant hereunder shall be unaffected by any extensions of time which Owner may grant to any assignee or subtenant for the payment of any rent or other charges due hereunder, or for the performance of any other term, covenant or condition of this lease; (ix) Owner shall not be responsible for any broker's commission(s) in connection with any such assignment or subletting; (xi) Tenant shall pay over to Owner as additional rent hereunder, as and when received, 50% of the Assignment Profit and 50% of the Sublease Profit (as such terms are hereinafter defined). Owner shall have reasonable access to Tenant's books, accounts and records relating to collection of Rent and additional rent and consideration at the Demised Premises or 9 resulting from an assignment of this lease; (xii) as to any subletting, the sublease expressly prohibits assignment or further subletting by the subtenant without Owner's written consent, which shall be granted or denied on the same terms and conditions as are herein contained; (xiii) as to any subletting, the sublease expressly states that it is subject to all of the covenants, agreements, terms, provisions and conditions of this lease except such as are irrelevant or inapplicable, and except as otherwise expressly set forth to the contrary herein; and (xiv) the proposed sublessee or assignee shall not be an occupant of any space in the Building or a party who dealt with Owner or Owner's agent (directly or through a broker) with respect to space in the Building during the six (6) months immediately preceding Tenant's request for Owner's consent. In no event shall Tenant sublet or request Owner's consent to a sublet of less than the entire Demised Premises. D. Except as provided in paragraphs F, G and H hereof, If Owner consents to an assignment or subletting, Tenant shall, as a condition precedent to the sublet or assignment becoming effective, pay, within three days after demand, Owner's processing fee and reasonable attorneys' fees and deliver to Owner within ten (10) days following its execution or not less than five (5) days prior to its effective date, whichever may be sooner, (A) a duplicate original copy of the assignment or sublease and (B) an agreement executed by the assignee or subtenant whereunder the assignee or subtenant assumes all of the obligations on the part of the Tenant to be performed hereunder. E. (i) The term "Assignment Profit" as used herein shall mean an amount equal to 100% of the excess of (x) all sums (whether designated as rent or otherwise) payable to Tenant by the assignee for or by reason of such assignment, over (y) commercially reasonable brokerage commissions (not to exceed one (1) and one half of a full commission), if any, actually paid by Tenant in connection with the assignment free rent (not to exceed two (2) months) and alterations expenses to prepare the Demised Premises for such assignees' occupancy which alteration expenses shall be amortized over the term of this Lease; and (ii) The term "Sublease Profit" as used herein shall mean in any year of the term of this lease the excess of (x) any rents, additional charges (whether designated as rent or otherwise) payable under the sublease to Tenant by the subtenant which is in excess of the Basic Annual Rent and additional rent accruing during the term of the sublease in respect of the subleased space pursuant to the terms hereof over (y) commercially reasonable brokerage commissions (not to exceed one (1) and one half full commission), if any, actually paid by Tenant in connection with the sublease, which shall be amortized over the term of the sublease free rent (not to exceed two (2) months) and alterations expenses to prepare the Demised Premises for such subtenant's occupancy, which alteration expenses shall be amortized over the term of each sublease. The sums payable under this Paragraph shall be additional rent under this lease and paid to Owner within twenty (20) days of the day said sums are paid by the assignee or the subtenant, as the case may be, to Tenant. Promptly upon Owner's request, Tenant will provide to Owner any and all reasonable information and documentation from time to time so that Owner may determine the Assignment Profit or Sublease Profit, as the case may be, and Owner's share thereof. F. Tenant may, without Owner's prior written consent and without being subject to the foregoing provisions of paragraphs A through E (inclusive), but upon prior written notice to Owner, permit any corporations or other business entities which control, are controlled by, or are under common control with Tenant (herein referred to as "related corporation") to sublet all or part of the Demised Premises for any of the purposes permitted to Tenant, subject however to compliance with Tenant's obligations under this Lease. Such subletting shall not be deemed to vest in any such related corporation any right or interest in this Lease or the Demised Premises nor shall it relieve, release, impair or discharge any of Tenant's obligations hereunder. For the purposes hereof, "control" shall be deemed to mean ownership of not less than fifty (50%) percent of all of the voting stock of such corporation or not less than fifty (50%) percent of all of the legal and equitable interest in any other business entities. G. Tenant may, without Owner's prior consent and without being subject to the foregoing provisions of paragraphs A through E (inclusive), but upon prior written notice to Owner, assign its interest in this Lease, or sublet all or a portion of the Demised Premises to a successor corporation of Tenant (as hereinafter defined); provided, however, that (i) Tenant shall not be in default in any of the terms of this Lease beyond applicable grace notice and/or cure periods, (ii) the proposed occupancy shall not increase the office cleaning requirements (if any) or impose an extra burden upon the Building equipment or Building services and (iii) the proposed subtenant or assignee shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity and shall be subject to the service of process in, and the jurisdiction of the courts of, New York State. A "successor corporation", as used in this Section shall mean (a) a corporation into which or with which Tenant, its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions for the merger or consolidation of corporations, provided that by operation of law or by effective provisions contained in the instruments of merger or consolidation, the liabilities of the corporations participating in such merger or consolidation are assumed by the corporation surviving such merger or consolidation, or (b) a corporation acquiring this lease and the term hereof and the estate hereby granted, the goodwill and all or substantially all of the other property and assets (other than capital stock of such acquiring corporation) of Tenant, its corporate successors or assigns, and assuming all or substantially all of the liabilities of Tenant, its corporate successors and assigns, or (c) any corporate successor to a successor corporation becoming such by either of the methods described in subdivisions (a) and (b) above; provided that, immediately after giving effect to any such merger or consolidation, or such acquisition and assumption, as the case may be, the corporation surviving such merger or created by such consolidation or acquiring such assets and assuming such liabilities, as the case may be, shall have assets, capitalization and a net worth, as determined in accordance with generally accepted accounting principles, at least equal to the assets, capitalization and net worth, similarly determined, of Tenant, its corporate successors or assigns, immediately prior to such merger or consolidation or such acquisition and assumption, as the case may be. Notwithstanding Tenant's right to assign its interest in this lease or sublease all or a portion of the Demised Premises to a successor corporation Tenant shall not 10 separately demise the Demised Premises or create separate entrances for such successor corporation and Tenant shall furnish satisfactory proof to Owner that such entity is in fact the successor corporation of Tenant. 12. ELECTRIC CURRENT: Tenant shall make all arrangements with the public utility company servicing the Building (the "Utility") for obtaining electricity directly from the Utility. Tenant shall be responsible to the Utility for the payment of all charges for electricity consumed by Tenant in the Demised Premises. All meters, panel boards, wiring and other equipment which may be required to obtain electricity from the Utility shall be installed and maintained by Tenant at its expense. All electric current used in the operation of the heating, ventilation and air-conditioning throughout the Demised Premises (including fans and motors) shall be the obligation of Tenant. Unless due to the act, omission or negligence of Owner, interruption or curtailment of such service shall not constitute a constructive or partial eviction nor entitle Tenant to any compensation or abatement of rent. Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of the existing feeders to the building or of the risers or wiring installation. Tenant shall make no alteration or additions to the electrical equipment without the prior written consent of Owner. Owner represents to Tenant that there will be at all times during the term of this Lease at least five (5) watts connected load per useable square foot of electric power available to service the Demised Premises (exclusive of electric current required for HVAC) provided, however, if Tenant demonstrates to Owner satisfaction, that Tenant requires additional capacity in connection with its operations at the Demised Premises, then, one (1) additional watt of connected load per square foot of electric power will be made available to the Demised Premises. 13. ACCESS TO PREMISES: Owner or Owner's agents shall have the right (but shall not be obligated) to enter the Demised Premises in any emergency at any time, and, at other reasonable times, upon reasonable prior notice to Tenant (written or oral) to examine the same and to make such repairs, replacements and improvements as Owner may have the right to make hereunder to the Demised Premises or as Owner may deem necessary and reasonably desirable to any other portion of the Building or which Owner may elect to perform. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the Demised Premises and to erect new pipes and conduits therein. Owner may, during the progress of any work in the Demised Premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or other wise. Throughout the term hereof Owner shall have the right to enter the Demised Premises at reasonable hours upon reasonable prior notice for the purpose of showing the same to prospective purchasers or mortgagees of the Building, and during the last six months of the term for the purpose of showing the same to prospective tenants, unless at that time, Owner and Tenant shall have executed a renewal lease or renewal lease modification agreement, as the case may be, but the existence of any such renewal lease or agreement shall not prevent Owner from showing same to respective mortgagees and purchasers, as the case may be. Provided Owner has previously notified Tenant of its intent to access the Demised Premises (except in emergency cases), if Tenant is not present to open and permit an entry into the premises, Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. Whenever Owner is permitted access to the Demised Premises pursuant to the provisions of this Lease, Owner agrees that it will not unreasonably interfere with the operation of Tenant's business. Damage, if any, to the Demised Premises resulting from Owner's access thereto shall be repaired by Owner with reasonable diligence provided that the foregoing shall not obligate Owner to employ labor at overtime or other premium pay rates. 14. VAULT, VAULT SPACE, AREA: No vaults, vault space or area, whether or not enclosed or covered, not within the property line of the Building is leased hereunder, anything contained in or indicated on any sketch, blue print or plan, or anything contained elsewhere in this lease to the contrary notwithstanding. Owner makes no representation as to the location of the property line of the Building. All vaults and vault space and all such areas not within the property line of the Building, which Tenant may be permitted to use and/or occupy, is to be used and/or occupied under a revocable license, and if any such license be revoked, or if the amount of such space or area be diminished or required by any federal, state or municipal authority or public utility, Owner shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such revocation, diminution or requisition be deemed constructive or actual eviction. Any tax, fee or charge of municipal authorities for such vault or area shall be paid by Tenant. 15. CERTIFICATE OF OCCUPANCY: Tenant will not at any time use or occupy the Demised Premises in violation of the certificate of occupancy issued for the Building of which the Demised Premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's Work, if any. If any event, Owner makes no representation as to the condition of the Demised Premises and Tenant agrees to accept the same subject to violations, whether or not of record. Annexed to this Lease as Exhibit C is a copy of the exiting Certificate of Occupancy for the Building. 11 16. BANKRUPTCY: A. Anything elsewhere in this lease to the contrary notwithstanding, this lease may be canceled by Owner by the sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor not dismissed within ninety (90) days from the date such action is commenced; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. B. It is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rent reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the Demised Premises for the same period plus Owner's out-of-pocket legal fees incurred in connection therewith. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the Demised Premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be relet by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. 17. DEFAULT: A. If Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent; or if the Demised Premises becomes abandoned for thirty (30) consecutive days; or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the Demised Premises shall be taken or occupied by someone other than Tenant; or if this lease be rejected under Section 235 of Title 11 of the U.S. Code (bankruptcy code); then, in any one or more of such events, upon Owner serving a written fifteen (15) days notice upon Tenant specifying the nature of said default and upon the expiration of said fifteen (15) days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said fifteen (15) day period, and if Tenant shall not have diligently commenced during such default within such fifteen (15) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the Demised Premises to Owner but Tenant shall remain liable as hereinafter provided. B. If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required for a period of five (5) days after written notice and Tenant's failure to cure such default within said five (5) day period, then and in any of such events Owner may dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of Demised Premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. 18. REMEDIES OF OWNER AND WAIVER OF REDEMPTION: In case of any such default and the expiration of any applicable grace, notice and/or cure period, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, and/or (c) Tenant or the legal representatives of Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and/or covenanted to be paid and the net amount, if any, of the rents collected on account of the lease or leases of the Demised Premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages, if any. In computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may reasonably incur in connection with re-letting, such as reasonable, out-of-pocket legal expenses, reasonable attorneys' fees, brokerage, advertising and for keeping the Demised Premises in good order or for preparing the same for re-letting provided, such expenses shall be appropriately pro-rated to the extent the term of an reletting of 12 the Demised Premises extends beyond the Expiration Date. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency of any subsequent month by a similar proceeding. Owner, in putting the Demised Premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the Demised Premises as Owner, in Owner's sole judgment, considers advisable and necessary for the purpose of re-letting the Demised Premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the Demised Premises, or in the event that the Demised Premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner or Tenant from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Owner obtaining possession of Demised Premises, by reason of the violation by Tenant of any of the covenants and conditions of this lease, or otherwise. 19. FEES AND EXPENSES: If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease after the expiration of all applicable grace notice and/or cure periods then, unless otherwise provided elsewhere in this lease, Owner may upon twenty (20) days notice and Tenant's failure to cure same within said twenty (20) day period (except in emergency cases, in which no notice shall be required), perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorney's fees, in instituting, prosecuting or defending any action or proceeding, then Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs which shall be itemized where practical. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within twenty (20) days of rendition of any bill or statement to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. 20. BUILDING ALTERATIONS AND MANAGEMENT: Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the Building (provided, however, that access to the Building shall remain not materially impaired and there shall be no unreasonable obstruction of access to the Demised Premises or unreasonable interference with the use or enjoyment thereof or any reduction in the amount of rentable square feet within the Demised Premises) and to change the name, number or designation by which the Building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenants making any repairs in the Building or any such alterations, additions and improvements, provided, however, that Owner shall exercise reasonable diligence to insure that all alterations, work, etc., be performed in such a manner so as to minimize interference with Tenant's business. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of such controls of the manner of access to the Building by Tenant's social or business visitors as the Owner may deem necessary for the security of the Building and its occupants. 21. NO REPRESENTATIONS BY OWNER: Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the Building, the land upon which it is erected or the Demised Premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the premises except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. Tenant has inspected the Building and the Demised Premises and is thoroughly acquainted with their condition and agrees to take the same "as is" on the date of delivery of the Demised Premises to Tenant (except as otherwise set forth in this Lease) and acknowledges that the taking of possession of the Demised Premises by Tenant shall be conclusive evidence that the said premises and the Building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. 22. END OF TERM: Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the Demised Premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property except as provided for 13 elsewhere in this lease. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. 23. QUIET ENJOYMENT: Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed after applicable grace, notice and cure periods), Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 31 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. 24. FAILURE TO GIVE POSSESSION: If Owner is unable to give possession of the Demised Premises on the date of the commencement of the term hereof, because of the holding-over or retention of possession of any tenant, undertenant or occupants, Owner shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any wise to extend the term of this lease, but the rent payable hereunder shall be abated until after Owner shall have given Tenant written notice that the Demised Premises are substantially ready for Tenant's occupancy. If permission is given to Tenant to enter into the possession of the Demised Premises or to occupy the Demised Premises other than the Demised Premises prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease, except as to the covenant to pay rent. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. 25. NO WAIVER: The failure of either Owner or Tenant (other than the covenant to pay Basic Annual Rent, Rent and Additional Rent) to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this lease shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by the other party. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises, and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. 26. WAIVER OF TRIAL BY JURY: It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding, including a counterclaim under Article 4, except for any mandatory counterclaim which would otherwise be waived by Tenant.. 27. INABILITY TO PERFORM: FORCE MAJEURE: If Owner or Tenant (other than the covenant to pay Basic Annual Rent, Additional Rent and Rent) is delayed or prevented from performing any of its obligations hereunder by reason of "force majeure", the period of such delay or of such prevention shall be added to the time herein provided within which such obligation may be performed. The term "force majeure" as used herein shall mean any period of delay which arises from or through Acts of God; strikes, lockouts or labor difficulty; explosion, sabotage, accident, riot or civil commotion; acts of war; fire or other casualty, and/or legal requirements. In furtherance of the foregoing, this lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Owner is prevented or delayed from so doing by reason of strike or labor troubles or any cause whatsoever beyond Owner's reasonable control including, but not limited to, government preemption in connection with a National Emergency or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. 14 Notwithstanding any other provision of this lease, in the event that a material portion of the Demised Premises shall become unusable or untenable by Tenant due to the performance by Owner of repairs, additions, alterations, replacements, decorations or improvements or due to interruption of services provided by Owner or Owner's failure to provide access to the Demised Premises required to be provided to Tenant under this lease and not due to any act or omission of Tenant or Tenant's employees, agents, contractors or licensees (the "Affected Space"), which condition (an "Interruption Condition") shall continue for a period of ten (10) consecutive business days after Tenant shall have notified Owner of the same, and Tenant shall not actually use or occupy the Affected Space during such period, then Tenant shall be entitled be entitled to abate the payment of Basic Annual Rent and Additional Rent with respect to the Affected Space to the extent not actually used or occupied by Tenant, if applicable, due under this lease for the period commencing on the eleventh (11th) business day of the existence of such condition and ending on the date which is the earlier to occur of (a) the date the condition no longer exists or (b) the date Tenant reoccupies the Demised Premises. Tenant agrees that other than as specifically provided for in this paragraph, Tenant's sole remedy at law in connection with an interruption of services to or access to the Demised Premises shall be by way of an action for damages for breach of contract. In the event of an act or omission or alleged act or omission by Owner which would give Tenant the right to terminate this lease or to claim a partial or total eviction (if any), Tenant shall not exercise any such right unless (i) Tenant shall first have given written notice of such act or omission to Owner and to the holder of any mortgage on the Building containing the Demised Premises whose name and address shall have been furnished to Tenant, including any existing mortgagee, and (ii) neither Owner nor any mortgagee shall have commenced to cure such act or omission within a reasonable period of time following the giving of such notice. 28. BILLS AND NOTICES: Except as otherwise in this lease provided, a bill, statement, notice or communication which Owner or Tenant may desire or be required to give to the other party, shall be deemed sufficiently given or rendered if, in writing, sent by registered or certified mail personal delivery or naturally recognized overnight courier addressed to Tenant or Owner at the Building, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be the time when the same is delivered or mailed. Notices shall be sent to any party hereto at the following address (or such other address as to which the parties may hereafter notify each other): A. To the Owner, at its address above stated, Attention: Michael Alter, with a copy to Peter Allen, Esq.; and B. To the Tenant, at its address above stated Attention: John Klopp; with a copy to Battle Fowler LLP, 75 East 55th Street, New York, New York 10022, Attention: Martin L. Edelman, Esq. Any such notice shall be deemed given and effective on the date of personal delivery thereof or the date set forth on the return receipt. All notices of default to Owner shall simultaneously be sent to The Bank of New York, One Wall Street, New York, New York 10286, Attention: Andrew Brody. 29. SERVICES: As long as Tenant is not then in default under any of the covenants of this Lease beyond applicable notice, grace and cure periods, Owner shall provide the following services: A. Elevator Service. ----------------- (i) Passenger Elevator Service. Owner shall provide passenger elevator facilities twenty-four (24) hours a day, three hundred, sixty five (365) days a year to the office premises. (ii) Freight Elevator Service. Owner shall provide freight elevator service to the Demised Premises on a first-come, first-served basis (i.e., no advance scheduling) on business days from 8:30 a.m. to 4:30 p.m. Freight elevator service shall, provided same is available also be provided to the Demised Premises on a reserved basis at all other times, and Tenant requests same no less than 48 hours in advance, upon the payment of Owner's then established charges therefor which shall constitute additional rent hereunder. The current charge which is subject to change based upon Owner's costs to provide same for such freight elevator service is eighty five dollars ($85) per hour, provided that weekend or holiday usage is subject to a four-hour minimum. Owner reserves the right from time to time to increase the hourly charge based upon increases in Owner's costs. B. Cleaning Services. Owner shall provide cleaning service for the Demised Premises on business days at Owner's expense provided that the same are kept in order by Tenant. If, however, said premises are to be kept clean by Tenant over and above Owner's cleaning obligations, it shall be done at Tenant's sole expense, in a manner satisfactory to Owner and no one other than persons approved by Owner shall be permitted to enter said premises or the Building of which they are a part for such purpose. Tenant shall pay Owner the cost of removal of any of Tenant's extraordinary refuse and rubbish from the Building. (i) Provided Tenant shall keep the Demised Premises in good order, Owner, at Owner's expense, shall cause the Demised Premises, but excluding any portions of the Demised Premises used for the storage, preparation, service or consumption of food or beverages and such portion thereof used for the operation of computers, data processing or similar equipment (but Owner shall in accordance with the annexed Cleaning Specifications dust the desk 15 tops upon which such computers rest), to be cleaned in accordance with the cleaning specifications attached hereto as Exhibit "B". Tenant shall pay to Owner on demand Owner's Building standard charges for cleaning work in the Demised Premises or the Building required because of (i) misuse or neglect on the part of Tenant or its employees or visitors, (ii) use of portions of the Demised Premises for preparation, serving, or consumption of food or beverages, reproducing operations, private lavatories or toilets or other special purposes requiring greater or more difficult cleaning work than office areas, (iii) interior partitioning glass surfaces, (iv) non-Building standard materials or finishes installed by Tenant or at its request. Owner and/or its cleaning contractor and their employees shall have after hours access to the Demised Premises and the use of Tenant's light, power and water in the Demised Premises as may be reasonably required for the purpose of cleaning the Demised Premises. Owner's cleaning contractor will not however, perform cleaning services prior to 6:00 p.m. (ii) Tenant, at Tenant's expense, shall cause all portions of the Demised Premises used for the storage, preparation, service or consumption of food or beverages to be cleaned daily in a manner satisfactory to Owner, and to be exterminated against infestation by vermin, roaches or rodents regularly and, in addition, whenever there shall be evidence of any infestation. (iii) Tenant acknowledges and is aware that the cleaning services required to be furnished by Owner pursuant to this Article 29 may be furnished by a contractor or contractors employed by Owner and Tenant agrees that Owner shall not be deemed in default of any of its obligations under this Paragraph unless such default shall continue after notice from Tenant to Owner setting forth the specific nature of such default and Owner's failure to cure such default within ten (10) days. (iv) Only Owner or any one or more persons, firms or corporations authorized in writing by Owner shall be permitted to act as maintenance contractor for any waxing, polishing, cleaning and maintenance work in the Demised Premises. Nothing herein contained shall prohibit Tenant from performing such work for itself by use of its regular employees. Owner may fix, in its absolute discretion, at any time and from time to time, the hours during which and regulations under which such services are to be furnished. Owner expressly reserves the right to act as or to designate, at any time and from time to time, an exclusive contractor for all or any one or more of such services, provided that the quality thereof and the charges therefor are reasonably comparable to that of other contractors, and Owner expressly reserves the right to exclude from the Building any person, firm or corporation attempting to furnish any of such services. C. Water. Owner shall provide hot and cold water for ordinary lavatory purposes, but if Tenant uses or consumes water for any other purposes or in unusual quantities (of which fact Owner shall be the sole judge), Owner may install a water meter at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense in good working order and repair to register such water consumption and Tenant shall pay for water consumed as shown on said meter as additional rent within 20 days after bills are rendered. D. HVAC. Owner shall provide heat to the Demised Premises when and as required by law, on business days from 8 a.m. to 6 p.m. (holidays excepted), and if the Demised Premises is serviced by Owner's air conditioning/cooling and ventilating system, air conditioning/cooling will be furnished to Tenant from May 15th through September 30th on business days (Mondays through Fridays, holidays excepted) from 8:00 a.m. to 6:00 p.m. and ventilation will be furnished on business days during the aforesaid hours except when air conditioning/cooling is being furnished as aforesaid. (i) If Tenant shall request heating, ventilating or air-conditioning services for extended hours or at any time other than as set forth above, Owner may, provided same is available, furnish such service for such times upon no less than forty-eight (48) hours' advance notice, and Tenant shall pay to Owner upon demand as additional rent Owner's then established charges therefor. The current charge (which is subject to change based upon Owner's costs to provide same) for such (i) heating service is $290.00 per hour, (ii) air conditioning service is $400.00 per hour and (iii) ventilation service is $290.00 per hour. Owner reserves the right from time to time to increase the aforesaid hourly charges upon notice to Tenant. (ii) Whenever heat generating machines or equipment are used in the Demised Premises, Owner reserves the right, at its option, either to require Tenant to discontinue the use of such heat generating equipment or to install supplementary air-conditioning equipment in the Demised Premises provided, however, that such right shall be exercised by Owner in a non-discriminatory manner against Tenant. The cost of such installation shall be paid by Tenant to Owner within twenty (20) days after being billed therefor, and the cost of operation and maintenance of said supplementary equipment shall be paid by Tenant, but in no event at a rate less than Owner's actual cost therefor including labor, materials and utilities. (iii) Tenant shall cooperate fully with Owner and shall abide by all rules and regulations which Owner reasonably may prescribe for the proper functioning and protection of the Building HVAC system. Tenant shall cause to be kept closed the doors, when not in use, and all windows in the Demised Premises, whenever the air conditioning system is in operation, and to lower and close the blinds when reasonably necessary because of the sun's position. Owner, throughout the term of this lease, shall have free and unrestricted access to the Building air conditioning facilities in the Demised Premises. Owner reserves the right to interrupt, suspend or cease any of the services referred to herein when necessary by reason of accident, or repairs, alteration or improvements which in Owner's option are necessary or desirable, or difficulty or inability in securing supplies or labor, or strikes, or any other cause beyond the reasonable control of the Owner whether similar or dissimilar to those hereinabove mentioned. Tenant shall not be entitled to any diminution or abatement of rent or other compensation, and Tenant's obligations under this lease shall not be affected or reduced, by reason of any interruption, suspension or cessation of services, subject, however, to the second paragraph of Article 27 hereof. No interruption, suspension or cessation of services shall constitute a constructive or partial eviction. 16 (iv) Tenant shall have the right, at Tenant's sole cost and expense, but subject to all the terms, covenants and conditions of this lease, including, without limitation, Article 3 entitled "Tenant Alterations and Tenant's Work" and Article 4, entitled "Maintenance and Repairs" to install a supplementary air conditioning unit or units (the "Supplemental A/C Unit") which must be installed within the Demised Premises, i.e., not on any setback or other area exterior to the Demised Premises. As and for consideration for Tenant's election to install the supplementary unit and to connect to and have 24-hour access to the condensor water line, there shall be an initial connection charge of $300 per ton (with a minimum charge of $1,500), irrespective of the tonnage installed) and an annual access charge of $500 per ton per annum. Owner reserves the right to from time to time to increase the aforesaid access charge upon notice to Tenant. Notwithstanding the foregoing, Owner hereby waives any initial connection charge on supplementary units that already exist in the Demised Premises, but said charge shall apply to any supplementary new units, if any, that Tenant may elect to install. Tenant shall assume sole full responsibility for the maintenance, repair and replacement of any supplementary units, it being agreed that Owner shall have no responsibility or obligations with respect thereto. E. Directory. Owner shall maintain an electronic directory board in the lobby of the Building for listings of Tenant, its officers, members and related entities pursuant to Article 11. F. Other Services. Except as otherwise provided in this Article 29, Owner shall have no obligation to furnish to the Demised Premises cleaning services, electric energy, water, heat, air-conditioning, ventilation, gas or any other service or utility except as expressly set forth herein. Tenant shall obtain heat, air-conditioning, ventilation, gas and any other services or utilities required by Tenant at Tenant's sole cost and expense and in compliance with the applicable provisions of (i) all rules, regulations and statues promulgated by any governmental or quasi-governmental authority having jurisdiction over the Building, (ii) all rules and regulations of Owner and any public utility or other company furnishing such service or utility, and (iii) this lease. G. Subject to the second paragraph of Article 27 hereof, Owner reserves the right, without same constituting an actual or constructive eviction or entitling Tenant to any abatement and/or diminution of Basic Annual Rent and/or additional rent, to stop services of the heating, elevators, plumbing, air-conditioning, power systems or cleaning or other services, if any, when necessary by reason of accident or for repairs, alterations, replacements or improvements necessary or desirable in the judgment of Owner for as long as may be reasonably required by reason thereof. If the Building of which the Demised Premises are a part supplies manually-operated elevator service, Owner at any time may substitute automatic-control elevator service and upon ten days' written notice to Tenant, proceed with alterations necessary therefor without in any wise affecting this lease or the obligation of Tenant hereunder. The same shall be done with a minimum of inconvenience to Tenant and Owner shall pursue the alteration with due diligence. H. Tenant shall have access to the Demised Premises twenty-four (24) hours per day, 365 days per year, subject to Owner's reasonable security requirements and payment of any applicable "after-hours" charges pursuant to the provisions of this Article 29. 30. CAPTIONS: The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease nor the intent of any provisions thereof. 31. DEFINITIONS: The term "office", or "offices", wherever used in this lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes or for manufacturing. The term "Owner" means a Owner or lessor, and as used in this lease means only the owner, or the mortgagee in possession, for the time being of the land and Building (or the owner of a lease of the Building or of the land and Building) of which the Demised Premises form a part, so that in the event of any sale or sales of said land and Building or of said lease, or in the event of a lease of said Building, or of the land and Building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder from and after the date of such transfer or lease, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the Building, or of the land and Building, that the purchaser or the lessee of the Building has assumed and agreed to carry out any and all covenants and obligations of Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "business days" as used in this lease shall exclude Saturdays (except such portion thereof as is covered by specific hours in Article 29 hereof), Sundays and all days designated as holidays by the applicable Building service union employees service contract or by the applicable Operating engineers contract with respect to HVAC service. 32. ADJACENT EXCAVATION - SHORING: If an excavation shall be made upon land adjacent to the Demised Premises, or shall be authorized to be made, Tenant shall at reasonable times and upon reasonable prior notice except in emergency cases afford to the person causing or authorized to cause such excavation, license to enter upon the Demised Premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the Building of which Demised Premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Owner, or diminution or abatement of rent. Nothing contained herein shall prevent Tenant from proceeding against any owner of said adjacent land performing said work to the extent allowed by applicable law. 17 33. RULES AND REGULATIONS: Tenant and Tenant's servants, employees, agents, visitors, and licenses shall observe faithfully, and comply strictly with, the Rules and Regulations and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to time adopt. Notice of any additional rules or regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within ten (10) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. Owner shall not enforce or fail to enforce any Rules or Regulations so as to apply the same against Tenant in a discriminatory manner. IMPORTANT - PLEASE READ RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 33. 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress to and egress from the Demised Premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the Building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks except those equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the Building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the Building; and no Tenant shall sweep or throw or permit to be swept or thrown from the Demised Premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the Building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Demised Premises, or permit or suffer the Demised Premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the Building by reason of unreasonable noise, odors, and/or vibrations or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be kept in or about the Building. Smoking or carrying lighted cigars or cigarettes in the elevators of the Building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the Building without the prior written consent of Owner. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the Demised Premises or the Building or on the inside of the Demised Premises if the same is visible from the outside of the premises without the prior written reasonable consent of Owner (with respect to interior signage only), except that the name of Tenant may appear on the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Owner may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by Owner at the expense of such Tenant, and shall be of a size, color and style acceptable to Owner. 6. Except as provided in Article 3 hereof, Tenant shall not mark, paint, drill into, or in any way deface any part of the Demised Premises or the Building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the Demised Premises, and, if linoleum or other similar floor covering is desired to be used as interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof without delivering a copy thereof to Owner. Each Tenant must, upon the termination of his Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only on the freight elevators and through the service entrances and corridors, and only during 18 hours and in a manner reasonably approved by Owner. Owner reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations of the lease or which these Rules and Regulations are a part. 9. Canvassing, soliciting and peddling in the Building is prohibited and each Tenant shall cooperate to prevent the same. 10. Owner reserves the right to exclude from the Building between the hours of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all persons who do not present a pass to the Building signed by Owner. Owner will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Owner for all acts of such persons. 11. Owner shall have the right to prohibit any advertising by any Tenant which in Owner's reasonable opinion, tends to impair the reputation of the Building or its desirability as a Building for offices, and upon written notice from Owner, Tenant shall refrain from or discontinue such advertising. 12. Except in the normal conduct of Tenant's business and in compliance with legal requirements, Tenant shall not bring or permit to be brought or kept in or on the Demised Premises, any inflammable, combustible or explosive fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the Demised Premises. 13. If the Building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by all rules and regulations issued by the Owner with respect to such services. If Tenant requests air conditioning or ventilation after the usual hours, Tenant shall give 48 hour notice in writing to the Building superintendent prior to 3:00 P.M. in the case of services requested on week days, and prior to 3:00 P.M. on the day prior in the case of after hours service requested on weekends or on holidays. 14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the Building without Owner's prior written consent. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, allow work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto and shall be done during such hours as Owner may designate. 34. SECURITY: (a) Tenant shall upon execution of this lease deposit with Owner the sum of THREE HUNDRED EIGHTY THOUSAND AND 00/100 ($380,000.00) DOLLARS (the "Security") which shall be held by Owner as hereinafter provided. The Security shall be held by Owner as security for the faithful performance and observance by Tenant of the terms, provisions and conditions in respect of this Lease, including but not limited to the payment of Basic Annual Rent, Rent and/or additional rent beyond any applicable grace, notice and/or cure periods. Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any Basic Annual Rent, Rent and/or additional rent or any other sum as to which Tenant is in default beyond applicable notice, grace and cure periods or for any other sum as to which Owner may expend or may be required to extend by reason of Tenant's default beyond applicable notice, grace and cure periods in respect of any of the terms, covenants and conditions of this Lease, including but not limited to, any damages or deficiency in the reletting of the Demised Premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the Security shall be returned to Tenant within thirty (30) days after the date fixed as the end of the lease and after delivery of entire possession of the Demised Premises to the Owner. In the event of a sale or leasing of the Building, of which the Demised Premises form a part, Owner shall transfer the Security to the vendee or lessee who expressly assumes the rights and obligations of Owner under this lease, and Owner shall thereupon be released by Tenant from all liability for the return of such Security; and Tenant agrees to look to the new Owner solely for the return of said Security; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the Security to a new Owner. Tenant further covenants and agrees that it will not assign or encumber or attempt to assign or encumber the Security and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance, except as permitted pursuant to Article 11 hereof. (b) If Tenant makes any portion of the Security in cash then Owner covenants and agrees to deposit same in an interest bearing account or certificate. Owner shall be entitled to and shall be paid 1% per annum for administration of such security account or certificate. The remainder of the interest on such account or certificate shall belong to Tenant. Notwithstanding the foregoing, Owner shall have no obligation to deposit the security in an interest bearing account or certificate and no interest shall be payable hereunder to Tenant unless Tenant's social security number or employer identification number is furnished in writing to Owner. Tenant's employer identification number is 946181186. (c) In lieu of the cash security provided for in above, Tenant may deliver to Owner, an irrevocable, clean, "Evergreen" commercial letter of credit in the amount of THREE HUNDRED EIGHTY THOUSAND AND 00/100 ($380,000.00) DOLLARS (the "Letter"), issued by a bank which is authorized by the State of New York to conduct banking business in New York State and is a member of the New York Clearing House Association, which shall permit Owner (a) to draw thereon up to the full amount of the credit evidenced thereby in the event of any default by Tenant in the terms, provisions, covenants or conditions of this Lease after the expiration of applicable notice, grace and cure periods or (b) to draw the full amount thereof to be held as cash security pursuant to Article hereof if for any reason the Letter is not renewed within thirty (30) days prior to its expiration date. The Letter (and each renewal thereof) shall (i) be for a term of not less than one (1) year (except that the last Letter shall be for a term expiring thirty (30) days after the Expiration Date), (ii) expressly provide for the issuing bank to notify Owner in writing not less than thirty (30) days prior to its expiration as to its renewal or non-renewal, as the case may be, and (iii) if not so renewed each year (or later period of 19 expiration) shall be immediately available for Owner to draw up to the full amount of such credit (to be held as cash security). Not less than thirty (30) days prior to the expiration date of each Letter (and every renewal thereof), Tenant shall deliver to Owner a renewal or new Letter subject to all of the conditions aforesaid, all to the intent and purposes, that a Letter in the sum of $380,000.00 shall be in effect during the entire term of this lease. Failure by Tenant to comply with the provisions of this Article shall be deemed a material default hereunder entitling Owner to exercise any and all remedies as provided in this Lease for default in the payment of fixed rent and, to draw on the existing Letter up to its full amount. (d) If deposited as cash security, the Security shall be deposited into an interest-bearing account earning no less than "money market rate" interest with interest accruing to the benefit of Tenant and becoming part of the Security, minus the administrative fee allowed by law to be retained by Landlord. Upon Tenant's request, Owner will remit such interest to Tenant annually, less the administrative fee allowed to be retained by Owner. 35. ESTOPPEL CERTIFICATE: Tenant, from time to time, within seven (7) days after Owner's request, shall execute, acknowledge and deliver to Owner a certificate stating: (a) that this lease is unmodified and in full force and effect (or, if there have been modifications, that this lease is in full force and effect, as modified, and identifying the modifications); (b) the commencement and expiration dates of the term of this lease; (c) the dates through which Basic Annual Rent and additional rent have been paid; (d) whether or not there is any existing default by Owner with respect to which a notice of default has been delivered, and if there is any such default, specifying the nature and extent thereof; (e) that this lease is subordinate to any existing or future mortgage placed by Owner on the Building; and (f) whether or not there are any setoffs, defenses or counterclaims against the enforcement of any of the agreements, terms, covenants or conditions of this lease to be paid, complied with or performed by Tenant. Any such certificate may be relied upon by Owner and any mortgagee, purchaser or other person with whom Owner may deal. In the event that Tenant fails to deliver the certificate required under this Article 35, then same shall deemed a default hereunder. 36. SUCCESSORS AND ASSIGNS: The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. 37. BROKER: Tenant and Owner each represent and warrant to the other that they dealt with no broker or agent in connection with this transaction other than Byrnham Wood, LLC whose commission or other compensation shall be borne solely by Tenant. Tenant and Owner each hereby agree to indemnify and hold the other harmless from any claims for brokerage commissions, other than those of the Broker, and all costs, expenses and liabilities in connection therewith, including, without limitation, reasonable attorneys' fees and expenses arising out of a breach of the representations contained in this Paragraph. The provisions of this Paragraph shall survive the termination of the lease. 38. OWNER'S LIABILITY: Tenant agrees that, notwithstanding any other provision of this Lease, Owner shall not be under any personal liability under this lease and, if Owner defaults hereunder, Tenant shall look solely to the interest of Owner or its successor in the Demised Premises, the Building and the land for the satisfaction of any judgment or other judicial process requiring the payment of money by Owner based upon any default hereunder, and no other assets of Owner or any such successor shall be subject to levy, execution or other enforcement procedure for the satisfaction of any such judgment or process. Upon any conveyance or transfer of the Building, the transferor shall be relieved from all liability accruing from and after said transfer. Owner shall not be held liable (except to the extent covered by insurance Owner is required to maintain in accordance with the provisions of this Lease) for any injury to or death of any person or persons, or injury or damage to property, from any cause, including, without limitation, theft or accident, or from steam, gas, electricity, water, rain which may seep into, issue or flow from the Building, until Owner shall have received sufficient prior actual notice of the existence of the condition causing such injury or death, so as to have enabled Owner to remedy same. In the event that it shall be determined that Owner was unreasonable in the withholding or delaying of its consent to any matter which under this lease Owner's consent is necessary, then Tenant's sole and exclusive remedy shall be to seek and obtain an injunction requiring the granting of such consent. Tenant hereby waives any claim that it may have asserted for damages as a result of Owner's failure or delay in the granting of such consent unless it is determined in an action or proceeding that Owner has withheld such consent arbitrarily and in bad faith. Notwithstanding the foregoing, Tenant shall have the right to determine any dispute between Owner and Tenant under Article 11 or whenever Owner has agreed not to unreasonably withhold or delay its consent by arbitration in the City of New York in accordance with the provisions of this Section. Within ten (10) business days next following the giving of any notice by Tenant to Owner stating that it wishes such dispute to be so determined, Owner and Tenant shall each give notice to each other setting forth the name and address of an impartial arbitrator designated by the party giving notice. If either party shall fail to give notice of such designation within said ten (10) business days, then the arbitrator chosen by the other side shall make the determination alone. The two arbitrators shall designate a third arbitrator. If the two arbitrators shall fail to agree upon the designation of a third arbitrator within five (5) business days after the designation of the second arbitrator, then either party may apply to the Supreme Court of the State of New York or to any other court having jurisdiction, requesting the designation of such arbitrator. All arbitrators shall be persons who shall have had at least ten (10) years continuous experience in the business of managing real estate or acting as real estate agents or brokers in the Borough of Manhattan. The three arbitrators shall conduct such hearings as they deem appropriate, making their determination in writing and give notice to Owner and Tenant of their determination as soon as 20 practicable, and if possible, within five (5) business days after the designation of the third arbitrator; the concurrence of any two of said arbitrators shall be binding upon Owner and Tenant. The sole question to be determined shall be whether or not Owner has unreasonably withheld or delayed its consent or approval, and the sole remedy shall be the determination that such consent or approval must be granted. The determination in any arbitration held pursuant to this Section shall be final and binding upon Owner and Tenant. Each party shall pay its own counsel fees and expenses, if any, in connection with any arbitration under this Section, including the expenses and fees of any arbitrator selected by it in accordance with provisions of this Section, and the parties shall share all other expenses and fees of any such arbitration. The arbitrators shall be bound by the provisions of this Lease, and shall not add to, subtract from or otherwise modify such provisions. 39. INSURANCE: A. Tenant, at its expense, shall maintain at all times during the term of this lease (i) public liability insurance in respect of the Demised Premises and the conduct or operation of business therein, with Owner and its managing agent (presently Eastgate Realty Corp., 410 Park Avenue, New York, New York 10022 (and Owner shall give Tenant written notice of any change or any additional or substitute managing agent prior to Tenant's requirement to name such managing agent as additional party insured)), if any, and each mortgagee whose name and address shall previously have been furnished to Tenant, as additional named insureds, with limits of not less than $3,000,000 combined single limit for bodily injury or death to one person and $5,000,000 if more than one person and $1,000,000 for property damage, and (ii) insurance against such other hazards and in such amounts as is customarily carried by tenants in similar office Buildings, as Owner reasonably may request. Tenant shall deliver to Owner and any additional named insured such fully paid-for policies or certificates of insurance, in form and substance reasonably satisfactory to Owner, issued by the insurance company or its authorized agent, on or before the execution and delivery of this lease. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Tenant shall deliver to Owner and any additional named insured a renewal policy or certificate thereof at least 30 days before the expiration of any existing policy. All such policies shall be issued by companies of recognized responsibility licensed to do business in New York State, and all such policies shall contain a provision whereby the same cannot be canceled or modified unless Owner and any additional insured(s) are given at least 30 days' prior written notice of such cancellation or modification (which provision shall also appear on the certificates delivered to Owner hereunder). Owner may from time to time require that the amount and types of insurance to be maintained by Tenant under this Paragraph be increased and/or modified, so that the amount and types thereof adequately protects Owner's interest, provided Owner does not discriminate against Tenant in such regard. B. Each party hereby releases the other party (which term as used in this paragraph includes the employees, agents, officers and directors of the other party) from all liability whether for negligence or otherwise, in connection with loss covered by any insurance policies which the releasor carries with respect to the Demised Premises, the Building or property therein or, thereon (whether or not such insurance is required to be carried under this Lease), but only to the extent that such loss is collected under said insurance policies. Such release is also conditioned upon the inclusion in the policy or policies of a provision whereby any such release shall not adversely affect said policies or prejudice any right of the releasor to recover thereunder. Each party agrees that its insurance policies, aforesaid, will include such a provision so long as the same shall be obtainable without extra cost, or if extra cost shall be charged therefor, each party shall advise the other thereof of the amount of the extra cost, and the other party, at its election, may pay the same, but shall not be obligated to do so. All insurance maintained by Tenant pursuant to this Article 39 shall name Owner, and any mortgagee as additional party insured as provided in 39A above, and shall provide that any loss shall be payable (other than liability insurance) to Owner notwithstanding any act or failure to act or negligence of Owner, Tenant or any other person, and shall provide that no cancellation, reduction in amount or material change in coverage thereof will be effective until at least ten days after receipt by Owner of written notice thereof, and shall be reasonably satisfactory to Owner in all other respects. C. If at any time Tenant shall neglect or fail to provide or maintain insurance or to deliver insurance policies in accordance with this Article 39, then after sixty (60) days notice to Tenant Owner may effect such insurance as agent for Tenant, by taking out policies in a company satisfactory to Owner, and the reasonable amount of the premiums paid for such insurance shall be paid by Tenant to Owner within twenty (20) days of demand. Owner, in addition to Owner's other rights, powers and remedies, shall be entitled to recover as damages for any breach of this Article 39 the uninsured amount of any liability, claim, loss, damage or expense, including reasonable attorneys' fees, suffered or incurred by Owner, and shall not be limited in the proof of damages which Owner may claim against Tenant to the amount of the insurance premiums not paid or incurred by Tenant which would have been payable for such insurance. D. Owner shall maintain casualty insurance covering the Building in amounts required by any mortgagee then holding a mortgage encumbering the Building. 40. OWNER NOT BOUND: It is understood and agreed that Owner shall be under no obligation hereunder until this lease has been executed by both parties and delivered to both parties. Owner's deposit of any checks delivered by Tenant in connection with Tenant's execution of this lease shall not constitute Owner's execution and delivery of this lease. 41. MODIFICATIONS REQUESTED BY LENDER: If, in connection with obtaining financing or refinancing for the Building of which the Demised Premises form a part, a banking, insurance or other institutional lender shall request reasonable modifications to this lease as a condition to such financing or refinancing, Tenant shall not unreasonably withhold or delay its consent thereto, provided such modifications do not materially and adversely affect the leasehold interest hereunder or increase Tenant's obligations 21 hereunder, except to the extent that Tenant may be required to give notices of any defaults by Owner to such lender or permit the curing of such defaults by such lender together with the granting of such additional time for such curing as may be required for such lender to get possession of the Building. In no event shall a requirement that the consent of any such lender be given for any modification of this lease be deemed to materially and adversely affect the leasehold interest hereby created. 42. HOLDOVER: A. If Tenant shall then hold over after the expiration of the term of this lease, irrespective of whether or not Owner accepts rent from Tenant for a period beyond the expiration of the term hereof, the parties hereby agree that Tenant's occupancy of the Demised Premises after the expiration of the term shall be under a month-to-month tenancy commencing on the first day after the expiration of the term, which tenancy shall be upon all of the terms set forth in this lease except Tenant shall pay on the first day of each month of the holdover period as use and occupancy, an amount equal to 150% of the sum of the Basic Annual Rent and Additional Rent payable by Tenant during the last month of the term of this lease for the first sixty (60) days of any holdover period and 175% of such sum for all periods thereafter. B. Anything to the foregoing notwithstanding, the acceptance of any use and occupancy paid by Tenant pursuant to Paragraph 42A above shall not preclude Owner from commencing and prosecuting a holdover or summary eviction proceeding, and the preceding sentence shall be deemed to be an "agreement expressly providing otherwise" within the meaning of Section 223-c of the Real Property Law of the State of New York. C. If Tenant shall hold over or remain in possession of any portion of the Demised Premises beyond the Expiration Date, Tenant shall be subject not only to summary proceedings and all damages related thereto, but also to any damages arising out of any lost opportunities (and/or new leases) by Owner to re-let the Demised Premises (or any part thereof). All damages to Owner by reason of such holding over by Tenant may be the subject of a separate action and need not be asserted by Owner in any summary proceedings against Tenant. Nothing contained herein shall be deemed Owner's consent to such holding over by Tenant or any party claiming through or under Tenant. 43. AUTHORIZATIONS: A. The individual signatories to this lease each represent that they are duly authorized to execute this document. Upon Owner's request, Tenant will execute and deliver to Owner a Secretary's Certificate setting forth the authority of the officer executing the lease by and on Tenant's behalf. B. Tenant represents that it is qualified and authorized to do business in the State of New York. 44. AS-IS: Tenant acknowledges that it has inspected the Demised Premises and agrees to accept possession thereof in its then "as-is" physical condition on the date the Demised Premises are delivered to Tenant it being understood and agreed that Owner shall not be obligated to make any improvements, alterations or repairs to the Demised Premises. 45. MISCELLANEOUS: A. Tenant shall reimburse Owner for all reasonable out-of-pocket attorneys' fees incurred in connection with actions to compel compliance by Tenant with any provision of this lease or to recover damages resulting from non- compliance. Such amounts shall be deemed additional rent and shall be within twenty (20) days after demand. B. Neither this lease nor any memorandum thereof shall be recorded. C. The failure of Owner or Tenant to insist upon a strict performance of any term, covenant or condition herein shall not be deemed a waiver of any rights or remedies that Owner or Tenant may have or a waiver of any subsequent breach or default. D. If any provision of this lease shall be unenforceable or invalid, such unenforceability or invalidity shall not affect any other provision of this lease. E. Tenant shall not cause or permit any Hazardous Materials (hereinafter defined) to be used, stored, transported, released, handled, produced or installed in, on or from the Demised Premises or the Building other than products associated with the cleaning and maintenance of the Demised Premises and/or photocopier toner. "Hazardous Materials", as used herein, shall mean any flammables, explosives, radioactive materials, hazardous wastes, hazardous and toxic substances or related materials, asbestos or any material containing asbestos, or any other substance or material included in the definition of "hazardous substances", hazardous wastes", "hazard materials", "toxic substances", "contaminants" or any other pollutant, or otherwise regulated by any Federal, state or local environmental laws, ordinance, rule or regulation including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended, and in the regulations adopted and publications promulgated pursuant to each of the foregoing. In the event of a violation of any of the foregoing provisions of this Paragraph, Owner may, without notice and without regard to any grace period contained herein, take all remedial action deemed necessary by Owner to correct such condition and Tenant shall reimburse Owner for the cost thereof, within twenty (20) days of demand, as additional rent. 22 F. The terms and provisions of this Lease are subject to the approval of the Building's lender of the terms contained herein. Owner's execution of this Lease shall not be deemed a representation by Owner that it has either obtained such lender's consent of the terms of this Lease or that such lender's right to approve the terms hereof was inapplicable or waived. G. With respect to any multi-tenant floor, Tenant shall, at Tenant's sole cost and expense, within thirty (30) days after the Commencement Date, install Building standard signage comparable and appropriate for a first class office building identifying Tenant and the location of the Demised Premises in the common elevator lobby, such signage to be installed in a location designated by Owner in its sole discretion and otherwise in a manner and design reasonably approved by Owner. 46. ADDENDUM TO ARTICLE 24: Tenant acknowledges and agrees that Owner has advised Tenant that the Demised Premises are presently subject to a lease with First Union Bank ("First Union") which lease contains an option on Owner's behalf to terminate the lease in the event of any proposed subletting of the Demised Premises by First Union. Owner acknowledges and agrees that Tenant has contacted First Union with respect to a proposed subletting of the Demised Premises directly from First Union. In the event that this Lease shall fail to be executed and delivered for any reason whatsoever including, without limitation, Owner not exercising its recapture option under the First Union Lease and in lieu thereof consenting to Tenant subletting the Demised Premises directly from First Union then, in such event, Tenant shall immediately reimburse Owner for all reasonable, out-of-pocket costs associated with the preparation, negotiation and drafting of this Lease including, without limitation, counsel fees incurred by Owner. Owner and Tenant hereby acknowledge and agree that the effectiveness of this Lease is subject to Owner delivering a so called "recapture" notice to First Union pursuant to the terms of the lease between Owner and First Union by no later than May 31, 2000. If Owner has not delivered such notice by such date, then Tenant shall have the right to terminate this Lease (in which case the terms and provisions hereof shall be of no force or effect) unless, within five (5) business days of Tenant so terminating this Lease, Owner delivers such recapture notice to First Union and notifies Tenant of such delivery. If after delivery of such notice, First Union does not vacate the Demised Premises and surrender the same to Owner in accordance with the terms of its lease, Owner hereby agrees to promptly commence (and diligently prosecute to completion) a summary dispossess proceeding to recover possession of the Demised Premises. Notwithstanding the foregoing provisions of this Lease, in the event that Owner fails to deliver possession of the Demised Premises on or prior to December 31, 2000, Tenant shall have the right to terminate this Lease within the following ten (10) days by giving notice thereof to Owner. Upon receipt of such notice by Owner, all liability between the parties hereto shall be extinguished, except that Owner shall return to Tenant any monies deposited with Owner pursuant to this Lease. 47. OWNER'S CONTRIBUTION: In consideration of Tenant performing all of the work necessary for its occupancy of the Demised Premises and for Tenant completing such work therein, Owner agrees that if Tenant, shall have submitted to Owner (a) detailed itemization of the leasehold improvements by Tenant i.e. exclusive of soft costs except for "FF&E" as hereinafter provided (b) receipted and paid bills, (c) lien waivers to Owner to the effect that there has not been filed with respect to the building and/or the Demised Premises or any part thereof or upon Tenant's leasehold interest therein any vendor's, mechanic's, laborer's, materialman's or other lien which has not been discharged of record and (d) sign offs from all municipal authorities having jurisdiction, including without limitation, the New York City Building Department, then, in all of such events, Owner shall reimburse or cause to be reimbursed to Tenant an amount equal to the lesser of (i) the actual cost of the building standard leasehold improvements performed by Tenant in the entire Demised Premises i.e. exclusive of soft costs or (ii) ONE HUNDRED SEVENTY EIGHT THOUSAND TWO HUNDRED SEVENTY FIVE AND 00/100 ($178,275.00) DOLLARS, representing "Owner's Contribution" to such work, it being understood and agreed that Owner's Contribution shall not exceed the sum of ONE HUNDRED SEVENTY EIGHT THOUSAND TWO HUNDRED SEVENTY FIVE AND 00/100 ($178,275.00) Dollars, and that all costs and expenses in excess of said sum shall be borne solely by Tenant. Notwithstanding the foregoing, Tenant may utilize all or any portion of Owner's Contribution solely for furniture, fixtures and equipment ("FF&E") provided, however, that Owner at Owner's sole option have the right at any time during the term of this Lease, to either require Tenant to leave all the FF&E in the Demised Premises at the expiration or sooner termination of the Lease, or to remove same as provided in Article 3 hereof. 48. TERRACE: Subject to all applicable legal requirements and the provisions of this lease, including, without limitation, Article 6 hereof, Tenant shall have the right, at Tenant's sole risk, to utilize the terrace area adjoining the Demised Premises solely for the purposes of entertaining Tenant and its employees, invitees and guests. Under no circumstances shall any equipment, including but not limited to, any supplementary air conditioning, be located or otherwise installed on the terrace, and Tenant shall maintain and keep the terrace in a neat and orderly like fashion. Tenant's insurance policy to be delivered hereunder shall cover Tenant's use of the terrace area. Tenant shall not keep any objects on the terrace which shall detract from the appearance and/or dignity of the Building. IN WITNESS WHEREOF, Owner and Tenant have executed this lease on the date first above written. In the presence of: 23 OWNER: 410 PARK AVENUE ASSOCIATES, L.P. -------------------------------- By: /s/ Michael Alter ---------------------------- TENANT: CAPITAL TRUST, INC. -------------------------------- By: /s/ John R. Klopp ----------------------------- Name: John R. Klopp Title: CEO 24 EXHIBIT A FLOOR PLAN 25 EXHIBIT B CLEANING SPECIFICATIONS Nightly - General (i) Empty ash trays and pick up paper. (ii) Clean all drinking fountains. (iii) Carpeted areas carpet swept. (4 nights) (iv) Vinyl Floors located in service corridor on multi-tenant floors, mopped. (v) Empty waste baskets and dust furniture. (vi) Freshen all public corridor and lobby sand urns. (vii) Clean interior of all elevator cabs including floor. (viii) Clean exterior of main lobby hatch doors (elevators). (ix) Clean main lobby, lobby doors and floor. Nightly - Lavatories 1. All flooring washed nightly. 2. All mirrors, powder shelves, bright work, etc., including flushometers, piping and toilet seat hinges washed and polished nightly. 3. All basins, bowls, urinals and toilet seats (both sides) washed nightly. 4. All partitions, tile walls, dispensers and receptacles dusted nightly. 5. Paper towel and sanitary disposal receptacles emptied and cleaned nightly. 6. Dispenser filled with supplies (provided by Tenant on full floor occupancies). Weekly 1. Carpeted areas vacuum cleaned. 2. Clean all window sills, baseboards, chair rails, and trim. 3. Wash all dispensers and receptacles in public bathroom. At Regular Intervals 1. Wash all toilet walls and scrub bathroom floors (excludes private restroom. (Monthly) 2. Clean venetian blinds. Semi-annually. 3. Dust A/C wall and ceiling grills, wall hangings. (Semi-annually) 4. Clean exterior windows, inside and out. (2 x a year) 26 EXHIBIT C CERTIFICATE OF OCCUPANCY 27 TABLE OF CONTENTS 1. RENT.................................................................1 2. OCCUPANCY............................................................3 3. TENANT ALTERATIONS AND TENANT'S WORK.................................4 4. MAINTENANCE AND REPAIRS..............................................6 5. WINDOW CLEANING..................................................... 6. REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS.....................6 7. SUBORDINATION ATTORNMENT AND REQUEST FOR NON-DISTURBANCE.............7 8. PROPERTY LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY......................7 9. DESTRUCTION, FIRE AND OTHER CASUALTY.................................8 10. EMINENT DOMAIN.......................................................9 11. ASSIGNMENT, MORTGAGE, ETC............................................9 12. ELECTRIC CURRENT....................................................11 13. ACCESS TO PREMISES..................................................12 14. VAULT, VAULT SPACE, AREA............................................12 15. CERTIFICATE OF OCCUPANCY............................................12 16. BANKRUPTCY..........................................................12 17. DEFAULT.............................................................13 18. REMEDIES OF OWNER AND WAIVER OF REDEMPTION..........................13 19. FEES AND EXPENSES...................................................14 20. BUILDING ALTERATIONS AND MANAGEMENT.................................14 21. NO REPRESENTATIONS BY OWNER.........................................14 22. END OF TERM.........................................................14 23. QUIET ENJOYMENT.....................................................14 24. FAILURE TO GIVE POSSESSION..........................................15 25. NO WAIVER...........................................................15 26. WAIVER OF TRIAL BY JURY.............................................15 27. INABILITY TO PERFORM: FORCE MAJEURE................................15 28. BILLS AND NOTICES...................................................16 29. SERVICES............................................................16 30. CAPTIONS............................................................18 31. DEFINITIONS.........................................................18 32. ADJACENT EXCAVATION - SHORING.......................................18 33. RULES AND REGULATIONS...............................................19 8 34. SECURITY............................................................20 35. ESTOPPEL CERTIFICATE................................................21 36. SUCCESSORS AND ASSIGNS..............................................21 37. BROKER..............................................................21 38. OWNER'S LIABILITY...................................................21 39. INSURANCE...........................................................22 40. OWNER NOT BOUND.....................................................23 41. MODIFICATIONS REQUESTED BY LENDER...................................23 42. HOLDOVER............................................................23 43. AUTHORIZATIONS......................................................23 44. AS-IS...............................................................23 45. MISCELLANEOUS.......................................................24 46. ADDENDUM TO ARTICLE 24..............................................24 47. OWNER'S CONTRIBUTION:...............................................25 48. TERRACE.............................................................25 EXHIBIT A FLOOR PLAN....................................................26 EXHIBIT B CLEANING SPECIFICATIONS.......................................27 EXHIBIT C CERTIFICATE OF OCCUPANCY......................................28 29 EX-10.14 6 0006.txt AMENDED AND RESTATED MASTER LOAN AGREEMENT EXECUTION Exhibit 10.14 ============================================================================== AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT FOR A CREDIT FACILITY IN AN AMOUNT UP TO $300,000,000 Dated as of February 8, 2001 CAPITAL TRUST, INC. as Borrower and MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. as Lender TABLE OF CONTENTS Page RECITALS .................................................................1 Section 1. Definitions and Accounting Matters...............................2 1.01 Certain Defined Terms............................................2 1.02 Accounting Terms and Determinations.............................14 Section 2. Loans, Note and Prepayments.....................................14 2.01 Loans...........................................................14 2.02 Notes...........................................................15 2.03 Procedures for Borrowing........................................15 2.04 Mandatory Prepayments or Pledge.................................19 Section 3. Payments; Computations; Etc.....................................19 3.01 Repayment of Loans; Interest....................................19 3.02 Payments........................................................20 3.03 Computations....................................................21 3.04 U.S. Taxes......................................................21 3.05 Booking of Loans................................................21 3.06 Lender's Funding of Eurodollar Rate Loans.......................22 3.07 Funding Costs...................................................22 3.08 Compensation for Increased Costs................................22 3.09 Limitation on Types of Loans; Illegality........................23 4.01 Collateral; Security Interest...................................23 4.02 Further Assurances..............................................24 4.03 Changes in Locations, Name, etc.................................25 4.04 Lender's Appointment as Attorney-in-Fact........................25 4.05 Performance by Lender of Borrower's Obligations.................26 4.06 Proceeds........................................................26 4.07 Remedies........................................................26 4.08 Limitation on Duties Regarding Preservation of Collateral.......27 4.09 Powers Coupled with an Interest.................................27 4.10 Release of Security Interest....................................27 4.11 Release of Collateral...........................................27 4.12 Substitution of Eligible Collateral.............................27 Section 5. Conditions Precedent............................................28 5.01 Initial Loan....................................................28 -i- TABLE OF CONTENTS (continued) Page 5.02 Initial and Subsequent Loans....................................28 5.03 Additional Requirements.........................................30 Section 6. Representations and Warranties..................................30 6.01 Existence.......................................................30 6.02 Action..........................................................31 6.03 Financial Condition.............................................31 6.04 Litigation......................................................31 6.05 No Breach.......................................................31 6.06 Approvals.......................................................32 6.07 Margin Regulations..............................................32 6.08 Taxes...........................................................32 6.09 Investment Company Act..........................................32 6.10 Collateral; Collateral Security.................................32 6.11 Chief Executive Office..........................................33 6.12 Location of Books and Records...................................33 6.13 True and Complete Disclosure....................................33 6.14 Tangible Net Worth..............................................33 6.15 ERISA...........................................................33 Section 7. Covenants of Borrower...........................................33 7.01 Financial Statements, Reports, etc..............................33 7.02 Litigation......................................................34 7.03 Existence, etc..................................................34 7.04 Prohibition of Fundamental Changes..............................35 7.05 Borrowing Base Deficiency.......................................35 7.06 Notices.........................................................35 7.07 Reports.........................................................36 7.08 Transactions with Affiliates....................................36 7.09 Foreclosure or Other Remediation by Borrower....................36 7.10 Limitation on Liens.............................................36 7.11 Limitation on Distributions.....................................36 7.12 Maintenance of Tangible Net Worth...............................36 7.13 Maintenance of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization to Interest and Preferred Dividends.......................................................36 7.14 Maintenance of Ratio of Total Indebtedness to Tangible Net Worth...........................................................36 -ii- TABLE OF CONTENTS (continued) Page 7.15 Servicer; Servicing Tape........................................36 7.16 Remittance of Prepayments.......................................37 7.17 Reserved........................................................37 7.18 Maintenance of Cash.............................................37 Section 8. Events of Default...............................................37 Section 9. Remedies Upon Default...........................................38 Section 10. No Duty of Lender...............................................39 Section 11. Miscellaneous...................................................39 11.01 Waiver..........................................................39 11.02 Notices.........................................................39 11.03 Indemnification and Expenses....................................39 11.04 Amendments......................................................40 11.05 Successors and Assigns..........................................40 11.06 Survival........................................................40 11.07 Captions........................................................40 11.08 Counterparts....................................................40 11.09 Loan Agreement Constitutes Security Agreement; Governing Law....41 11.10 SUBMISSION TO JURISDICTION; WAIVERS.............................41 11.11 WAIVER OF JURY TRIAL............................................41 11.12 Acknowledgments.................................................41 11.13 Hypothecation or Pledge of Loans................................41 11.14 Servicing.......................................................42 11.15 Periodic Due Diligence Review...................................43 11.16 Intent..........................................................43 11.17 Change of Borrower's State of Formation.........................43 11.18 Trustee Exculpation.............................................43 11.19 Set-Off.........................................................43 -iii- TABLE OF CONTENTS (continued) SCHEDULES - --------- SCHEDULE 1 Filing Jurisdictions and Offices SCHEDULE 2 Approved Appraisers SCHEDULE 3 Approved Engineers SCHEDULE 4 Approved Environmental Consultants EXHIBITS - -------- EXHIBIT A Form of Amended and Restated Promissory Note EXHIBIT B Form of Custodial Agreement EXHIBIT C Form of Opinion of Counsel to Borrower EXHIBIT D Form of Request for Borrowing EXHIBIT E Form of Lender's Release Letter EXHIBIT F Form of Bailee Agreement -iv- AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT (this "Loan Agreement"), dated as of February 8, 2001, between CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), and MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC., a New York corporation formerly known as Morgan Stanley Mortgage Capital Inc. ("Lender"). RECITALS WHEREAS, Lender and Capital Trust, a California business trust (a predecessor-in-interest of Borrower, hereinafter "Predecessor Borrower") are parties to that certain Master Loan and Security Agreement, dated as of June 8, 1998, by and between Predecessor Borrower and Lender (the "Original Loan and Security Agreement"); WHEREAS, Lender and Borrower amended the Original Loan and Security Agreement by First Amendment to Master Loan and Security Agreement dated as of March 30, 1999, in order to make certain additional arrangements regarding, among other things, the extension of the term of the Original Loan and Security Agreement, limitations on the amounts which may be borrowed against Eligible Collateral, the timing of the repayment of amounts due and owing to Lender, the applicable rates of interest to be paid on such borrowed amounts and the addition of certain conditions regarding the financial status of Borrower ("Amendment No. 1"). In addition, Borrower advised Lender that (i) Predecessor Borrower had entered into, and merged with and into, Captrust Limited Partnership, a Maryland limited partnership, (ii) Captrust Limited Partnership survived such merger and subsequently merged with and into Borrower, and (iii) Borrower survived such subsequent merger with Captrust Limited Partnership. In connection therewith, Borrower ratified, confirmed, and assumed all liabilities of Predecessor Borrower under the Original Loan and Security Agreement, as amended by Amendment No. 1, the Note and the other Loan Documents; WHEREAS, Lender and Borrower as further amended the Original Loan and Security Agreement, as amended by Amendment No. 1, by Second Amendment to Master Loan and Security Agreement dated as of June 30, 2000 ("Amendment No. 2"); WHEREAS, pursuant to the Original Loan and Security Agreement, as amended by Amendment No. 1 and Amendment No. 2, Borrower has requested that Lender from time to time, make revolving credit loans to it to finance certain conduit loans, multifamily and commercial mortgage loans, mezzanine loans, equity interests, and other approved collateral owned by Borrower, and Lender is prepared to make such loans upon the terms and conditions hereof. In addition, Borrower has requested that Lender from time to time make revolving credit loans to it to finance certain commercial mortgage-backed securities owned by Borrower and Lender is prepared to make such loans pursuant to the terms and conditions of that certain Amended and Restated CMBS Loan Agreement dated as of February 8, 2001 between Borrower and Morgan Stanley International Limited Inc. ("MSIL") (collectively and together with all further amendments, modifications, restatements and supplements, the "CMBS Loan Agreement"). References herein to commercial mortgage backed securities and related terms are solely to set forth the definitions of Eurodollar Rate Spread, Advance Rate and Maximum Advance Rate for such collateral and the CMBS Loan Agreement shall govern as to all other matters; WHEREAS, Lender and Borrower further understand that Borrower may enter into loan facilities with other parties on a secured and unsecured basis, including, without limitation, loans secured by collateral similar to the Collateral hereunder; WHEREAS, Lender and Borrower desire to amend and restate the Original Loan and Security Agreement, as amended by Amendment No. 1 and Amendment No. 2, to incorporate their mutual agreements with respect thereto; 1 NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree that the Original Loan and Security Agreement, as amended by Amendment No. 1 and Amendment No. 2, is amended and restated in its entirety as follows: Section 1. Definitions and Accounting Matters. 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Loan Agreement in the singular will have the same meanings when used in the plural and vice versa): "Advance Rate" means, for any item of Eligible Collateral, the ratio, expressed as a percentage, set forth opposite the collateral type in the chart provided in the definition of Eurodollar Rate Spread or as otherwise defined or limited herein. "Affiliate" shall mean (i) with respect to Lender, any entity which controls, is controlled by, or is under common control with Lender, and (ii) with respect to Borrower, any affiliate of Borrower as such term is defined in the Bankruptcy Code. "Affiliate Credit Facility" shall mean any one or more agreements between Lender, or an Affiliate of Lender, and an Affiliate of Borrower (including, without limitation, Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers Real Estate Mezzanine Investments II, LLC, Travelers Limited Real Estate Mezzanine Investments II, LLC, CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC and CT Investment Management Co., LLC and CT Mezzanine Partners I, LLC ("CT Fund I"); any such Affiliate, a "CT Affiliate"), pursuant to which such CT Affiliate shall incur Indebtedness to Lender or such Affiliate of Lender including, without limitation, that certain Master Loan and Security Agreement dated as of September 19, 2000 between CT Fund I and Lender as amended by that certain First Amendment to Master Loan and Security Agreement dated as of December 29, 2000 between CT Fund I and Lender and further amended by that certain Second Amendment to Master Loan and Security Agreement dated as of the dated hereof between CT Fund I and Lender and that certain CMBS Loan Agreement dated as of September 19, 2000 between CT Fund I and MSIL and that certain First Amendment to CMBS Loan Agreement dated as of the dated hereof between CT Fund I and MSIL, and any other loan agreement or repurchase agreement. "Amortization Period" shall mean, if the Termination Date shall be extended in accordance with the terms hereof, the period from and after June 30, 2001 to, but not including, March 31, 2002. "Appraisal" means an appraisal of any Property prepared by a licensed appraiser listed on Schedule 2 attached hereto, as such schedule may be amended from time to time by Borrower or Lender upon approval by Lender in its reasonable discretion, in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation, in compliance with the requirements of Title 11 of the Financial Institution Reform, Recovery and Enforcement Act and utilizing customary valuation methods such as the income, sales/market or cost approaches, as any of the same may be updated by recertification from time to time by the appraiser performing such Appraisal. "Asset-Specific Loan Balance" means a portion of the Loan allocable to each item of the Eligible Collateral. Such portion initially consists of the sum of all advances of the Loan made on account of such Eligible Collateral, without subtracting from such advances the Drawdown Fee, Lender's Transaction Costs and other advance costs and fees to the extent borrowed. Wherever this Loan Agreement states that principal payments on account of the Loan are to be allocated or applied to or against the Asset-Specific Loan Balance of a specific item of Eligible Collateral, the Asset-Specific Loan Balance of such item of Eligible Collateral shall be deemed reduced accordingly by the amount of the principal payments so applied. "Asset Value" shall mean, as of any date in respect of an item of Eligible Collateral, the price at which such Eligible Collateral could readily be sold as determined in the sole good faith of Lender, which price 2 may be determined to be zero. Lender's determination of Asset Value, which may be made at any time and from time to time, shall be conclusive upon the parties. Whenever an Asset Value determination is required under this Loan Agreement, Borrower shall cooperate with Lender in its determination of the Asset Value of each item of Eligible Collateral (including, without limitation, providing all information and documentation in the possession of Borrower regarding such item of Eligible Collateral or otherwise required by Lender in its sole good faith business discretion). "Bailee" shall mean Paul, Hastings, Janofsky & Walker LLP or such other third party as Lender may approve. "Bailee Agreement" shall mean the Bailee Agreement among Borrower, Lender and Bailee in the form of Exhibit F hereto. "Bailee's Trust Receipt and Certification" shall mean a Trust Receipt and Certification in the form annexed to the Bailee Agreement as Attachment 2. "Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time. "Base Rate" means, as determined by Lender on a daily basis, the higher of (a) the rate per annum established by The Chase Manhattan Bank from time to time as its "Prime" Rate or "reference" rate (which Borrower acknowledges is not necessarily such bank's lowest rate) and (b) one-half percentage point (0.5%) (50 basis points) over the Federal funds rate, as determined by Lender in its sole discretion. "Borrower" shall have the meaning provided in the heading hereof. "Borrowing Base" shall mean the aggregate Collateral Value of all Eligible Collateral pledged to secure the amounts from time to time outstanding under this Loan Agreement. "Borrowing Base Deficiency" shall have the meaning provided in Section 2.04 hereof. "Business Day" shall mean any day other than (i) a Saturday or Sunday or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of New York or Custodian is authorized or obligated by law or executive order to be closed. "Capital Lease Obligations" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Loan Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Cash" means, at the date of determination, any and all cash and cash equivalents as determined in accordance with GAAP. "CMBS" shall mean, in the singular or plural as the context requires, securities backed by mortgages and other liens on commercial real estate and related collateral or by securities, interests or other obligations backed by such mortgages. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall have the meaning provided in Section 4.01(b) hereof. "Collateral Assignment" shall mean all documents pursuant to which Borrower shall have collaterally assigned all of its right, title and interest in, to and under an item of Collateral to secure a Loan made hereunder. 3 "Collateral Documents" shall mean with respect to any Collateral Loan, Equity Interest, or Other Approved Collateral, the documents comprising the Collateral File for such item of Collateral. "Collateral File" shall mean, as to each item of Collateral, those documents set forth in a schedule to be delivered by Lender to Custodian and which are delivered to the Custodian pursuant to the terms of this Loan Agreement or the Custodial Agreement including, without limitation, all documents required by Lender to grant and perfect a first priority security interest in such item of Collateral. "Collateral Loan" shall mean, as applicable, a Mortgage Loan or a Mezzanine Loan. "Collateral Obligor" shall mean any obligor under any Collateral Loan, any issuer of any security comprising any portion of the Collateral and any entity in which an Equity Interest comprises any portion of the Collateral. "Collateral Report" shall mean the collateral schedule and exception report prepared by Custodian pursuant to the Custodial Agreement. "Collateral Schedule" shall mean a list of Eligible Collateral to be pledged pursuant to this Loan Agreement, attached to a Custodial Identification Certificate setting forth, as to each item of Eligible Collateral, the applicable information for such Collateral Type specified on Annex 1 to the Custodial Agreement. "Collateral Type" shall mean a Mortgage Loan, Mezzanine Loan, Equity Interest and Other Approved Collateral. "Collateral Value" shall mean, with respect to each item of Eligible Collateral, the Asset Value of such Eligible Collateral multiplied by the applicable Advance Rate set forth in the definition of "Eurodollar Rate Spread" set forth herein or as otherwise defined or limited herein; provided, that, the Collateral Value shall be deemed to be zero or such greater amount as determined by Lender in respect of each item of Eligible Collateral (1) in respect of which there is a breach of a representation or warranty by a Collateral Obligor, (2) in respect of which there is a delinquency in the payment of principal and/or interest which continues for a period in excess of 30 days (such period to include any applicable grace periods) unless otherwise approved by Lender, or (3) which has been released from the possession of Custodian under the Custodial Agreement to Borrower for a period in excess of 14 days. "Collection Account" shall mean one or more accounts established by the Servicer subject to a security interest in favor of Lender, into which all Collections shall be deposited by the Servicer. "Collections" shall mean, collectively, all collections and proceeds on or in respect of the Collateral, excluding collections required to be paid to the Servicer or a borrower on the Collateral. "Conduit Loan" shall mean a Mortgage Loan, secured by a first mortgage on a real property, that in Lender's determination, satisfies the following criteria: (i) principal balance not exceeding $40,000,000.00; (ii) interest at a fixed rate with prepayment protection satisfactory to Lender; (iii) single-asset, bankruptcy remote property owner complying with all nationally recognized statistical rating agency requirements; (iv) no subordinate financing and mortgage and organizational documents prohibiting subordinate financing or unsecured financing not otherwise subject to intercreditor agreements satisfactory to rating agencies; (v) debt service coverage ratio (as determined by Lender in its sole discretion) of not less than 1.25:1 or such higher debt service coverage ratio as may be required by rating agencies; (vi) not having any characteristics that would impair the rating of any securities issued pursuant to a securitization that included a substantial component of mortgages similar to such mortgage; and (vii) in full compliance with such other "conduit" underwriting and structuring requirements as Lender shall establish from time to time. "control" shall mean possession of the power, directly or indirectly, to (a) vote more than fifty percent (50%) of the voting securities having ordinary power for the election of directors of an entity, or (b) direct or cause the direction of the management and policies of such entity, whether by contract or otherwise. 4 "Custodial Agreement" shall mean the Custodial Agreement, dated as of the date hereof, among Borrower, Custodian and Lender, substantially in the form of Exhibit B hereto, as the same shall be modified and supplemented and in effect from time to time. "Custodial Identification Certificate" shall mean the certificate executed by Borrower in connection with the pledge of Eligible Collateral to Lender in the form of Annex 3 to the Custodial Agreement. "Custodian" shall mean LaSalle National Bank as custodian under the Custodial Agreement, and its successors and permitted assigns thereunder. "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Diligence Materials" means the Preliminary Due Diligence Package together with the materials requested in the Supplemental Due Diligence List. "Direct Mortgage" means a recorded mortgage or deed of trust in favor of Lender on real property. "Dollars" and "$" shall mean lawful money of the United States of America. "Drawdown Fee" shall mean, for each Loan with respect to any particular item of Eligible Collateral, an amount equal to the product of 0.25% and the principal amount of such Loan; provided, however, that (a) the Drawdown Fee shall be equal to zero to the extent that such Loan is to be made with respect to a Conduit Loan as Collateral and (b) with respect to any other such item of Eligible Collateral, borrowings which are repaid and subsequently reborrowed will not be charged a subsequent Drawdown Fee. "Due Diligence Review" shall mean the performance by Lender of any or all of the reviews permitted under Section 11.15 hereof with respect to any or all of the Collateral, as desired by Lender from time to time. "Effective Date" shall mean the date upon which the conditions precedent set forth in Section 5.01 shall have been satisfied. "Eligible Collateral" shall mean Mortgage Loans, Mezzanine Loans, Equity Interests and Other Approved Collateral as to which the representations and warranties in Section 6.10 hereof are correct. "Equity Interest" shall mean any interest in a Person constituting a share of stock or a partnership or membership interest or other right or interest in a Person not characterized as indebtedness under GAAP. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which Borrower is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which Borrower is a member. "Eurocurrency Reserve Requirements" shall mean, for any day as applied to a Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including without limitation basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto), dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such Governmental Authority. 5 "Eurodollar Base Rate" shall mean, with respect to any Eurodollar Contract Period, the rate per annum equal to the rate appearing at page 3750 of the Telerate Screen as 30, 60 or 90 day LIBOR on the second Business Day prior to the commencement of any Eurodollar Contract Period, and if such rate shall not be so quoted, the rate per annum at which Lender is offered Dollar deposits at or about 10:00 A.M., New York City time, on such date by prime banks in the interbank eurodollar market where the eurodollar and foreign currency exchange operations in respect of its Loans are then being conducted for delivery on such day for a period of 30, 60 or 90 days and in an amount comparable to the amount of the Loans to be outstanding on such day. "Eurodollar Contract Period" means, with respect to each Loan, a period determined by Borrower from time to time on the second Business Day prior to the expiration of each prior Eurodollar Contract Period as the period for which a Eurodollar Base Rate shall be in effect, which period shall be thirty (30) days, sixty (60) days or ninety (90) days (or if Borrower shall make no determination, thirty (30) days) and the number of days in such period being subject to adjustment as follows: (a) in no event shall a Eurodollar Contract Period extend beyond the Termination Date; (b) each such period shall end on the day immediately preceding the Payment Date which occurs approximately thirty (30) days, sixty (60) days or ninety (90) days, as applicable, after the commencement of the period chosen by Borrower; and (c) the initial Eurodollar Contract Period with respect to each Asset-Specific Loan Balance shall commence on the related Funding Date and each succeeding Eurodollar Contract Period shall commence on the day on which the immediately preceding Eurodollar Contract Period shall expire. "Eurodollar Rate" shall mean, with respect to each day a Loan is outstanding, a rate per annum determined by Lender in its sole discretion in accordance with the following formula (rounded upwards to the nearest 1/100th of one percent), which rate as determined by Lender shall be conclusive absent manifest error by Lender: Eurodollar Base Rate ------------------------------------------------------ 1.00 minus Eurocurrency Reserve Requirements "Eurodollar Rate Spread" means (A) as to each Advance Rate the applicable Eurodollar Rate Spread set forth below opposite such Advance Rate for the applicable Collateral type, or such other Eurodollar Rate Spread as may be mutually agreed to by Borrower and Lender: - -------------------------------------------------------------------------------- Collateral Type Advance Eurodollar Rate Spread Rate (expressed as percentage points per annum and as basis points) - -------------------------------------------------------------------------------- Conduit Loan 90% 1.25% 125bp - -------------------------------------------------------------------------------- Non-Conduit Mortgage Loans - -------------------------- First Mortgage (75% LTV maximum) 85% 1.75% 175bp - -------------------------------------------------------------------------------- Subordinate Mortgage Loans, Mezzanine Loans, CMBS and Equity Interests* 70% 2.25% 225bp - -------------------------------------------------------------------------------- * Solely for illustrative purposes, Borrower and Lender agree that the following example of a transaction illustrates their intent: with respect to an item of Collateral for which the appraised value of the underlying real property is $100,000,000, on which Mortgage Loans and Mezzanine Loans have been made in the aggregate amount of $85,000,000, with Lender advancing hereunder 85% of a 75% LTV ($63,750,000), plus 70% of a subordinate Mortgage Loan or Mezzanine Loan (70% of $10,000,000 equals $7,000,000), the aggregate loans from Lender to Borrower would equal $70,750,000, resulting in a 83.24% underlying loan-to-loan value. In addition, Lender will finance loans originated by Borrower with an aggregate underlying LTV up to 90% and above 90% on a case-by-case basis. The Eurodollar Rate Spread may exceed the levels set forth above on loans with underlying LTVs in excess of 90%. and (B) notwithstanding anything set forth in clause (A) to the contrary, in the event the Termination Date shall be extended pursuant to the terms hereof, for the period from and after June 30, 2001 to, and including, the date 6 the Loans are repaid in full, as to each Advance Rate the sum of (x) the applicable Eurodollar Rate Spread set forth opposite such Advance Rate for the applicable Collateral type in clause (A) above, plus (y) .25 percent, or 25 basis points, per annum. "Eurodollar Substitute Rate" means a rate of interest equal to (a) the Base Rate minus (b) Two and eighty-five hundredths percent (2.85%) per annum (285 basis points). "Event of Default" shall have the meaning provided in Section 8 hereof. "Federal Funds Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by Lender from three federal funds brokers of recognized standing selected by Lender. "Funding Costs" shall mean, collectively, the actual costs to Lender of breaking a Eurodollar contract (or costs that would have been incurred if Lender had entered into and broken a Eurodollar contract for a Eurodollar Contract Period as requested by Borrower) prior to the expiration of the Eurodollar Contract Period applicable thereto in connection with (a) any prepayment (whether voluntary or involuntary) of all or any portion of an Asset-Specific Loan Balance or other principal repayments required or permitted under the Security Documents, that is made at any time other than at the expiration of the related Eurodollar Contract Period, (b) any voluntary or involuntary acceleration of the Termination Date, such that the Termination Date occurs on any date that is not the expiration date of the Eurodollar Contract Period with respect to any Asset-Specific Loan Balance, and (c) any other set of circumstances not attributable solely to Lender's acts. Subject to the foregoing, Funding Costs shall not include any diminution in yield suffered by Lender upon re-lending or re-investing the principal of the Loan after any prepayment of the Loan. "Funding Date" shall mean the date on which a Loan is made hereunder. "GAAP" shall mean generally accepted accounting principles consistently applied as in effect from time to time in the United States. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over any obligor on any underlying loan, Borrower, any of its Subsidiaries or any of its properties. "Guarantee" shall mean, as to any Person, any obligation of such Person directly or indirectly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise); provided that the term "Guarantee" shall not include (i) endorsements for collection or deposit in the ordinary course of business, or (ii) obligations to make servicing advances for delinquent taxes and insurance or other obligations in respect of a Mortgaged Property, to the extent required by Lender. The amount of any Guarantee of a Person shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have correlative meanings. "Indebtedness" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses 7 incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) obligations (contingent or otherwise) of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; (f) obligations of such Person under repurchase agreements or like arrangements; (g) Indebtedness of others Guaranteed by such Person; (h) all obligations of such Person incurred in connection with the acquisition or carrying of fixed assets by such Person; and (i) Indebtedness of general partnerships of which such Person is a general partner. "Interest Rate Protection Agreement" shall mean, with respect to any or all of the Mortgage Loans and Mezzanine Loans, any short sale of US Treasury Securities, or futures 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 any obligor on any underlying loan or Borrower (specifically with respect to such items of Collateral) and acceptable to Lender. "Lender" shall have the meaning provided in the heading hereto. "Lien" shall mean any mortgage, lien, pledge, charge, encumbrance, security interest or adverse claim. "Loan" and "Loans" shall have the meanings provided in Section 2.01(a) hereof. "Loan Agreement" shall mean this Amended and Restated Master Loan and Security Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Loan Documents" shall mean, collectively, this Loan Agreement, the Note and the Custodial Agreement. "LTV" shall mean, as to any Eligible Collateral, the ratio that (x) the aggregate outstanding principal balances of all loans (including Loans hereunder) and preferred equity interests secured in whole or in part by real property or direct or indirect beneficial interests therein relating to such Eligible Collateral bears to (y) the value, determined by an Appraisal reasonably acceptable to Lender, of the real property (together with all applicable appurtenant interests and subject to all applicable liens, encumbrances and tenancies), or direct or indirect beneficial interests which form the basis of such Eligible Collateral. "Material Adverse Effect" shall mean a material adverse effect on (a) the Property, business, operations, financial condition or prospects of Borrower taken as a whole, (b) the ability of 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 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 aggregate value of the Collateral. "Maximum Advance Rate" shall mean, as to any item of Eligible Collateral, the maximum Advance Rate that shall be determined by Lender in Lender's sole and absolute discretion; provided, that, with respect to the specific categories of Eligible Collateral referred to in the definition of Eurodollar Rate Spread, the Maximum Advance Rate shall not exceed the respective Advance Rates set forth in such definition. "Maximum Credit" shall mean Two Hundred Fifty Million Dollars ($250,000,000.00); provided, however, that if, in each case, no Default or Event of Default shall have occurred and shall be continuing, Borrower shall be entitled upon the delivery of one or more written notices to Lender on any Business Day (or Days) prior to June 30, 2001 to increase the Maximum Credit to an amount up to Three Hundred Million Dollars ($300,000,000.00) upon the payment, in each case, by Borrower to Lender of an amount equal to (i) the amount 8 of the requested increase in the Maximum Credit set forth in such notice multiplied by (ii) 30 basis points (0.30%) multiplied by (iii) the quotient of (x) the number of days from (and including) the day of such request to (and including) the Termination Date divided by (y) the number of days from and after the date hereof to, and including, the Termination Date (the "Maximum Credit Increase Fee"); provided, that, in the event the Affiliate Credit Facility closes prior to the payment of a portion, or all, of the Maximum Credit Increase Fee hereunder, Borrower shall not be required to pay the Maximum Credit Increase Fee to the extent that an equal fee is paid by the borrower under the Affiliate Credit Facility for credit availability thereunder in excess of $150,000,000; and provided, further, however, that the Maximum Credit under this Loan Agreement shall be reduced by an amount equal to the sum of (A) the amount from time to time outstanding under the CMBS Loan Agreement, such that in no event shall the aggregate amount outstanding under this Loan Agreement and the CMBS Loan Agreement exceed $250,000,000 (or, in the event the Maximum Credit from time to time has been increased in an amount up to $300,000,000 pursuant to the terms of the immediately preceding proviso, such amount) and (B) an amount equal to the excess over $100,000,000 of the amount from time to time outstanding under the Affiliate Credit Facility, such that in no event shall the aggregate amount outstanding under this Loan Agreement, the CMBS Loan Agreement and the Affiliate Credit Facility exceed $350,000,000 (or, in the event the Maximum Credit has been increased up to $300,000,000 pursuant to the terms of the immediately preceding proviso, such amount plus $100,000,000). "Mezzanine Loan" shall mean a loan secured by a pledge of Equity Interests in one or more entities holding direct or indirect beneficial interests in an entity owning (or having a ground lease interest in) a commercial or multi-family residential property, preferred equity interests or a second mortgage. "Monthly Statement" shall mean, for each calendar month during which this Loan Agreement shall be in effect, Borrower's reconciliation in arrears of beginning balances, interest, principal, paid-to-date and ending balances for each asset constituting the Collateral, together with (a) an Officer's Certificate with respect to all Collateral pledged to Lender as at the end of such month, (b) a written report of any developments or events that are reasonably likely to have a Material Adverse Effect, (c) a written report of any and all written modifications to any documents underlying any items of Collateral and (d) such other internally prepared reports as mutually agreed by Borrower and Lender which reconciliation, Officer's Certificate and reports shall be delivered to Lender for each calendar month during the term of this Loan Agreement within ten (10) days following the end of each such calendar month. "Mortgage" shall mean the mortgage, deed of trust or other instrument securing a Mortgage Note, which creates a valid lien on the fee or leasehold interest in real property securing the Mortgage Note and the assignment of rents and leases related thereto. "Mortgage Loan" shall mean a mortgage loan (including, without limitation, a Conduit Loan) which Custodian has been instructed to hold for Lender pursuant to the Custodial Agreement, and which Mortgage Loan includes, without limitation, (i) the indebtedness evidenced by a Mortgage Note and secured by a related Mortgage and (ii) all right, title and interest of Borrower in and to the Mortgaged Property covered by such Mortgage. "Mortgage Note" shall mean the original executed promissory note or other evidence of the indebtedness of a mortgagor with respect to a Mortgage Loan. "Mortgaged Property" shall mean the real property (including all improvements, buildings, fixtures, building equipment and personal property thereon and all additions, alterations and replacements made at any time with respect to the foregoing) and all other Collateral securing repayment of the debt evidenced by a Mortgage Note. "MS & Co." shall mean Morgan Stanley & Co. Incorporated, a registered broker-dealer. 9 "MS Indebtedness" shall mean all Indebtedness from time to time owed by Borrower to Lender or any Affiliate of Lender including, without limitation, under this Loan Agreement, the CMBS Loan Agreement, or any repurchase or other agreement between Lender, or an Affiliate of Lender, and Borrower. "Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been or are required to be made by Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA. "'Non-Table' Funded Eligible Collateral" shall mean the items of Eligible Collateral as described in Section 2.03(e) of this Loan Agreement. "Note" shall mean the promissory note provided for by Section 2.02(a) hereof for Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified, amended, supplemented or extended and in effect from time to time including, without limitation, that certain Amended and Restated Promissory Note dated as of June 8, 1998 by Borrower to Lender in the form attached hereto as Exhibit A given in substitution for, and replacement of, that certain amended and restated promissory note dated as of June 8, 1998 by Borrower to Lender. "Officer's Certificate" shall mean the certificate of a Responsible Officer as set forth in Section 5.02(b) hereof. "Other Approved Collateral" shall mean such other Property of Borrower as Lender shall accept as Collateral for the Loans. "Payment Date" shall mean, with respect to each Loan, the first Business Day of each calendar month following the related Funding Date. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Investments" shall mean any United States dollar denominated investment that, as at the date of determination, is one or more of the following obligations or securities: (1) direct registered obligations of, and registered obligations the timely payment of principal and interest on which is fully and expressly guaranteed by, the United States of America or any agency or instrumentality of the United States of America the obligations of which are expressly backed by the full faith and credit of the United States of America; (2) demand and time deposits in, certificates of deposit of, bankers' acceptances issued by, or federal funds sold by any depositary institution or trust company incorporated under the laws of the United States of America or any state thereof and subject to supervision and examination by federal and/or state banking authorities so long as the commercial paper and/or the debt obligations of such depositary institution or trust company (or, in the case of the principal depositary institution in a holding company system, the commercial paper or debt obligations of such holding company) at the time of such investment or contractual commitment providing for such investment have a credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's, in the case of long-term debt obligations, or "P-1" by Moody's and "A-1+" by Standard & Poor's in the case of commercial paper and short-term debt obligations; provided, that in the case of commercial paper and short-term debt obligations with a maturity of longer than 91 days, the issuer thereof must also have at the time of such investment a long-term credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; 10 (3) unleveraged repurchase obligations with respect to (a) any security described in clause (1) above or (b) any other security issued or guaranteed by an agency or instrumentality of the United States of America, in either case entered into with a depositary institution or trust company (acting as principal) described in clause (2) above or entered into with a corporation (acting as principal) whose long-term rating is not less than "Aa2" by Moody's and "AA" by Standard & Poor's or whose short-term credit rating is "P-1" by Moody's and "A-1+" by Standard & Poor's at the time of such investment; provided, that if such security has a maturity of longer than 91 days, the issuer thereof must also have at the time of such investment a long-term credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (4) Registered securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States of America or any state thereof that have a credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's at the time of such investment or contractual commitment providing for such investment; (5) commercial paper or other short-term obligations having at the time of such investment a credit rating of "P-1" by Moody's and "A-1+" by Standard & Poor's and that are Registered and either are bearing interest or are sold at a discount from the face amount thereof and have a maturity of not more than 183 days from their date of issuance; provided, that if such security has a maturity of longer than 91 days, the issuer thereof must also have at the time of such investment a long-term credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (6) a Reinvestment Agreement issued by any bank (if treated as a deposit by such bank), or a Registered Reinvestment Agreement issued by any insurance company or other corporation or entity, in each case that has a credit rating of not less than "P-1" by Moody's and "A-1+" by Standard & Poor's; provided, that if such security has a maturity of longer than 91 days, the issuer thereof must also have at the time of such investment a long-term credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (7) money market funds with respect to any investments described in clauses (1), (2), (3), (4) or (5) above having at the time of such investment, a credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (8) any other investment similar to those described in clauses (1) through (7) above which has, in the case of an investment with a maturity of 91 days or less, a credit rating of not less than "P-1" by Moody's and "A-1+" by Standard & Poor's; provided, however, that Eligible Investments shall not include: (1) any interest-only security, (2) any security whose repayment is subject to substantial non-credit related risk as determined in the reasonable business judgment of Lender (which judgment shall not be called into question as a result of subsequent events), or (3) any security subject to U.S. withholding tax or foreign withholding tax unless the issuer of the security is required to make "gross-up" payments for the full amounts of such tax; and provided, further, that, the term "Eligible Investments" shall not include any obligation or security that has a rating by Standard & Poor's that includes the symbol "r". 11 "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee benefit or other plan established or maintained by Borrower or any ERISA Affiliate during the five-year period ended immediately before the date of this Loan Agreement or to which Borrower or any ERISA Affiliate makes, is obligated to make or has, within the five-year period before the date of this Loan Agreement, been required to make contributions and that is covered Title IV of ERISA or Section 302 of ERISA or Section 412 of the Code, other than a Multiemployer Plan. "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount under this Loan Agreement, the Note or any other Loan Document that is not paid when due to Lender (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 4% per annum plus the Base Rate. "Preliminary Due Diligence Package" means with respect to any proposed Collateral, the following due diligence information relating to such proposed Collateral to be provided by Borrower to Lender pursuant to this Loan Agreement: (i) a summary memorandum outlining the proposed transaction, including potential transaction benefits and all material underwriting risks, all Underwriting Issues and all other characteristics of the proposed transaction that a prudent lender would consider material; (ii) current rent roll, if applicable; (iii) cash flow pro-forma, plus historical information, if available; (iv) description of the property (real property, pledged loan or other Collateral); (v) indicative debt service coverage ratios; (vi) indicative loan-to-value ratio; (vii) Borrower's or any affiliate's relationship with its potential underlying borrower or any affiliate; (viii)if applicable, Phase I environmental report (including asbestos and lead paint report); (ix) if applicable, engineering and structural reports; (x) third party reports, to the extent available and applicable, including: (a) current Appraisal; (b) Phase II or other follow-up environmental report if recommended in Phase I; (c) seismic reports; and (d) operations and maintenance plan with respect to asbestos containing materials; (xi) analyses and reports with respect to such other matters concerning the Collateral as Lender may in its sole discretion require; (xii) documents comprising such Collateral, or current drafts thereof, including, without limitation, underlying debt and security documents, guaranties, underlying borrower's 12 organizational documents, warrant agreements, and loan and collateral pledge agreements, as applicable; and (xiii)a list that specifically and expressly identifies any Collateral Documents that relate to such Collateral but are not in Borrower's possession. "Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Regulations T, U and X" shall mean Regulations T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Responsible Officer" shall mean, as to any Person, the chief executive officer, any vice chairman and the chief financial officer of such Person or, for the purpose of executing certificates, the vice president and counsel responsible therefor. "Secured Obligations" shall have the meaning provided in Section 4.01(a) hereof. "Security Documents" means this Loan Agreement, the Note, and all other agreements, instruments, certificates and documents delivered by or on behalf of Borrower to evidence or secure the Loan(s) or otherwise in satisfaction of the requirements of this Loan Agreement, or the other documents listed above as same may be amended or modified from time to time. "Servicer" shall have the meaning provided in Section 11.14(c) hereof. "Servicing Agreement" shall have the meaning provided in Section 11.14(c) hereof. "Servicing Records" shall have the meaning provided in Section 11.14(b) hereof. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Supplemental Due Diligence List" means, with respect to any proposed Collateral, information or deliveries concerning such proposed Collateral, such items that Lender shall request in addition to the Preliminary Due Diligence Package including, without limitation, a credit approval memorandum representing the final terms of the underlying transaction, a final LTV ratio computation and a final debt service coverage ratio computation for such proposed Collateral. "'Table Funded' Eligible Collateral" shall mean the items of Eligible Collateral as described in Section 2.03(e) of this Loan Agreement. "Tangible Net Worth" shall mean, as of a particular date, (a) all amounts which would be included under capital (it being agreed that any convertible trust preferred securities will be included as capital) on a balance sheet of Borrower at such date, determined in accordance with GAAP, less (b) (i) amounts owing to Borrower from Affiliates and (ii) intangible assets. "Termination Date" shall mean June 30, 2001 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law; provided, however, that in the 13 event that (i) this Agreement shall not have been earlier terminated and (ii) no Default shall have occurred and be continuing on June 30, 2001, the Termination Date shall be automatically extended to March 31, 2002. "Title Insurance Policy" shall mean, with respect to any real property underlying a Collateral Loan, a mortgagee's title insurance policy or policies issued to Lender and Lender's successors and assigns (or, subject to the prior written approval of Lender, an endorsement to Borrower's title insurance policy insuring the collateral assignment to Lender of the applicable mortgage) by one or more title companies reasonably satisfactory to Lender, which policy or policies shall be in form and substance reasonably acceptable to Lender, with such endorsements as Lender shall reasonably require and, with respect to any Collateral Loan, a mortgagee's title insurance policy or policies issued to Lender and Lender's successors and/or assigns by one or more title companies reasonably satisfactory to Lender reflecting Lender's interest in such Collateral Loan. "Total Indebtedness" shall mean, for any period, the aggregate Indebtedness of Borrower during such period less the amount of any nonspecific balance sheet reserves maintained in accordance with GAAP. "Transaction Costs" shall mean, with respect to any Loan, all actual out-of-pocket reasonable costs and expenses paid or incurred by Lender and payable by Borrower relating to the making of such Loan (including legal fees and other fees described in Section 11.03 hereof). Lender shall endeavor to limit the Transaction Costs associated with such Loan (excluding the initial Loan) to $5,000, but the foregoing shall not limit Borrower's obligations with respect to Transaction Costs or constitute a "cap" on Transaction Costs for any Loan. Transaction Costs shall not include costs incurred by Lender for overhead and general administrative expenses. "Trust Receipt" shall mean the receipt delivered by Custodian pursuant to the provisions of Section 4 of the Custodial Agreement acknowledging receipt of a Collateral File in connection with a Loan hereunder in the form of Annex 2 to the Custodial Agreement. "Underwriting Issues" means with respect to any Collateral as to which Borrower intends to request a Loan, all information that has come to Borrower's attention, based on the making of reasonable inquiries and the exercise of reasonable care and diligence under the circumstances, which would be considered a materially "negative" factor (either separately or in the aggregate with other information), or a material defect in loan documentation or closing deliveries (such as any absence of any material Collateral Document(s)), to a reasonable institutional lender in determining whether to originate or acquire the Collateral in question. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02 Accounting Terms and Determinations. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to Lender hereunder shall be prepared, in accordance with GAAP. Section 2. Loans, Note and Prepayments. 2.01 Loans. (a) Lender agrees to consider, as provided herein, from time to time Borrower's requests that Lender make, on the terms and conditions of this Loan Agreement, loans (each, individually, a "Loan" and, collectively, the "Loans") to Borrower in Dollars, from and including the Effective Date to and including June 30, 2001, in an aggregate principal amount at any one time outstanding up to but not exceeding the Maximum Credit as in effect from time to time. Nothing in this Loan Agreement shall be interpreted as a commitment by Lender to make any Loans, but rather sets forth the procedures to be used in connection with periodic requests for Loans 14 and the conditions to the making of any Loans. Borrower hereby acknowledges that Lender is under no obligation to agree to make, or to make, any Loan pursuant to this Loan Agreement. (b) Subject to the terms and conditions of this Loan Agreement, during such period Borrower may borrow, prepay and reborrow hereunder. 2.02 Notes. (a) The Loans made by Lender shall be evidenced by a single promissory note of Borrower substantially in the form of Exhibit A hereto, dated the date hereof, payable to Lender in the principal amount of Three Hundred Million Dollars ($300,000,000.00), as otherwise duly completed; provided, however, that until such time as Borrower has satisfied all conditions precedent to the increase of the Maximum Credit amount from $250,000,000.00 to $300,000,000.00, Borrower shall not be permitted to borrow amounts in excess of $250,000,000.00. Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise and shall have the right to sell participating interests in such Note; provided, however, that Lender must retain (i) in excess of fifty percent (50%) ownership interest in the Note and (ii) control over all decisions with respect to loan pricing and the exercise of remedies with respect to each item of Collateral; and provided, further, however, that Lender may subject up to one hundred percent (100%) of the Loans made hereunder to a repurchase agreement. (b) The date, amount and interest rate of each Loan made by Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by Lender on its books and, prior to any transfer of the Note, endorsed by Lender on the schedule attached to the Note or any continuation thereof; provided that the failure of Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. 2.03 Procedures for Borrowing. (a) Preliminary Approval of Proposed Collateral. (i) Borrower may, from time to time, submit to Lender a Preliminary Due Diligence Package for Lender's review and approval in order to request a borrowing hereunder with respect to any proposed Collateral that Borrower proposes to pledge to Lender and to be included in the Borrowing Base in connection with such borrowing. (ii) Upon Lender's receipt of a complete Preliminary Due Diligence Package, Lender within two (2) Business Days shall have the right to request, in Lender's sole and absolute discretion, additional diligence materials and deliveries that Lender shall specify on a Supplemental Due Diligence List. Upon Lender's receipt of all of the Diligence Materials or Lender's waiver thereof, Lender, within five (5) Business Days, shall either (i) notify Borrower of the Maximum Advance Rate (which may be less than the Advance Rate set forth in the definition of Eurodollar Rate Spread) and the Asset Value for the proposed Collateral or (ii) deny, in Lender's sole and absolute discretion, Borrower's request for an advance. Lender's failure to respond to Borrower within five (5) Business Days following receipt of all Diligence Materials or Lender's written waiver thereof shall be deemed to be a denial of Borrower's request for an advance, unless Lender and Borrower have agreed otherwise in writing. Nothing in this Section 2.03(a)(ii) or elsewhere in this Loan Agreement shall, or be deemed to, prohibit Lender from determining in its sole discretion the adequacy, correctness and appropriateness of, or from disapproving, any and all financial and other underwriting data required to be supplied by Borrower under this Loan Agreement. (b) Final Approval of Proposed Collateral. Upon Lender's notification to Borrower of the Maximum Advance Rate and the Asset Value for any proposed Collateral, Borrower shall, if Borrower desires to obtain one or more advances secured by such proposed Collateral, satisfy the conditions set forth below (in addition to satisfying the conditions precedent to obtaining each advance, as set forth in Section 5 of this Loan 15 Agreement) as conditions precedent to Lender's approval of such proposed Collateral as Collateral, all in a manner, and pursuant to documentation, satisfactory in all respects to Lender and its counsel: (i) Environmental and Engineering. If applicable, Lender shall have received an Environmental Report and an Engineering Report, each in form and substance satisfactory to Lender, by an Engineer and Environmental Consultant listed on Schedules 3 and 4 attached hereto, respectively, as each such schedule may be amended from time to time by Lender in its reasonable discretion. (ii) Appraisal. If applicable, Lender shall have received an Appraisal. (iii) Insurance. With respect to proposed Collateral that is real property, Lender shall have received certificates or other evidence of insurance demonstrating insurance coverage in respect of such real property of types, in amounts, with insurers and otherwise in compliance with the terms, provisions and conditions set forth in the Collateral Documents or the Security Documents. Such certificates or other evidence shall indicate Borrower, as lender, will be named as an additional insured as its interest may appear and shall contain a loss payee endorsement in favor of such additional insured with respect to the property policies required to be maintained under the Collateral Documents. (iv) Survey. With respect to a Mortgage Loan, a Mezzanine Loan or an Equity Interest, to the extent obtained by Borrower from the Collateral Obligor with respect to any item of Collateral at the origination of the underlying loan or equity interest, as the case may be, relating thereto, Lender shall have received with respect to proposed Collateral that is real property, a current Survey of such real property in a form satisfactory to Lender. (v) Lien Search Reports. Lender or Lender's counsel shall have received, as reasonably requested by Lender, satisfactory reports of UCC, tax lien, judgment and litigation searches and title reports and updates, as applicable, conducted by search firms and/or title companies acceptable to Lender with respect to the Collateral, Borrower and the related underlying obligor, such searches to be conducted in each location Lender shall reasonably designate. (vi) Title Insurance Policy. (A) With respect to a Mortgage Loan, Borrower shall have delivered to Lender (1) an unconditional commitment to issue title insurance policies in favor of Lender and Lender's successors and/or assigns with respect to Lender's interest in the related real property with an amount of insurance that shall be not less than the related Asset-Specific Loan Balance (taking into account the proposed advance) or such other amount as Lender shall require in its sole discretion or (2) an endorsement or confirmatory letter from the existing title company to the existing Title Insurance Policy in favor of Lender and Lender's successors and/or assigns that amends the existing title insurance policy by stating that the amount of the insurance is no less than the related Asset-Specific Loan Balance (taking into account the proposed advance) or such other amount of title coverage as Lender shall require in its sole discretion. (B) With respect to a Mezzanine Loan or an Equity Interest, Borrower shall have delivered to Lender such evidence as Lender, in its sole discretion, shall require of the ownership of the real property underlying such item of Collateral including, without limitation, a copy of a title insurance policy dated a date, and by a title insurer, in each case acceptable to Lender in its sole discretion, showing that title is vested in the related Collateral Obligor or in an entity in whom such Collateral Obligor holds a beneficial interest. (vii) Security Documents. Borrower shall have executed and delivered to Lender, in form and substance satisfactory to Lender and its counsel, all security documents perfecting Lender's security interest in the proposed Collateral (and in any Interest Rate Protection Agreements held by Borrower with respect thereto) which shall be subject to no Liens except as expressly permitted by 16 Lender. Each of the security documents shall contain such representations and warranties concerning the proposed Collateral and such other terms as shall be reasonably satisfactory to Lender. (viii)Opinions of Counsel. Lender shall have received from counsel to Borrower its legal opinion as to enforceability of this Loan Agreement and all documents executed and delivered hereunder in connection with such Loan, (at Lender's option) an opinion from local counsel where the applicable property is located and an opinion to Borrower and its successors and assigns from counsel to the underlying obligor on the underlying loan transaction, as applicable, as to enforceability of the loan documents governing such transaction and such other matters as Lender shall require (including, without limitation, opinions as to due formation, authority, choice of law and perfection of security interests). Such legal opinions shall be addressed to Lender and its successors and assigns, dated the related Funding Date, and in form and substance reasonably satisfactory to Lender. (ix) Additional Real Estate Matters. To the extent obtained by Borrower from the Collateral Obligor relating to any item of Collateral at the origination of the underlying loan or equity interest relating thereto, Borrower shall have delivered to Lender such other real estate related certificates and documentation as may have been requested by Lender, such as (i) certificates of occupancy and letters certifying that the property is in compliance with all applicable zoning laws, each issued by appropriate Governmental Authority and (ii) abstracts of all Leases in effect at the real property relating to such Collateral. (x) Other Documents. Lender shall have received such other documents as Lender or its counsel shall request with respect to each or any item of Collateral. (c) Collateral Approval or Disapproval. Within two (2) Business Days following the date upon which Borrower has tendered performance of the conditions enumerated in Sections 2.03(b)(i) through (x), or has delivered such items or documents fully executed, if applicable, in final form, Lender shall either (i) if the Collateral Documents or the Security Documents with respect to the proposed Collateral are not reasonably satisfactory in form and substance to Lender, notify Borrower that Lender has not approved the proposed Collateral as Collateral or (ii) notify Borrower and Bailee that Lender has approved the proposed Collateral as Collateral and such notice shall identify the documents to be delivered to Custodian in connection with such proposed Collateral pursuant to Sections 2.03 and 5 of this Loan Agreement and shall identify the party whom Lender shall designate to record and/or file, as the case may be, any security documents necessary to perfect Lender's security interest in the Eligible Collateral. The terms of delivery and filing and/or recordation of such security documents shall be set forth in a separate agreement between Lender and its designee. Lender's failure to respond to Borrower within two (2) Business Days shall be deemed to be a denial of Borrower's request that Lender approve the proposed Collateral, unless Lender and Borrower have agreed otherwise in writing. (d) Procedure for Borrowing with Respect to Eligible Collateral. Once Lender has approved the Collateral in accordance with Section 2.03(c) above, Borrower may request a Loan hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, by delivering to Lender, with a copy to Custodian, an irrevocable written request for borrowing, substantially in the form of Exhibit D attached hereto, which request must be received by Lender prior to 11:00 a.m., New York City time, one (l) Business Day prior to the requested Funding Date. Such request for borrowing shall (1) attach a schedule identifying the Eligible Collateral that Borrower proposes to pledge to Lender and to be included in the Borrowing Base in connection with such borrowing, (2) specify the requested Funding Date, and (3) attach an Officer's Certificate signed by a Responsible Officer of Borrower as required by Section 5.02(b) hereof. Contemporaneously with the delivery of the request for borrowing, Borrower shall deliver to Lender with a copy to Custodian, a Custodial Identification Certificate along with the accompanying Collateral Schedule with respect to all proposed Eligible Collateral to be pledged to Lender on the applicable Funding Date. (e) Delivery of Collateral Files and Security Documents. 17 "Non-Table Funded" Eligible Collateral: (1) By no later than 1:00 p.m., New York City time, one (1) Business Day prior to any Funding Date, the Borrower and/or the Bailee shall deliver to the Custodian as to any Eligible Collateral on a case-by-case basis, (i) original counterparts of all Collateral Documents comprising the Collateral File, (ii) the security documents described in Section 2.03(b)(vii) above, and (iii) to the extent applicable, any other documents, reports or updated information as Lender shall request pursuant to Section 2.03(b)(i)-(x) and Section 5.03(b) not heretofore finally approved by Lender. "Table Funded" Eligible Collateral: (2) By no later than 1:00 p.m., New York City time, on the Funding Date, the Borrower shall cause the Bailee to deliver to the Custodian by facsimile (i) as to each item of Eligible Collateral, the note, if applicable, evidencing the making of a loan secured by such Eligible Collateral, a fully executed Bailee Agreement and Bailee's Trust Receipt and Certification issued by the Bailee thereunder, (ii) as to all other categories of Eligible Collateral on a case-by-case basis, the delivery of all fully executed documents and instruments required by Lender to comprise the Collateral File and (iii) evidence satisfactory to Lender that all documents necessary to perfect Borrower's interest in the Eligible Collateral have been delivered to a party acceptable to Lender for recordation and filing. (3) By no later than 1:00 p.m., New York City time, on the third Business Day following the applicable Funding Date, the Borrower shall cause the Bailee to deliver to the Custodian the Collateral File. (f) No later than 1:00 p.m., New York City time, on each Funding Date, Borrower shall provide Custodian with a final Custodial Identification Certificate and related Collateral Schedule with respect to the Eligible Collateral to be pledged to the Lender on such Funding Date, indicating any changes, if any, from the Custodial Identification Certificate and related Collateral Schedule heretofore delivered to Lender and Custodian pursuant to Section 2.03(d) above. (g) If Borrower shall deliver a request for a borrowing pursuant to Section 2.03(d) hereof and all conditions precedent set forth in Sections 2.03(a), 2.03(b), 2.03(c), 5.01 and 5.02 have been met, and provided no Default or Event of Default shall have occurred and be continuing, Lender shall make a Loan to Borrower on the requested Funding Date, in the amount so requested and approved by Lender. (h) Subject to the delivery by Custodian to Borrower and Lender of a Trust Receipt with a Collateral Schedule in respect to all Collateral pledged to Lender on such Funding Date by no later then 3:00 p.m. on such date, and subject further to the provisions of Section 5 hereof, such borrowing will then be made available to Borrower by Lender transferring, via wire transfer, to the following account of Borrower: Bank of New York, 530 Fifth Avenue, New York, New York, Account No. 630-0439428 for the benefit of Capital Trust, ABA# 021-000018, Attn: Tarryn Kone ((212) 852-4219), in the aggregate amount of such borrowing in funds immediately available to Borrower. (i) From time to time, the Borrower shall forward to the Custodian additional original documents or additional documents evidencing any (i) assumption, modification, consolidation or extension of a Collateral Loan, or (iii) any amendment to the operative documents with respect to an Equity Interest, in each case approved by the Lender in accordance with the terms of this Loan Agreement and upon receipt of any such other documents, the Custodian shall hold such other documents as the Lender shall request from time to time. (j) With respect to any documents which have been delivered or are being delivered to recording offices for recording and have not been returned to the Borrower in time to permit their delivery hereunder at the time required, in lieu of delivering such original documents, Borrower shall deliver to Lender a 18 true copy thereof with an Officer's Certificate certifying that such copy is a true, correct and complete copy of the original, which has been transmitted for recordation. The Borrower shall deliver such original documents to the Custodian promptly when they are received. 2.04 Mandatory Prepayments or Pledge. (a) Lender may determine and re-determine the Borrowing Base on any Business Day and on as many Business Days as it may elect. If at any time (i) the aggregate outstanding principal amount of Loans exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined by Lender in its sole discretion and notified to Borrower on any Business Day, Borrower shall no later than one Business Day after receipt of such notice, or (ii) Borrower shall have received a prepayment of the principal of any loan or preferred equity interest comprising a portion of the Collateral (including, without limitation, the payment of casualty or condemnation proceeds), Borrower shall, not later than one (1) Business Day after receipt of such prepayment, either prepay the Loans in part or in whole or pledge additional Collateral (which Collateral shall be in all respects acceptable to Lender) to Lender, such that after giving effect to such prepayment or pledge the aggregate outstanding principal amount of the Loans does not exceed the Borrowing Base as re-determined by Lender after the addition of Collateral. So long as no Default or Event of Default has occurred and is then continuing, all partial repayments shall be applied against the Asset-Specific Loan Balance relating to the Loan being repaid. (b) If at any time under any Collateral Document evidencing Eligible Collateral (x) there is an Event of Default, or event with which the giving of notice or lapse of time or both would become an Event of Default, or (y) any representation or warranty made by or on behalf of the relevant Collateral Obligor becomes false or misleading in any material respect or (z) the relevant Collateral Obligor fails to perform or observe any material covenant or other obligation, Lender may, in its sole discretion and without regard to any determination of the Asset Value of such Eligible Collateral, notify Borrower of such occurrence and may require that the Asset-Specific Loan Balance related to the relevant Eligible Collateral be prepaid in whole or in part in the determination of Lender. Not later than one (1) Business Day after the receipt of such notice, Borrower shall prepay the Asset-Specific Loan Balance related to such Eligible Collateral. Lender may, in its sole discretion, determine and re-determine the amount to be prepaid irrespective of whether or not either (i) any statement of fact contained in any Officer's Certificate delivered pursuant to Section 5.02(b) or (ii) any representation of Borrower set forth in Section 6.13 was true to Borrower's actual knowledge. Section 3. Payments; Computations; Etc. 3.01 Repayment of Loans; Interest. (a) Borrower hereby promises to repay in full on the Termination Date the aggregate outstanding principal amount of the Loans; provided, however, in the event the Termination Date shall be extended to March 31, 2002 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on June 30, 2001 by the payment on the first Business Day of each month during the Amortization Period beginning with July 1, 2001 and on the Termination Date, as extended (each, an "Installment Date") of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding as at June 30, 2001 divided by (y) nine (9) (such schedule of payments, the "Amortization Schedule"); provided, further, that in the event that Borrower shall repay any portion of the outstanding principal in an amount in excess of the amount then due and payable in accordance with the Amortization Schedule, the Amortization Schedule shall be recalculated such that Borrower shall repay the principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) by the payment on each Installment Date remaining in the Amortization Period of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) divided by (y) the number of Installment Dates remaining during the Amortization Period. Any repayment of the principal of the Loans made by Borrower to Lender subsequent to an Installment Date shall be credited at the time of such payment and applied to the payment due on next succeeding Installment Date. 19 (b) Borrower hereby promises to pay (at the times set forth in subsection (c) below) to Lender interest on the unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at a rate per annum equal to the Eurodollar Rate plus the applicable Eurodollar Rate Spread. Notwithstanding the foregoing, Borrower hereby promises to pay to Lender, to the extent permitted by applicable law, interest at the applicable Post-Default Rate on any principal of any Loan and on any other amount payable by Borrower hereunder or under the Note that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory prepayment or otherwise) for the period from and including the due date thereof to but excluding the date the same is paid in full. Payment and acceptance of interest pursuant to this subsection shall not constitute a waiver of any Default and shall not otherwise limit or prejudice any right of Lender hereunder. In no event shall Lender be entitled to receive any proceeds received from any Collateral Obligor in connection with the refinancing and/or final distribution to Lender with respect to any Eligible Collateral to the extent same exceeds the sums provided to be paid to Lender under Section 7.l6 of this Loan Agreement. (c) Accrued interest on each Loan shall be payable monthly in arrears on the first Business Day of each month and for the last month of the Loan Agreement on the first Business Day of such last month and on the Termination Date, except that interest payable at the Post-Default Rate shall accrue daily and shall be payable upon such accrual. (d) The Loans may be prepaid in whole or in part at any time upon two (2) Business Days' prior written notice, without any penalty or premium; provided, however, that any such prepayment shall be accompanied by an amount representing accrued interest on the principal amount being prepaid and all other amounts then due under the Loan Documents (including, without limitation, all amounts due under Section 3 hereof). Each partial prepayment that is voluntary (as opposed to mandatory under the terms of this Loan Agreement) shall be in an amount of not less than One Hundred Thousand Dollars ($100,000). So long as no Default or Event of Default has occurred and is then continuing, each voluntary prepayment shall be applied to reduce any Asset-Specific Loan Balance as designated by Borrower to Lender in writing. (e) With respect to any item of Collateral, Borrower shall repay to Lender an amount equal to the amount of casualty or condemnation proceeds paid to, or for the benefit of, Borrower or any underlying obligor in respect of such item of Collateral to the extent that Borrower is not required under the underlying loan documents with Borrower's obligor to reserve, escrow, readvance or apply such proceeds for the benefit of such obligor or the underlying real property. So long as no Default or Event of Default has occurred and is then continuing, such amounts paid to Lender shall be applied in reduction of the Asset-Specific Loan Balance relating to such item of Collateral. 3.02 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by Borrower under this Loan Agreement and the Note shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to Lender at the following account maintained by Lender: Account No. 40615114, for the account of MSMCI, Citibank, N.A., ABA No. 021000089, Attn: Whole Loan Operations, Mortgage-Backed Securities Department, Fixed Income Division, not later than 1:00 p.m., New York City time, on the date on which such payment shall become due (and each such payment made after such time on such due date shall be deemed to have been made on the next succeeding Business Day). Borrower acknowledges that it has no rights of withdrawal from the foregoing account. Lender shall endeavor to send Borrower a detailed bill on the date which is two (2) Business Days prior to the date on which payment is due; provided, however, that the failure of Lender to send, or of Borrower to receive, such bill shall in no way affect Borrower's obligation to pay amounts due under this Loan Agreement. (b) Except to the extent otherwise expressly provided herein, if the due date of any payment under this Loan Agreement or the Note would otherwise fall on a day that is not a Business Day, such date shall 20 be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 3.03 Computations. Interest on the Loans shall be computed on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Lender shall determine any rate of interest payable on Loans hereunder, and such determination shall be conclusive and binding, absent manifest error. 3.04 U.S. Taxes. (a) Borrower agrees to pay to Lender such additional amounts as are necessary in order that the net payment of any amount due to Lender hereunder after deduction for or withholding in respect of any U.S. Tax (as defined below) imposed with respect to such payment (or in lieu thereof, payment of such U.S. Tax by Lender), will not be less than the amount stated herein to be then due and payable; provided that the foregoing obligation to pay such additional amounts shall not apply: (i) to any payment to Lender hereunder unless Lender is entitled to submit a Form 1001 (relating to Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by Lender hereunder in respect of the Loans), or (ii) to any U.S. Tax imposed solely by reason of the failure by Lender to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of Lender if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Tax. For the purposes of this Section 3.03, (x) "Form 1001" shall mean Form 1001 (Ownership, Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America, (y) "Form 4224" shall mean Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of the Treasury of the United States of America (or in relation to either such Form such successor and related form as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates), and (z) "U.S. Taxes" shall mean any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America, any political subdivision of the United States of America or any taxing authority thereof or therein. (b) Within 30 days after paying any such amount to Lender, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, Borrower shall deliver to Lender evidence satisfactory to Lender of such deduction, withholding or payment (as the case may be). (c) Lender represents and warrants to Borrower that on the date hereof Lender is either incorporated under the laws of the United States or a State thereof or is entitled to submit a Form 1001 (relating to Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by Lender hereunder in respect of the Loans). Lender shall not assign or sell participation interests in the Loans made or to be made hereunder to a foreign bank if as a result thereof Lender shall be unable to make the representations set forth in this Section 3.04(c). 3.05 Booking of Loans. Without limitation of Lender's rights to sell, assign or transfer a Loan or any interest therein, including any participation interest therein, at any time and from time to time, Lender may make, carry or transfer such Loan at, to, or for the account of any of its branch offices or the office of an Affiliate of Lender; provided, however, that the representation in Section 3.04(c) shall remain true throughout the term of such Loan. 21 3.06 Lender's Funding of Eurodollar Rate Loans. Borrower hereby expressly acknowledges and agrees that Lender may fund a Loan in any manner it sees fit, including (i) through the actual purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to the definition of Eurodollar Rate in an amount equal to the principal amount of such Loan and having a maturity comparable to the relevant interest period or (ii) through Lender's entering into or purchase of repurchase agreements, interest rate agreements, swap agreements or other arrangements in such amounts as Lender shall determine (and which amounts may or may not, in Lender's sole discretion, be "match funded" to such Loan). Calculation of all amounts payable to Lender under this Section 3.06 and under Section 3.07 shall be made as though Lender had actually funded such Loan through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to the definition of Eurodollar Rate in an amount equal to the amount of such Loan and having a maturity comparable to the relevant interest period and through the transfer of such Eurodollar deposit from an off-shore office of Lender to a domestic office of Lender in the United States of America; provided, however, that Lender may fund such Loan in any manner it sees fit and the foregoing assumptions shall be utilized only for purposes of calculating amounts payable under this Section 3.06 and under Section 3.07, if any. 3.07 Funding Costs. (a) Borrower shall compensate Lender, upon written request by Lender (which request shall set forth the basis for requesting such amounts), for all Funding Costs. (b) Lender shall deliver to Borrower a statement setting forth the amount and basis of determination of any Funding Cost, it being agreed that such statement and the method of calculation shall be conclusive and binding on Borrower, absent manifest error. In addition, in the event Borrower provides Lender not less than five (5) Business Days prior written notice of a proposed voluntary prepayment hereunder, Lender shall deliver to Borrower a non-binding good faith estimate of the applicable components and amount of Funding Costs which would be incurred by Borrower if Borrower were to make a voluntary prepayment hereunder; provided, however, that Borrower shall remain liable for all Funding Costs shown on the statement referred to in the first sentence of this subsection (b), notwithstanding such good faith estimate. (c) In lieu of prepaying the Loan when and as otherwise required or permitted by this Loan Agreement, Borrower may on any Business Day (a "Deposit Funding Date") instead deposit with Lender an amount equal to the applicable prepayment, to be held by Lender (the "Prepayment Deposit") until such date as application of the Prepayment Deposit on account of the Loan would not cause Lender to suffer Funding Costs (the "Deposit Application Date"). Any Prepayment Deposit held by Lender shall: (a) constitute additional security for the Loan, for which the parties shall enter into such security documents (and account establishment and administration documents) as Lender shall require; (b) be held by Lender in an interest-bearing account selected and controlled solely by Lender, interest on which shall be added to principal and applied in the same manner as principal; (c) at Lender's option, be accompanied by a payment (as estimated by Lender) equal to the difference between the interest to be earned on the Prepayment Deposit and the interest that will accrue on a portion of the Loan equal to the Prepayment Deposit during the period from the Deposit Funding Date to the Deposit Application Date; (d) with respect to the Collateral, entitle Borrower to the same rights and benefits (including the right to releases, if any) that would have been available to Borrower if Borrower had prepaid the Loan (and designated Asset-Specific Loan Balance(s)) by an amount equal to the Prepayment Deposit; and (e) be applied on account of the Loan (principal and interest) on the Deposit Application Date. 3.08 Compensation for Increased Costs. If Lender shall in good faith determine that any change in any law, treaty or governmental rule, regulation or order, or in the interpretation, administration or application thereof, or any determination of a court or governmental authority, or compliance with any guideline, request or directive issued or made by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (a) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement 22 against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of Lender; or (b) imposes any other condition on or affecting Lender or its obligations hereunder or the interbank Eurodollar market; and the result of any of the foregoing is to increase the cost to Lender of agreeing to make, making or maintaining the Loan hereunder or to reduce any amount received or receivable by Lender with respect thereto; then, in any such case, Borrower shall promptly (but in any event no later than five (5) Business Days following any notice from Lender of the same) pay to Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate Lender for any such increased cost or reduction in amounts received or receivable hereunder. Lender shall deliver to Borrower a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to Lender under this Section 3.08, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 3.09 Limitation on Types of Loans; Illegality. Anything herein to the contrary notwithstanding, if: (a) Lender determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Loans as provided herein; or (b) Lender determines, which determination shall be conclusive, that the relevant rate of interest referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Loans is to be determined is not likely adequate to cover the cost to Lender of making or maintaining Loans; or (c) Lender determines, which determination shall be conclusive, that it is or will be unlawful for Lender to honor its obligation to make or maintain Loans hereunder using a Eurodollar Rate as a result of compliance by Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful); then Lender shall give Borrower prompt notice thereof and, so long as such condition remains in effect, Lender shall be under no obligation to make additional Loans, and Borrower shall, either prepay all such Loans as may be outstanding or pay interest on such Loans at a rate per annum equal to the Eurodollar Substitute Rate. Section 4. Collateral Security. 4.01 Collateral; Security Interest. (a) Borrower hereby assigns, pledges and grants a security interest in all of its right, title and interest in, to and under the Collateral described in Section 4.01(b) below to Lender to secure the repayment of principal of and interest on all Loans and all other amounts owing to Lender hereunder, under the Note, under the other Loan Documents and any and all MS Indebtedness from time to time outstanding (collectively, the "Secured Obligations"). Borrower agrees to mark its computer records to evidence the interests granted to Lender hereunder. (b) All of Borrower's right, title and interest in, to and under each of the following items of property pledged by Borrower to Lender from time to time and whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter individually and collectively referred to as the "Collateral": 23 (i) all Mortgage Loans, Mezzanine Loans, Equity Interests and Other Approved Collateral; (ii) all Collateral Documents, including without limitation all promissory notes, any collateral pledged or otherwise relating to such Collateral, all representations and warranties made to, or for the benefit of, Borrower by any Collateral Obligor, all Servicing Records (as defined in Section 11.14(b) below) and servicing agreements, together with all files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, computer storage media, accounting records and other books and records relating thereto, in each case subject to prior liens and encumbrances permitted by Lender; (iii) all guaranties and insurance (issued by governmental agencies or otherwise) and any insurance certificate or other document evidencing such guaranties or insurance relating to any Collateral and all claims and payments thereunder; (iv) all other insurance policies and insurance proceeds relating to any Collateral or the related Property; (v) all Interest Rate Protection Agreements; (vi) the Collection Account and all monies from time to time on deposit in the Collection Account; (vii) all "general intangibles", "accounts" and "chattel paper" as defined in the Uniform Commercial Code relating to or constituting any and all of the foregoing; and (viii)any and all replacements, substitutions, distributions on, or proceeds (including, without limitation, condemnation proceeds) of, any and all of the foregoing set forth in items (i) through (vii) of this Section 4.01(b), whether now owned or hereafter acquired, now existing or hereafter created and wherever located. (c) Pursuant to the Custodial Agreement, Custodian shall hold the Collateral Documents as exclusive bailee and agent for Lender pursuant to terms of the Custodial Agreement and shall deliver to Lender Trust Receipts each to the effect that it has reviewed such Collateral Documents in the manner and to the extent required by the Custodial Agreement and identifying any deficiencies in such Collateral Documents as so reviewed. 4.02 Further Assurances. (a) Borrower shall undertake, with respect to each item of Collateral pledged hereunder as security for a Loan, any and all actions deemed necessary by Lender for the granting by Borrower to Lender of a valid first priority security interest in such Collateral. Without limiting the generality of the foregoing, Borrower shall take such steps as are for the granting and perfection of a first priority security interest in Securities and related Collateral. (b) At any time and from time to time, upon the written request of Lender, and at the sole expense of Borrower, Borrower will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments and documents and take such further action as Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Loan Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. Borrower also hereby authorizes Lender to file any such financing or continuation statement without the signature of Borrower to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Loan Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 24 4.03 Changes in Locations, Name, etc. Borrower shall not (i) change the location of its chief executive office/chief place of business from that specified in Section 6 hereof or (ii) change its name, identity or corporate structure (or the equivalent) or change the location where it maintains its records with respect to the Collateral unless it shall have given Lender at least ten (10) days prior written notice thereof and shall have delivered to Lender all Uniform Commercial Code financing statements and amendments thereto as Lender shall request and taken all other actions deemed necessary by Lender to continue its perfected status in the Collateral with the same or better priority. 4.04 Lender's Appointment as Attorney-in-Fact. (a) Borrower hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Borrower and in the name of Borrower or in its own name, from time to time in Lender's discretion, for the purpose of carrying out the terms of this Loan Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Loan Agreement, and, without limiting the generality of the foregoing, Borrower hereby gives Lender the power and right, on behalf of Borrower, without assent by, but with notice to, Borrower, if an Event of Default shall have occurred and be continuing, to do the following: (i) in the name of Borrower or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Lender for the purpose of collecting any and all such moneys due under any such mortgage insurance or with respect to any other Collateral whenever payable; (ii) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; and (iii) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to Lender or as Lender shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against Borrower with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as Lender may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender's option and Borrower's expense, at any time, and from time to time, all acts and things which Lender deems reasonably necessary to protect, preserve or realize upon the Collateral and Lender's Liens thereon and to effect the intent of this Loan Agreement, all as fully and effectively as Borrower might do. Borrower hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the repayment in full of all Secured Obligations hereunder. (b) Borrower also authorizes Lender, at any time and from time to time, to execute, in connection with any sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. 25 (c) The powers conferred on Lender are solely to protect Lender's interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither Lender nor any of its officers, directors, or employees shall be responsible to Borrower for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. 4.05 Performance by Lender of Borrower's Obligations. If Borrower fails to perform or comply with any of its agreements contained in the Loan Documents and Lender may itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of Lender incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Post-Default Rate, shall be payable by Borrower to Lender on demand and shall constitute Secured Obligations. 4.06 Proceeds. If an Event of Default shall occur and be continuing, (a) all proceeds of Collateral received by Borrower consisting of cash, checks and other near-cash items shall be held by Borrower in trust for Lender, segregated from other funds of Borrower, and, within two (2) Business Days of receipt by Borrower, shall be turned over to Lender in the exact form received by Borrower (duly endorsed by Borrower to Lender, if required, in order to be negotiated by Lender) and (b) any and all such proceeds received by Lender (whether from Borrower or otherwise) may, in the sole discretion of Lender, be held by Lender as collateral security for, and/or then or at any time thereafter may be applied by Lender against, the Secured Obligations (whether matured or unmatured), such application to be in such order as Lender shall elect. Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full and this Loan Agreement shall have been terminated shall be paid over to Borrower or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned rents and any other income and all other amounts received with respect to the Collateral. 4.07 Remedies. If a Default shall occur and be continuing, Lender may, at its option, enter into one or more Interest Rate Protection Agreements covering all or a portion of the Mortgage Loans or Mezzanine Loans pledged to Lender hereunder, and Borrower shall be responsible for all damages, judgment costs and expenses of any kind which may be imposed on, incurred by or asserted against Lender relating to or arising out of such Interest Rate Protection Agreements; including without limitation any losses resulting from such Interest Rate Protection Agreements. If an Event of Default shall occur and be continuing, Lender may exercise, in addition to all other rights and remedies granted to it in this Loan Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, Lender without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon Borrower or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker's board or office of Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Borrower, which right or equity is hereby waived or released. Borrower further agrees, at Lender's request, to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at Borrower's premises or elsewhere. Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Lender hereunder, including without limitation reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as Lender may 26 elect, and only after such application and after the payment by Lender of any other amount required or permitted by any provision of law, including without limitation Section 9-504(1)(c) of the Uniform Commercial Code, need Lender account for the surplus, if any, to Borrower. To the extent permitted by applicable law, Borrower waives all claims, damages and demands it may acquire against Lender arising out of the exercise by Lender of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of Lender. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. Borrower shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 3.01(b) hereof) if the proceeds of any sale or other disposition of the Collateral (net of costs incurred in connection with such sale or other disposition) are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by Lender to collect such deficiency. 4.08 Limitation on Duties Regarding Preservation of Collateral. Lender's duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as Lender deals with similar property for its own account. Neither Lender nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Borrower or otherwise. 4.09 Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 4.10 Release of Security Interest. Upon termination of this Loan Agreement and the CMBS Loan Agreement and repayment to Lender of all Secured Obligations and the performance of all obligations under the Loan Documents and under the CMBS Loan Agreement, Lender shall release its security interest in any remaining Collateral. 4.11 Release of Collateral. Provided that no Default or Event of Default shall exist (other than one that (a) relates solely to the Collateral to be released and (b) will be cured simultaneously with such release) and that Borrower shall have paid all sums then due under the Loan relating thereto, upon (i) Borrower's payment in full of the Asset-Specific Loan Balance with respect to a portion of the Collateral and (ii) receipt by Lender of a written request from Borrower for the release of such Collateral, Lender shall as soon as practicable release (and Lender shall reasonably cooperate with Borrower to facilitate reasonable escrow arrangements to facilitate a simultaneous release of) the related Collateral Documents and the related Collateral and any liens related thereto to Borrower or, to the extent necessary to facilitate future savings of mortgage tax in states that impose mortgage taxes, assign such liens as Borrower shall request; provided, that any such assignments shall be without recourse, representation or warranty of any kind except that Lender shall represent and warrant that such Collateral has not been previously assigned by Lender. Lender shall with reasonable promptness, after a written request from Borrower, execute any document or instrument necessary to effectuate such release or assignment. 4.12 Substitution of Eligible Collateral. From time to time until the Custodian is otherwise notified by the Lender, which notice shall be given by the Lender only during the existence of an Event of Default, and with the prior written consent of the Lender, the Borrower may substitute for one or more items of Eligible Collateral constituting the Collateral with one or more substitute items of Eligible Collateral having aggregate Collateral Value equal to or greater than the Collateral Value of the Collateral being substituted for, or obtain the release of one or more items of Collateral constituting Collateral hereunder: provided that, after giving effect to such substitution or release, the Secured Obligations then outstanding shall not exceed the Borrowing Base, which determination shall be made solely by the Lender. In connection with any such requested substitution or release, the Borrower will provide notice to the Custodian and the Lender no later than 3:00 p.m. New York City time, on the date of such request, specifying the items of Collateral to be substituted for or released and the items of substitute Collateral to be pledged hereunder in substitution thereof, if any, and shall deliver with such notice a Custodial Identification Certificate and a revised Collateral Schedule indicating any substitute Collateral. 27 Section 5. Conditions Precedent. 5.01 Initial Loan. The obligation of Lender to make its initial Loan hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan, of the condition precedent that Lender shall have received all of the following items and documents, each of which shall be satisfactory to Lender and its counsel in form and substance: (a) Loan Documents. (i) This Loan Agreement, duly completed and executed; (ii) The Note, duly completed and executed, together with a fee in the amount of $750,000.00; (iii) The Custodial Agreement, duly executed and delivered by Borrower and Custodian. In addition, Borrower shall have taken such other action as Lender shall have requested in order to perfect the security interests created pursuant to the Loan Agreement; (b) Organizational Documents. Certified copies of the articles of incorporation and by-laws (or equivalent documents) of Borrower and of all requisite authority for Borrower with respect to the execution, delivery and performance of the Loan Documents and each other document to be delivered by Borrower from time to time in connection herewith (and Lender may conclusively rely on such certificate until it receives notice in writing from Borrower to the contrary); (c) Legal Opinion. A legal opinion of counsel to Borrower, substantially in the form attached hereto as Exhibit C; (d) Trust Receipt and Collateral Schedule and Exception Report. A Trust Receipt, substantially in the form of Annex 2 of the Custodial Agreement, dated the Effective Date, from Custodian, duly completed, with a Collateral Schedule and Exception Report attached thereto; (e) Servicing Agreement(s). Any Servicing Agreement, certified as a true, correct and complete copy of the original, with the letter of the applicable Servicer (i) consenting to termination of such Servicing Agreement upon the occurrence of an Event of Default and (ii) agreeing to hold all moneys received in respect of each item of Collateral for the benefit of Lender, attached; and (f) Other Documents. Such other documents as Lender may reasonably request. 5.02 Initial and Subsequent Loans. The making of each Loan to Borrower (including the initial Loan) on any Business Day is subject to the delivery of all Collateral Documents pertaining to the Eligible Collateral to be pledged for such Loan, together with all documents set forth in Section 2.03(b)(i)-(x) and the satisfaction of the following further conditions precedent, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) no Event of Default or Default shall have occurred and be continuing on such date either before or after giving effect to the making of the advance; (b) Lender shall have received from Borrower and Borrower shall have received from each Collateral Obligor such representations and warranties as Lender shall, in its sole discretion, deem satisfactory. The representations and warranties made by Borrower in Section 6 hereof, and elsewhere in each of the Loan Documents, shall be true and complete on and as of the date of the making of such Loan in all material respects (in the case of the representations and warranties in Section 6.10, solely with respect to Eligible Collateral included in the Borrowing Base) with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Lender shall have received an officer's certificate signed by a Responsible Officer of Borrower certifying as to the truth and accuracy of the above, which certificate shall also include a representation that (i) Borrower is in 28 compliance with all governmental licenses and authorizations, (ii) Borrower is qualified to do business, validly existing and, to the extent determinable, in good standing, in all required jurisdictions, (iii) the facts set forth in the Diligence Materials related to the Collateral for such Loan are, to the best knowledge of Borrower after diligent inquiry, true and correct (or shall fully explain all adverse changes from the information previously supplied to Lender), (iv) there has been no change in the organizational and authority documents provided to Lender pursuant to Section 5.01(b) hereof since the date of the most recent certification thereof to Lender, and (v) there has been no Material Adverse Effect since the date of the last advance to Borrower hereunder. (c) the aggregate outstanding principal amount of the Loans shall not exceed the Borrowing Base; (d) subject to Lender's right to perform one or more Due Diligence Reviews pursuant to Section 11.15 hereof, Lender shall have completed its due diligence review of the Collateral Documents for each item of Collateral and such other documents, records, agreements, instruments, mortgaged properties or information relating to such item of Collateral as Lender in its sole discretion deems appropriate to review and such review shall be satisfactory to Lender in its sole discretion; (e) Lender shall have received from Custodian a Trust Receipt, together with a Collateral Schedule and Exception Report with Exceptions (as defined in the Custodial Agreement) as are acceptable to Lender in its sole discretion, in respect of the Eligible Collateral to be pledged hereunder on such Business Day; (f) Lender shall have received from Borrower a Lender's Release Letter substantially in the form of Exhibit E hereto (or such other form acceptable to Lender) covering each item of Collateral to be pledged to Lender to the extent such Collateral is subject to a lender's lien; (g) none of the following shall have occurred and/or be continuing: (i) an event or events shall have occurred resulting in the effective absence of a "repo market" or comparable "lending market" for financing debt obligations secured by mortgage loans or securities for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in Lender not being able to finance any Loans through the "repo market" or "lending market" with traditional counterparties at rates which would have been reasonable prior to the occurrence of such event or events; (ii) an event or events shall have occurred resulting in the effective absence of a "securities market" for securities backed by mortgage loans for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in Lender not being able to sell securities backed by mortgage loans at prices which would have been reasonable prior to such event or events; or (iii) there shall have occurred a material adverse change in the financial condition of Lender which effects (or can reasonably be expected to effect) materially and adversely the ability of Lender to fund its obligations under this Loan Agreement; (h) Drawdown Fee. Borrower shall have paid Lender from the proceeds of the advance to be made in connection with such Loan, a Drawdown Fee calculated on the amount of such Loan then being disbursed. (i) Transaction Costs. Borrower shall have paid Lender from the proceeds of the advance to be made in connection with such Loan, all Transaction Costs for which bills have been submitted; provided, however, that nothing herein shall be deemed to waive Borrower's obligation to pay all Transaction Costs whether billed before or after the making of a Loan pursuant to which such Transaction Costs were incurred. 29 (j) Other Documents. Lender shall have received such other documents, and Borrower shall have taken such other action in order to perfect the security interests created hereunder, as Lender or its counsel shall deem necessary. (k) No Morgan Stanley Downgrade. Morgan Stanley Dean Witter & Co.'s corporate bond rating as calculated by S&P or Moody's shall not have been lowered or downgraded to a rating below A- as indicated by S&P or below A3 as indicated by Moody's. Each request for a borrowing by Borrower hereunder shall constitute a certification by Borrower that all the conditions set forth in this Section 5 have been satisfied (both as of the date of such notice, request or confirmation and as of the date of such borrowing). 5.03 Additional Requirements. (a) Borrower and Lender recognize and agree that the categories of Collateral set forth in the Recital paragraph hereof and defined herein as categories of assets which may be submitted by Borrower to Lender for review by Lender as Eligible Collateral hereunder are general in nature and that the full scope of such Collateral categories may be unknown. Consequently, the appropriate requirements are not fully known for (i) the documents to be provided by Borrower for underwriting and due diligence review by Lender and (ii) submittals by Borrower in order to create and perfect a first priority security interest in the Collateral. Therefore, Borrower and Lender agree that, as a further condition precedent to funding a Loan in respect of any Collateral hereunder, Borrower shall have delivered to Lender all information and documents determined by Lender in good faith to be required for its underwriting and examination of such Collateral and for the granting and perfection of a first priority security interest therein. (b) Without limiting the generality of the foregoing Section 5.03(a), Borrower shall execute and deliver all documents necessary for the granting of a first priority security interest in any Collateral determined by Lender to be Eligible Collateral hereunder, including without limitation (i) all instruments evidencing indebtedness payable to Borrower or pledged to Borrower as security for a loan, (ii) all instruments granting or perfecting a security interest for the benefit of Borrower or pledged to Borrower as security for a loan (including, without limitation, collateral assignments, pledge agreements and UCC financing statements), (iii) all instruments evidencing an interest in an entity pledged to Borrower as security for a loan (including, without limitation, partnership interests, shares of corporate stock, participation interests, and other beneficial interests of any kind), (iv) all instruments guaranteeing the repayment of indebtedness owed to Borrower, or pledged to Borrower for the repayment of a Loan and (v) all agreements among holders of debt or equity interests providing for a priority among such parties of interests in related assets forming the basis of an item of Collateral. Section 6. Representations and Warranties. Borrower represents and warrants to Lender that throughout the term of this Loan Agreement: 6.01 Existence. Borrower (a) is a corporation duly organized and validly existing under the laws of the jurisdiction of its organization, (b) has all requisite power, and has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the lack of such licenses, authorizations, consents and approvals would not be reasonably likely to have a Material Adverse Effect on its Property, business or financial condition or prospects; and (c) is qualified to do business, validly existing and is, to the extent determinable, in good standing, in all other jurisdictions in which the nature of the business conducted by it makes such qualification necessary, except where failure so to qualify would not be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect on its Property, business or financial condition or prospects. 6.02 Action. Borrower has all necessary power, authority and legal right to execute, deliver and perform its obligations under each of the Loan Documents; the execution, delivery and performance by Borrower of each of the Loan Documents have been duly authorized by all necessary action on its part; and each 30 Loan Document has been duly and validly executed and delivered by Borrower and constitutes a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms. 6.03 Financial Condition. Borrower agrees to promptly deliver to Lender all publicly filed financial information when and to the extent that the same is made available to the general public. Borrower has heretofore furnished to Lender a copy of (a) its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for the fiscal year of Borrower ended December 31, 1997 and the related consolidated statements of income and retained earnings and of cash flows for Borrower and its consolidated Subsidiaries for such fiscal year, setting forth in each case in comparative form the figures for the previous year, (b) its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for Borrower and its consolidated Subsidiaries for such fiscal year, setting forth in each case in comparative form the figures for the previous year, with the opinion thereon of Ernst & Young and Coopers & Lybrand and (c) its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for the quarterly fiscal period of Borrower ended September 30, 2000 and the related consolidated statements of income and retained earning and of cash flows for Borrower and its consolidated Subsidiaries for such quarterly fiscal periods, setting forth in each case in comparative form the figures for the previous year. All such financial statements are complete and correct and fairly present, in all material respects, the consolidated financial condition of Borrower and its Subsidiaries and the consolidated results of their operations as at such dates and for such fiscal periods, all in accordance with GAAP applied on a consistent basis. Since September 30, 2000, there has been no material adverse change in the consolidated business, operations or financial condition of Borrower and its consolidated Subsidiaries taken as a whole from that set forth in said financial statements. 6.04 Litigation. There are no actions, suits, arbitrations, investigations (including, without limitation, any of the foregoing which are pending or threatened) or other legal or arbitrable proceedings affecting Borrower or any of its Subsidiaries or affecting any of the Property of any of them before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby, (ii) makes a claim or claims in an aggregate amount greater than $5,000,000, (iii) which, individually or in the aggregate, if adversely determined, could reasonably be likely to have a Material Adverse Effect, or (iv) requires filing with the Securities and Exchange Commission in accordance with the 1934 Act or any rules thereunder. 6.05 No Breach. Neither (a) the execution and delivery of the Loan Documents nor (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the articles of incorporations and by-laws (or equivalent documents) of Borrower, or any applicable law, rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any Servicing Agreement or other material agreement or instrument to which Borrower or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such material agreement or instrument or result in the creation or imposition of any Lien (except for the Liens created pursuant to this Loan Agreement) upon any Property of Borrower or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. 6.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority or any securities exchange are necessary for the execution, delivery or performance by Borrower of the Loan Documents or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to this Loan Agreement. 6.07 Use of Proceeds; Margin Regulations. No part of the proceeds of any Loan will be used, whether directly, indirectly, immediately, incidentally or ultimately (i) to purchase or carry any "margin stock" within the meaning of Regulation U or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which entails a violation of, or is inconsistent with, such Regulation U or any other regulations of the Board of Governors of the Federal Reserve System, or (iii) for any purposes prohibited by any applicable law, order, rule, regulation, ordinance or similar code or restriction. If requested by Lender, Borrower, any applicable 31 Affiliate or Subsidiary of Borrower and the recipient of any portion of the proceeds all or any portion of any Loan shall furnish to Lender a statement on Federal Reserve Form G-3 referred to in Regulation U. 6.08 Taxes. Borrower and its Subsidiaries have filed all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except for any such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of Borrower and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of Borrower, adequate. 6.09 Investment Company Act. Neither Borrower nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.10 Collateral; Collateral Security. (a) Borrower has not assigned, pledged, or otherwise conveyed or encumbered any Collateral to any other Person, and immediately prior to the pledge of such Collateral to Lender, unless otherwise approved by Lender in writing, Borrower was the sole owner of such Collateral and had good and marketable title thereto, free and clear of all Liens, in each case except for Liens to be released simultaneously with the Liens granted in favor of Lender hereunder. No Collateral pledged to Lender hereunder was acquired by Borrower from an Affiliate of Borrower unless otherwise approved by Lender in writing. (b) The provisions of this Loan Agreement are effective to create in favor of Lender a valid security interest in all right, title and interest of Borrower in, to and under the Collateral. (c) (i) Upon (x) receipt by Custodian of each Mortgage Note evidencing a Mortgage Loan, endorsed in blank by a duly authorized officer of Borrower, (y) the recordation of the mortgage to Lender securing such Mortgage Loan and an assignment of such mortgage and (z) the filing of a UCC-1 financing statement with respect to such assignment of mortgage, Lender shall have a fully perfected first priority security interest therein, subject only to prior liens and encumbrances permitted by Lender, in the Mortgage Loan evidenced thereby and in Borrower's interest in the related Property. (ii) Upon (x) receipt by Custodian of each note evidencing a Mezzanine Loan, endorsed in blank by a duly authorized officer of Borrower, (y) the delivery of a duly executed pledge to Borrower of direct or indirect beneficial interests in the underlying property and the filing of UCC-1 financing statements with respect thereto, and (z) the delivery by Borrower of a duly executed pledge of such pledged interests and the filing of UCC-3 assignment statements with respect thereto, Lender shall have a fully perfected first priority security interest therein, in the Mezzanine Loan evidenced thereby, and in Borrower's interest in the related Property. (iii) As to all other Collateral, upon receipt by Custodian of all documents set forth in Lender's notice to Borrower and Custodian pursuant to Section 2.03(b)(x) hereof, Lender shall have a fully perfected first priority security interest therein and in Borrower's interest in the related Property. (d) Upon the filing of financing statements on Form UCC-1 naming Lender as "Secured Party" and Borrower as "Debtor", and describing the Collateral, in the jurisdictions and recording offices for which security interests may be perfected in the Collateral by the filing of UCC financing statements, the security interests granted hereunder in the Collateral will constitute fully perfected first priority security interests under the Uniform Commercial Code in all right, title and interest of Borrower in, to and under such Collateral which can be perfected by filing under the Uniform Commercial Code. 6.11 Chief Executive Office. Borrower's chief executive office on the Executive Date is located at 410 Park Avenue, 14th Floor, New York, New York 10022. 32 6.12 Location of Books and Records. The location where Borrower keeps its books and records, including all computer tapes and records relating to the Collateral is its chief executive office. 6.13 True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of Borrower to Lender in connection with the negotiation, preparation or delivery of this Loan Agreement and the other Loan Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, (x) do not contain any untrue statement of material fact and (y) contain all statements of material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, true. All written information furnished after the date hereof by or on behalf of Borrower to Lender in connection with this Loan Agreement and the other Loan Documents and the transactions contemplated hereby and thereby, will be true, complete 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 actual knowledge of a Responsible Officer of Borrower, after due inquiry, that could reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Loan Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to Lender for use in connection with the transactions contemplated hereby or thereby. 6.14 Tangible Net Worth. On the date hereof, the Tangible Net Worth is not less than the sum of (i) $100,000,000 plus (ii) an amount equal to 75% of the aggregate of positive changes in Borrower's book equity, since March 31, 2000 (without deduction for quarterly losses). 6.15 ERISA. Each Plan to which Borrower or its Subsidiaries make direct contributions, and, to the knowledge of Borrower, 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. No event or condition has occurred and is continuing as to which Borrower would be under an obligation to furnish a report to Lender under Section 7.01(d) hereof assuming a request therefor has been made by Lender. Section 7. Covenants of Borrower. Borrower covenants and agrees with Lender that, so long as any Loan is outstanding and until payment in full of all Secured Obligations: 7.01 Financial Statements, Reports, etc. Borrower agrees to promptly deliver to Lender all publicly filed financial information when and to the extent same is available to the general public. In addition to such public financial information, Borrower shall also provide the following financial information: (a) the Monthly Statement; (b) within forty-five (45) days following the end of each quarter, a status report with respect to such quarter which describes the cumulative sources and uses of the funds for the immediately preceding calendar quarter on each asset pledged under this Loan Agreement and a detailed report in a form reasonably satisfactory to Lender; (c) within forty-five (45) days following the end of each quarter, a certificate from a Responsible Officer of Borrower in form and substance reasonably satisfactory to Lender that there has been no Event of Default and no Material Adverse Effect; (d) within fifteen (15) Business Days after Lender's request, such further information with respect to the operation of any real property, the Collateral, the financial affairs of Borrower and any Plan and Multiemployer Plan as may be requested by Lender, including all business plans prepared by or for Borrower; provided, however, that with respect to information not previously known to, or in the possession of, Borrower relating to any Multiemployer Plan, Borrower shall only be required to provide such information as may be obtained through good faith efforts; 33 (e) upon Lender's request, a copy of any financial or other report Borrower shall receive from any underlying obligor with respect to an item of Collateral within fifteen (15) days after Borrower's receipt thereof; and (f) such other reports as Lender shall reasonably require. 7.02 Litigation. Borrower will promptly, and in any event within 10 days after service of process on any of the following, give to Lender notice of all litigation, actions suits, arbitrations, investigations (including, without limitation, any of the foregoing which are pending or threatened) or other legal or arbitrable proceedings affecting Borrower or any of its Subsidiaries or affecting any of the Property of any of them before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby, (ii) makes a claim or claims in an aggregate amount greater than $1,000,000.00, or (iii) which, individually or in the aggregate, if adversely determined could reasonably be likely to have a Material Adverse Effect. 7.03 Existence, etc. Borrower will: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 7.03(a) shall prohibit any transaction expressly permitted under Section 7.04 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, all environmental laws) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect on its Property, business or financial condition, or prospects; (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied; (d) not move its chief executive office from the address referred to in Section 6.11 unless it shall have provided Lender 10 days' prior written notice of such change; (e) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and (f) permit representatives of Lender, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by Lender. 7.04 Prohibition of Fundamental Changes. Borrower shall not 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; provided, that Borrower may enter into a merger or consolidation if (a) the surviving or resulting entity shall be a corporation or partnership organized under the laws of the United States or any state thereof; (b) such entity shall expressly assume by written agreement, in form and substance satisfactory to Lender in Lender's sole discretion, the performance of all of Borrower's duties and obligations under this Loan Agreement, the Note and the Loan Documents; and (c) such entity shall be at least as creditworthy as Borrower, as determined by Lender in Lender's sole and absolute discretion; and, provided, further, that if after giving effect thereto, no Default would exist hereunder. Notwithstanding the foregoing, Borrower shall not enter into or be subject to any transaction, and no direct or indirect change in the ownership structure of Borrower shall occur (whether or not within Borrower's control), if as a result thereof: (a) either John R. Klopp and Samuel Zell would no longer retain his respective present or comparable or more senior offices (Vice Chairman and Chairman of the Executive Committee; Chief Executive 34 Officer and Vice Chairman; and Chairman of the Board, respectively) and directorships, or (b) in Lender's judgment, such individuals would no longer collectively retain effective control of Borrower's business and operations. 7.05 Borrowing Base Deficiency. If at any time there exists a Borrowing Base Deficiency, Borrower shall cure same in accordance with Section 2.04 hereof. 7.06 Notices. Borrower shall give notice to Lender: (a) promptly upon receipt of notice or knowledge of the occurrence of any Default or Event of Default; (b) with respect to any Collateral pledged to Lender hereunder, immediately upon receipt of any principal payment (in full or partial) or payment in respect of an Equity Interest; (c) with respect to any Collateral pledged to Lender hereunder, immediately upon receipt of notice or knowledge that the underlying Property has been damaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, or otherwise damaged so as to affect adversely the Asset Value of such pledged Collateral; (d) promptly upon receipt of notice or knowledge of (i) any default related to any Collateral unless otherwise specifically approved by Lender in writing, (ii) any Lien or security interest (other than security interests created hereby or by the other Loan Documents) on, or claim asserted against, any of the Collateral, (iii) any event or change in circumstances has or could reasonably be expected to have an adverse affect on the Collateral Value of the Collateral for a Loan or (iv) any event or change in circumstances which could reasonably be expected to have a Material Adverse Effect; (e) with respect to any item of Collateral pledged to Lender hereunder, promptly upon entering into a modification of any documents pertaining to such item of Collateral which would have a material adverse effect on such item of Collateral; and (f) with respect to any Collateral pledged to Lender hereunder, immediately upon the acquisition or receipt by Borrower or any Affiliate of Borrower of any interest of any kind in respect of such Collateral which interest has not been pledged to Lender as Collateral under this Loan Agreement. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of Borrower setting forth details of the occurrence referred to therein and stating what action Borrower has taken or proposes to take with respect thereto. 7.07 Reports. Borrower shall provide Lender with a quarterly report, which report shall include, among other items, a summary of Borrower's delinquency and loss experience with respect to any Collateral serviced by Borrower, any Servicer or any designee of either, plus any such additional reports as Lender may reasonably request with respect to Borrower's or any Servicer's servicing portfolio or pending originations of Collateral. 7.08 Transactions with Affiliates. Borrower will not, except as approved by Lender in writing, enter into any transaction in any manner relating to any item of Collateral hereunder, including without limitation any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate; provided, however, that Lender may consider for approval any such transaction which is (a) otherwise permitted under this Loan Agreement, (b) in the ordinary course of Borrower's business and (c) upon fair and reasonable terms no less favorable to Borrower than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate, or make a payment under such transactions that is not otherwise permitted by this Section 7.08 to any Affiliate. In no event shall Borrower pledge to Lender hereunder any items of Collateral acquired by Borrower from an Affiliate of Borrower. 35 7.09 Foreclosure or Other Remediation by Borrower. Borrower may propose, and Lender will consider but shall be under no obligation to approve, strategies for the foreclosure or other realization upon the security for underlying loans held by Borrower relating to items of Collateral hereunder. 7.10 Limitation on Liens. 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, or otherwise specifically permitted in writing by Lender under this Loan Agreement, and Borrower will defend the right, title and interest of Lender's in and to any of the Collateral against the claims and demands of all persons whomsoever. Borrower may request from time to time, subject to Lender's approval in Lender's sole determination, to sell participation interests in its interests in items of Collateral, the sale of which participation interests shall be arm's length transactions and subject to such terms and conditions as Lender in its sole discretion shall require. 7.11 Limitation on Distributions. After the occurrence and during the continuation of any Event of Default, Borrower shall not make any payment on account of, or set apart assets for, a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of any equity or partnership interest of Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Borrower. 7.12 Maintenance of Tangible Net Worth. Borrower shall not permit Tangible Net Worth (including convertible trust preferred stock) at any time to be less than the sum of (i) $125,000,000 plus (ii) an amount equal to 75% of the aggregate of positive net income (without deduction for quarterly losses). 7.13 Maintenance of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization to Interest and Preferred Dividends. Borrower shall not permit the ratio of (a) earnings before interest, taxes, depreciation and amortization (excluding dividends) to (b) the sum of (i) interest expense and (ii) preferred dividends (specifically excluding any convertible trust preferred dividends) to be less than 1.20:1. 7.14 Maintenance of Ratio of Total Indebtedness to Tangible Net Worth. Borrower shall not permit the ratio of Total Indebtedness to Tangible Net Worth at any time to be greater than 5:1. Lender may consider waiving the foregoing requirement under certain circumstances if requested by Borrower; however, Lender shall be under no obligation to do so. 7.15 Servicer; Servicing Tape. Borrower shall provide to Lender on the fifteenth calendar day of each month, or if such day is not a Business Day then on the first Business Day immediately following such day, a computer readable file containing servicing information, including without limitation those fields specified by Lender from time to time, on a loan-by-loan basis and in the aggregate, with respect to the Mortgage Loans, Mezzanine Loans and Equity Interests serviced hereunder by Borrower or any Servicer. Borrower shall not cause any Collateral to be serviced by any servicer other than a servicer expressly approved in writing by Lender. 7.16 Remittance of Prepayments. Borrower shall remit, with sufficient detail to enable Lender to appropriately identify the Loan, or Loans, to which any amount remitted applies, to Lender on each Business Day all principal prepayments that Borrower has received during the previous Business Day in an amount equal to the sum of the Asset-Specific Loan Balances being prepaid, together with all interest due thereon through the date of such remittance, any and all charges due with respect to such Loans and any and all costs and expenses incurred by Lender (as provided in this Loan Agreement) in connection with such Loans and the prepayment thereof. 7.17 Reserved. 7.18 Maintenance of Cash. Borrower shall maintain (i) a minimum Cash balance of $5,000,000 plus (ii) an additional amount equal to $5,000,000 invested in Permitted Investments. 36 Section 8. Events of Default. Each of the following events shall constitute an event of default (an "Event of Default") hereunder: (a) Borrower shall default in the payment of any principal of or interest on any Loan when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or (b) Borrower shall default in the payment of any principal of or interest on any MS Indebtedness when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or (c) Borrower shall default in the payment of any other amount payable by it hereunder or under any other Loan Document after notification by Lender of such default, and such default shall have continued unremedied for seven (7) Business Days; or (d) any representation, warranty or certification made or deemed made herein, or in any other Loan Document by Borrower or any certificate furnished to Lender pursuant to the provisions hereof or thereof shall prove to have been false or misleading in any material respect as of the time made or furnished (other than the representations and warranties set forth in Section 6 hereof which shall be considered solely for the purpose of Section 2.04(b) hereof; unless Borrower shall have made any such representations and warranties with knowledge that they were materially false or misleading at the time made); or (e) Borrower shall fail to comply with the requirements of Section 7.03(a), Section 7.04, Section 7.05, Section 7.06, or Sections 7.08 through 7.18 hereof; or Borrower shall otherwise fail to comply with the requirements of Section 7.03 hereof and such default shall continue unremedied for a period of ten (10) Business Days; or Borrower shall fail to observe or perform any other covenant or agreement contained in this Loan Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of ten (10) Business Days; or (f) a final judgment or judgments for the payment of money in excess of $5,000,000.00 in the aggregate shall be rendered against Borrower or any of its Subsidiaries by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be satisfied, discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within thirty (30) days from the date of entry thereof, and Borrower or any such Subsidiary shall not, within said period of thirty (30) 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; or (g) Borrower shall admit in writing its inability to pay its debts as such debts become due; or (h) Borrower or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator or the like of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (i) a proceeding or case shall be commenced, without the application or consent of Borrower or any of its Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of Borrower or any such Subsidiary or of all or any substantial part of its property, or (iii) similar relief in respect of Borrower or any such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and 37 continue unstayed and in effect, for a period of thirty (30) or more days; or an order for relief against Borrower or any such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (j) the Custodial Agreement or any Loan Document shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by Borrower; or (k) Borrower shall grant, or suffer to exist, any Lien on any Collateral except the Liens contemplated hereby; or the Liens contemplated hereby shall cease to be first priority perfected Liens on the Collateral in favor of Lender or shall be Liens in favor of any Person other than Lender; or (l) Borrower or any of Borrower's Affiliates shall be in default under any note, indenture, loan agreement, guaranty, swap agreement or any other contract to which it is a party (other than MS Indebtedness), which default (i) involves the failure to pay a matured obligation, or (ii) permits the acceleration of the maturity of obligations by any other party to or beneficiary of such note, indenture, loan agreement, guaranty, swap agreement or other contract, in any such case in which the amount of such obligation or obligations, in the aggregate, exceed $10,000,000.00; or (m) any materially adverse change in the Property, business, financial condition or prospects of Borrower or any of its Subsidiaries shall occur, in each case as determined by Lender in its sole discretion, or any other condition shall exist which, in Lender's sole discretion, constitutes a material impairment of Borrower's ability to perform its obligations under this Loan Agreement, the Note or any other Loan Document; or (n) MS & Co.'s corporate bond rating shall have been lowered or downgraded to a rating below A- by S&P or A3 by Moody's and Borrower shall have failed to repay all amounts owing to Lender under this Agreement, the Note and the other Loan Documents within 90 days following such downgrade. Section 9. Remedies Upon Default. (a) Upon the occurrence of one or more Events of Default other than those referred to in Section 8(g) or (h), Lender may immediately declare the principal amount of the Loans then outstanding under the Note to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Loan Agreement. Upon the occurrence of an Event of Default referred to in Sections 8(g) or (h), such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by Borrower. (b) Upon the occurrence of one or more Events of Default, Lender shall have the right to obtain physical possession of the Servicing Records and all other files of Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of Borrower or any third party acting for Borrower and Borrower shall deliver to Lender such assignments as Lender shall request. Lender shall be entitled to specific performance of all agreements of Borrower contained in this Loan Agreement. (c) Upon the occurrence of an Event of Default, without limiting any other rights or remedies of Lender, Lender shall have the right to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by or for account of Lender or Lender's Affiliates to any indebtedness at any time owing to Lender to the credit or for the account of Borrower against any and all of the Indebtedness of Borrower, irrespective of whether Lender shall have made any demand under this Loan Agreement, the Note, any other Security Document or any other document executed in connection with any other MS Indebtedness. Section 10. No Duty of Lender. The powers conferred on Lender hereunder are solely to protect Lender's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. 38 Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to Borrower for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct. Section 11. Miscellaneous. 11.01 Waiver. No failure on the part of Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. Except as otherwise expressly permitted by this Loan Agreement, all notices, requests and other communications provided for herein and under the Custodial Agreement (including without limitation any modifications of, or waivers, requests or consents under, this Loan Agreement) shall be given or made in writing (including without limitation by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or thereof; or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Loan Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03 Indemnification and Expenses. (a) Borrower agrees to hold Lender, and its Affiliates and their officers, directors, employees, agents and advisors (each an "Indemnified Party") harmless from and indemnify any Indemnified Party against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by or asserted against such Indemnified Party (collectively, the "Costs") relating to or arising out of this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than any Indemnified Party's gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Borrower agrees to hold any Indemnified Party harmless from and indemnify such Indemnified Party against all Costs with respect to all Collateral Loans and Equity Interests relating to or arising out of any violation or alleged violation of any environmental law, rule or regulation or any consumer credit laws, including without limitation the Truth in Lending Act and/or the Real Estate Settlement Procedures Act, that, in each case, results from anything other than such Indemnified Party's gross negligence or willful misconduct. In any suit, proceeding or action brought by an Indemnified Party in connection with any Collateral for any sum owing thereunder, or to enforce any provisions of any Collateral Documents, Borrower will save, indemnify and hold such Indemnified Party harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by Borrower of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from Borrower. Borrower also agrees to reimburse an Indemnified Party as and when billed by such Indemnified Party for all such Indemnified Party's costs and expenses incurred in connection with the enforcement or the preservation of such Indemnified Party's rights under this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. Borrower hereby acknowledges that, notwithstanding the fact that the Note is secured by the Collateral, the obligation of Borrower under the Note is a recourse obligation of Borrower. 39 (b) Borrower agrees to pay as and when billed by Lender all of the out-of-pocket costs and expenses incurred by Lender in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Loan Agreement, the Note, any other Loan Document or any other documents prepared in connection herewith or therewith. Borrower agrees to pay as and when billed by Lender all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including without limitation (i) all the reasonable fees, disbursements and expenses of counsel to Lender and (ii) all the due diligence, inspection, testing and review costs and expenses incurred by Lender with respect to Collateral under this Loan Agreement, including, but not limited to, those costs and expenses incurred by Lender pursuant to Sections 11.03(a), 11.14 and 11.15 hereof. 11.04 Amendments. Except as otherwise expressly provided in this Loan Agreement, any provision of this Loan Agreement may be modified or supplemented only by an instrument in writing signed by Borrower and Lender and any provision of this Loan Agreement may be waived by Lender. 11.05 Successors and Assigns. This Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Survival. The obligations of Borrower under Sections 3.03 and 11.03 hereof shall survive the repayment of the Loans and the termination of this Loan Agreement. In addition, each representation and warranty made or deemed to be made by a request for a borrowing, herein or pursuant hereto shall survive the making of such representation and warranty, and Lender shall not be deemed to have waived, by reason of making any Loan, any Default that may arise because any such representation or warranty shall have proved to be false or misleading, notwithstanding that Lender may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.07 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement. 11.08 Counterparts. This Loan Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. 11.09 Loan Agreement Constitutes Security Agreement; Governing Law. This Loan Agreement shall be governed by New York law without reference to choice of law doctrine, and shall constitute a security agreement within the meaning of the Uniform Commercial Code. 11.10 SUBMISSION TO JURISDICTION; WAIVERS. BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR 40 THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH LENDER SHALL HAVE BEEN NOTIFIED; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 11.11 WAIVER OF JURY TRIAL. EACH OF BORROWER AND LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 11.12 Acknowledgments. Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Loan Agreement, the Note and the other Loan Documents; (b) Lender has no fiduciary relationship to Borrower, and the relationship between Borrower and Lender is solely that of debtor and creditor; and (c) no joint venture exists between Lender and Borrower. 11.13 Hypothecation or Pledge of Loans. Lender shall have free and unrestricted use of all Collateral and nothing in this Loan Agreement shall preclude Lender from engaging in repurchase transactions with the Collateral or otherwise pledging, repledging, transferring, hypothecating, or rehypothecating the Collateral or pledging or otherwise transferring its rights to payment hereunder in respect of any Loan made hereunder; provided, that no action by Lender referred to in this sentence shall confer on any Person other than Lender any right against Borrower to require any prepayment under Section 2.04 hereof or any right to enforce against Borrower any other provision of this Loan Agreement, but may grant to any Person the right to require Lender to enforce any such provisions. Nothing contained in this Loan Agreement shall obligate Lender to segregate any Collateral delivered to Lender by Borrower. 11.14 Servicing. (a) Borrower covenants to maintain or cause the servicing of the Collateral to be maintained with respect to each type of Collateral pledged to Lender hereunder in conformity with accepted and prudent servicing practices in the industry for such same type of Collateral and in a manner at least equal in quality to the servicing Borrower provides for assets similar to such Collateral which it owns. In the event that the preceding language is interpreted as constituting one or more servicing contracts, each such servicing contract shall terminate automatically upon the earliest of (i) an Event of Default, (ii) the date on which all the Secured Obligations have been paid in full or (iii) the transfer of servicing approved by Borrower and Lender, which Lender's consent shall not be unreasonably withheld. Midland Loan Services, L.P. shall be the initial servicer. (b) If the Collateral, or any portion thereof, is serviced by Borrower, (i) Borrower agrees that Lender is the collateral assignee of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance 41 coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of such Collateral (the "Servicing Records"), and (ii) Borrower grants Lender a security interest in all servicing fees and rights relating to such Collateral and all Servicing Records to secure the obligation of Borrower or its designee to service in conformity with this Section and any other obligation of Borrower to Lender. Borrower covenants to safeguard such Servicing Records and to deliver them promptly to Lender or its designee (including Custodian) at Lender's request. (c) If the Collateral, or any portion thereof, is serviced by a third party servicer (such third party servicer, the "Servicer"), Borrower (i) shall provide a copy of the servicing agreement to Lender, which shall be in form and substance acceptable to Lender (the "Servicing Agreement"); and (ii) hereby irrevocably assigns to Lender and Lender's successors and assigns all right, title, interest of Borrower in, to and under, and the benefits of, any Servicing Agreement with respect to such Collateral. Any successor to the Servicer shall be approved in writing by Lender prior to such successor's assumption of servicing obligations with respect to such Collateral. The Travelers Real Estate Investment Group ("Travelers") is hereby approved as a Servicer, subject to (x) there having occurred no materially adverse change in Travelers' ability to perform as Servicer prior to the date of Lender's approval hereunder of any servicing agreement between Borrower and Travelers and (y) the satisfaction by Borrower of clause (i) hereof and the delivery by Borrower to Lender of such additional documentation as Lender may require to further evidence the security interest granted to Lender by Borrower in Borrower's interest in any servicing agreement entered into between Borrower and Travelers. (d) Borrower shall provide to Lender a letter from Borrower (if Borrower is the Servicer) or the Servicer, as the case may be, to the effect that upon the occurrence of an Event of Default, Lender may terminate any Servicing Agreement and transfer servicing to its designee, at no cost or expense to Lender, it being agreed that Borrower will pay any and all fees required to terminate the Servicing Agreement and to effectuate the transfer of servicing to the designee of Lender. (e) After the Funding Date, until the pledge of any Collateral is relinquished by Custodian, Borrower will have no right to modify or alter the terms of any of the documents pertaining to such Collateral and Borrower will have no obligation or right to repossess such Collateral or substitute other Collateral, except as provided in the Custodial Agreement; provided, however, that so long as no Default or Event of Default has occurred and is continuing, Borrower may enter into such modifications of the terms of such documents as do not, as to any individual item of Collateral, (i) result in a negative monetary effect or (ii) constitute a material adverse effect. (f) In the event Borrower or its Affiliate is servicing any Collateral, Borrower shall permit Lender to inspect Borrower's or its Affiliate's servicing facilities, as the case may be, for the purpose of satisfying Lender that Borrower or its Affiliate, as the case may be, has the ability to service such Collateral as provided in this Loan Agreement. (g) Borrower shall cause the Servicer to provide a copy of each report and notice sent to Borrower to be sent to Lender concurrently therewith. 11.15 Periodic Due Diligence Review. Borrower acknowledges that Lender has the right to perform continuing due diligence reviews with respect to the Collateral, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or determining and re-determining the Borrowing Base under Section 2.04(a) hereof, or otherwise, and Borrower agrees that Lender, at its option, has the right at any time to conduct a partial or complete due diligence review on any or all of the Collateral securing the Loans, including, without limitation, ordering new credit reports and Appraisals on the applicable Collateral and otherwise regenerating the information used to originate such Eligible Collateral. Upon reasonable (but no less than one (1) Business Day) prior notice to Borrower, Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Collateral Files and any and all documents, records, agreements, instruments or information relating to such Collateral in the possession or under the control of Borrower and/or Custodian. Borrower also shall make available to Lender a 42 knowledgeable financial or accounting officer for the purpose of answering questions respecting the Collateral Files and the Collateral. Borrower agrees to cooperate with Lender and any third party underwriter designated by Lender in connection with such underwriting, including, but not limited to, providing Lender and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Collateral in the possession, or under the control, of Borrower. Borrower further agrees that Borrower shall reimburse Lender for any and all out-of-pocket costs and expenses incurred by Lender in connection with Lender's activities pursuant to this Section 11.15. 11.16 Intent. The parties recognize that each Loan is a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. 11.17 Change of Borrower's State of Formation. If Borrower shall change the State under whose laws Borrower shall be organized, Borrower shall promptly provide Lender with a copy of its new Declaration of Trust, Articles of Incorporation or similar document, certified by the Secretary of State or other appropriate official of Borrower's new State of formation, if applicable, together with such opinions of counsel regarding such change as Lender, in its sole discretion, shall require. 11.18 Trustee Exculpation. The parties agree that except for fraudulent acts, willful misrepresentation or gross negligence, no trustee of Borrower shall have personal liability hereunder to Lender and any obligation of Borrower hereunder to Lender shall be satisfied solely from the assets of Borrower. 11.19 Set-Off. In addition to any rights and remedies of Lender provided by this Loan Agreement and by law, Lender shall have the right, without prior notice to Borrower, any such notice being expressly waived by Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by Lender or any Affiliate thereof to or for the credit or the account of Borrower. Lender agrees promptly to notify Borrower after any such set-off and application made by Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. [SIGNATURE PAGE FOLLOWS] 43 WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. BORROWER CAPITAL TRUST, INC. By: /s/ Edward L. Shugrue III --------------------------------------- Name: Edward L. Shugrue, III Title: Chief Financial Officer Address for Notices: 410 Park Avenue, 14th Floor New York, New York 10022 Attention: Edward L. Shugrue, III Chief Financial Officer Telecopier No.: (212) 655-0044 Telephone No.: (212) 655-0220 With a copy to: Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Attention: John A. Cahill, Esq. Telecopier No.: (212) 319-4090 Telephone No.: (212) 318-6260 LENDER MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC. By: /s/ Christian B. Malone --------------------------------------- Name: Christian B. Malone Title:Vice President Address for Notices: 1585 Broadway New York, New York 10036 Attention: Mr. Marc Flamino, Whole Loan Operations Mortgage-Backed Securities Department, Fixed-Income Division Telecopier No.: 212-761-0093 Telephone No.: 212-761-4243 With a copy to: Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166-0153 Attention: Frederick B. Utley, III, Esq. Telecopier No.: (212) 878-8375 Telephone No.: (212) 878-8356 44 SCHEDULE 1 FILING JURISDICTIONS AND OFFICES [TO BE PROVIDED BY COUNSEL TO BORROWER] S-1 SCHEDULE 2 APPROVED APPRAISERS 1. KTR Appraisal Services 2. Cushman & Wakefield, Inc. 3. Landauer Real Estate Counselors 4. CB Commercial 5. The Weitzman Group 6. Greenwich Group 7. Arthur Anderson 8. Joseph Blake S-2 SCHEDULE 3 APPROVED ENGINEERS 1. EMG 2. KTR Realty Services 3. Merritt & Harris, Inc. 4. C.A. Rich, Inc. 5. IVI 6. Dames & Moore 7. Law 8. Echland 9. EM&CA 10. Acqua Terra 11. ATC (BCM Engineers) 12. Horn Chandler & Thomas S-3 SCHEDULE 4 APPROVED ENVIRONMENTAL CONSULTANTS 1. Acqua Terra 2. Law Environmental 3. KTR Realty Services 4. EMG 5. Clayton 6. Dames & Moore 7. Brown & Root 8. C.A. Rich, Inc. 9. Echland 10. EM&CA 11. ATC (BCM Engineers) 12. Front Royal S-4 EXHIBIT A [FORM OF AMENDED AND RESTATED PROMISSORY NOTE] $ 300,000,000.00 as of June 8, 1998 New York, New York AMENDED AND RESTATED PROMISSORY NOTE dated as of June 8, 1998 (this "Amended and Restated Promissory Note") made by CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), to MORGAN STANLEY DEAN WITTER MORTGAGE CAPITAL INC., a New York corporation formerly known as Morgan Stanley Mortgage Capital Inc. ("Lender") in substitution for, and replacement of, the promissory note dated as of June 8, 1998 (the "Original Note") made by Capital Trust, a California business trust (a predecessor-in-interest of Borrower, hereinafter "Predecessor Borrower") to Lender pursuant to that certain Master Loan and Security Agreement dated as of June 8, 1998 (the "Original Loan and Security Agreement") between Predecessor Borrower and Lender. PRELIMINARY STATEMENT Borrower has advised Lender that (i) Predecessor Borrower has entered into, and merged with and into, Captrust Limited Partnership, a Maryland limited partnership, (ii) Captrust Limited Partnership has survived such merger and subsequently has merged with and into Borrower, and (iii) Borrower has survived such subsequent merger with Captrust Limited Partnership. In order to provide for (a) the assumption by Borrower of the obligations of Predecessor Borrower and to further amend the Original Loan and Security Agreement, Borrower and Lender have entered into First Amendment to Master Loan and Security Agreement dated as of March 30, 1999 ("Amendment No. 1"), which Amendment No. 1 provides, among other things, for the ratification, confirmation and assumption by Borrower of all liabilities of the borrower under the Original Loan and Security Agreement, as amended thereby, the Note and the other Loan Documents (as such capitalized terms are defined in such Amendment No. 1), (b) the further amendment of the Original Loan and Security Agreement (as amended by Amendment No. 1) Borrower and Lender have entered into that certain Second Amendment to Master Loan and Security Agreement dated as of June 30, 2000 ("Amendment No. 2") and (c) the amendment and restatement in its entirety of the Original Loan and Security Agreement ( as amended by Amendment No. 1 and Amendment No. 2) Borrower and Lender have entered into that certain Amended and Restated Master Loan and Security Agreement dated as of February 8, 2001 which amends and restates in its entirety the Original Loan and Security Agreement, as thereafter amended by Amendment No. 1 and Amendment No. 2 (as further amended, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement"). In connection therewith, Borrower has agreed to enter into this Amended and Restated Promissory Note in substitution for, and replacement of, the Original Note. NOW THEREFORE, FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of Lender, at the principal office of Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the United States, and in immediately available funds, the principal sum of THREE HUNDRED MILLION DOLLARS ($300,000,000.00) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by Lender to Borrower under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Loan made by Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by Lender on its books and, prior to B-1 any transfer of this Amended and Restated Promissory Note, endorsed by Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Loans made by Lender. This Amended and Restated Promissory Note is the Note referred to in the Loan Agreement, and evidences Loans made by Lender thereunder. Terms used but not defined in this Amended and Restated Promissory Note have the respective meanings assigned to them in the Loan Agreement. This Amended and Restated Promissory Note amends and restates in its entirety the Original Note and is given as a continuation and extension, and not a novation, release or satisfaction, of the Original Note. The issuance and delivery of this Amended and Restated Promissory Note does not create or evidence any principal indebtedness other than the principal indebtedness evidenced by the Original Note. Borrower hereby acknowledges and agrees that simultaneously with Borrower's execution and delivery of this Amended and Restated Promissory Note to Lender, Lender has delivered to Borrower the Original Note. Borrower hereby (i) ratifies, confirms and assumes all of the obligations of Predecessor Borrower under, and adopts and agrees to be bound by, all of the terms covenants and conditions of, the Original Note, as amended and restated hereby, and the other Loan Documents with the same force and effect as if Borrower had been the party executing such agreements as the "Borrower" thereunder and (ii) represents, warrants and covenants that, as of the date hereof, (a) Borrower has no cause of action at law or in equity against Lender (including, without limitation, any offset, defense, deduction or counterclaim) with respect to any of such obligations and (b) the principal amount due and owing under this Amended and Restated Promissory Note is $39,228,461.00. Borrower agrees to pay all Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Amended and Restated Promissory Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, Borrower hereby acknowledges, admits and agrees that Borrower's obligations under this Amended and Restated Promissory Note are recourse obligations of Borrower to which Borrower pledges its full faith and credit. Borrower, and any endorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Amended and Restated Promissory Note, (b) expressly agree that this Amended and Restated Promissory Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Amended and Restated Promissory Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that it will not be necessary for Lender, in order to enforce payment of this Amended and Restated Promissory Note, to first institute or exhaust Lender's remedies against Borrower or any other party liable hereon or against any Collateral for this Amended and Restated Promissory Note. No extension of time for the payment of this Amended and Restated Promissory Note, or any installment hereof, made by agreement by Lender with any person now or hereafter liable for the payment of this Amended and Restated Promissory Note, shall affect the liability under this Amended and Restated Promissory Note of Borrower, even if Borrower is not a party to such agreement; provided, however, that Lender and Borrower, by written agreement between them, may affect the liability of Borrower. Any reference herein to Lender shall be deemed to include and apply to every subsequent holder of this Amended and Restated Promissory Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Amended and Restated Promissory Note. S-2 This Amended and Restated Promissory Note shall be governed by and construed under the laws of the State of New York (without reference to choice of law doctrine) whose laws Borrower expressly elects to apply to this Amended and Restated Promissory Note. Borrower agrees that any action or proceeding brought to enforce or arising out of this Amended and Restated Promissory Note may be commenced in the Supreme Court of the State of New York, Borough of Manhattan, or in the District Court of the United States for the Southern District of New York. CAPITAL TRUST, INC., a Maryland corporation By: --------------------------------- Name: Edward L. Shugrue, III Title: Chief Financial Officer S-3 SCHEDULE OF LOANS This Amended and Restated Promissory Note evidences Loans made under the within-described Loan Agreement to Borrower, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below.
- ------------------------------------------------------------------------------------------------------------ Name of Date Made Principal Interest Amount Paid Unpaid Cumulative Notation Collateral Amount of Rate or Prepaid Principal Total Unpaid Made by Loan Amount Principal Amount - ------------------------------------------------------------------------------------------------------------ 140 6/15/98 $20,000,000.00 Libor + 220 * $20,000,000.00 $20,000,000.00 CBM Broadway - --------------------------------------------------------------------------------------------------------- Cohen Bros. 6/16/98 0 Libor + 220 * 0 $20,000,000.00 CBM - ------------------------------------------------------------------------------- ------------------------- 135 East 3/30/99 $528,461.00 Libor + 225 * $528,461.00 $20,528,461.00 CBM 57th Street - --------------------------------------------------------------------------------------------------------- Melrose 6/01/99 $18,700,000.00 Libor + 175 * $18,700,000.00 $39,228,461.00 CBM Hotel - --------------------------------------------------------------------------------------------------------- 277 Park 6/08/99 0 Libor + 225 * 0 $39,228,461.00 CBM Avenue - --------------------------------------------------------------------------------------------------------- Station 6/16/99 0 Libor + 225 * 0 $39,228,461.00 CBM Square
*The respective amounts shown in the columns entitled "Principal Amount of Loan" and "Cumulative Total Unpaid Principal Amount" reflect the respective net unpaid principal amounts inclusive of all advances and repayments to, and including, the date hereof in respect of the indicated collateral. S-4 EXHIBIT B [FORM OF CUSTODIAL AGREEMENT] [STORED AS A SEPARATE DOCUMENT] B-1 EXHIBIT C [FORM OF OPINION OF COUNSEL OF BORROWER] The opinions of counsel, or counsels, to Borrower shall be substantially in the forms of the opinions attached hereto submitted by Borrower to Morgan Stanley Dean Witter Mortgage Capital, Inc., in connection with the 135 East 57th Street, New York, New York transaction and otherwise acceptable to Lender; provided, however, that the attached opinion from Atlheimer & Gray is intended to serve as an example of the opinion to be delivered in connection with collateral (such as a note or similar instrument) with respect to which perfection of a security interest granted therein is achieved through possession, it being understood that in the case of collateral with respect to which perfection of a security interest is achieved through other means, the perfection opinion shall vary. C-1 EXHIBIT D [FORM OF REQUEST FOR BORROWING] Amended and Restated Master Loan and Security Agreement, dated as of February __, 2001 (the "Loan and Security Agreement"), by and between Borrower and Morgan Stanley Dean Witter Mortgage Capital Inc. (the "Lender"), Lender: Morgan Stanley Dean Witter Mortgage Capital Inc. Borrower: [NAME OF BORROWER] Requested Fund Date: ------------------------------ Transmission Date: ------------------------------ Transmission time: ------------------------------ [Type of Funding: ------------------------------] (Wet or Dry) [Type of Loan requested: ------------------------------] Committed or Uncommitted Number of Mortgage ------------------------ Loans to be Pledged: Unpaid Principal Balance: $ ------------------------ Requested Wire Amount: $ ------------------------ Wire Instructions: Requested by: [NAME OF BORROWER] By: --------------------------- Name: Title: D-1 EXHIBIT E [FORM OF LENDER'S RELEASE LETTER] (Date) Morgan Stanley Dean Witter Mortgage Capital Inc. 1585 Broadway New York, New York 10036 Attention: ------------- Facsimile: ------------- Re: Certain Collateral Identified on Schedule A hereto and owned by [BORROWER] The undersigned hereby releases all right, interest, lien or claim of any kind with respect to the Collateral described in the attached Schedule A, such release to be effective automatically without any further action by any party upon payment in one or more installments, in immediately available finds of $__________, in accordance with the following wire instructions: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Very truly yours, [LENDER] By: -------------------------- Name: Title: E-1 EXHIBIT F [FORM OF BAILEE AGREEMENT] F-1 EX-10.15 7 0007.txt AMENDED AND RESTATED LOAN AGREEMENT Exhibit 10.15 AMENDED AND RESTATED CMBS LOAN AGREEMENT FOR A CREDIT FACILITY IN AN AMOUNT UP TO $300,000,000 Dated as of February 8, 2001 CAPITAL TRUST, INC. as Borrower and MORGAN STANLEY & CO. INTERNATIONAL LIMITED as Lender AMENDED AND RESTATED CMBS LOAN AGREEMENT AMENDED AND RESTATED CMBS LOAN AGREEMENT (this "Loan Agreement"), dated as of February 8, 2001 between CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), and MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("Lender"). RECITALS WHEREAS, Lender and Capital Trust, a California business trust (a predecessor-in-interest of Borrower, hereinafter "Predecessor Borrower") are parties to that certain CMBS Loan Agreement, dated as of June 30, 1998, by and between Predecessor Borrower and Lender (the "Original Loan and Security Agreement"); WHEREAS, Lender and Borrower amended the Original Loan and Security Agreement by First Amendment to CMBS Loan Agreement dated as of June 30, 1999, in order to make certain additional arrangements regarding, among other things, the extension of the term of the Original Loan and Security Agreement, limitations on the amounts which may be borrowed against Eligible Collateral, the timing of the repayment of amounts due and owing to Lender, the applicable rates of interest to be paid on such borrowed amounts and the addition of certain conditions regarding the financial status of Borrower ("Amendment No. 1"). In addition, Borrower advised Lender that (i) Predecessor Borrower had entered into, and merged with and into, Captrust Limited Partnership, a Maryland limited partnership, (ii) Captrust Limited Partnership survived such merger and subsequently merged with and into Borrower, and (iii) Borrower survived such subsequent merger with Captrust Limited Partnership. In connection therewith, Borrower ratified, confirmed, and assumed all liabilities of Predecessor Borrower under the Original Loan and Security Agreement, as amended by Amendment No. 1, the Note and the other Loan Documents; WHEREAS, Lender and Borrower further amended the Original Loan and Security Agreement, as amended Amendment No. 1, by Second Amendment to CMBS Loan Agreement dated as of June 30, 1999 in order to make certain additional arrangements solely with respect to the Eligible Collateral set forth in that certain Request for Borrowing dated as of June 30, 1999 by Borrower to Lender (the "Original Lazard Collateral") regarding, among other things, the Advance Rate, Eurodollar Rate Spread, Drawdown Fee, Debt Service Coverage Ratio and terms and conditions governing payments of interest and principal indebtedness applicable to such Original Lazard Collateral ("Amendment No. 2"); WHEREAS Lender and Borrower further amended the Original Loan and Security Agreement, as amended by Amendment No. 1 and Amendment No. 2, by Third Amendment to CMBS Loan Agreement, dated as of June 30, 2000, by and between Lender and Borrower ("Amendment No. 3"); WHEREAS, pursuant to the Original Loan and Security Agreement, as amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3, Borrower has requested that Lender from time to time make revolving credit loans to it to finance certain commercial mortgage-backed securities owned by Borrower, and Lender is prepared to make such loans upon the terms and conditions hereof. In addition, Borrower has requested that Morgan Stanley Dean Witter Mortgage Capital Inc. ("MSDWMC") from time to time make revolving credit loans to it to finance certain Mortgage Loans, Mezzanine Loans, Equity Interests and other approved collateral owned by Borrower and MSDWMC has agreed to make such loans pursuant to the terms and conditions of that certain Amended and Restated Master Loan and Security Agreement dated as of February 8, 2001 (collectively and together with all further amendments, modifications, restatements and supplements, the "Conduit Loan Agreement"). WHEREAS, Lender and Borrower further understand that Borrower may enter into loan facilities with other parties on a secured and unsecured basis, including, without limitation, loans secured by collateral similar to the Collateral hereunder; WHEREAS, Lender and Borrower desire to amend and restate the Original Loan and Security Agreement, as amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3, to incorporate their mutual agreements with respect thereto; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree that the Original Loan and Security Agreement, as amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3, is amended and restated in its entirety as follows: Section 1. Definitions and Accounting Matters. 1.01. "Certain Defined Terms" As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Loan Agreement in the singular will have the same meanings when used in the plural and vice versa): "Additional Lazard Collateral" collectively means (i) the Eligible Collateral set forth in that certain Request for Borrowing dated as of February 8,2001, delivered by Borrower to Lender, and (ii) the Eligible Collateral set forth in that certain Request for Borrowing dated as of February 8, 2001, delivered by CT Fund I (hereinafter defined) to MSDWMC. "Advance Rate" means, for any item of Eligible Collateral, the ratio, expressed as a percentage, set forth opposite the collateral type in the chart provided in the definition of Eurodollar Rate Spread or as otherwise defined or limited herein. "Affiliate" shall mean (i) with respect to Lender, any entity which controls, is controlled by, or is under common control with Lender, and (ii) with respect to Borrower, any affiliate of Borrower as such term is defined in the Bankruptcy Code. "Affiliate Credit Facility" shall mean any one or more agreements between Lender, or an Affiliate of Lender, and an Affiliate of Borrower (including, without limitation, Travelers Limited Real Estate Mezzanine Investments I, LLC, Travelers Real Estate Mezzanine Investments II, LLC, Travelers Limited Real Estate Mezzanine Investments II, LLC, CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC and CT Investment Management Co., LLC and CT Mezzanine Partners I, LLC ("CT Fund I"); any such Affiliate, a "CT Affiliate"), pursuant to which such CT Affiliate shall incur Indebtedness to Lender or such Affiliate of Lender including, without limitation, that certain Master Loan and Security Agreement dated as of September 19, 2000 between CT Fund I and MSDWMC, as amended by that certain First Amendment to Master Loan and Security Agent dated as of December 29, 2000 between CT Fund I and MSDWMC as amended by that certain First Amendment to Master Loan and Security Agreement dated as of December 29, 2000 between CT Fund I and MSDWMC and as further amended by that certain Second Amendment to the Master Loan and Security Agreement dated as of the date hereof between CT Fund I and MSDWMC and that certain CMBS Loan Agreement dated as of September 19, 2000 between CT Fund I and Lender as amended by that certain First Amendment to CMBS Loan Agreement dated as of the date hereof between CT Fund I and Lender, as the 2 same may have heretofore or may hereafter be amended, modified, supplemented or restated and any other loan agreement or repurchase agreement. "Amortization Period" shall mean, if the Termination Date shall be extended in accordance with the terms hereof, the period from and after June 30, 2001 to, but not including, March 31, 2002. "Appraisal" means an appraisal of any Property prepared by a licensed appraiser listed on Schedule 2 attached hereto, as such schedule may be amended from time to time by Borrower or Lender upon approval by Lender in its reasonable discretion, in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation, in compliance with the requirements of Title 11 of the Financial Institution Reform, Recovery and Enforcement Act and utilizing customary valuation methods such as the income, sales/market or cost approaches, as any of the same may be updated by recertification from time to time by the appraiser performing such Appraisal. "Asset-Specific Loan Balance" means a portion of the Loan allocable to each item of the Eligible Collateral. Such portion initially consists of the sum of all advances of the Loan made on account of such Eligible Collateral, without subtracting from such advances the Drawdown Fee, Lender's Transaction Costs and other advance costs and fees to the extent borrowed. Wherever this Loan Agreement states that principal payments on account of the Loan are to be allocated or applied to or against the Asset-Specific Loan Balance of a specific item of Eligible Collateral, the Asset-Specific Loan Balance of such item of Eligible Collateral shall be deemed reduced accordingly by the amount of the principal payments so applied. "Asset Value" shall mean, as of any date in respect of an item of Eligible Collateral, the price at which such Eligible Collateral could readily be sold as determined in the sole good faith of Lender, which price may be determined to be zero. Lender's determination of Asset Value, which may be made at any time and from time to time, shall be conclusive upon the parties. Whenever an Asset Value determination is required under this Loan Agreement, Borrower shall cooperate with Lender in its determination of the Asset Value of each item of Eligible Collateral (including, without limitation, providing all information and documentation in the possession of Borrower regarding such item of Eligible Collateral or otherwise required by Lender in its sole good faith business discretion). "Bailee" shall mean Paul, Hastings, Janofsky & Walker LLP or such other third party as Lender may approve. "Bailee Agreement" shall mean the Bailee Agreement among Borrower, Lender and Bailee in the form of Exhibit F hereto. "Bailee's Trust Receipt and Certification" shall mean a Trust Receipt and Certification in the form annexed to the Bailee Agreement as Attachment 2. "Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time. "Base Rate" means, as determined by Lender on a daily basis, the higher of (a) the rate per annum established by The Chase Manhattan Bank from time to time as its "Prime" Rate or "reference" rate (which Borrower acknowledges is not necessarily such bank's lowest rate) and (b) one-half percentage point (0.5%) (50 basis points) over the Federal funds rate, as determined by Lender in its sole discretion. "Borrower" shall have the meaning provided in the heading hereof. 3 "Borrowing Base" shall mean the aggregate Collateral Value of all Eligible Collateral pledged to secure the amounts from time to time outstanding under this Loan Agreement. "Borrowing Base Deficiency" shall have the meaning provided in Section 2.04 hereof. "Business Day" shall mean any day other than (i) a Saturday or Sunday or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of New York or Custodian is authorized or obligated by law or executive order to be closed. "Capital Lease Obligations" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Loan Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Cash" means, at the date of determination, any and all cash and cash equivalents as determined in accordance with GAAP. "CMBS" shall mean, in the singular or plural as the context requires, securities backed by mortgages and other liens on commercial real estate and related collateral or by securities, interests or other obligations backed by such mortgages. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall have the meaning provided in Section 4.01(b) hereof. "Collateral Assignment" shall mean all documents pursuant to which Borrower shall have collaterally assigned all of its right, title and interest in, to and under an item of Collateral to secure a Loan made hereunder. "Collateral Documents" shall mean with respect to any Collateral Loan, Equity Interest, or Other Approved Collateral, the documents comprising the Collateral File for such item of Collateral. "Collateral File" shall mean, as to each item of Collateral, those documents set forth in a schedule to be delivered by Lender to Custodian and which are delivered to the Custodian pursuant to the terms of this Loan Agreement or the Custodial Agreement including, without limitation, all documents required by Lender to grant and perfect a first priority security interest in such item of Collateral. "Collateral Loan" shall mean, as applicable, a Mortgage Loan or a Mezzanine Loan. "Collateral Obligor" shall mean any obligor under any Collateral Loan, any issuer of any security comprising any portion of the Collateral and any entity in which an Equity Interest comprises any portion of the Collateral. "Collateral Report" shall mean the collateral schedule and exception report prepared by Custodian pursuant to the Custodial Agreement. "Collateral Schedule" shall mean a list of Eligible Collateral to be pledged pursuant to this Loan Agreement, attached to a Custodial Identification Certificate setting forth, 4 as to each item of Eligible Collateral, the applicable information for such Collateral Type specified on Annex 1 to the Custodial Agreement. "Collateral Type" shall mean CMBS and Other Approved Collateral. "Collateral Value" shall mean, with respect to each item of Eligible Collateral, the Asset Value of such Eligible Collateral multiplied by the applicable Advance Rate set forth in the definition of "Eurodollar Rate Spread" set forth herein or as otherwise defined or limited herein; provided, that, the Collateral Value shall be deemed to be zero or such greater amount as determined by Lender in respect of each item of Eligible Collateral (1) in respect of which there is a breach of a representation or warranty by a Collateral Obligor, (2) in respect of which there is a delinquency in the payment of principal and/or interest which continues for a period in excess of 30 days (such period to include any applicable grace periods) unless otherwise approved by Lender, or (3) which has been released from the possession of Custodian under the Custodial Agreement to Borrower for a period in excess of 14 days. "Collection Account" shall mean one or more accounts established by the Servicer subject to a security interest in favor of Lender, into which all Collections shall be deposited by the Servicer. "Collections" shall mean, collectively, all collections and proceeds on or in respect of the Collateral, excluding collections required to be paid to the Servicer or a borrower on the Collateral. "Conduit Loan" shall mean a Mortgage Loan, secured by a first mortgage on a real property, that in Lender's determination, satisfies the following criteria: (i) principal balance not exceeding $40,000,000.00; (ii) interest at a fixed rate with prepayment protection satisfactory to Lender; (iii) single-asset, bankruptcy remote property owner complying with all nationally recognized statistical rating agency requirements; (iv) no subordinate financing and mortgage and organizational documents prohibiting subordinate financing or unsecured financing not otherwise subject to intercreditor agreements satisfactory to rating agencies; (v) debt service coverage ratio (as determined by Lender in its sole discretion) of not less than 1.25:1 or such higher debt service coverage ratio as may be required by rating agencies; (vi) not having any characteristics that would impair the rating of any securities issued pursuant to a securitization that included a substantial component of mortgages similar to such mortgage; and (vii) in full compliance with such other "conduit" underwriting and structuring requirements as Lender shall establish from time to time. "control" shall mean possession of the power, directly or indirectly, to (a) vote more than fifty percent (50%) of the voting securities having ordinary power for the election of directors of an entity, or (b) direct or cause the direction of the management and policies of such entity, whether by contract or otherwise. "Custodial Agreement" shall mean the Custodial Agreement, dated as of the date hereof, among Borrower, Custodian and Lender, substantially in the form of Exhibit B hereto, as the same shall be modified and supplemented and in effect from time to time. "Custodial Identification Certificate" shall mean the certificate executed by Borrower in connection with the pledge of Eligible Collateral to Lender in the form of Annex 3 to the Custodial Agreement. "Custodian" shall mean LaSalle National Bank as custodian under the Custodial Agreement, and its successors and permitted assigns thereunder. 5 "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Diligence Materials" means the Preliminary Due Diligence Package together with the materials requested in the Supplemental Due Diligence List. "Direct Mortgage" means a recorded mortgage or deed of trust in favor of Lender on real property. "Dollars" and "$" shall mean lawful money of the United States of America. "Drawdown Fee" shall mean, for each Loan with respect to any particular item of Eligible Collateral, an amount equal to the product of 0.25% and the principal amount of such Loan; provided, however, that (a) the Drawdown Fee shall be equal to zero to the extent that such Loan is to be made with respect to a Conduit Loan as Collateral, (b) the Drawdown Fee applicable solely to the Original Lazard Collateral shall be an amount equal to the product of (i) .50% multiplied by (ii) the principal amount of the Loan made by Lender to Borrower in respect of such Original Lazard Collateral and (c) with respect to any other such item of Eligible Collateral, borrowings which are repaid and subsequently reborrowed will not be charged a subsequent Drawdown Fee. Borrower shall not be required to pay a Drawdown Fee in connection with any Loan advanced with respect to the Additional Lazard Collateral. "Due Diligence Review" shall mean the performance by Lender of any or all of the reviews permitted under Section 11.15 hereof with respect to any or all of the Collateral, as desired by Lender from time to time. "Effective Date" shall mean the date upon which the conditions precedent set forth in Section 5.01 shall have been satisfied. "Eligible Collateral" shall mean CMBS and Other Approved Collateral as to which the representations and warranties in Section 6.10 hereof are correct. "Equity Interest" shall mean any interest in a Person constituting a share of stock or a partnership or membership interest or other right or interest in a Person not characterized as indebtedness under GAAP. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which Borrower is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which Borrower is a member. "Eurocurrency Reserve Requirements" shall mean, for any day as applied to a Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including without limitation basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto), dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such Governmental Authority. 6 "Eurodollar Base Rate" shall mean, with respect to any Eurodollar Contract Period, the rate per annum equal to the rate appearing at page 3750 of the Telerate Screen as 30, 60 or 90 day LIBOR on the second Business Day prior to the commencement of any Eurodollar Contract Period, and if such rate shall not be so quoted, the rate per annum at which Lender is offered Dollar deposits at or about 10:00 A.M., New York City time, on such date by prime banks in the interbank eurodollar market where the eurodollar and foreign currency exchange operations in respect of its Loans are then being conducted for delivery on such day for a period of 30, 60 or 90 days and in an amount comparable to the amount of the Loans to be outstanding on such day. "Eurodollar Contract Period" means, with respect to each Loan, a period determined by Borrower from time to time on the second Business Day prior to the expiration of each prior Eurodollar Contract Period as the period for which a Eurodollar Base Rate shall be in effect, which period shall be thirty (30) days, sixty (60) days or ninety (90) days (or if Borrower shall make no determination, thirty (30) days) and the number of days in such period being subject to adjustment as follows: (a) in no event shall a Eurodollar Contract Period extend beyond the Termination Date; (b) each such period shall end on the day immediately preceding the Payment Date which occurs approximately thirty (30) days, sixty (60) days or ninety (90) days, as applicable, after the commencement of the period chosen by Borrower; and (c) the initial Eurodollar Contract Period with respect to each Asset-Specific Loan Balance shall commence on the related Funding Date and each succeeding Eurodollar Contract Period shall commence on the day on which the immediately preceding Eurodollar Contract Period shall expire. "Eurodollar Rate" shall mean, with respect to each day a Loan is outstanding, a rate per annum determined by Lender in its sole discretion in accordance with the following formula (rounded upwards to the nearest 1/100th of one percent), which rate as determined by Lender shall be conclusive absent manifest error by Lender: Eurodollar Base Rate ------------------------------- 1.00 minus Eurocurrency Reserve Requirements "Eurodollar Rate Spread" means (A) as to each Advance Rate the applicable Eurodollar Rate Spread set forth below opposite such Advance Rate for the applicable Collateral type, or such other Eurodollar Rate Spread as may be mutually agreed to by Borrower and Lender:
- ----------------------------------------------------------------------------------------------- Collateral Type Advance Eurodollar Rate Spread (expressed as Rate percentage points per annum and as basis points) - ----------------------------------------------------------------------------------------------- Conduit Loan 90% 1.25% 125bp - ----------------------------------------------------------------------------------------------- Non-Conduit Mortgage Loans First Mortgage (75% LTV maximum) 85% 1.75% 175bp - ----------------------------------------------------------------------------------------------- Subordinate Mortgage Loans, Mezzanine Loans, CMBS and Equity Interests* 70% 2.25% 225bp Lazard Collateral 70% 2.63% 263bp - -----------------------------------------------------------------------------------------------
* Solely for illustrative purposes, Borrower and Lender agree that the following example of a transaction illustrates their intent: with respect to an item of Collateral for which the appraised value of the underlying real property is $100,000,000, on which Mortgage Loans and Mezzanine Loans have been made in the aggregate amount of $85,000,000, with Lender advancing hereunder 85% of a 75% LTV ($63,750,000), plus 70% of a subordinate Mortgage Loan or Mezzanine Loan (70% of $10,000,000 equals $7,000,000), the aggregate loans from Lender to Borrower would equal $70,750,000, resulting in a 83.24% underlying loan-to-loan value. In addition, Lender will 7 finance loans originated by Borrower with an aggregate underlying LTV up to 90% and above 90% on a case-by-case basis. The Eurodollar Rate Spread may exceed the levels set forth above on loans with underlying LTVs in excess of 90%. and (B) notwithstanding anything set forth in clause (A) to the contrary, in the event the Termination Date shall be extended pursuant to the terms hereof, for the period from and after June 30, 2001 to, and including, the date the Loans are repaid in full, as to each Advance Rate the sum of (x) the applicable Eurodollar Rate Spread set forth opposite such Advance Rate for the applicable Collateral type in clause (A) above, plus (y) .25 percent, or 25 basis points, per annum. "Eurodollar Substitute Rate" means a rate of interest equal to (a) the Base Rate minus (b) Two and eighty-five hundredths percent (2.85%) per annum (285 basis points). "Event of Default" shall have the meaning provided in Section 8 hereof. "Federal Funds Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by Lender from three federal funds brokers of recognized standing selected by Lender. "Funding Costs" shall mean, collectively, the actual costs to Lender of breaking a Eurodollar contract (or costs that would have been incurred if Lender had entered into and broken a Eurodollar contract for a Eurodollar Contract Period as requested by Borrower) prior to the expiration of the Eurodollar Contract Period applicable thereto in connection with (a) any prepayment (whether voluntary or involuntary) of all or any portion of an Asset-Specific Loan Balance or other principal repayments required or permitted under the Security Documents, that is made at any time other than at the expiration of the related Eurodollar Contract Period, (b) any voluntary or involuntary acceleration of the Termination Date, such that the Termination Date occurs on any date that is not the expiration date of the Eurodollar Contract Period with respect to any Asset-Specific Loan Balance, and (c) any other set of circumstances not attributable solely to Lender's acts. Subject to the foregoing, Funding Costs shall not include any diminution in yield suffered by Lender upon re-lending or re-investing the principal of the Loan after any prepayment of the Loan. "Funding Date" shall mean the date on which a Loan is made hereunder. "GAAP" shall mean generally accepted accounting principles consistently applied as in effect from time to time in the United States. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over any obligor on any underlying loan, Borrower, any of its Subsidiaries or any of its properties. "Guarantee" shall mean, as to any Person, any obligation of such Person directly or indirectly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise); provided that the term "Guarantee" shall not include (i) endorsements for collection or deposit in the ordinary course of business, or (ii) obligations to make servicing advances for delinquent taxes and insurance or other obligations in respect of a Mortgaged Property, to the extent required by Lender. The amount of any Guarantee of a Person shall be deemed to be an amount equal to the 8 stated or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have correlative meanings. "Indebtedness" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) obligations (contingent or otherwise) of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; (f) obligations of such Person under repurchase agreements or like arrangements; (g) Indebtedness of others Guaranteed by such Person; (h) all obligations of such Person incurred in connection with the acquisition or carrying of fixed assets by such Person; and (i) Indebtedness of general partnerships of which such Person is a general partner. "Interest Rate Protection Agreement" shall mean, with respect to any or all of the Mortgage Loans and Mezzanine Loans, any short sale of US Treasury Securities, or futures 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 any obligor on any underlying loan or Borrower (specifically with respect to such items of Collateral) and acceptable to Lender. "Lazard Collateral" means the Original Lazard Collateral and the Additional Lazard Collateral. "Lazard Parties" means, collectively, LFSRI II SPV REIT Corp., Senior Quarters Funding Corp., LF Strategic Realty Investors II L.P., LFSRI II - CADIM Alternative Partnership L.P. and LFSRI II Alternative Partnership L.P. "Lender" shall have the meaning provided in the heading hereto. "Lien" shall mean any mortgage, lien, pledge, charge, encumbrance, security interest or adverse claim. "Loan" and "Loans" shall have the meanings provided in Section 2.01(a) hereof. "Loan Agreement" shall mean this Amended and Restated CMBS Loan Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "Loan Documents" shall mean, collectively, this Loan Agreement, the Supplemental Terms and Conditions (Rule 15a-6 Annex), the Note and the Custodial Agreement. "LTV" shall mean, as to any Eligible Collateral, the ratio that (x) the aggregate outstanding principal balances of all loans (including Loans hereunder) and preferred equity interests secured in whole or in part by real property or direct or indirect beneficial interests therein relating to such Eligible Collateral bears to (y) the value, determined by an Appraisal 9 reasonably acceptable to Lender, of the real property (together with all applicable appurtenant interests and subject to all applicable liens, encumbrances and tenancies), or direct or indirect beneficial interests which form the basis of such Eligible Collateral. "Material Adverse Effect" shall mean a material adverse effect on (a) the Property, business, operations, financial condition or prospects of Borrower taken as a whole, (b) the ability of 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 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 aggregate value of the Collateral. "Maximum Advance Rate" shall mean, as to any item of Eligible Collateral, the maximum Advance Rate that shall be determined by Lender in Lender's sole and absolute discretion; provided, that, with respect to the specific categories of Eligible Collateral referred to in the definition of Eurodollar Rate Spread, the Maximum Advance Rate shall not exceed the respective Advance Rates set forth in such definition. "Maximum Credit" shall mean Two Hundred Fifty Million Dollars ($250,000,000.00); provided, however, that if, in each case, no Default or Event of Default shall have occurred and shall be continuing, Borrower shall be entitled upon the delivery of one or more written notices to Lender on any Business Day (or Days) prior to June 30, 2001 to increase the Maximum Credit to an amount up to Three Hundred Million Dollars ($300,000,000.00) upon the payment, in each case, by Borrower to Lender of an amount equal to (i) the amount of the requested increase in the Maximum Credit set forth in such notice multiplied by (ii) 30 basis points (0.30%) multiplied by (iii) the quotient of (x) the number of days from (and including) the day of such request to (and including) the Termination Date divided by (y) the number of days from and after the date hereof to, and including, the Termination Date (the "Maximum Credit Increase Fee"); provided, that, in the event the Affiliate Credit Facility closes prior to the payment of a portion, or all, of the Maximum Credit Increase Fee hereunder, Borrower shall not be required to pay the Maximum Credit Increase Fee to the extent that an equal fee is paid by the borrower under the Affiliate Credit Facility for credit availability thereunder in excess of $150,000,000; and provided, further, however, that the Maximum Credit under this Loan Agreement shall be reduced by an amount equal to the sum of (A) the amount from time to time outstanding under the Conduit Loan Agreement, such that in no event shall the aggregate amount outstanding under this Loan Agreement and the Conduit Loan Agreement exceed $250,000,000 (or, in the event the Maximum Credit has from time to time been increased in an amount up to $300,000,000 pursuant to the terms hereof, such amount) and (B) an amount equal to the excess over $100,000,000 of the amount from time to time outstanding under the Affiliate Credit Facility, such that in no event shall the aggregate amount outstanding under this Loan Agreement, the Conduit Loan Agreement and the Affiliate Credit Facility exceed $350,000,000 (or, in the event the Maximum Credit has been increased to $300,000,000 pursuant to the terms hereof, such amount plus $100,000,000). "Mezzanine Loan" shall mean a loan secured by a pledge of Equity Interests in one or more entities holding direct or indirect beneficial interests in an entity owning (or having a ground lease interest in) a commercial or multi-family residential property, preferred equity interests or a second mortgage. "Monthly Statement" shall mean, for each calendar month during which this Loan Agreement shall be in effect, Borrower's reconciliation in arrears of beginning balances, interest, principal, paid-to-date and ending balances for each asset constituting the Collateral, together with (a) an Officer's Certificate with respect to all Collateral pledged to Lender as at the 10 end of such month, (b) a written report of any developments or events that are reasonably likely to have a Material Adverse Effect, (c) a written report of any and all written modifications to any documents underlying any items of Collateral and (d) such other internally prepared reports as mutually agreed by Borrower and Lender which reconciliation, Officer's Certificate and reports shall be delivered to Lender for each calendar month during the term of this Loan Agreement within ten (10) days following the end of each such calendar month. "Mortgage" shall mean the mortgage, deed of trust or other instrument securing a Mortgage Note, which creates a valid lien on the fee or leasehold interest in real property securing the Mortgage Note and the assignment of rents and leases related thereto. "Mortgage Loan" shall mean a mortgage loan (including, without limitation, a Conduit Loan) which Custodian has been instructed to hold for Lender pursuant to the Custodial Agreement, and which Mortgage Loan includes, without limitation, (i) the indebtedness evidenced by a Mortgage Note and secured by a related Mortgage and (ii) all right, title and interest of Borrower in and to the Mortgaged Property covered by such Mortgage. "Mortgage Note" shall mean the original executed promissory note or other evidence of the indebtedness of a mortgagor with respect to a Mortgage Loan. "Mortgaged Property" shall mean the real property (including all improvements, buildings, fixtures, building equipment and personal property thereon and all additions, alterations and replacements made at any time with respect to the foregoing) and all other Collateral securing repayment of the debt evidenced by a Mortgage Note. "MS & Co." shall mean Morgan Stanley & Co. Incorporated, a registered broker-dealer. "MSDWMC" shall mean Morgan Stanley Dean Witter Mortgage Capital Inc., formerly known as Morgan Stanley Mortgage Capital Inc. "MS Indebtedness" shall mean all Indebtedness from time to time owed by Borrower to Lender or any Affiliate of Lender including, without limitation, under this Loan Agreement, the Conduit Loan Agreement, or any repurchase or other agreement between Lender, or an Affiliate of Lender, and Borrower. "Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been or are required to be made by Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA. "'Non-Table' Funded Eligible Collateral" shall mean the items of Eligible Collateral as described in Section 2.03(e) of this Loan Agreement. "Note" shall mean the promissory note provided for by Section 2.02(a) hereof for Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified, amended, supplemented or extended and in effect from time to time including, without limitation, that certain Amended and Restated Promissory Note dated as of June 8, 1998 by Borrower to Lender in the form attached hereto as Exhibit A given in substitution for, and replacement of, that certain amended and restated promissory note dated as of June 30, 1998 by Borrower to Lender. "Officer's Certificate" shall mean the certificate of a Responsible Officer as set forth in Section 5.02(b) hereof. 11 "Original Lazard Collateral" means the Eligible Collateral set forth in that certain request for borrowing dated as of June 30, 1999 delivered by Borrower to Lender in connection with that certain Second Amendment to CMBS Loan Agreement dated as of June 30, 1999 between Borrower and Lender. "Other Approved Collateral" shall mean such other Property of Borrower as Lender shall accept as Collateral for the Loans. "Payment Date" shall mean, with respect to each Loan, the first Business Day of each calendar month following the related Funding Date. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Investments" shall mean any United States dollar denominated investment that, as at the date of determination, is one or more of the following obligations or securities: (1) direct registered obligations of, and registered obligations the timely payment of principal and interest on which is fully and expressly guaranteed by, the United States of America or any agency or instrumentality of the United States of America the obligations of which are expressly backed by the full faith and credit of the United States of America; (2) demand and time deposits in, certificates of deposit of, bankers' acceptances issued by, or federal funds sold by any depositary institution or trust company incorporated under the laws of the United States of America or any state thereof and subject to supervision and examination by federal and/or state banking authorities so long as the commercial paper and/or the debt obligations of such depositary institution or trust company (or, in the case of the principal depositary institution in a holding company system, the commercial paper or debt obligations of such holding company) at the time of such investment or contractual commitment providing for such investment have a credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's, in the case of long-term debt obligations, or "P-1" by Moody's and "A-1+" by Standard & Poor's in the case of commercial paper and short-term debt obligations; provided, that in the case of commercial paper and short-term debt obligations with a maturity of longer than 91 days, the issuer thereof must also have at the time of such investment a long-term credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (3) unleveraged repurchase obligations with respect to (a) any security described in clause (1) above or (b) any other security issued or guaranteed by an agency or instrumentality of the United States of America, in either case entered into with a depositary institution or trust company (acting as principal) described in clause (2) above or entered into with a corporation (acting as principal) whose long-term rating is not less than "Aa2" by Moody's and "AA" by Standard & Poor's or whose short-term credit rating is "P-1" by Moody's and "A-1+" by Standard & Poor's at the time of such investment; provided, that if such security has a maturity of long than 91 days, the issuer thereof must also have at the time of such investment a long-term credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (4) Registered securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States of America or any state thereof that have a credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's at the time of such investment or contractual commitment providing for such investment; 12 (5) commercial paper or other short-term obligations having at the time of such investment a credit rating of "P-1" by Moody's and "A-1+" by Standard & Poor's and that are Registered and either are bearing interest or are sold at a discount from the face amount thereof and have a maturity of not more than 183 days from their date of issuance; provided, that if such security has a maturity of longer than 91 days, the issuer thereof must also have at the time of such investment a long-term credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (6) a Reinvestment Agreement issued by any bank (if treated as a deposit by such bank), or a Registered Reinvestment Agreement issued by any insurance company or other corporation or entity, in each case that has a credit rating of not less than "P-1" by Moody's and "A-1+" by Standard & Poor's; provided, that if such security has a maturity of longer than 91 days, the issuer thereof must also have at the time of such investment a long-term credit ratting of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (7) money market funds with respect to any investments described in clauses (1), (2), (3), (4) or (5) above having at the time of such investment, a credit rating of not less than "Aa2" by Moody's and "AA" by Standard & Poor's; (8) any other investment similar to those described in clauses (1) through (7) above which has, in the case of an investment with a maturity of 91 days or less, a credit rating of not less than "P-1" by Moody's and "A-1+" by Standard & Poor's; provided, however, that Eligible Investments shall not include: (1) any interest-only security, (2) any security whose repayment is subject to substantial non-credit related risk as determined in the reasonable business judgment of Lender (which judgment shall not be called into question as a result of subsequent events), or (3) any security subject to U.S. withholding tax or foreign withholding tax unless the issuer of the security is required to make "gross-up" payments for the full amounts of such tax; and provided, further, that, the term "Eligible Investments" shall not include any obligation or security that has a rating by Standard & Poor's that includes the symbol "r". "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee benefit or other plan established or maintained by Borrower or any ERISA Affiliate during the five-year period ended immediately before the date of this Loan Agreement or to which Borrower or any ERISA Affiliate makes, is obligated to make or has, within the five-year period before the date of this Loan Agreement, been required to make contributions and that is covered Title IV of ERISA or Section 302 of ERISA or Section 412 of the Code, other than a Multiemployer Plan. "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount under this Loan Agreement, the Note or any other Loan Document that is not paid when due to Lender (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 4% per annum plus the Base Rate. "Preliminary Due Diligence Package" means with respect to any proposed Collateral, the following due diligence information relating to such proposed Collateral to be provided by Borrower to Lender pursuant to this Loan Agreement: 13 (i) a summary memorandum outlining the proposed transaction, including potential transaction benefits and all material underwriting risks, all Underwriting Issues and all other characteristics of the proposed transaction that a prudent lender would consider material; (ii) current rent roll, if applicable; (iii) cash flow pro forma, plus historical information, if available; (iv) description of the property (real property, pledged loan or other Collateral); (v) indicative debt service coverage ratios; (vi) indicative loan-to-value ratio; (vii) Borrower's or any affiliate's relationship with its potential underlying borrower or any affiliate; (viii) if applicable, Phase I environmental report (including asbestos and lead paint report); (ix) if applicable, engineering and structural reports; (x) third party reports, to the extent available and applicable, including: (a) current Appraisal; (b) Phase II or other follow-up environmental report if recommended in Phase I; (c) seismic reports; and (d) operations and maintenance plan with respect to asbestos containing materials; (xi) analyses and reports with respect to such other matters concerning the Collateral as Lender may in its sole discretion require; (xii) documents comprising such Collateral, or current drafts thereof, including, without limitation, underlying debt and security documents, guaranties, underlying borrower's organizational documents, warrant agreements, and loan and collateral pledge agreements, as applicable; and (xiii) a list that specifically and expressly identifies any Collateral Documents that relate to such Collateral but are not in Borrower's possession. "Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Regulations T, U and X" shall mean Regulations T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Responsible Officer" shall mean, as to any Person, the chief executive officer, any vice chairman and the chief financial officer of such Person or, for the purpose of executing certificates, the vice president and counsel responsible therefor. "Secured Obligations" shall have the meaning provided in Section 4.01(a) hereof. 14 "Security Documents" means this Loan Agreement, the Note, and all other agreements, instruments, certificates and documents delivered by or on behalf of Borrower to evidence or secure the Loan(s) or otherwise in satisfaction of the requirements of this Loan Agreement, or the other documents listed above as same may be amended or modified from time to time. "Servicer" shall have the meaning provided in Section 11.14(c) hereof. "Servicing Agreement" shall have the meaning provided in Section 11.14(c) hereof. "Servicing Records" shall have the meaning provided in Section 11.14(b) hereof. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Supplemental Due Diligence List" means, with respect to any proposed Collateral, information or deliveries concerning such proposed Collateral, such items that Lender shall request in addition to the Preliminary Due Diligence Package including, without limitation, a credit approval memorandum representing the final terms of the underlying transaction, a final LTV ratio computation and a final debt service coverage ratio computation for such proposed Collateral. "'Table Funded' Eligible Collateral" shall mean the items of Eligible Collateral as described in Section 2.03(e) of this Loan Agreement. "Tangible Net Worth" shall mean, as of a particular date, (a) all amounts which would be included under capital (it being agreed that any convertible trust preferred securities will be included as capital) on a balance sheet of Borrower at such date, determined in accordance with GAAP, less (b) amounts owing to Borrower from Affiliates and (ii) intangible assets. "Termination Date" shall mean June 30, 2001 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law; provided, however, that in the event that (i) this Agreement shall not have been earlier terminated and (ii) no Default shall have occurred and be continuing on June 30, 2001, the Termination Date shall be automatically extended to March 31, 2002. "Title Insurance Policy" shall mean, with respect to any real property underlying a Collateral Loan, a mortgagee's title insurance policy or policies issued to Lender and Lender's successors and assigns (or, subject to the prior written approval of Lender, an endorsement to Borrower's title insurance policy insuring the collateral assignment to Lender of the applicable mortgage) by one or more title companies reasonably satisfactory to Lender, which policy or policies shall be in form and substance reasonably acceptable to Lender, with such endorsements as Lender shall reasonably require and, with respect to any Collateral Loan, a mortgagee's title insurance policy or policies issued to Lender and Lender's successors and/or assigns by one or 15 more title companies reasonably satisfactory to Lender reflecting Lender's interest in such Collateral Loan. "Total Indebtedness" shall mean, for any period, the aggregate Indebtedness of Borrower during such period less the amount of any nonspecific balance sheet reserves maintained in accordance with GAAP. "Transaction Costs" shall mean, with respect to any Loan, all actual out-of-pocket reasonable costs and expenses paid or incurred by Lender and payable by Borrower relating to the making of such Loan (including legal fees and other fees described in Section 11.03 hereof). Lender shall endeavor to limit the Transaction Costs associated with such Loan (excluding the initial Loan) to $5,000, but the foregoing shall not limit Borrower's obligations with respect to Transaction Costs or constitute a "cap" on Transaction Costs for any Loan. Transaction Costs shall not include costs incurred by Lender for overhead and general administrative expenses. "Trust Receipt" shall mean the receipt delivered by Custodian pursuant to the provisions of Section 4 of the Custodial Agreement acknowledging receipt of a Collateral File in connection with a Loan hereunder in the form of Annex 2 to the Custodial Agreement. "Underwriting Issues" means with respect to any Collateral as to which Borrower intends to request a Loan, all information that has come to Borrower's attention, based on the making of reasonable inquiries and the exercise of reasonable care and diligence under the circumstances, which would be considered a materially "negative" factor (either separately or in the aggregate with other information), or a material defect in loan documentation or closing deliveries (such as any absence of any material Collateral Document(s)), to a reasonable institutional lender in determining whether to originate or acquire the Collateral in question. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02. Accounting Terms and Determinations. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to Lender hereunder shall be prepared, in accordance with GAAP. Section 2. Loans, Note and Prepayments. 2.01. Loans. (a) Lender agrees to consider, as provided herein, from time to time Borrower's requests that Lender make, on the terms and conditions of this Loan Agreement, loans (each, individually, a "Loan" and, collectively, the "Loans") to Borrower in Dollars, from and including the Effective Date to and including June 30, 2001, in an aggregate principal amount at any one time outstanding up to but not exceeding the Maximum Credit as in effect from time to time. Nothing in this Loan Agreement shall be interpreted as a commitment by Lender to make any Loans, but rather sets forth the procedures to be used in connection with periodic requests for Loans and the conditions to the making of any Loans. Borrower hereby 16 acknowledges that Lender is under no obligation to agree to make, or to make, any Loan pursuant to this Loan Agreement. (b) Subject to the terms and conditions of this Loan Agreement, during such period Borrower may borrow, prepay and reborrow hereunder. 2.02. Notes. (a) The Loans made by Lender shall be evidenced by a single promissory note of Borrower substantially in the form of Exhibit A hereto, dated the date hereof, payable to Lender in the principal amount of Three Hundred Million Dollars ($300,000,000.00), as otherwise duly completed; provided, however, that until such time as Borrower has satisfied all conditions precedent to the increase of the Maximum Credit amount from $250,000,000.00 to $300,000,000.00, Borrower shall not be permitted to borrow amounts in excess of $250,000,000.00. Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise and shall have the right to sell participating interests in such Note; provided, however, that Lender must retain (i) in excess of fifty percent (50%) ownership interest in the Note and (ii) control over all decisions with respect to loan pricing and the exercise of remedies with respect to each item of Collateral; and provided, further, however, that Lender may subject up to one hundred percent (100%) of the Loans made hereunder to a repurchase agreement. (b) The date, amount and interest rate of each Loan made by Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by Lender on its books and, prior to any transfer of the Note, endorsed by Lender on the schedule attached to the Note or any continuation thereof; provided that the failure of Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. 2.03. Procedures for Borrowing. (a) Preliminary Approval of Proposed Collateral. (i) Borrower may, from time to time, submit to Lender a Preliminary Due Diligence Package for Lender's review and approval in order to request a borrowing hereunder with respect to any proposed Collateral that Borrower proposes to pledge to Lender and to be included in the Borrowing Base in connection with such borrowing. (ii) Upon Lender's receipt of a complete Preliminary Due Diligence Package, Lender within two (2) Business Days shall have the right to request, in Lender's sole and absolute discretion, additional diligence materials and deliveries that Lender shall specify on a Supplemental Due Diligence List. Upon Lender's receipt of all of the Diligence Materials or Lender's waiver thereof, Lender, within five (5) Business Days, shall either (i) notify Borrower of the Maximum Advance Rate (which may be less than the Advance Rate set forth in the definition of Eurodollar Rate Spread) and the Asset Value for the proposed Collateral or (ii) deny, in Lender's sole and absolute discretion, Borrower's request for an advance. Lender's failure to respond to Borrower within five (5) Business Days following receipt of all Diligence Materials or Lender's written waiver thereof shall be deemed to be a denial of Borrower's request for an advance, unless Lender and Borrower have agreed otherwise in writing. Nothing in this Section 2.03(a)(ii) or elsewhere in this Loan Agreement shall, or be 17 deemed to, prohibit Lender from determining in its sole discretion the adequacy, correctness and appropriateness of, or from disapproving, any and all financial and other underwriting data required to be supplied by Borrower under this Loan Agreement. (b) Final Approval of Proposed Collateral. Upon Lender's notification to Borrower of the Maximum Advance Rate and the Asset Value for any proposed Collateral, Borrower shall, if Borrower desires to obtain one or more advances secured by such proposed Collateral, satisfy the conditions set forth below (in addition to satisfying the conditions precedent to obtaining each advance, as set forth in Section 5 of this Loan Agreement) as conditions precedent to Lender's approval of such proposed Collateral as Collateral, all in a manner, and pursuant to documentation, satisfactory in all respects to Lender and its counsel: (i) Environmental and Engineering. If applicable, Lender shall have received an Environmental Report and an Engineering Report, each in form and substance satisfactory to Lender, by an Engineer and Environmental Consultant listed on Schedules 3 and 4 attached hereto, respectively, as each such schedule may be amended from time to time by Lender in its reasonable discretion. (ii) Appraisal. If applicable, Lender shall have received an Appraisal. (iii) Insurance. With respect to proposed Collateral that is real property, Lender shall have received certificates or other evidence of insurance demonstrating insurance coverage in respect of such real property of types, in amounts, with insurers and otherwise in compliance with the terms, provisions and conditions set forth in the Collateral Documents or the Security Documents. Such certificates or other evidence shall indicate Borrower, as lender, will be named as an additional insured as its interest may appear and shall contain a loss payee endorsement in favor of such additional insured with respect to the property policies required to be maintained under the Collateral Documents. (iv) Survey. With respect to a Mortgage Loan, a Mezzanine Loan or an Equity Interest, to the extent obtained by Borrower from the Collateral Obligor with respect to any item of Collateral at the origination of the underlying loan or equity interest, as the case may be, relating thereto, Lender shall have received with respect to proposed Collateral that is real property, a current Survey of such real property in a form satisfactory to Lender. (v) Lien Search Reports. Lender or Lender's counsel shall have received, as reasonably requested by Lender, satisfactory reports of UCC, tax lien, judgment and litigation searches and title reports and updates, as applicable, conducted by search firms and/or title companies acceptable to Lender with respect to the Collateral, Borrower and the related underlying obligor, such searches to be conducted in each location Lender shall reasonably designate. (vi) Title Insurance Policy. (A) With respect to a Mortgage Loan, Borrower shall have delivered to Lender (1) an unconditional commitment to issue title insurance policies in favor of Lender and Lender's successors and/or assigns with respect to Lender's interest in the related real property with an amount of insurance that shall be not less than the related Asset-Specific Loan Balance (taking into account the 18 proposed advance) or such other amount as Lender shall require in its sole discretion or (2) an endorsement or confirmatory letter from the existing title company to the existing Title Insurance Policy in favor of Lender and Lender's successors and/or assigns that amends the existing title insurance policy by stating that the amount of the insurance is no less than the related Asset-Specific Loan Balance (taking into account the proposed advance) or such other amount of title coverage as Lender shall require in its sole discretion. (B) With respect to a Mezzanine Loan or an Equity Interest, Borrower shall have delivered to Lender such evidence as Lender, in its sole discretion, shall require of the ownership of the real property underlying such item of Collateral including, without limitation, a copy of a title insurance policy dated a date, and by a title insurer, in each case acceptable to Lender in its sole discretion, showing that title is vested in the related Collateral Obligor or in an entity in whom such Collateral Obligor holds a beneficial interest. (vii) Security Documents. Borrower shall have executed and delivered to Lender, in form and substance satisfactory to Lender and its counsel, all security documents perfecting Lender's security interest in the proposed Collateral (and in any Interest Rate Protection Agreements held by Borrower with respect thereto) which shall be subject to no Liens except as expressly permitted by Lender. Each of the security documents shall contain such representations and warranties concerning the proposed Collateral and such other terms as shall be reasonably satisfactory to Lender. (viii)Opinions of Counsel. Lender shall have received from counsel to Borrower its legal opinion as to enforceability of this Loan Agreement and all documents executed and delivered hereunder in connection with such Loan, (at Lender's option) an opinion from local counsel where the applicable property is located and an opinion to Borrower and its successors and assigns from counsel to the underlying obligor on the underlying loan transaction, as applicable, as to enforceability of the loan documents governing such transaction and such other matters as Lender shall require (including, without limitation, opinions as to due formation, authority, choice of law and perfection of security interests). Such legal opinions shall be addressed to Lender and its successors and assigns, dated the related Funding Date, and in form and substance reasonably satisfactory to Lender. (ix) Additional Real Estate Matters. To the extent obtained by Borrower from the Collateral Obligor relating to any item of Collateral at the origination of the underlying loan or equity interest relating thereto, Borrower shall have delivered to Lender such other real estate related certificates and documentation as may have been requested by Lender, such as (i) certificates of occupancy and letters certifying that the property is in compliance with all applicable zoning laws, each issued by appropriate Governmental Authority and (ii) abstracts of all Leases in effect at the real property relating to such Collateral. (x) Other Documents. Lender shall have received such other documents as Lender or its counsel shall request with respect to each or any item of Collateral. (c) Collateral Approval or Disapproval. Within two (2) Business Days following the date upon which Borrower has tendered performance of the conditions 19 enumerated in Sections 2.03(b)(i) through (x), or has delivered such items or documents fully executed, if applicable, in final form, Lender shall either (i) if the Collateral Documents or the Security Documents with respect to the proposed Collateral are not reasonably satisfactory in form and substance to Lender, notify Borrower that Lender has not approved the proposed Collateral as Collateral or (ii) notify Borrower and Bailee that Lender has approved the proposed Collateral as Collateral and such notice shall identify the documents to be delivered to Custodian in connection with such proposed Collateral pursuant to Sections 2.03 and 5 of this Loan Agreement and shall identify the party whom Lender shall designate to record and/or file, as the case may be, any security documents necessary to perfect Lender's security interest in the Eligible Collateral. The terms of delivery and filing and/or recordation of such security documents shall be set forth in a separate agreement between Lender and its designee. Lender's failure to respond to Borrower within two (2) Business Days shall be deemed to be a denial of Borrower's request that Lender approve the proposed Collateral, unless Lender and Borrower have agreed otherwise in writing. (d) Procedure for Borrowing with Respect to Eligible Collateral. Once Lender has approved the Collateral in accordance with Section 2.03(c) above, Borrower may request a Loan hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, by delivering to Lender, with a copy to Custodian, an irrevocable written request for borrowing, substantially in the form of Exhibit D attached hereto, which request must be received by Lender prior to 11:00 a.m., New York City time, one (l) Business Day prior to the requested Funding Date. Such request for borrowing shall (1) attach a schedule identifying the Eligible Collateral that Borrower proposes to pledge to Lender and to be included in the Borrowing Base in connection with such borrowing, (2) specify the requested Funding Date, and (3) attach an Officer's Certificate signed by a Responsible Officer of Borrower as required by Section 5.02(b) hereof. Contemporaneously with the delivery of the request for borrowing, Borrower shall deliver to Lender with a copy to Custodian, a Custodial Identification Certificate along with the accompanying Collateral Schedule with respect to all proposed Eligible Collateral to be pledged to Lender on the applicable Funding Date. (e) Delivery of Collateral Files and Security Documents. "Non-Table Funded" Eligible Collateral: 1) By no later than 1:00 p.m., New York City time, one (1) Business Day prior to any Funding Date, the Borrower and/or the Bailee shall deliver to the Custodian as to any Eligible Collateral on a case-by-case basis, (i) original counterparts of all Collateral Documents comprising the Collateral File, (ii) the security documents described in Section 2.03(b)(vii) above, and (iii) to the extent applicable, any other documents, reports or updated information as Lender shall request pursuant to Section 2.03(b)(i)-(x) and Section 5.03(b) not heretofore finally approved by Lender. "Table Funded" Eligible Collateral: 1) By no later than 1:00 p.m., New York City time, on the Funding Date, the Borrower shall cause the Bailee to deliver to the Custodian by facsimile (i) as to each item of Eligible Collateral, the note, if applicable, evidencing the making of a loan secured by such Eligible Collateral, a fully executed Bailee Agreement and Bailee's Trust Receipt and Certification issued by the Bailee thereunder, (ii) as to all other categories of Eligible Collateral on a case-by-case basis, the delivery of all fully executed documents and instruments required by 20 Lender to comprise the Collateral File and (iii) evidence satisfactory to Lender that all documents necessary to perfect Borrower's interest in the Eligible Collateral have been delivered to a party acceptable to Lender for recordation and filing. 2) By no later than 1:00 p.m., New York City time, on the third Business Day following the applicable Funding Date, the Borrower shall cause the Bailee to deliver to the Custodian the Collateral File. (f) No later than 1:00 p.m., New York City time, on each Funding Date, Borrower shall provide Custodian with a final Custodial Identification Certificate and related Collateral Schedule with respect to the Eligible Collateral to be pledged to the Lender on such Funding Date, indicating any changes, if any, from the Custodial Identification Certificate and related Collateral Schedule heretofore delivered to Lender and Custodian pursuant to Section 2.03(d) above. (g) If Borrower shall deliver a request for a borrowing pursuant to Section 2.03(d) hereof and all conditions precedent set forth in Sections 2.03(a), 2.03(b), 2.03(c), 5.01 and 5.02 have been met, and provided no Default or Event of Default shall have occurred and be continuing, Lender shall make a Loan to Borrower on the requested Funding Date, in the amount so requested and approved by Lender. (h) Subject to the delivery by Custodian to Borrower and Lender of a Trust Receipt with a Collateral Schedule in respect to all Collateral pledged to Lender on such Funding Date by no later then 3:00 p.m. on such date, and subject further to the provisions of Section 5 hereof, such borrowing will then be made available to Borrower by Lender transferring, via wire transfer, to the following account of Borrower: Bank of New York, 530 Fifth Avenue, New York, New York, Account No. 630-0439428 for the benefit of Capital Trust, ABA# 021-000018, Attn: Tarryn Kone ((212) 852-4219), in the aggregate amount of such borrowing in funds immediately available to Borrower. (i) From time to time, the Borrower shall forward to the Custodian additional original documents or additional documents evidencing any (i) assumption, modification, consolidation or extension of a Collateral Loan, or (iii) any amendment to the operative documents with respect to an Equity Interest, in each case approved by the Lender in accordance with the terms of this Loan Agreement and upon receipt of any such other documents, the Custodian shall hold such other documents as the Lender shall request from time to time. (j) With respect to any documents which have been delivered or are being delivered to recording offices for recording and have not been returned to the Borrower in time to permit their delivery hereunder at the time required, in lieu of delivering such original documents, Borrower shall deliver to Lender a true copy thereof with an Officer's Certificate certifying that such copy is a true, correct and complete copy of the original, which has been transmitted for recordation. The Borrower shall deliver such original documents to the Custodian promptly when they are received. 2.04. Mandatory Prepayments or Pledge. (a) Lender may determine and re-determine the Borrowing Base on any Business Day and on as many Business Days as it may elect. If at any time (i) the aggregate outstanding principal amount of Loans exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined by Lender in its sole discretion and notified to Borrower on any 21 Business Day, Borrower shall no later than one Business Day after receipt of such notice, or (ii) Borrower shall have received a prepayment of the principal of any loan or preferred equity interest comprising a portion of the Collateral (including, without limitation, the payment of casualty or condemnation proceeds), Borrower shall, not later than one (1) Business Day after receipt of such prepayment, either prepay the Loans in part or in whole or pledge additional Collateral (which Collateral shall be in all respects acceptable to Lender) to Lender, such that after giving effect to such prepayment or pledge the aggregate outstanding principal amount of the Loans does not exceed the Borrowing Base as re-determined by Lender after the addition of Collateral. So long as no Default or Event of Default has occurred and is then continuing, all partial repayments shall be applied against the Asset-Specific Loan Balance relating to the Loan being repaid. (b) If at any time under any Collateral Document evidencing Eligible Collateral (x) there is an Event of Default, or event with which the giving of notice or lapse of time or both would become an Event of Default, or (y) any representation or warranty made by or on behalf of the relevant Collateral Obligor becomes false or misleading in any material respect or (z) the relevant Collateral Obligor fails to perform or observe any material covenant or other obligation, Lender may, in its sole discretion and without regard to any determination of the Asset Value of such Eligible Collateral, notify Borrower of such occurrence and may require that the Asset-Specific Loan Balance related to the relevant Eligible Collateral be prepaid in whole or in part in the determination of Lender. Not later than one (1) Business Day after the receipt of such notice, Borrower shall prepay the Asset-Specific Loan Balance related to such Eligible Collateral. Lender may, in its sole discretion, determine and re-determine the amount to be prepaid irrespective of whether or not either (i) any statement of fact contained in any Officer's Certificate delivered pursuant to Section 5.02(b) or (ii) any representation of Borrower set forth in Section 6.13 was true to Borrower's actual knowledge. Section 3. Payments; Computations; Etc. 3.01. Repayment of Loans; Interest. (a) Borrower hereby promises to repay in full on the Termination Date the aggregate outstanding principal amount of the Loans; provided, however, in the event the Termination Date shall be extended to March 31, 2002 pursuant to the terms hereof, Borrower promises to repay such aggregate principal amount of the Loans outstanding on June 30, 2001 by the payment on the first Business Day of each month during the Amortization Period beginning with July 1, 2001 and on the Termination Date, as extended (each, an "Installment Date") of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding as at June 30, 2001 divided by (y) nine (9) (such schedule of payments, the "Amortization Schedule"); provided, further, that in the event that Borrower shall repay any portion of the outstanding principal in an amount in excess of the amount then due and payable in accordance with the Amortization Schedule, the Amortization Schedule shall be recalculated such that Borrower shall repay the principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) by the payment on each Installment Date remaining in the Amortization Period of an amount equal to the quotient of (x) the aggregate principal amount of the Loans outstanding on the date of such repayment (after taking such repayment into account) divided by (y) the number of Installment Dates remaining during the Amortization Period. Any repayment of the principal of the Loans made by Borrower to Lender subsequent to an Installment Date shall be credited at the time of such payment and applied to the payment due on next succeeding Installment Date. 22 (b) Borrower hereby promises to pay (at the times set forth in subsection (c) below) to Lender interest on the unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at a rate per annum equal to the Eurodollar Rate plus the applicable Eurodollar Rate Spread. Notwithstanding the foregoing, Borrower hereby promises to pay to Lender, to the extent permitted by applicable law, interest at the applicable Post-Default Rate on any principal of any Loan and on any other amount payable by Borrower hereunder or under the Note that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory prepayment or otherwise) for the period from and including the due date thereof to but excluding the date the same is paid in full. Payment and acceptance of interest pursuant to this subsection shall not constitute a waiver of any Default and shall not otherwise limit or prejudice any right of Lender hereunder. In no event shall Lender be entitled to receive any proceeds received from any Collateral Obligor in connection with the refinancing and/or final distribution to Lender with respect to any Eligible Collateral to the extent same exceeds the sums provided to be paid to Lender under Section 7.16 of this Loan Agreement. (c) Accrued interest on each Loan shall be payable monthly in arrears on the first Business Day of each month and for the last month of the Loan Agreement on the first Business Day of such last month and on the Termination Date, except that interest payable at the Post-Default Rate shall accrue daily and shall be payable upon such accrual. (d) Except as otherwise prohibited pursuant to the terms and conditions of this Agreement, (including, but not limited to, the terms and conditions of Section 3.02(d) hereof), the Loans may be prepaid in whole or in part at any time upon two (2) Business Days prior written notice, without any penalty or premium; provided, however, that any such prepayment shall be accompanied by an amount representing accrued interest on the principal amount being prepaid and all other amounts then due under the Loan Documents (including, without limitation, all amounts due under Section 3 hereof). Each partial prepayment that is voluntary (as opposed to mandatory under the terms of this Loan Agreement) shall be in an amount of not less than One Hundred Thousand Dollars ($100,000). So long as no Default or Event of Default has occurred and is then continuing, each voluntary prepayment shall be applied to reduce any Asset-Specific Loan Balance as designated by Borrower to Lender in writing. (e) With respect to any item of Collateral, Borrower shall repay to Lender an amount equal to the amount of casualty or condemnation proceeds paid to, or for the benefit of, Borrower or any underlying obligor in respect of such item of Collateral to the extent that Borrower is not required under the underlying loan documents with Borrower's obligor to reserve, escrow, readvance or apply such proceeds for the benefit of such obligor or the underlying real property. So long as no Default or Event of Default has occurred and is then continuing, such amounts paid to Lender shall be applied in reduction of the Asset-Specific Loan Balance relating to such item of Collateral. 3.02. Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by Borrower under this Loan Agreement and the Note shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to Lender at an account in the United States, to be notified by MS & Co. on behalf of Lender from time to time in writing, not later than 1:00 p.m., New York City time, on the date on which such payment shall become due (and each such payment made after such 23 time on such due date shall be deemed to have been made on the next succeeding Business Day). Borrower acknowledges that it has no rights of withdrawal from the foregoing account. Lender shall endeavor to send Borrower a detailed bill on the date which is two (2) Business Days prior to the date on which payment is due; provided, however, that the failure of Lender to send, or of Borrower to receive, such bill shall in no way affect Borrower's obligation to pay amounts due under this Loan Agreement. (b) Except to the extent otherwise expressly provided herein, if the due date of any payment under this Loan Agreement or the Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. (c) In addition to, and not in contravention of, the terms and provisions of this Loan Agreement generally governing the repayment and prepayment of Loans, on November 1, 2001 and on February 1, 2002, Borrower shall pay to Lender $1,575,000 to be applied to the Loan made in respect of the Lazard Collateral. (d) Notwithstanding anything to the contrary contained herein, except in connection with a Permitted Lazard Prepayment, Borrower shall not be permitted to pay any portion of the principal of the Loan made with respect to the Lazard Collateral (whether such Loan was made hereunder or under an Affiliate Credit Facility) prior to February 8, 2002. In the event that any portion of the principal of the Loan made in respect of the Lazard Collateral (whether such Loan was made hereunder or under an Affiliate Credit Facility) is prepaid (whether pursuant to Section 7.16 hereof or otherwise) on or before August 8, 2001 other than in connection with a Permitted Lazard Prepayment, Borrower shall, concurrently with such prepayment, pay to Lender the sum of $80,000 (or such portion thereof that has not been paid concurrently with the applicable prepayment under such Affiliate Credit Facility). In the event that any portion of the principal of the Loan made in respect of the Lazard Collateral (whether such Loan was made hereunder or under an Affiliate Credit Facility) is prepaid (whether pursuant to Section 7.16 hereof or otherwise) after August 8, 2001 but on or before February 8, 2002 other than in connection with a Permitted Lazard Prepayment, Borrower shall, concurrently with such prepayment, pay to Lender the sum of $40,000 (or such portion thereof that has not been paid concurrently with the applicable prepayment under such Affiliate Credit Facility). (e) As used in this Section 3.02, "Permitted Lazard Prepayment" shall mean a payment of any portion of the outstanding principal of the Loan made in respect of the Lazard Collateral pursuant to, or as a result of, the terms of Section 2.04(a)(i) or Section 3.02(c) hereof. 3.03. Computations. Interest on the Loans shall be computed on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. Lender shall determine any rate of interest payable on Loans hereunder, and such determination shall be conclusive and binding, absent manifest error. 24 3.04. U.S. Taxes. (a) Borrower agrees to pay to Lender such additional amounts as are necessary in order that the net payment of any amount due to Lender hereunder after deduction for or withholding in respect of any U.S. Tax (as defined below) imposed with respect to such payment (or in lieu thereof, payment of such U.S. Tax by Lender), will not be less than the amount stated herein to be then due and payable; provided that the foregoing obligation to pay such additional amounts shall not apply: (i) to any payment to Lender hereunder unless (A) Lender is entitled to submit a Form 1001 (relating to Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by Lender hereunder in respect of the Loans), or (B) prior to such payment Lender shall have furnished to Borrower a Form W-8 (or substitute) or otherwise established an exemption from U.S. withholding tax, or (ii) to any U.S. Tax imposed solely by reason of the failure by Lender to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of Lender if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Tax. For the purposes of this Section 3.03, (x) "Form 1001" shall mean Form 1001 (Ownership, Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America, (y) "Form 4224" shall mean Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of the Treasury of the United States of America (or in relation to either such Form such successor and related form as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates), and (z) "U.S. Taxes" shall mean any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America, any political subdivision of the United States of America or any taxing authority thereof or therein. (b) Within 30 days after paying any such amount to Lender, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, Borrower shall deliver to Lender evidence satisfactory to Lender of such deduction, withholding or payment (as the case may be). (c) Lender shall not assign or sell participation interests in the Loans made or to be made hereunder subject to Section 2.02 and unless it shall have given prior notice to Borrower and unless a condition specified in Section 3.04(a)(i) or (ii) shall not apply. 3.05. Booking of Loans. Without limitation of Lender's rights to sell, assign or transfer a Loan or any interest therein, including any participation interest therein, at any time and from time to time, Lender may make, carry or transfer such Loan at, to, or for the account of any of its branch offices or the office of an Affiliate of Lender; provided, however, that the representation in Section 3.04(c) shall remain true throughout the term of such Loan. 3.06. Lender's Funding of Eurodollar Rate Loans. Borrower hereby expressly acknowledges and agrees that Lender may fund a Loan in any manner it sees fit, 25 including (i) through the actual purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to the definition of Eurodollar Rate in an amount equal to the principal amount of such Loan and having a maturity comparable to the relevant interest period or (ii) through Lender's entering into or purchase of repurchase agreements, interest rate agreements, swap agreements or other arrangements in such amounts as Lender shall determine (and which amounts may or may not, in Lender's sole discretion, be "match funded" to such Loan). Calculation of all amounts payable to Lender under this Section 3.06 and under Section 3.07 shall be made as though Lender had actually funded such Loan through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to the definition of Eurodollar Rate in an amount equal to the amount of such Loan and having a maturity comparable to the relevant interest period and through the transfer of such Eurodollar deposit from an off-shore office of Lender to a domestic office of Lender in the United States of America; provided, however, that Lender may fund such Loan in any manner it sees fit and the foregoing assumptions shall be utilized only for purposes of calculating amounts payable under this Section 3.06 and under Section 3.07, if any. 3.07. Funding Costs. (a) Borrower shall compensate Lender, upon written request by Lender (which request shall set forth the basis for requesting such amounts), for all Funding Costs. (b) Lender shall deliver to Borrower a statement setting forth the amount and basis of determination of any Funding Cost, it being agreed that such statement and the method of calculation shall be conclusive and binding on Borrower, absent manifest error. In addition, in the event Borrower provides Lender not less than five (5) Business Days prior written notice of a proposed voluntary prepayment hereunder, Lender shall deliver to Borrower a non-binding good faith estimate of the applicable components and amount of Funding Costs which would be incurred by Borrower if Borrower were to make a voluntary prepayment hereunder; provided, however, that Borrower shall remain liable for all Funding Costs shown on the statement referred to in the first sentence of this subsection (b), notwithstanding such good faith estimate. (c) In lieu of prepaying the Loan when and as otherwise required or permitted by this Loan Agreement, Borrower may on any Business Day (a "Deposit Funding Date") instead deposit with Lender an amount equal to the applicable prepayment, to be held by Lender (the "Prepayment Deposit") until such date as application of the Prepayment Deposit on account of the Loan would not cause Lender to suffer Funding Costs (the "Deposit Application Date"). Any Prepayment Deposit held by Lender shall: (a) constitute additional security for the Loan, for which the parties shall enter into such security documents (and account establishment and administration documents) as Lender shall require; (b) be held by Lender in an interest-bearing account selected and controlled solely by Lender, interest on which shall be added to principal and applied in the same manner as principal; (c) at Lender's option, be accompanied by a payment (as estimated by Lender) equal to the difference between the interest to be earned on the Prepayment Deposit and the interest that will accrue on a portion of the Loan equal to the Prepayment Deposit during the period from the Deposit Funding Date to the Deposit Application Date; (d) with respect to the Collateral, entitle Borrower to the same rights and benefits (including the right to releases, if any) that would have been available to Borrower if Borrower had prepaid the Loan (and designated Asset-Specific Loan Balance(s)) by an amount equal to the Prepayment Deposit; and (e) be applied on account of the Loan (principal and interest) on the Deposit Application Date. 26 3.08. Compensation for Increased Costs. If Lender shall in good faith determine that any change in any law, treaty or governmental rule, regulation or order, or in the interpretation, administration or application thereof, or any determination of a court or governmental authority, or compliance with any guideline, request or directive issued or made by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (a) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of Lender; or (b) imposes any other condition on or affecting Lender or its obligations hereunder or the interbank Eurodollar market; (c) and the result of any of the foregoing is to increase the cost to Lender of agreeing to make, making or maintaining the Loan hereunder or to reduce any amount received or receivable by Lender with respect thereto; then, in any such case, Borrower shall promptly (but in any event no later than five (5) Business Days following any notice from Lender of the same) pay to Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate Lender for any such increased cost or reduction in amounts received or receivable hereunder. Lender shall deliver to Borrower a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to Lender under this Section 3.08, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 3.09. Limitation on Types of Loans; Illegality. Anything herein to the contrary notwithstanding, if: (a) Lender determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Loans as provided herein; or (b) Lender determines, which determination shall be conclusive, that the relevant rate of interest referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Loans is to be determined is not likely adequate to cover the cost to Lender of making or maintaining Loans; or (c) Lender determines, which determination shall be conclusive, that it is or will be unlawful for Lender to honor its obligation to make or maintain Loans hereunder using a Eurodollar Rate as a result of compliance by Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful); then Lender shall give Borrower prompt notice thereof and, so long as such condition remains in effect, Lender shall be under no obligation to make additional Loans, and Borrower shall, either prepay all such Loans as may be outstanding or pay interest on such Loans at a rate per annum equal to the Eurodollar Substitute Rate. 27 Section 4. Collateral Security. 4.01. Collateral; Security Interest. (a) Borrower hereby assigns, pledges and grants a security interest in all of its right, title and interest in, to and under the Collateral described in Section 4.01(b) below to Lender to secure the repayment of principal of and interest on all Loans and all other amounts owing to Lender hereunder, under the Note, under the other Loan Documents and any and all MS Indebtedness from time to time outstanding (collectively, the "Secured Obligations"). Borrower agrees to mark its computer records to evidence the interests granted to Lender hereunder. (b) All of Borrower's right, title and interest in, to and under each of the following items of property pledged by Borrower to Lender from time to time and whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter individually and collectively referred to as the "Collateral": (i) all CMBS and Other Approved Collateral; (ii) all Collateral Documents, including without limitation all securities, promissory notes, any collateral pledged or otherwise relating to such Collateral, all representations and warranties made to, or for the benefit of, Borrower by any Collateral Obligor, all Servicing Records (as defined in Section 11.14(b) below) and servicing agreements, together with all files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, computer storage media, accounting records and other books and records relating thereto, in each case subject to prior liens and encumbrances permitted by Lender; (iii) all guaranties and insurance (issued by governmental agencies or otherwise) and any insurance certificate or other document evidencing such guaranties or insurance relating to any Collateral and all claims and payments thereunder; (iv) all other insurance policies and insurance proceeds relating to any Collateral or the related Property; (v) all Interest Rate Protection Agreements; (vi) the Collection Account and all monies from time to time on deposit in the Collection Account; (vii) all "general intangibles", "accounts" and "chattel paper" as defined in the Uniform Commercial Code relating to or constituting any and all of the foregoing; and (viii)any and all replacements, substitutions, distributions on, or proceeds (including, without limitation, condemnation proceeds) of, any and all of the foregoing set forth in items (i) through (vii) of this Section 4.01(b), whether now owned or hereafter acquired, now existing or hereafter created and wherever located. (c) Pursuant to the Custodial Agreement, Custodian shall hold the Collateral Documents as exclusive bailee and agent for Lender pursuant to terms of the Custodial Agreement and shall deliver to Lender Trust Receipts each to the effect that it has 28 reviewed such Collateral Documents in the manner and to the extent required by the Custodial Agreement and identifying any deficiencies in such Collateral Documents as so reviewed. (d) Without limiting the generality of the foregoing provisions of this Section 4.01 or any other term or provision of this Loan Agreement, Borrower shall, as additional collateral for Loan made in respect of the Lazard Collateral, pledge to Lender and grant Lender a first priority perfected security interest in, and shall cause each of the Lazard Parties to pledge, assign or otherwise transfer to Borrower, any additional ownership interests or assets acquired, whether direct or indirect, relating to, associated with, or otherwise held by each of the Lazard Parties. 4.02. Further Assurances. (a) Borrower shall undertake, with respect to each item of Collateral pledged hereunder as security for a Loan, any and all actions deemed necessary by Lender for the granting by Borrower to Lender of a valid first priority security interest in such Collateral. Without limiting the generality of the foregoing, Borrower shall take such steps as are for the granting and perfection of a first priority security interest in Securities and related Collateral. (b) At any time and from time to time, upon the written request of Lender, and at the sole expense of Borrower, Borrower will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments and documents and take such further action as Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Loan Agreement and of the rights and powers herein granted, including, without limitation, the filing of (i) any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. Borrower also hereby authorizes Lender to file any such financing or continuation statement without the signature of Borrower to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Loan Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 4.03. Changes in Locations, Name, etc. Borrower shall not (i) change the location of its chief executive office/chief place of business from that specified in Section 6 hereof or (ii) change its name, identity or corporate structure (or the equivalent) or change the location where it maintains its records with respect to the Collateral unless it shall have given Lender at least ten (10) days prior written notice thereof and shall have delivered to Lender all Uniform Commercial Code financing statements and amendments thereto as Lender shall request and taken all other actions deemed necessary by Lender to continue its perfected status in the Collateral with the same or better priority. 4.04. Lender's Appointment as Attorney-in-Fact. (a) Borrower hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Borrower and in the name of Borrower or in its own name, from time to time in Lender's discretion, for the purpose of carrying out the terms of this Loan Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Loan Agreement, and, without limiting the generality of the foregoing, Borrower hereby gives Lender the power and right, on behalf of Borrower, without 29 assent by, but with notice to, Borrower, if an Event of Default shall have occurred and be continuing, to do the following: (i) in the name of Borrower or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Lender for the purpose of collecting any and all such moneys due under any such mortgage insurance or with respect to any other Collateral whenever payable; (ii) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; and (iii) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to Lender or as Lender shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against Borrower with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as Lender may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender's option and Borrower's expense, at any time, and from time to time, all acts and things which Lender deems reasonably necessary to protect, preserve or realize upon the Collateral and Lender's Liens thereon and to effect the intent of this Loan Agreement, all as fully and effectively as Borrower might do. Borrower hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the repayment in full of all Secured Obligations hereunder. (b) Borrower also authorizes Lender, at any time and from time to time, to execute, in connection with any sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on Lender are solely to protect Lender's interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither Lender nor any of its officers, directors, or employees shall be responsible to Borrower for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. 4.05. Performance by Lender of Borrower's Obligations. If Borrower fails to perform or comply with any of its agreements contained in the Loan Documents and Lender 30 may itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of Lender incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Post-Default Rate, shall be payable by Borrower to Lender on demand and shall constitute Secured Obligations. 4.06. Proceeds. If an Event of Default shall occur and be continuing, (a) all proceeds of Collateral received by Borrower consisting of cash, checks and other near-cash items shall be held by Borrower in trust for Lender, segregated from other funds of Borrower, and, within two (2) Business Days of receipt by Borrower, shall be turned over to Lender in the exact form received by Borrower (duly endorsed by Borrower to Lender, if required, in order to be negotiated by Lender), and (b) any and all such proceeds received by Lender (whether from Borrower or otherwise) may, in the sole discretion of Lender, be held by Lender as collateral security for, and/or then or at any time thereafter may be applied by Lender against, the Secured Obligations (whether matured or unmatured), such application to be in such order as Lender shall elect. Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full and this Loan Agreement shall have been terminated shall be paid over to Borrower or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned rents and any other income and all other amounts received with respect to the Collateral. 4.07. Remedies. If a Default shall occur and be continuing, Lender may, at its option, enter into one or more Interest Rate Protection Agreements covering all or a portion of the Mortgage Loans or Mezzanine Loans pledged to Lender hereunder, and Borrower shall be responsible for all damages, judgment costs and expenses of any kind which may be imposed on, incurred by or asserted against Lender relating to or arising out of such Interest Rate Protection Agreements; including without limitation any losses resulting from such Interest Rate Protection Agreements. If an Event of Default shall occur and be continuing, Lender may exercise, in addition to all other rights and remedies granted to it in this Loan Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, Lender without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon Borrower or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker's board or office of Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in Borrower, which right or equity is hereby waived or released. Borrower further agrees, at Lender's request, to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at Borrower's premises or elsewhere. Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or 31 incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Lender hereunder, including without limitation reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as Lender may elect, and only after such application and after the payment by Lender of any other amount required or permitted by any provision of law, including without limitation Section 9-504(1)(c) of the Uniform Commercial Code, need Lender account for the surplus, if any, to Borrower. To the extent permitted by applicable law, Borrower waives all claims, damages and demands it may acquire against Lender arising out of the exercise by Lender of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of Lender. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. Borrower shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 3.01(b) hereof) if the proceeds of any sale or other disposition of the Collateral (net of costs incurred in connection with such sale or other disposition) are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by Lender to collect such deficiency. 4.08. Limitation on Duties Regarding Preservation of Collateral. Lender's duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as Lender deals with similar property for its own account. Neither Lender nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Borrower or otherwise. 4.09. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 4.10. Release of Security Interest. Upon termination of this Loan Agreement and the Conduit Loan Agreement and repayment to Lender of all Secured Obligations and the performance of all obligations under the Loan Documents and under the Conduit Loan Agreement, Lender shall release its security interest in any remaining Collateral. 4.11. Release of Collateral. Provided that no Default or Event of Default shall exist (other than one that (a) relates solely to the Collateral to be released and (b) will be cured simultaneously with such release) and that Borrower shall have paid all sums then due under the Loan relating thereto, upon (i) Borrower's payment in full of the Asset-Specific Loan Balance with respect to a portion of the Collateral and (ii) receipt by Lender of a written request from Borrower for the release of such Collateral, Lender shall as soon as practicable release (and Lender shall reasonably cooperate with Borrower to facilitate reasonable escrow arrangements to facilitate a simultaneous release of) the related Collateral Documents and the related Collateral and any liens related thereto to Borrower or, to the extent necessary to facilitate future savings of mortgage tax in states that impose mortgage taxes, assign such liens as Borrower shall request; provided, that any such assignments shall be without recourse, representation or warranty of any kind except that Lender shall represent and warrant that such Collateral has not been previously assigned by Lender. Lender shall with reasonable 32 promptness, after a written request from Borrower, execute any document or instrument necessary to effectuate such release or assignment. 4.12. Substitution of Eligible Collateral. From time to time until the Custodian is otherwise notified by the Lender, which notice shall be given by the Lender only during the existence of an Event of Default, and with the prior written consent of the Lender, the Borrower may substitute for one or more items of Eligible Collateral constituting the Collateral with one or more substitute items of Eligible Collateral having aggregate Collateral Value equal to or greater than the Collateral Value of the Collateral being substituted for, or obtain the release of one or more items of Collateral constituting Collateral hereunder: provided that, after giving effect to such substitution or release, the Secured Obligations then outstanding shall not exceed the Borrowing Base, which determination shall be made solely by the Lender. In connection with any such requested substitution or release, the Borrower will provide notice to the Custodian and the Lender no later than 3:00 p.m. New York City time, on the date of such request, specifying the items of Collateral to be substituted for or released and the items of substitute Collateral to be pledged hereunder in substitution thereof, if any, and shall deliver with such notice a Custodial Identification Certificate and a revised Collateral Schedule indicating any substitute Collateral. Section 5. Conditions Precedent. 5.01. Initial Loan. The obligation of Lender to make its initial Loan hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan, of the condition precedent that Lender shall have received all of the following items and documents, each of which shall be satisfactory to Lender and its counsel in form and substance: (a) Loan Documents. (i) This Loan Agreement, duly completed and executed; (ii) The Note, duly completed and executed, together with a fee in the amount of $750,000.00; (iii) The Custodial Agreement, duly executed and delivered by Borrower and Custodian. In addition, Borrower shall have taken such other action as Lender shall have requested in order to perfect the security interests created pursuant to the Loan Agreement; (b) Organizational Documents. Certified copies of the articles of incorporation and by-laws (or equivalent documents) of Borrower and of all requisite authority for Borrower with respect to the execution, delivery and performance of the Loan Documents and each other document to be delivered by Borrower from time to time in connection herewith (and Lender may conclusively rely on such certificate until it receives notice in writing from Borrower to the contrary); (c) Legal Opinion. A legal opinion of counsel to Borrower, substantially in the form attached hereto as Exhibit C; (d) Trust Receipt and Collateral Schedule and Exception Report. A Trust Receipt, substantially in the form of Annex 2 of the Custodial Agreement, dated the Effective Date, from Custodian, duly completed, with a Collateral Schedule and Exception Report attached thereto; 33 (e) Servicing Agreement(s). Any Servicing Agreement, certified as a true, correct and complete copy of the original, with the letter of the applicable Servicer (i) consenting to termination of such Servicing Agreement upon the occurrence of an Event of Default and (ii) agreeing to hold all moneys received in respect of each item of Collateral for the benefit of Lender, attached; and (f) The Supplemental Terms and Conditions (Rule 15a-6 Annex) duly executed by Borrower. (g) Other Documents. Such other documents as Lender may reasonably request. 5.02. Initial and Subsequent Loans. The making of each Loan to Borrower (including the initial Loan) on any Business Day is subject to the delivery of all Collateral Documents pertaining to the Eligible Collateral to be pledged for such Loan, together with all documents set forth in Section 2.03(b)(i)-(x) and the satisfaction of the following further conditions precedent, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) no Event of Default or Default shall have occurred and be continuing on such date either before or after giving effect to the making of the advance; (b) Lender shall have received from Borrower and Borrower shall have received from each Collateral Obligor such representations and warranties as Lender shall, in its sole discretion, deem satisfactory. The representations and warranties made by Borrower in Section 6 hereof, and elsewhere in each of the Loan Documents, shall be true and complete on and as of the date of the making of such Loan in all material respects (in the case of the representations and warranties in Section 6.10, solely with respect to Eligible Collateral included in the Borrowing Base) with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Lender shall have received an officer's certificate signed by a Responsible Officer of Borrower certifying as to the truth and accuracy of the above, which certificate shall also include a representation that (i) Borrower is in compliance with all governmental licenses and authorizations, (ii) Borrower is qualified to do business, validly existing and, to the extent determinable, in good standing, in all required jurisdictions, (iii) the facts set forth in the Diligence Materials related to the Collateral for such Loan are, to the best knowledge of Borrower after diligent inquiry, true and correct (or shall fully explain all adverse changes from the information previously supplied to Lender), (iv) there has been no change in the organizational and authority documents provided to Lender pursuant to Section 5.01(b) hereof since the date of the most recent certification thereof to Lender, and (v) there has been no Material Adverse Effect since the date of the last advance to Borrower hereunder. (c) the aggregate outstanding principal amount of the Loans shall not exceed the Borrowing Base; (d) subject to Lender's right to perform one or more Due Diligence Reviews pursuant to Section 11.15 hereof, Lender shall have completed its due diligence review of the Collateral Documents for each item of Collateral and such other documents, records, agreements, instruments, mortgaged properties or information relating to such item of 34 Collateral as Lender in its sole discretion deems appropriate to review and such review shall be satisfactory to Lender in its sole discretion; (e) Lender shall have received from Custodian a Trust Receipt, together with a Collateral Schedule and Exception Report with Exceptions (as defined in the Custodial Agreement) as are acceptable to Lender in its sole discretion, in respect of the Eligible Collateral to be pledged hereunder on such Business Day; (f) Lender shall have received from Borrower a Lender's Release Letter substantially in the form of Exhibit E hereto (or such other form acceptable to Lender) covering each item of Collateral to be pledged to Lender to the extent such Collateral is subject to a lender's lien; (g) none of the following shall have occurred and/or be continuing: (i) an event or events shall have occurred resulting in the effective absence of a "repo market" or comparable "lending market" for financing debt obligations secured by mortgage loans or securities for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in Lender not being able to finance any Loans through the "repo market" or "lending market" with traditional counterparties at rates which would have been reasonable prior to the occurrence of such event or events; (ii) an event or events shall have occurred resulting in the effective absence of a "securities market" for securities backed by mortgage loans for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in Lender not being able to sell securities backed by mortgage loans at prices which would have been reasonable prior to such event or events; or (iii) there shall have occurred a material adverse change in the financial condition of Lender which effects (or can reasonably be expected to effect) materially and adversely the ability of Lender to fund its obligations under this Loan Agreement; (h) Drawdown Fee. Borrower shall have paid Lender from the proceeds of the advance to be made in connection with such Loan, a Drawdown Fee calculated on the amount of such Loan then being disbursed. (i) Transaction Costs. Borrower shall have paid Lender from the proceeds of the advance to be made in connection with such Loan, all Transaction Costs for which bills have been submitted; provided, however, that nothing herein shall be deemed to waive Borrower's obligation to pay all Transaction Costs whether billed before or after the making of a Loan pursuant to which such Transaction Costs were incurred. (j) Other Documents. Lender shall have received such other documents, and Borrower shall have taken such other action in order to perfect the security interests created hereunder, as Lender or its counsel shall deem necessary. Each request for a borrowing by Borrower hereunder shall constitute a certification by Borrower that all the conditions set forth in this Section 5 have been satisfied (both as of the date of such notice, request or confirmation and as of the date of such borrowing). 35 (k) No Morgan Stanley Downgrade. Morgan Stanley Dean Witter & Co.'s corporate bond rating as calculated by S&P or Moody's shall not have been lowered or downgraded to a rating below A- as indicated by S&P or below A3 as indicated by Moody's. 5.03. Additional Requirements. (a) Borrower and Lender recognize and agree that the categories of Collateral set forth in the Recital paragraph hereof and defined herein as categories of assets which may be submitted by Borrower to Lender for review by Lender as Eligible Collateral hereunder are general in nature and that the full scope of such Collateral categories may be unknown. Consequently, the appropriate requirements are not fully known for (i) the documents to be provided by Borrower for underwriting and due diligence review by Lender and (ii) submittals by Borrower in order to create and perfect a first priority security interest in the Collateral. Therefore, Borrower and Lender agree that, as a further condition precedent to funding a Loan in respect of any Collateral hereunder, Borrower shall have delivered to Lender all information and documents determined by Lender in good faith to be required for its underwriting and examination of such Collateral and for the granting and perfection of a first priority security interest therein. (b) Without limiting the generality of the foregoing Section 5.03(a), Borrower shall execute and deliver all documents necessary for the granting of a first priority security interest in any Collateral determined by Lender to be Eligible Collateral hereunder, including without limitation (i) all instruments evidencing indebtedness payable to Borrower or pledged to Borrower as security for a loan, (ii) all instruments granting or perfecting a security interest for the benefit of Borrower or pledged to Borrower as security for a loan (including, without limitation, collateral assignments, pledge agreements and UCC financing statements), (iii) all instruments evidencing an interest in an entity pledged to Borrower as security for a loan (including, without limitation, partnership interests, shares of corporate stock, participation interests, and other beneficial interests of any kind), (iv) all instruments guaranteeing the repayment of indebtedness owed to Borrower, or pledged to Borrower for the repayment of a Loan and (v) all agreements among holders of debt or equity interests providing for a priority among such parties of interests in related assets forming the basis of an item of Collateral. Section 6. Representations and Warranties. Borrower represents and warrants to Lender that throughout the term of this Loan Agreement: 6.01. Existence. Borrower (a) is a corporation duly organized and validly existing under the laws of the jurisdiction of its organization, (b) has all requisite power, and has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the lack of such licenses, authorizations, consents and approvals would not be reasonably likely to have a Material Adverse Effect on its Property, business or financial condition or prospects; and (c) is qualified to do business, validly existing and is, to the extent determinable, in good standing, in all other jurisdictions in which the nature of the business conducted by it makes such qualification necessary, except where failure so to qualify would not be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect on its Property, business or financial condition or prospects. 36 6.02. Action. Borrower has all necessary power, authority and legal right to execute, deliver and perform its obligations under each of the Loan Documents; the execution, delivery and performance by Borrower of each of the Loan Documents have been duly authorized by all necessary action on its part; and each Loan Document has been duly and validly executed and delivered by Borrower and constitutes a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms. 6.03. Financial Condition. Borrower agrees to promptly deliver to Lender all publicly filed financial information when and to the extent that the same is made available to the general public. Borrower has heretofore furnished to Lender a copy of (a) its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for the fiscal year of Borrower ended December 31, 1997 and the related consolidated statements of income and retained earnings and of cash flows for Borrower and its consolidated Subsidiaries for such fiscal year, setting forth in each case in comparative form the figures for the previous year, (b) its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for Borrower and its consolidated Subsidiaries for such fiscal year, setting forth in each case in comparative form the figures for the previous year, with the opinion thereon of Ernst & Young and Coopers & Lybrand and (c) its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for the quarterly fiscal period of Borrower ended September 30, 2000 and the related consolidated statements of income and retained earning and of cash flows for Borrower and its consolidated Subsidiaries for such quarterly fiscal periods, setting forth in each case in comparative form the figures for the previous year. All such financial statements are complete and correct and fairly present, in all material respects, the consolidated financial condition of Borrower and its Subsidiaries and the consolidated results of their operations as at such dates and for such fiscal periods, all in accordance with GAAP applied on a consistent basis. Since September 30, 2000, there has been no material adverse change in the consolidated business, operations or financial condition of Borrower and its consolidated Subsidiaries taken as a whole from that set forth in said financial statements. 6.04. Litigation. There are no actions, suits, arbitrations, investigations (including, without limitation, any of the foregoing which are pending or threatened) or other legal or arbitrable proceedings affecting Borrower or any of its Subsidiaries or affecting any of the Property of any of them before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby, (ii) makes a claim or claims in an aggregate amount greater than $5,000,000, (iii) which, individually or in the aggregate, if adversely determined, could reasonably be likely to have a Material Adverse Effect, or (iv) requires filing with the Securities and Exchange Commission in accordance with the 1934 Act or any rules thereunder. 6.05. No Breach. Neither (a) the execution and delivery of the Loan Documents nor (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the articles of incorporation and by-laws (or equivalent documents) of Borrower, or any applicable law, rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any Servicing Agreement or other material agreement or instrument to which Borrower or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such material agreement or instrument 37 or result in the creation or imposition of any Lien (except for the Liens created pursuant to this Loan Agreement) upon any Property of Borrower or any of its Subsidiaries pursuant to the terms of any such agreement or instrument. 6.06. Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority or any securities exchange are necessary for the execution, delivery or performance by Borrower of the Loan Documents or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to this Loan Agreement. 6.07. Use of Proceeds; Margin Regulations. No part of the proceeds of any Loan will be used, whether directly, indirectly, immediately, incidentally or ultimately (i) to purchase or carry any "margin stock" within the meaning of Regulation U or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which entails a violation of, or is inconsistent with, such Regulation U or any other regulations of the Board of Governors of the Federal Reserve System, or (iii) for any purposes prohibited by any applicable law, order, rule, regulation, ordinance or similar code or restriction. If requested by Lender, Borrower, any applicable Affiliate or Subsidiary of Borrower and the recipient of any portion of the proceeds all or any portion of any Loan shall furnish to Lender a statement on Federal Reserve Form G-3 referred to in Regulation U. 6.08. Taxes. Borrower and its Subsidiaries have filed all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except for any such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of Borrower and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of Borrower, adequate. 6.09. Investment Company Act. Neither Borrower nor any of its Subsidiaries is an "investment company", or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.10. Collateral; Collateral Security. (a) Borrower has not assigned, pledged, or otherwise conveyed or encumbered any Collateral to any other Person, and immediately prior to the pledge of such Collateral to Lender, unless otherwise approved by Lender in writing, Borrower was the sole owner of such Collateral and had good and marketable title thereto, free and clear of all Liens, in each case except for Liens to be released simultaneously with the Liens granted in favor of Lender hereunder. No Collateral pledged to Lender hereunder was acquired by Borrower from an Affiliate of Borrower unless otherwise approved by Lender in writing. (b) The provisions of this Loan Agreement are effective to create in favor of Lender a valid security interest in all right, title and interest of Borrower in, to and under the Collateral. (c) As to all other Collateral, upon receipt by Custodian of all documents set forth in Lender's notice to Borrower and Custodian pursuant to Section 2.03(b)(x) hereof, Lender shall have a fully perfected first priority security interest therein and in Borrower's interest in the related Property. 38 (d) Upon (i) the delivery to Lender or its designee of CMBS or other items of Collateral constituting securities (as defined in Article 8 of the Uniform Commercial Code) in accordance with Section 5.02 hereof and (ii) the filing of financing statements on Form UCC-1 naming Lender as "Secured Party" and Borrower as "Debtor", and describing the Collateral, in the jurisdictions and recording offices for which security interests may be perfected in the Collateral by the filing of UCC financing statements, the security interests granted hereunder in the Collateral will constitute fully perfected first priority security interests under the Uniform Commercial Code in all right, title and interest of Borrower in, to and under such Collateral, and, without limiting the foregoing, Lender will have a "securities entitlement" (as defined in Article 8 of the Uniform Commercial Code) in the Collateral referenced in the foregoing clause (i). 6.11. Chief Executive Office. Borrower's chief executive office on the Effective Date is located at 410 Park Avenue, 14th Floor, New York, New York 10022. 6.12. Location of Books and Records. The location where Borrower keeps its books and records, including all computer tapes and records relating to the Collateral is its chief executive office. 6.13. True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of Borrower to Lender in connection with the negotiation, preparation or delivery of this Loan Agreement and the other Loan Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, (x) do not contain any untrue statement of material fact and (y) contain all statements of material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, true. All written information furnished after the date hereof by or on behalf of Borrower to Lender in connection with this Loan Agreement and the other Loan Documents and the transactions contemplated hereby and thereby, will be true, complete 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 actual knowledge of a Responsible Officer of Borrower, after due inquiry, that could reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Loan Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to Lender for use in connection with the transactions contemplated hereby or thereby. 6.14. Tangible Net Worth. On the date hereof, the Tangible Net Worth is not less than the sum of (i) $100,000,000 plus (ii) an amount equal to 75% of the aggregate of positive changes in Borrower's book equity, since March 31, 2000 (without deduction for quarterly losses). 6.15. ERISA. Each Plan to which Borrower or its Subsidiaries make direct contributions, and, to the knowledge of Borrower, 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. No event or condition has occurred and is continuing as to which Borrower would be under an obligation to furnish a report to Lender under Section 7.01(d) hereof assuming a request therefor has been made by Lender. 6.16. Lazard Collateral. The Lazard Collateral represents (i) all of the collateral that, as of the date hereof, has been transferred, assigned or pledged to Borrower. 39 Section 7. Covenants of Borrower. Borrower covenants and agrees with Lender that, so long as any Loan is outstanding and until payment in full of all Secured Obligations: 7.01. Financial Statements, Reports, etc. Borrower agrees to promptly deliver to Lender all publicly filed financial information when and to the extent same is available to the general public. In addition to such public financial information, Borrower shall also provide the following financial information: (a) the Monthly Statement; (b) within forty-five (45) days following the end of each quarter, a status report with respect to such quarter which describes the cumulative sources and uses of the funds for the immediately preceding calendar quarter on each asset pledged under this Loan Agreement and a detailed report in a form reasonably satisfactory to Lender; (c) within forty-five (45) days following the end of each quarter, a certificate from a Responsible Officer of Borrower in form and substance reasonably satisfactory to Lender that there has been no Event of Default and no Material Adverse Effect; (d) within fifteen (15) Business Days after Lender's request, such further information with respect to the operation of any real property, the Collateral, the financial affairs of Borrower and any Plan and Multiemployer Plan as may be requested by Lender, including all business plans prepared by or for Borrower; provided, however, that with respect to information not previously known to, or in the possession of, Borrower relating to any Multiemployer Plan, Borrower shall only be required to provide such information as may be obtained through good faith efforts; (e) upon Lender's request, a copy of any financial or other report Borrower shall receive from any underlying obligor with respect to an item of Collateral within fifteen (15) days after Borrower's receipt thereof; and (f) such other reports as Lender shall reasonably require. 7.02. Litigation. Borrower will promptly, and in any event within 10 days after service of process on any of the following, give to Lender notice of all litigation, actions suits, arbitrations, investigations (including, without limitation, any of the foregoing which are pending or threatened) or other legal or arbitrable proceedings affecting Borrower or any of its Subsidiaries or affecting any of the Property of any of them before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby, (ii) makes a claim or claims in an aggregate amount greater than $1,000,000.00, or (iii) which, individually or in the aggregate, if adversely determined could reasonably be likely to have a Material Adverse Effect. 7.03. Existence, etc. Borrower will: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 7.03(a) shall prohibit any transaction expressly permitted under Section 7.04 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, all environmental laws) 40 if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect on its Property, business or financial condition, or prospects; (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied; (d) not move its chief executive office from the address referred to in Section 6.11 unless it shall have provided Lender 10 days' prior written notice of such change; (e) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and (f) permit representatives of Lender, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by Lender. 7.04. Prohibition of Fundamental Changes. Borrower shall not 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; provided, that Borrower may enter into a merger or consolidation if (a) the surviving or resulting entity shall be a corporation or partnership organized under the laws of the United States or any state thereof; (b) such entity shall expressly assume by written agreement, in form and substance satisfactory to Lender in Lender's sole discretion, the performance of all of Borrower's duties and obligations under this Loan Agreement, the Note and the Loan Documents; and (c) such entity shall be at least as creditworthy as Borrower, as determined by Lender in Lender's sole and absolute discretion; and, provided, further, that if after giving effect thereto, no Default would exist hereunder. Notwithstanding the foregoing, Borrower shall not enter into or be subject to any transaction, and no direct or indirect change in the ownership structure of Borrower shall occur (whether or not within Borrower's control), if as a result thereof: (a) either John R. Klopp and Samuel Zell would no longer retain his respective present or comparable or more senior offices (Vice Chairman and Chairman of the Executive Committee; Chief Executive Officer and Vice Chairman; and Chairman of the Board, respectively) and directorships, or (b) in Lender's judgment, such individuals would no longer collectively retain effective control of Borrower's business and operations. 7.05. Borrowing Base Deficiency. If at any time there exists a Borrowing Base Deficiency, Borrower shall cure same in accordance with Section 2.04 hereof. 7.06. Notices. Borrower shall give notice to Lender: (a) promptly upon receipt of notice or knowledge of the occurrence of any Default or Event of Default; (b) with respect to any Collateral pledged to Lender hereunder, immediately upon receipt of any principal payment (in full or partial) or payment in respect of an Equity Interest; 41 (c) with respect to any Collateral pledged to Lender hereunder, immediately upon receipt of notice or knowledge that the underlying Property has been damaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, or otherwise damaged so as to affect adversely the Asset Value of such pledged Collateral; (d) promptly upon receipt of notice or knowledge of (i) any default related to any Collateral unless otherwise specifically approved by Lender in writing, (ii) any Lien or security interest (other than security interests created hereby or by the other Loan Documents) on, or claim asserted against, any of the Collateral, (iii) any event or change in circumstances has or could reasonably be expected to have an adverse affect on the Collateral Value of the Collateral for a Loan or (iv) any event or change in circumstances which could reasonably be expected to have a Material Adverse Effect; (e) with respect to any item of Collateral pledged to Lender hereunder, promptly upon entering into a modification of any documents pertaining to such item of Collateral which would have a material adverse effect on such item of Collateral; and (f) with respect to any Collateral pledged to Lender hereunder, immediately upon the acquisition or receipt by Borrower or any Affiliate of Borrower of any interest of any kind in respect of such Collateral which interest has not been pledged to Lender as Collateral under this Loan Agreement. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of Borrower setting forth details of the occurrence referred to therein and stating what action Borrower has taken or proposes to take with respect thereto. 7.07. Reports. Borrower shall provide Lender with a quarterly report, which report shall include, among other items, a summary of Borrower's delinquency and loss experience with respect to any Collateral serviced by Borrower, any Servicer or any designee of either, plus any such additional reports as Lender may reasonably request with respect to Borrower's or any Servicer's servicing portfolio or pending originations of Collateral. 7.08. Transactions with Affiliates. Borrower will not, except as approved by Lender in writing, enter into any transaction in any manner relating to any item of Collateral hereunder, including without limitation any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate; provided, however, that Lender may consider for approval any such transaction which is (a) otherwise permitted under this Loan Agreement, (b) in the ordinary course of Borrower's business and (c) upon fair and reasonable terms no less favorable to Borrower than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate, or make a payment under such transactions that is not otherwise permitted by this Section 7.08 to any Affiliate. In no event shall Borrower pledge to Lender hereunder any items of Collateral acquired by Borrower from an Affiliate of Borrower. 7.09. Foreclosure or Other Remediation by Borrower. Borrower may propose, and Lender will consider but shall be under no obligation to approve, strategies for the foreclosure or other realization upon the security for underlying loans held by Borrower relating to items of Collateral hereunder. 7.10. Limitation on Liens. 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, or otherwise specifically permitted in 42 writing by Lender under this Loan Agreement, and Borrower will defend the right, title and interest of Lender's in and to any of the Collateral against the claims and demands of all persons whomsoever. Borrower may request from time to time, subject to Lender's approval in Lender's sole determination, to sell participation interests in its interests in items of Collateral, the sale of which participation interests shall be arm's length transactions and subject to such terms and conditions as Lender in its sole discretion shall require. 7.11. Limitation on Distributions. After the occurrence and during the continuation of any Event of Default, Borrower shall not make any payment on account of, or set apart assets for, a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of any equity or partnership interest of Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Borrower. 7.12. Maintenance of Tangible Net Worth. Borrower shall not permit Tangible Net Worth (including convertible trust preferred stock) at any time to be less than the sum of (i) $125,000,000 plus (ii) an amount equal to 75% of the aggregate of positive net income (without deduction for quarterly losses). 7.13. Maintenance of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization to Interest and Preferred Dividends. Borrower shall not permit the ratio of (a) earnings before interest, taxes, depreciation and amortization (excluding dividends) to (b) the sum of (i) interest expense and (ii) preferred dividends (specifically excluding any convertible trust preferred dividends) to be less than 1.20:1. 7.14. Maintenance of Ratio of Total Indebtedness to Tangible Net Worth. Borrower shall not permit the ratio of Total Indebtedness to Tangible Net Worth at any time to be greater than 5:1. Lender may consider waiving the foregoing requirement under certain circumstances if requested by Borrower; however, Lender shall be under no obligation to do so. 7.15. Servicer; Servicing Tape. Borrower shall provide to Lender on the fifteenth calendar day of each month, or if such day is not a Business Day then on the first Business Day immediately following such day, a computer readable file containing servicing information, including without limitation those fields specified by Lender from time to time, on a loan-by-loan basis and in the aggregate, with respect to the Mortgage Loans, Mezzanine Loans and Equity Interests serviced hereunder by Borrower or any Servicer. Borrower shall not cause any Collateral to be serviced by any servicer other than a servicer expressly approved in writing by Lender. 7.16. Remittance of Prepayments. Borrower shall remit, with sufficient detail to enable Lender to appropriately identify the Loan, or Loans, to which any amount remitted applies, to Lender on each Business Day all principal prepayments that Borrower has received during the previous Business Day in an amount equal to the sum of the Asset-Specific Loan Balances being prepaid, together with all interest due thereon through the date of such remittance, any and all charges due with respect to such Loans and any and all costs and expenses incurred by Lender (as provided in this Loan Agreement) in connection with such 43 Loans and the prepayment thereof. 7.17. Reserved. 7.18. Maintenance of Cash. Borrower shall maintain (i) a minimum Cash balance of $5,000,000 plus (ii) an additional amount equal to $5,000,000 invested in Permitted Investments. Section 8. Events of Default. Each of the following events shall constitute an event of default (an "Event of Default") hereunder: (a) Borrower shall default in the payment of any principal of or interest on any Loan when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or (b) Borrower shall default in the payment of any principal of or interest on any MS Indebtedness when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or (c) Borrower shall default in the payment of any other amount payable by it hereunder or under any other Loan Document after notification by Lender of such default, and such default shall have continued unremedied for seven (7) Business Days; or (d) any representation, warranty or certification made or deemed made herein, or in any other Loan Document by Borrower or any certificate furnished to Lender pursuant to the provisions hereof or thereof shall prove to have been false or misleading in any material respect as of the time made or furnished (other than the representations and warranties set forth in Section 6 hereof which shall be considered solely for the purpose of Section 2.04(b) hereof; unless Borrower shall have made any such representations and warranties with knowledge that they were materially false or misleading at the time made); or (e) Borrower shall fail to comply with the requirements of Section 7.03(a), Section 7.04, Section 7.05, Section 7.06, or Sections 7.08 through 7.18 hereof; or Borrower shall otherwise fail to comply with the requirements of Section 7.03 hereof and such default shall continue unremedied for a period of ten (10) Business Days; or Borrower shall fail to observe or perform any other covenant or agreement contained in this Loan Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of ten (10) Business Days; or (f) a final judgment or judgments for the payment of money in excess of $5,000,000.00 in the aggregate shall be rendered against Borrower or any of its Subsidiaries by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be satisfied, discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within thirty (30) days from the date of entry thereof, and Borrower or any such Subsidiary shall not, within said period of thirty (30) 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; or (g) Borrower shall admit in writing its inability to pay its debts as such debts become due; or (h) Borrower or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator or the like of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the 44 Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (i) a proceeding or case shall be commenced, without the application or consent of Borrower or any of its Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of Borrower or any such Subsidiary or of all or any substantial part of its property, or (iii) similar relief in respect of Borrower or any such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of thirty (30) or more days; or an order for relief against Borrower or any such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (j) the Custodial Agreement or any Loan Document shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by Borrower; or (k) Borrower shall grant, or suffer to exist, any Lien on any Collateral except the Liens contemplated hereby; or the Liens contemplated hereby shall cease to be first priority perfected Liens on the Collateral in favor of Lender or shall be Liens in favor of any Person other than Lender; or (l) Borrower or any of Borrower's Affiliates shall be in default under any note, indenture, loan agreement, guaranty, swap agreement or any other contract to which it is a party (other than MS Indebtedness), which default (i) involves the failure to pay a matured obligation, or (ii) permits the acceleration of the maturity of obligations by any other party to or beneficiary of such note, indenture, loan agreement, guaranty, swap agreement or other contract, in any such case in which the amount of such obligation or obligations, in the aggregate, exceed $10,000,000.00; (m) any materially adverse change in the Property, business, financial condition or prospects of Borrower or any of its Subsidiaries shall occur, in each case as determined by Lender in its sole discretion, or any other condition shall exist which, in Lender's sole discretion, constitutes a material impairment of Borrower's ability to perform its obligations under this Loan Agreement, the Note or any other Loan Document; or (n) MS & Co.'s corporate bond rating has been lowered or downgraded to a rating below A- by S&P or A3 by Moody's and Borrower shall have failed to repay all amounts owing to Lender under this Agreement, the Note and the other Loan Documents within 90 days following such downgrade. Section 9. Remedies Upon Default. (a) Upon the occurrence of one or more Events of Default other than those referred to in Section 8(g) or (h), Lender may immediately declare the principal amount of the 45 Loans then outstanding under the Note to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Loan Agreement. Upon the occurrence of an Event of Default referred to in Sections 8(g) or (h), such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by Borrower. (b) Upon the occurrence of one or more Events of Default, Lender shall have the right to obtain physical possession of the Servicing Records and all other files of Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of Borrower or any third party acting for Borrower and Borrower shall deliver to Lender such assignments as Lender shall request. Lender shall be entitled to specific performance of all agreements of Borrower contained in this Loan Agreement. (c) Upon the occurrence of an Event of Default, without limiting any other rights or remedies of Lender, Lender shall have the right to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by or for account of Lender or Lender's Affiliates to any indebtedness at any time owing to Lender to the credit or for the account of Borrower against any and all of the Indebtedness of Borrower, irrespective of whether Lender shall have made any demand under this Loan Agreement, the Note, any other Security Document or any other document executed in connection with any other MS Indebtedness. Section 10. No Duty of Lender. The powers conferred on Lender hereunder are solely to protect Lender's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to Borrower for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct. Section 11. Miscellaneous. 11.01. Waiver. No failure on the part of Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02. Notices. Except as otherwise expressly permitted by this Loan Agreement, all notices, requests and other communications provided for herein and under the Custodial Agreement (including without limitation any modifications of, or waivers, requests or consents under, this Loan Agreement) shall be given or made in writing (including without limitation by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or thereof; or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Loan Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to 46 have been duly given when transmitted by telex or telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03. Indemnification and Expenses. (a) Borrower agrees to hold Lender, and its Affiliates and their officers, directors, employees, agents and advisors (each an "Indemnified Party") harmless from and indemnify any Indemnified Party against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by or asserted against such Indemnified Party (collectively, the "Costs") relating to or arising out of this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than any Indemnified Party's gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Borrower agrees to hold any Indemnified Party harmless from and indemnify such Indemnified Party against all Costs with respect to all Collateral Loans and Equity Interests relating to or arising out of any violation or alleged violation of any environmental law, rule or regulation or any consumer credit laws, including without limitation the Truth in Lending Act and/or the Real Estate Settlement Procedures Act, that, in each case, results from anything other than such Indemnified Party's gross negligence or willful misconduct. In any suit, proceeding or action brought by an Indemnified Party in connection with any Collateral for any sum owing thereunder, or to enforce any provisions of any Collateral Documents, Borrower will save, indemnify and hold such Indemnified Party harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by Borrower of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from Borrower. Borrower also agrees to reimburse an Indemnified Party as and when billed by such Indemnified Party for all such Indemnified Party's costs and expenses incurred in connection with the enforcement or the preservation of such Indemnified Party's rights under this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. Borrower hereby acknowledges that, notwithstanding the fact that the Note is secured by the Collateral, the obligation of Borrower under the Note is a recourse obligation of Borrower. (b) Borrower agrees to pay as and when billed by Lender all of the out-of-pocket costs and expenses incurred by Lender in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Loan Agreement, the Note, any other Loan Document or any other documents prepared in connection herewith or therewith. Borrower agrees to pay as and when billed by Lender all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including without limitation (i) all the reasonable fees, disbursements and expenses of counsel to Lender and (ii) all the due diligence, inspection, testing and review costs and expenses incurred by Lender with respect to Collateral under this Loan Agreement, including, but not limited to, those costs and expenses incurred by Lender pursuant to Sections 11.03(a), 11.14 and 11.15 hereof. 47 11.04. Amendments. Except as otherwise expressly provided in this Loan Agreement, any provision of this Loan Agreement may be modified or supplemented only by an instrument in writing signed by Borrower and Lender and any provision of this Loan Agreement may be waived by Lender. 11.05. Successors and Assigns. This Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06. Survival. The obligations of Borrower under Sections 3.03 and 11.03 hereof shall survive the repayment of the Loans and the termination of this Loan Agreement. In addition, each representation and warranty made or deemed to be made by a request for a borrowing, herein or pursuant hereto shall survive the making of such representation and warranty, and Lender shall not be deemed to have waived, by reason of making any Loan, any Default that may arise because any such representation or warranty shall have proved to be false or misleading, notwithstanding that Lender may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.07. Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement. 11.08. Counterparts. This Loan Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. 11.09. Loan Agreement Constitutes Security Agreement; Governing Law. This Loan Agreement shall be governed by New York law without reference to choice of law doctrine, and shall constitute a security agreement within the meaning of the Uniform Commercial Code. 11.10. SUBMISSION TO JURISDICTION; WAIVERS. BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; 48 (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH LENDER SHALL HAVE BEEN NOTIFIED; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 11.11. WAIVER OF JURY TRIAL. EACH OF BORROWER AND LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 11.12. Acknowledgments. Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Loan Agreement, the Note and the other Loan Documents; (b) Lender has no fiduciary relationship to Borrower, and the relationship between Borrower and Lender is solely that of debtor and creditor; and (c) no joint venture exists between Lender and Borrower. 11.13. Hypothecation or Pledge of Loans. Lender shall have free and unrestricted use of all Collateral and nothing in this Loan Agreement shall preclude Lender from engaging in repurchase transactions with the Collateral or otherwise pledging, repledging, transferring, hypothecating, or rehypothecating the Collateral or pledging or otherwise transferring its rights to payment hereunder in respect of any Loan made hereunder; provided, that no action by Lender referred to in this sentence shall confer on any Person other than Lender any right against Borrower to require any prepayment under Section 2.04 hereof or any right to enforce against Borrower any other provision of this Loan Agreement, but may grant to any Person the right to require Lender to enforce any such provisions. Nothing contained in this Loan Agreement shall obligate Lender to segregate any Collateral delivered to Lender by Borrower. 11.14. Servicing. (a) Borrower covenants to maintain or cause the servicing of the Collateral to be maintained with respect to each type of Collateral pledged to Lender hereunder in conformity with accepted and prudent servicing practices in the industry for such same type of Collateral and in a manner at least equal in quality to the servicing Borrower provides for assets similar to such Collateral which it owns. In the event that the preceding language is interpreted as constituting one or more servicing contracts, each such servicing contract shall terminate automatically upon the earliest of (i) an Event of Default, (ii) the date on which all the Secured Obligations have been paid in full or (iii) the transfer of servicing approved by Borrower and 49 Lender, which Lender's consent shall not be unreasonably withheld. Midland Loan Services, L.P. shall be the initial servicer. (b) If the Collateral, or any portion thereof, is serviced by Borrower, (i) Borrower agrees that Lender is the collateral assignee of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of such Collateral (the "Servicing Records"), and (ii) Borrower grants Lender a security interest in all servicing fees and rights relating to such Collateral and all Servicing Records to secure the obligation of Borrower or its designee to service in conformity with this Section and any other obligation of Borrower to Lender. Borrower covenants to safeguard such Servicing Records and to deliver them promptly to Lender or its designee (including Custodian) at Lender's request. (c) If the Collateral, or any portion thereof, is serviced by a third party servicer (such third party servicer, the "Servicer"), Borrower (i) shall provide a copy of the servicing agreement to Lender, which shall be in form and substance acceptable to Lender (the "Servicing Agreement"); and (ii) hereby irrevocably assigns to Lender and Lender's successors and assigns all right, title, interest of Borrower in, to and under, and the benefits of, any Servicing Agreement with respect to such Collateral. Any successor to the Servicer shall be approved in writing by Lender prior to such successor's assumption of servicing obligations with respect to such Collateral. The Travelers Real Estate Investment Group ("Travelers") is hereby approved as a Servicer, subject to (x) there having occurred no materially adverse change in Travelers' ability to perform as Servicer prior to the date of Lender's approval hereunder of any servicing agreement between Borrower and Travelers and (y) the satisfaction by Borrower of clause (i) hereof and the delivery by Borrower to Lender of such additional documentation as Lender may require to further evidence the security interest granted to Lender by Borrower in Borrower's interest in any servicing agreement entered into between Borrower and Travelers. (d) Borrower shall provide to Lender a letter from Borrower (if Borrower is the Servicer) or the Servicer, as the case may be, to the effect that upon the occurrence of an Event of Default, Lender may terminate any Servicing Agreement and transfer servicing to its designee, at no cost or expense to Lender, it being agreed that Borrower will pay any and all fees required to terminate the Servicing Agreement and to effectuate the transfer of servicing to the designee of Lender. (e) After the Funding Date, until the pledge of any Collateral is relinquished by Custodian, Borrower will have no right to modify or alter the terms of any of the documents pertaining to such Collateral and Borrower will have no obligation or right to repossess such Collateral or substitute other Collateral, except as provided in the Custodial Agreement; provided, however, that so long as no Default or Event of Default has occurred and is continuing, Borrower may enter into such modifications of the terms of such documents as do not, as to any individual item of Collateral, (i) result in a negative monetary effect or (ii) constitute a material adverse effect. (f) In the event Borrower or its Affiliate is servicing any Collateral, Borrower shall permit Lender to inspect Borrower's or its Affiliate's servicing facilities, as the case may be, for the purpose of satisfying Lender that Borrower or its Affiliate, as the case may be, has the ability to service such Collateral as provided in this Loan Agreement. 50 (g) Borrower shall cause the Servicer to provide a copy of each report and notice sent to Borrower to be sent to Lender concurrently therewith. 11.15. Periodic Due Diligence Review. Borrower acknowledges that Lender has the right to perform continuing due diligence reviews with respect to the Collateral, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or determining and re-determining the Borrowing Base under Section 2.04(a) hereof, or otherwise, and Borrower agrees that Lender, at its option, has the right at any time to conduct a partial or complete due diligence review on any or all of the Collateral securing the Loans, including, without limitation, ordering new credit reports and Appraisals on the applicable Collateral and otherwise regenerating the information used to originate such Eligible Collateral. Upon reasonable (but no less than one (1) Business Day) prior notice to Borrower, Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Collateral Files and any and all documents, records, agreements, instruments or information relating to such Collateral in the possession or under the control of Borrower and/or Custodian. Borrower also shall make available to Lender a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Collateral Files and the Collateral. Borrower agrees to cooperate with Lender and any third party underwriter designated by Lender in connection with such underwriting, including, but not limited to, providing Lender and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Collateral in the possession, or under the control, of Borrower. Borrower further agrees that Borrower shall reimburse Lender for any and all out-of-pocket costs and expenses incurred by Lender in connection with Lender's activities pursuant to this Section 11.15. 11.16. Intent. The parties recognize that each Loan is a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. 11.17. Change of Borrower's State of Formation. If Borrower shall change the State under whose laws Borrower shall be organized, Borrower shall promptly provide Lender with a copy of its new Declaration of Trust, Articles of Incorporation or similar document, certified by the Secretary of State or other appropriate official of Borrower's new State of formation, if applicable, together with such opinions of counsel regarding such change as Lender, in its sole discretion, shall require. 11.18. Trustee Exculpation. The parties agree that except for fraudulent acts, willful misrepresentation or gross negligence, no trustee of Borrower shall have personal liability hereunder to Lender and any obligation of Borrower hereunder to Lender shall be satisfied solely from the assets of Borrower. 11.19. Set-Off. In addition to any rights and remedies of Lender provided by this Loan Agreement and by law, Lender shall have the right, without prior notice to Borrower, any such notice being expressly waived by Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by Lender or any Affiliate thereof to or for the credit or the account of Borrower. Lender agrees promptly to 51 notify Borrower after any such set-off and application made by Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application." 52 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. BORROWER CAPITAL TRUST, INC. By: /s/ Edward L. Shugrue, III --------------------------------------- Name: Edward L. Shugrue, III Title: Chief Financial Officer Address for Notices: 410 Park Avenue, 14th Floor New York, New York 10022 Attention: Edward L. Shugrue, III Chief Financial Officer Telecopier No.: (212) 655-0044 Telephone No.: (212) 655-0220 With a copy to: Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Attention: John A. Cahill, Esq. Telecopier No.: (212) 319-4090 Telephone No.: (212) 318-6260 LENDER MORGAN STANLEY & CO. INTERNATIONAL LIMITED By:/s/ Edward A. McAleer --------------------------------------- Name: Edward A. McAleer Title: Executive Director Address for Notices: 1585 Broadway New York, New York 10036 Attention: Mr. Marc Flamino, Whole Loan Operations Mortgage-Backed Securities Department, Fixed-Income Division Telecopier No.: 212-761-0093 Telephone No.: 212-761-4243 With a copy to: Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166-0153 Attention: Frederick B. Utley, III, Esq. Telecopier No.: (212) 878-8375 Telephone No.: (212) 878-8356 53 SCHEDULE 1 FILING JURISDICTIONS AND OFFICES [TO BE PROVIDED BY COUNSEL TO BORROWER] 54 SCHEDULE 2 APPROVED APPRAISERS 1. KTR Appraisal Services 2. Cushman & Wakefield, Inc. 3. Landauer Real Estate Counselors 4. CB Commercial 5. The Weitzman Group 6. Greenwich Group 7. Arthur Anderson 8. Joseph Blake 55 SCHEDULE 3 APPROVED ENGINEERS 1. EMG 2. KTR Realty Services 3. Merritt & Harris, Inc. 4. C.A. Rich, Inc. 5. IVI 6. Dames & Moore 7. Law 8. Echland 9. EM&CA 10. Acqua Terra 11. ATC (BCM Engineers) 12. Horn Chandler & Thomas 56 SCHEDULE 4 APPROVED ENVIRONMENTAL CONSULTANTS 1. Acqua Terra 2. Law Environmental 3. KTR Realty Services 4. EMG 5. Clayton 6 Dames & Moore 7 Brown & Root 8. C.A. Rich, Inc. 9. Echland 10. EM&CA 11. ATC (BCM Engineers) 12. Front Royal 57 EXHIBIT A [FORM OF AMENDED AND RESTATED PROMISSORY NOTE] $300,000,000.00 as of June 8, 1998 New York, New York AMENDED AND RESTATED PROMISSORY NOTE dated as of June 8, 1998 (this "Amended and Restated Promissory Note") made by CAPITAL TRUST, INC., a Maryland corporation ("Borrower"), to MORGAN STANLEY & CO. INTERNATIONAL LIMITED ("Lender") in substitution for, and replacement of, the promissory note dated as of June 30, 1998 (the "Original Note") made by Capital Trust, a California business trust (a predecessor-in-interest of Borrower, hereinafter "Predecessor Borrower") to Lender pursuant to that certain CMBS Loan Agreement dated as of June 30, 1998 (the "Original Loan Agreement") between Predecessor Borrower and Lender. PRELIMINARY STATEMENT Borrower has advised Lender that (i) Predecessor Borrower has entered into, and merged with and into, Captrust Limited Partnership, a Maryland limited partnership, (ii) Captrust Limited Partnership has survived such merger and subsequently has merged with and into Borrower, and (iii) Borrower has survived such subsequent merger with Captrust Limited Partnership. In order to provide for (a) the assumption by Borrower of the obligations of Predecessor Borrower and to further amend the Original Loan Agreement, Borrower and Lender have entered into First Amendment to CMBS Loan Agreement dated as of June 30, 1999 ("Amendment No. 1"), which Amendment No. 1 provides, among other things, for the ratification, confirmation and assumption by Borrower of all liabilities of the borrower under the Original Loan Agreement, as amended thereby, the Note and the other Loan Documents (as such capitalized terms are defined in such Amendment No. 1), (b) the further amendment of the Original Loan and Security Agreement (as amended by Amendment No. 1) Borrower and Lender have entered into that certain Second Amendment to CMBS Loan Agreement dated as of June 30, 1999 ("Amendment No. 2"), (c) the further amendment of the Original Loan and Security Agreement (as amended by Amendment No. 1 and Amendment No. 2) Borrower and Lender have entered into that certain Third Amendment to CMBS Loan Agreement dated as of June 30, 2000 ("Amendment No. 3") and (d) the amendment and restatement in its entirety of the Original Loan and Security Agreement (as amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3) Borrower and Lender have entered into that certain Amended and Restated Master Loan and Security Agreement dated as of February 8, 2001 which amends and restates in its entirety the Original Loan and Security Agreement, as thereafter amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3 (as further amended, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement"). In connection therewith, Borrower has agreed to enter into this Amended and Restated Promissory Note in substitution for, and replacement of, the Original Note. NOW THEREFORE, FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of Lender, at the principal office of Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the United States, and in immediately available funds, the principal sum of THREE HUNDRED MILLION DOLLARS ($300,000,000.00) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by Lender to Borrower under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such A-1 office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Loan made by Lender to Borrower, and each payment made on account of the principal thereof, shall be recorded by Lender on its books and, prior to any transfer of this Amended and Restated Promissory Note, endorsed by Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of Lender to make any such recordation or endorsement shall not affect the obligations of Borrower to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Loans made by Lender. This Amended and Restated Promissory Note is the Note referred to in the Loan Agreement and evidences Loans made by Lender thereunder. Terms used but not defined in this Amended and Restated Promissory Note have the respective meanings assigned to them in the Loan Agreement. This Amended and Restated Promissory Note amends and restates in its entirety the Original Note and is given as a continuation and extension, and not a novation, release or satisfaction, of the Original Note. The issuance and delivery of this Amended and Restated Promissory Note does not create or evidence any principal indebtedness other than the principal indebtedness evidenced by the Original Note. Borrower hereby acknowledges and agrees that simultaneously with Borrower's execution and delivery of this Amended and Restated Promissory Note to Lender, Lender has delivered to Borrower the Original Note. Borrower hereby (i) ratifies, confirms and assumes all of the obligations of Predecessor Borrower under, and adopts and agrees to be bound by, all of the terms covenants and conditions of, the Original Note, as amended and restated hereby, and the other Loan Documents with the same force and effect as if Borrower had been the party executing such agreements as the "Borrower" thereunder and (ii) represents, warrants and covenants that, as of the date hereof, (a) Borrower has no cause of action at law or in equity against Lender (including, without limitation, any offset, defense, deduction or counterclaim) with respect to any of such obligations and (b) the principal amount due and owing under this Amended and Restated Promissory Note is $29,750,000. Borrower agrees to pay all Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Amended and Restated Promissory Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, Borrower hereby acknowledges, admits and agrees that Borrower's obligations under this Amended and Restated Promissory Note are recourse obligations of Borrower to which Borrower pledges its full faith and credit. Borrower, and any endorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Amended and Restated Promissory Note, (b) expressly agree that this Amended and Restated Promissory Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Amended and Restated Promissory Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that it will not be necessary for Lender, in order to enforce payment of this Amended and Restated Promissory Note, to first institute or exhaust Lender's remedies against Borrower or any other party liable hereon or against any Collateral for this Amended and Restated Promissory A-2 Note. No extension of time for the payment of this Amended and Restated Promissory Note, or any installment hereof, made by agreement by Lender with any person now or hereafter liable for the payment of this Amended and Restated Promissory Note, shall affect the liability under this Amended and Restated Promissory Note of Borrower, even if Borrower is not a party to such agreement; provided, however, that Lender and Borrower, by written agreement between them, may affect the liability of Borrower. Any reference herein to Lender shall be deemed to include and apply to every subsequent holder of this Amended and Restated Promissory Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Amended and Restated Promissory Note. This Amended and Restated Promissory Note shall be governed by and construed under the laws of the State of New York (without reference to choice of law doctrine) whose laws Borrower expressly elects to apply to this Amended and Restated Promissory Note. Borrower agrees that any action or proceeding brought to enforce or arising out of this Amended and Restated Promissory Note may be commenced in the Supreme Court of the State of New York, Borough of Manhattan, or in the District Court of the United States for the Southern District of New York. CAPITAL TRUST, INC., a Maryland corporation By: --------------------------------- Name: Edward L. Shugrue, III Title: Chief Financial Officer A-3 SCHEDULE OF LOANS This Amended and Restated Promissory Note evidences Loans made under the within-described Loan Agreement to Borrower, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below.
- --------------------------------------------------------------------------------------------------------- Name of Date Made Principal Interest Amount Paid Unpaid Cumulative Notation Collateral Amount of Rate or Prepaid Principal Total Unpaid Made by Loan Amount Principal Amount - --------------------------------------------------------------------------------------------------------- Lazard 2/08/01 $29,750,000 Libor + 263 * $29,750,000 $29,750,000 CBM
*The respective amounts shown in the columns entitled "Principal Amount of Loan" and "Cumulative Total Unpaid Principal Amount" reflect the respective net unpaid principal amounts inclusive of all advances and repayments to, and including, the date hereof in respect of the indicated collateral. EXHIBIT B [FORM OF CUSTODIAL AGREEMENT] [STORED AS A SEPARATE DOCUMENT] B-1 EXHIBIT C [FORM OF OPINION OF COUNSEL OF BORROWER] The opinions of counsel, or counsels, to Borrower shall be substantially in the forms of the opinions attached hereto submitted by Borrower to Morgan Stanley Dean Witter Mortgage Capital Inc., in connection with the Fisher Brothers/FGSB transaction and otherwise acceptable to Lender; provided, however, that the attached opinion from Altheimer & Gray is intended to serve as an example of the opinion to be delivered in connection with collateral (such as a note or similar instrument) with respect to which perfection of a security interest granted therein is achieved through possession, it being understood that in the case of collateral with respect to which perfection of a security interest is achieved through other means, the perfection opinion shall vary. C-1 EXHIBIT D [FORM OF REQUEST FOR BORROWING] Amended and Restated CMBS Loan Agreement, dated as of February __, 2001 (the "Loan and Security Agreement"), by and between Borrower and Morgan Stanley & Co. International Limited (the "Lender"), Lender: Morgan Stanley & Co. International Limited Borrower: [NAME OF BORROWER] Requested Fund Date: -------------------------------------- Transmission Date: -------------------------------------- Transmission Time: -------------------------------------- [Type of Funding: --------------------------------------] (Wet or Dry) [Type of Loan requested: Committed or Uncommitted --------------------------------------] Number of Mortgage Loans to be Pledged: -------------------------------------- Unpaid Principal Balance: $ -------------------------------------- Requested Wire Amount: $ -------------------------------------- Wire Instructions: Requested by: [NAME OF BORROWER] By: ___________________________ Name: Title: D-1 EXHIBIT E [FORM OF LENDER'S RELEASE LETTER] (Date) Morgan Stanley & Co. International Limited 1585 Broadway New York, New York 10036 Attention: ----------------------------- Facsimile: ----------------------------- Re: Certain Collateral Identified on Schedule A hereto and owned by [BORROWER] The undersigned hereby releases all right, interest, lien or claim of any kind with respect to the Collateral described in the attached Schedule A, such release to be effective automatically without any further action by any party upon payment in one or more installments, in immediately available finds of $_____, in accordance with the following wire instructions: - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Very truly yours, [LENDER] By: -------------------------------- Name: Title: E-1 EXHIBIT F [FORM OF BAILEE AGREEMENT] F-1 TABLE OF CONTENTS Page Section 1. Definitions and Accounting Matters............................2 1.01. "Certain Defined Terms\.......................................2 1.02. Accounting Terms and Determinations..........................16 Section 2. Loans, Note and Prepayments..................................16 2.01. Loans........................................................16 2.02. Notes........................................................17 2.03. Procedures for Borrowing.....................................17 2.04. Mandatory Prepayments or Pledge..............................21 Section 3. Payments; Computations; Etc..................................22 3.01. Repayment of Loans; Interest.................................22 3.02. Payments.....................................................23 3.03. Computations.................................................24 3.04. U.S. Taxes...................................................25 3.05. Booking of Loans.............................................25 3.06. Lender's Funding of Eurodollar Rate Loans....................25 3.07. Funding Costs................................................26 3.08. Compensation for Increased Costs.............................27 3.09. Limitation on Types of Loans; Illegality.....................27 Section 4. Collateral Security..........................................28 4.01. Collateral; Security Interest................................28 4.02. Further Assurances...........................................29 4.03. Changes in Locations, Name, etc..............................29 4.04. Lender's Appointment as Attorney-in-Fact.....................29 4.05. Performance by Lender of Borrower's Obligations..............30 4.06. Proceeds.....................................................31 4.07. Remedies.....................................................31 4.08. Limitation on Duties Regarding Preservation of Collateral....32 4.09. Powers Coupled with an Interest..............................32 4.10. Release of Security Interest.................................32 4.11. Release of Collateral........................................32 4.12. Substitution of Eligible Collateral..........................33 Section 5. Conditions Precedent.........................................33 5.01. Initial Loan.................................................33 5.02. Initial and Subsequent Loans.................................34 5.03. Additional Requirements......................................36 i TABLE OF CONTENTS (continued) Page Section 6. Representations and Warranties................................36 6.01. Existence.....................................................36 6.02. Action........................................................36 6.03. Financial Condition...........................................37 6.04. Litigation....................................................37 6.05. No Breach.....................................................37 6.06. Approvals.....................................................38 6.07. Use of Proceeds; Margin Regulations...........................38 6.08. Taxes.........................................................38 6.09. Investment Company Act........................................38 6.10. Collateral; Collateral Security...............................38 6.11. Chief Executive Office........................................39 6.12. Location of Books and Records.................................39 6.13. True and Complete Disclosure..................................39 6.14. Tangible Net Worth............................................39 6.15. ERISA.........................................................39 6.16. Lazard Collateral.............................................39 Section 7. Covenants of Borrower.........................................40 7.01. Financial Statements, Reports, etc............................40 7.02. Litigation....................................................40 7.03. Existence, etc................................................40 7.04. Prohibition of Fundamental Changes............................41 7.05. Borrowing Base Deficiency.....................................41 7.06. Notices.......................................................41 7.07. Reports.......................................................42 7.08. Transactions with Affiliates..................................42 7.09. Foreclosure or Other Remediation by Borrower..................42 7.10. Limitation on Liens...........................................43 7.11. Limitation on Distributions...................................43 7.12. Maintenance of Tangible Net Worth.............................43 7.13. Maintenance of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization to Interest and Preferred Dividends.....................................................43 7.14. Maintenance of Ratio of Total Indebtedness to Tangible Net Worth.........................................................43 7.15. Servicer; Servicing Tape......................................43 7.16. Remittance of Prepayments.....................................43 ii TABLE OF CONTENTS (continued) Page 7.17. Reserved......................................................44 7.18. Maintenance of Cash...........................................44 Section 8. Events of Default.............................................44 Section 9. Remedies Upon Default.........................................45 Section 10. No Duty of Lender.............................................46 Section 11. Miscellaneous.................................................46 11.01. Waiver........................................................46 11.02. Notices.......................................................46 11.03. Indemnification and Expenses..................................47 11.04. Amendments....................................................48 11.05. Successors and Assigns........................................48 11.06. Survival......................................................48 11.07. Captions......................................................48 11.08. Counterparts..................................................48 11.09. Loan Agreement Constitutes Security Agreement; Governing Law..48 11.10. SUBMISSION TO JURISDICTION; WAIVERS...........................48 11.11. WAIVER OF JURY TRIAL..........................................49 11.12. Acknowledgments...............................................49 11.13. Hypothecation or Pledge of Loans..............................49 11.14. Servicing.....................................................49 11.15. Periodic Due Diligence Review.................................51 11.16. Intent........................................................51 11.17. Change of Borrower's State of Formation.......................51 11.18. Trustee Exculpation...........................................51 11.19. Set-Off.......................................................51 iii SCHEDULES SCHEDULE 1 Filing Jurisdictions and Offices SCHEDULE 2 Approved Appraisers SCHEDULE 3 Approved Engineers SCHEDULE 4 Approved Environmental Consultants EXHIBITS EXHIBIT A Form of Promissory Note EXHIBIT B Form of Custodial Agreement EXHIBIT C Form of Opinion of Counsel to Borrower EXHIBIT D Form of Request for Borrowing EXHIBIT E Form of Lender's Release Letter EXHIBIT F Form of Bailee Agreement EX-10.16 8 0008.txt EDELMAN CONSULTING AGREEMENT Exhibit 10.16 CONSULTING AGREEMENT (the "Agreement"), dated as of January 1, 1998, among Capital Trust, a California business trust (the "Company"), and Martin L. Edelman (the "Consultant"). Preliminary Statement The Company wishes to engage the services of the Consultant as a consultant and the Consultant wishes to serve the Company as a consultant, on the terms set forth below. Accordingly, the parties hereto agree as follows. 1. Engagement of the Consultant. (a) The Company hereby agrees to engage the Consultant, and the Consultant hereby agrees to serve, as a consultant to the Company on the terms and conditions set forth herein during the period commencing on the date hereof and ending on December 31, 1998. This Agreement, unless otherwise terminated by either party, shall be automatically extended for an additional one-year term commencing on January 1, 1999 and ending on December 31, 1999. (b) This Agreement may be terminated by either party for any reason upon 30 consecutive days notice to the other party. This Agreement shall automatically terminate in the event of the death of the Consultant. 2. Duties of the Consultant. The Consultant will provide such consulting services as the Company requests, including client development and advisory services in connection with the Company's lending and investment banking activities and asset and business acquisition transactions. 3. Time commitment of the Consultant. The Consultant will make his services available to the Company when and as reasonably requested by the Company, subject to: a. receipt by the Consultant of reasonable advance notice from the Company of the need for the Consultant's services, and b. Consultant's bona fide prior commitments. 4. Compensation. The Consultant shall receive a consulting fee of $8,000 per month for his services during the term of this Agreement, payable on a monthly basis. 5. Participation in the Company's Incentive Share Plan. The Consultant shall be entitled to participate in the Company's Long-Term Incentive Share Plan on such basis as may be determined by the Compensation Committee of the board of trustees of the Company. In addition, upon execution of this Agreement, the Company shall grant the Consultant 50,000 options to purchase class A common shares of beneficial interest, $1.00 par value, in the Company, pursuant to the terms of the Company's Long-Term Incentive Share Plan. 6. No trustee liability. The Consultant agrees that the trustees of the Company shall have no personal liability to the Consultant under this Agreement and that any obligation of the Company hereunder shall be satisfied solely from the assets of the Company. 7. Independent Contractor. The parties agree that Consultant is an independent contractor and that any persons whom Consultant may employ to assist Consultant shall be deemed to be Consultant's employees in all respects. Consultant agrees that Consultant is not an employee of the Company and shall not be entitled to any benefits afforded by the Company to its employees or employees of its affiliates by reason of the services performed under this Agreement, other than as provided in section 5 with respect to the Company's Long-Term Incentive Share Plan. The Company will not deduct from the consulting fees paid under this Agreement any taxes, payments for unemployment compensation, social security or other expenses unless required to do so by law and Consultant will be responsible for payment of all such taxes and expenses. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed in writing, and is signed by the Consultant and the Company. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York, without regard to its principles of conflict of laws. This Agreement is for the personal services of Consultant. Consultant's rights and obligations hereunder may not be assigned by Consultant without the prior written consent of the Company. 9. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 2 10. Headings. The headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. CAPITAL TRUST By: /s/ John R. Klopp --------------------------------- Name: John R. Klopp Title: Vice Chairman THE CONSULTANT By:/s/ Martin L. Edelman --------------------------------- Martin L. Edelman 3 EX-21.1 9 0009.txt SUBSIDIARIES OF CAPITAL TRUST, INC. [TABLE] [CAPTION] Exhibit 21.1 JURISDICTION OF D/B/A ENTITY INCORPORATION JURISDICTION Victor Capital Group, L.P. Delaware Vic, Inc. Delaware Vic NY VCG Montreal Management, Inc. New York IPJ Funding Corp Delaware CT Convertible Trust I Delaware CT-BB Funding Corp. Delaware CT-F1, LLC Delaware CT-F2-GP, LLC Delaware CT-F2-LP, LLC Delaware CT Investment Management Co., LLC Delaware CT Mezzanine Partners I LLC Delaware CT MP II LLC Delaware CT Mezzanine Partners II LP Delaware EX-23.1 10 0010.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-39743 and No. 333-72725) pertaining to the Amended and Restated 1997 Long Term Incentive Stock Plan, and Amended and Restated 1997 Non-Employee Director Stock Plan of Capital Trust, Inc. of our report dated February 9, 2001, with respect to the consolidated financial statements and schedules of Capital Trust, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP New York, New York April 2, 2001 -----END PRIVACY-ENHANCED MESSAGE-----