-----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, MKP6BTs4xg1Q/WlDnVuiC7ISU9O5gLWFUkAMMwidgZviboN9B7wr81NFD+OnWDF4 xSWz1mpmsBfwFmzU5LED4g== 0001116679-06-002505.txt : 20061030 0001116679-06-002505.hdr.sgml : 20061030 20061030163912 ACCESSION NUMBER: 0001116679-06-002505 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061030 DATE AS OF CHANGE: 20061030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14788 FILM NUMBER: 061172495 BUSINESS ADDRESS: STREET 1: 410 PARK AVENUE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: PAUL, HASTINGS, JANOFSKY & WALKER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 cap10q.txt SEPTEMBER 30, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2006 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 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 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of outstanding shares of the registrant's class A common stock, par value $0.01 per share, as of October 30, 2006 was 15,397,525. CAPITAL TRUST, INC. INDEX Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - September 30, 2006 (unaudited) and December 31, 2005 (audited) 1 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2006 and 2005 (unaudited) 2 Consolidated Statements of Changes in Shareholders' Equity - Nine Months Ended September 30, 2006 and 2005 (unaudited) 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2006 and 2005 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3: Quantitative and Qualitative Disclosures about Market Risk 29 Item 4: Controls and Procedures 30 Part II. Other Information Item 1: Legal Proceedings 31 Item 1A: Risk Factors 31 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 32 Item 3: Defaults Upon Senior Securities 32 Item 4: Submission of Matters to a Vote of Security Holders 32 Item 5: Other Information 32 Item 6: Exhibits 33 Signatures 34
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2006 and December 31, 2005 (in thousands)
September 30, December 31, 2006 2005 -------------------- -------------------- (unaudited) (audited) Assets Cash and cash equivalents $ 26,720 $ 24,974 Restricted cash 8,210 1,264 Commercial mortgage-backed securities 845,452 487,970 Loans receivable 1,334,014 990,142 Total return swaps 3,000 4,000 Equity investment in unconsolidated subsidiaries 11,185 14,301 Deposits and other receivables 6,664 5,679 Accrued interest receivable 10,431 9,437 Interest rate hedge assets 959 2,273 Deferred income taxes 5,630 3,979 Prepaid and other assets 17,400 13,511 -------------------- -------------------- Total assets $ 2,269,665 $ 1,557,530 ==================== ==================== Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued expenses $ 23,474 $ 24,957 Repurchase obligations 351,433 369,751 Collateralized debt obligations ("CDOs") 1,241,949 823,744 Junior subordinated debentures 51,550 -- Participations sold 248,137 -- Deferred origination fees and other revenue 5,529 228 -------------------- -------------------- Total liabilities 1,922,072 1,218,680 -------------------- -------------------- Commitments and contingencies Shareholders' equity: Class A common stock, $0.01 par value, 100,000 shares authorized, 14,912 and 14,870 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively ("class A common stock") 149 149 Restricted class A common stock, $0.01 par value 485 and 404 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively ("restricted class A common stock" and together with class A common stock, 5 4 "common stock") Additional paid-in capital 329,564 326,299 Accumulated other comprehensive gain 13,246 14,879 Retained earnings/(deficit) 4,629 (2,481) -------------------- -------------------- Total shareholders' equity 347,593 338,850 -------------------- -------------------- Total liabilities and shareholders' equity $ 2,269,665 $ 1,557,530 ==================== ====================
See accompanying notes to unaudited consolidated financial statements. - 1 - Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three and Nine Months Ended September 30, 2006 and 2005 (in thousands, except share and per share data) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ 2006 2005 2006 2005 ----------------- ----------------- ----------------- ----------------- Income from loans and other investments: Interest and related income $ 46,011 $ 22,751 $ 123,862 $ 57,359 Less: Interest and related expenses 28,838 10,325 72,374 23,709 ----------------- ----------------- ----------------- ----------------- Income from loans and other investments, net 17,173 12,426 51,488 33,650 ----------------- ----------------- ----------------- ----------------- Other revenues: Management and advisory fees 748 1,517 2,196 12,144 Income/(loss) from equity investments 328 467 1,050 (835) Other interest income 440 137 790 374 ----------------- ----------------- ----------------- ----------------- Total other revenues 1,516 2,121 4,036 11,683 ----------------- ----------------- ----------------- ----------------- Other expenses: General and administrative 5,879 5,316 16,706 16,384 Depreciation and amortization 357 278 2,696 837 ----------------- ----------------- ----------------- ----------------- Total other expenses 6,236 5,594 19,402 17,221 ----------------- ----------------- ----------------- ----------------- Income before income taxes 12,453 8,953 36,122 28,112 (Benefit)/provision for income taxes (984) (846) (2,455) 315 ----------------- ----------------- ----------------- ----------------- Net income allocable to common stock $ 13,437 $ 9,799 $ 38,577 $ 27,797 ================= ================= ================= ================= Per share information: Net earnings per share of common stock: Basic $ 0.88 $ 0.65 $ 2.52 $ 1.84 ================= ================= ================= ================= Diluted $ 0.86 $ 0.64 $ 2.48 $ 1.81 ================= ================= ================= ================= Weighted average shares of common stock outstanding: Basic 15,337,325 15,125,443 15,327,855 15,110,227 ================= ================= ================= ================= Diluted 15,585,880 15,358,943 15,542,306 15,339,533 ================= ================= ================= ================= Dividends declared per share of common stock $ 0.75 $ 0.55 $ 2.05 $ 1.65 ================= ================= ================= =================
See accompanying notes to unaudited consolidated financial statements. - 2 - Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Nine Months Ended September 30, 2006 and 2005 (in thousands) (unaudited)
Restricted Accumulated Class A Class A Additional Other Retained Comprehensive Common Common Paid-In Comprehensive Earnings Income/(Loss) Stock Stock Capital Income/(Loss) (Deficit) Total ------------- -------------------------------------------------------------------------- Balance at January 1, 2005 $ 148 $ 3 $ 321,937 $ 3,815 $ (9,406) $ 316,497 Net income $ 27,797 -- -- -- -- 27,797 27,797 Unrealized loss on derivative financial instruments 876 -- -- -- 876 -- 876 Unrealized gain on available-for-sale securities 8,393 -- -- -- 8,393 -- 8,393 Sale of shares of class A common stock under stock option agreements -- -- -- 1,121 -- -- 1,121 Deferred gain on settlement of swap, net of amortization -- -- -- -- 1,011 -- 1,011 Restricted class A common stock earned -- -- -- 1,936 -- -- 1,936 Restricted class A common stock forfeited upon resignation by holder -- -- -- (57) -- -- (57) Dividends declared on class A common stock -- -- -- -- -- (24,967) (24,967) ------------- -------------------------------------------------------------------------- Balance at September 30, 2005 $ 37,066 $ 148 $ 3 $ 324,937 $ 14,095 $ (6,576) $ 332,607 ============= ========================================================================== Balance at January 1, 2006 $ 149 $ 4 $ 326,299 $ 14,879 $ (2,481) $ 338,850 Net income $ 38,577 -- -- -- -- 38,577 38,577 Unrealized loss on derivative financial instruments (1,315) -- -- -- (1,315) -- (1,315) Unrealized loss on available for sale security (96) -- -- -- (96) (96) Amortization of unrealized gain on securities (1,226) -- -- -- (1,226) -- (1,226) Currency translation adjustments 1 -- -- -- 1 -- 1 Sale of shares of class A common stock under stock option agreements -- -- -- 368 -- -- 368 Deferred gain on settlement of swap, net of amortization -- -- -- -- 1,003 -- 1,003 Reimbursement of offering expenses -- -- -- 124 -- -- 124 Restricted class A common stock earned -- -- -- 2,818 -- -- 2,818 Restricted class A common stock forfeited upon resignation by holder -- -- -- (45) -- -- (45) Issuance of restricted stock -- -- 1 -- -- -- 1 Dividends declared on class A common stock -- -- -- -- -- (31,467) (31,467) ------------- -------------------------------------------------------------------------- Balance at September 30, 2006 $ 35,941 $ 149 $ 5 $ 329,564 $ 13,246 $ 4,629 $ 347,593 ============= ==========================================================================
See accompanying notes to unaudited consolidated financial statements. -3- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Nine months ended September 30, 2006 and 2005 (in thousands) (unaudited)
2006 2005 ---------------- ----------------- Cash flows from operating activities: Net income $ 38,577 $ 27,797 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,696 837 (Income)/loss from equity investments (1,050) 835 Distributions from equity investments 1,009 -- Restricted class A common stock earned 2,818 -- Amortization of premiums and accretion of discounts on loans and investments, net (1,131) (2,158) Amortization of deferred gains on interest rate hedges (182) -- Stock based compensation (45) 1,899 Changes in assets and liabilities, net: Deposits and other receivables 5,237 279 Accrued interest receivable (994) (3,954) Deferred income taxes (1,651) 1,889 Prepaid and other assets 2,261 886 Accounts payable and accrued expenses (814) (354) Deferred origination fees and other revenue 5,301 (97) ---------------- ----------------- Net cash provided by operating activities 52,032 27,859 ---------------- ----------------- Cash flows from investing activities: Purchases of commercial mortgage-backed securities (384,732) (205,565) Principal collections on and proceeds from sale of commercial mortgage-backed securities 26,548 8,787 Origination and purchase of loans receivable (771,200) (510,015) Principal collections on loans receivable 421,617 261,787 Equity investments (3,208) (4,660) Return of capital 3,752 7,950 Purchase of total return swaps (4,138) (4,000) Proceeds from total return swaps 5,138 -- Increase in restricted cash (6,946) (1,478) Purchases of equipment and leasehold improvements -- (23) ---------------- ----------------- Net cash used in investing activities (713,169) (447,217) ---------------- ----------------- Cash flows from financing activities: Proceeds from repurchase obligations 878,534 436,393 Repayment of repurchase obligations (896,852) (503,710) Proceeds from credit facilities -- 104,704 Repayment of credit facilities -- (169,880) Issuance of junior subordinated debentures 51,550 -- Purchase of common equity in CT Preferred Trust I (1,550) -- Proceeds from CDOs 429,399 571,039 Repayments of CDOs (11,194) -- Proceeds from participations sold 248,137 -- Settlement of interest rate hedge 1,186 1,410 Payment of deferred financing costs (4,681) (7,734) Reimbursement of offering expenses 124 -- Dividends paid on class A common stock (32,138) (24,156) Sale of shares of class A common stock under stock option agreements 368 1,121 ---------------- ----------------- Net cash provided by financing activities 662,883 409,187 ---------------- ----------------- Net decrease in cash and cash equivalents 1,746 (10,171) Cash and cash equivalents at beginning of year 24,974 24,583 ---------------- ----------------- Cash and cash equivalents at end of period $ 26,720 $ 14,412 ================ =================
See accompanying notes to unaudited consolidated financial statements -4- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 1. Organization References herein to "we," "us" or "our" refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise. We are a fully integrated, self-managed finance and investment management company that specializes in credit-sensitive structured financial products. To date, our investment programs have focused on loans and securities backed by commercial real estate assets. We invest for our own account and for private equity funds that we manage on behalf of third parties. From the commencement of our finance business in 1997 through September 30, 2006, we have completed $7.2 billion of investments both directly and on behalf of our managed funds. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes and we are headquartered in New York City. 2. Summary of Significant Accounting Policies The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management discussion and analysis of financial condition and results of operations filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. In our opinion, all adjustments (consisting only of normal, recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2006. Our accounting and reporting policies conform in all material respects to accounting principles generally accepted in the United States. Principles of Consolidation The accompanying unaudited consolidated interim financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries and our interests in variable interest entities in which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. Our interest in CT Preferred Trust I is accounted for using the equity method and its assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust I is a variable interest entity in which we are not the primary beneficiary under Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN 46. We account for our co-investment interests in two of the private equity funds we have co-sponsored and continue to manage, CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., or Fund II and Fund III, respectively, under the equity method of accounting. We also account for our investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, under the equity method of accounting. As such, we report a percentage of the earnings of Fund II, Fund III and Bracor equal to our ownership percentage on a single line item in the consolidated statement of operations as income from equity investments. Revenue Recognition Interest income from our loans receivable is recognized over the life of the investment using the effective interest method and recorded on the accrual basis. Fees, premiums, discounts and direct costs in connection with these investments 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. For loans where we have unfunded commitments, we amortize the appropriate items on a straight line basis. 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 special servicing and asset management services are recognized as services are rendered. We account for incentive fees we can potentially earn from our investment management business in accordance with Method 1 of Emerging Issues Task Force Topic D-96. Under Method 1, no incentive income is recorded until all contingencies have been eliminated. -5- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) Restricted Cash Restricted cash of $8.2 million at September 30, 2006 is on deposit with the trustee for our CDOs and is expected to be used to pay contractual interest and principal and to purchase replacement collateral for our reinvesting CDOs during their respective reinvestment periods. Commercial Mortgage Backed Securities From time to time we purchase commercial mortgage-backed securities, or CMBS, and other investments in which we have a level of control over the issuing entity; we refer to these investments as controlling class investments, or Controlling Class Investments. The presentation of Controlling Class Investments in our financial statements is governed in part by FIN 46. FIN 46 could require that certain Controlling Class Investments be presented on a consolidated basis. Based upon the specific circumstances of certain of our CMBS investments that are Controlling Class Investments and our interpretation of FIN 46, specifically the exemption for qualifying special purpose entities as defined under FASB Statements of Financial Accounting Standard No. 140, or FAS 140, we have concluded that the entities that have issued the Controlling Class Investments should not be presented on a consolidated basis. We are aware that FAS 140 is currently under review by standard setters and that, as a result of this review, our current interpretation of FIN 46 and FAS 140 may change. We classify our CMBS investments pursuant to FAS No. 115 on the date of acquisition of the investment. On August 4, 2005, we made a decision to change the accounting classification of our CMBS investments from available-for-sale to held-to-maturity. Held-to-maturity investments are stated at cost plus the amortization of any premiums or discounts and any premiums or discounts will be amortized through the consolidated statements of income using the level yield method. Other than in the instance of impairment, these held-to-maturity investments will be shown in our financial statements at their adjusted values pursuant to the methodology described above. We may from time to time invest in CMBS and certain other securities which may be classified as available-for-sale. Available-for-sale securities are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income/(loss) in shareholders' equity. Many of these investments are relatively illiquid and management must estimate their values. In making these estimates, management utilizes market prices provided by dealers who make markets in these securities, but may, under certain circumstances, adjust these valuations based on management's judgment. Changes in the valuations do not affect our reported income or cash flows, but impact shareholders' equity and, accordingly, book value per share. Income on these securities is recognized based upon a number of assumptions that are subject to uncertainties and contingencies. Examples include, among other things, the rate and timing of principal payments, including prepayments, repurchases, defaults and liquidations, the pass-through or coupon rate and interest rates. Additional factors that may affect our reported interest income on our mortgage-backed securities include interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and magnitude of credit losses on the mortgage loans underlying the securities that are impacted by, among other things, the general condition of the real estate market, including competition for tenants and their related credit quality, and changes in market rental rates. These uncertainties and contingencies are difficult to predict and are subject to future events that may alter the assumptions. We account for CMBS under Emerging Issues Task Force 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets", or EITF 99-20. Under EITF 99-20, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience and the present value of the revised cash flows using the current expected yield is less than the present value of the previously estimated remaining cash flows, adjusted for cash receipts during the intervening period, an other-than-temporary impairment is deemed to have occurred. Accordingly, the security is written down to fair value with the resulting change being included in income and a new cost basis established with the original discount or premium written off when the new cost basis is established. In accordance with this guidance, on a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, we calculate a revised yield based upon the current amortized cost of the investment, including any other-than-temporary impairments recognized to date, and the revised cash flows. The revised yield is then applied prospectively to recognize interest income. Management must also assess whether unrealized losses on securities reflect a decline in value that is other-than-temporary, and, accordingly, write down the impaired security to its fair value, through a charge to earnings. Significant judgment of management is required in this analysis that includes, but is not limited to, making -6- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) assumptions regarding the collectibility of the principal and interest, net of related expenses, on the underlying loans. Loans Receivable and Reserve for Possible Credit Losses We purchase and originate commercial real estate debt and related instruments, or Loans, to be held as long term investments at amortized cost. Management must periodically evaluate each of these loans for possible impairment. Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan were determined to be permanently impaired, we would write down the loan through a charge to the reserve for possible credit losses. Given the nature of our loan portfolio and the underlying commercial real estate collateral, significant judgment of management is required in determining the permanent impairment and the resulting charge to the reserve, which includes but is not limited to making assumptions regarding the value of the real estate that secures the loan. Each loan in our portfolio is evaluated at least quarterly using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors deemed necessary by management to assess the likelihood of delinquency or default. If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our loan, and this potential loss is multiplied by the default likelihood to determine the size of the reserve. Actual losses, if any, could ultimately differ from these estimates. Repurchase Obligations In certain circumstances, we have financed the purchase of investments from a counterparty through a repurchase agreement with that same counterparty. We currently record these investments in the same manner as other investments financed with repurchase agreements, with the investment recorded as an asset and the related borrowing under any repurchase agreement as a liability on our consolidated balance sheet. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on the consolidated statements of income. There is a position under consideration by standard setters, based upon a technical interpretation of FAS 140, that these transactions will not qualify as a purchase by us. We believe, consistent with industry practice, that we are accounting for these transactions in an appropriate manner; however, if these investments do not qualify as a purchase under FAS 140, we would be required to present the net investment (asset balance less the repurchase obligation balance) on our balance sheet together with an embedded derivative with the corresponding change in fair value of the derivative being recorded in the consolidated statements of income. The value of the derivative would reflect not only changes in the value of the underlying investment, but also changes in the value of the underlying credit provided by the counterparty. Income from these arrangements would be presented on a net basis. Furthermore, hedge instruments related to these assets and liabilities, currently deemed effective, may no longer be effective and may have to be accounted for as non-hedge derivatives. As of September 30, 2006 we had entered into thirteen such transactions, with a book value of the associated assets of $310.1 million financed with repurchase obligations of $198.0 million. Adoption of the aforementioned treatment would result in a reduction in total assets and liabilities on our consolidated balance sheet of $198.0 million and $118.2 million at September 30, 2006 and December 31, 2005, respectively. Interest Rate Derivative Financial Instruments In the normal course of business, we use interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations. Specifically, we currently use interest rate swaps to effectively convert variable rate liabilities, that are financing fixed rate assets, to fixed rate liabilities. The differential to be paid or received on these agreements is recognized on the accrual basis as an adjustment to the interest expense related to the attendant liability. The swap agreements are generally accounted for on a held-to-maturity basis, and, in cases where they are terminated early, any gain or loss is generally amortized over the remaining life of the hedged item. These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment. Changes in value of effective cash flow hedges are reflected in our financial statements through accumulated other comprehensive income/(loss) and do not affect our net income. To the extent a derivative does not qualify for hedge accounting, and is deemed a non-hedge derivative, the changes in its value are included in net income. To determine the fair value of derivative instruments, we use third parties to periodically value our interests. Income Taxes Our financial results generally do not reflect provisions for current or deferred income taxes on our REIT taxable income. Management believes that we have and intend to continue to operate in a manner that will continue to allow -7- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) us to be taxed as a REIT and, as a result, do not expect to pay substantial corporate-level taxes (other than taxes payable by our taxable REIT subsidiaries which are accounted for in accordance with Statement of Financial Accounting Standards No. 109). Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we may be subject to Federal income tax on current and past income and may be subject to penalties. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 may ultimately differ from those estimates. Reclassifications Certain reclassifications have been made in the presentation of the prior periods consolidated financial statements to conform to the September 30, 2006 presentation. -8- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 3. Commercial Mortgage-Backed Securities Activity relating to our commercial mortgage-backed securities, or CMBS, for the nine months ended September 30, 2006 was as follows ($ values in thousands):
Weighted Average ------------------------------------------ Number Number Face Book of of Maturity Asset Type Value Value Securities Issues Rating(1) Coupon(2) Yield(2) (Years)(3) - ---------------------------------------------- ------------ ---------- ------- ---------- ---------- --------- ---------- December 31, 2005 Floating Rate $ 106,666 $ 105,032 11 9 BBB- 6.89% 6.99% 2.3 Fixed Rate 419,885 382,938 34 21 B+ 6.97% 7.72% 10.1 ------------- ------------ ------------------ ---------- ---------- --------- ---------- Total/Average 526,551 487,970 45 30 BB- 6.95% 7.57% 8.4 Originations- Nine Months Floating Rate 25,448 25,451 4 2 BB+ 7.18% 7.21% 3.0 ------------- ------------ ------------------ ---------- ---------- --------- ---------- Fixed Rate 361,255 359,280 34 28 BBB- 6.35% 6.33% 8.0 ------------- ------------ ------------------ ---------- ---------- --------- ---------- Total/Average 386,703 384,731 38 30 BBB- 6.41% 6.39% 7.6 Repayments & Other(4)-Nine Months Floating Rate 18,748 18,737 3 2 N/A N/A N/A N/A Fixed Rate 9,059 8,512 1 1 N/A N/A N/A N/A ------------- ------------ ------------------ ---------- ---------- --------- ---------- Total/Average 27,807 27,249 4 3 N/A N/A N/A N/A September 30, 2006 Floating Rate 113,366 111,747 12 9 BBB- 7.66% 7.79% 2.0 Fixed Rate 772,081 733,705 67 48 BB 6.70% 7.35% 8.7 ------------- ------------ ------------------ ---------- ---------- --------- ---------- Total/Average $ 885,447 $ 845,452 79 57 BB 6.82% 7.41% 7.8 ============ ============ ========= ======= ========== ========== ========= =========
(1) Rating is the lowest rating from Fitch Ratings, Standard & Poor's and/or Moody's Investors Service and the weighted average is calculated using the Fitch Ratings methodology. (2) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of 4.39% as of December 31, 2005. (3) Represents the maturity of the investment assuming all extension options are executed. (4) Includes full repayments, sale, partial repayments, mark-to-market adjustments, and the impact of premium and discount amortization and losses, if any. The figures shown in "Number of Securities" and "Number of Issues" represent the full repayments/sales, if any. While we typically account for our CMBS investments on a held-to-maturity basis, under certain circumstances we will account for CMBS on an available-for-sale basis. At September 30, 2006, we had one CMBS investment that we designated and account for on an available-for-sale basis with a face value of $10.0 million. The security earns interest at a rate of 8.00%. As of September 30, 2006, the security was carried at its fair market value of $10.5 million. The investment matures in February 2010. Quarterly, we reevaluate our CMBS portfolio to determine if there has been an other-than-temporary impairment based upon our assessment of future cash flow receipts. For the nine months ended September 30, 2006, we believe that there has not been any adverse change in cash flows for our CMBS portfolio and, therefore, did not recognize any other-than-temporary impairments. During the fourth quarter of 2004, we concluded that two of our CMBS investments had incurred other-than-temporary impairment and we incurred a charge of $5.9 million through the consolidated statements of income. Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectibility of the principal and interest, net of related expenses, on the underlying loans. -9- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 4. Loans Receivable Activity relating to our loans receivable for the nine months ended September 30, 2006 was as follows ($ values in thousands):
Weighted Average(1) --------------------------------------- Invest- Maturity Asset Type Face Value(1) Book Value(1) ments(1) LTV(2) Coupon(3) Yield(3) (Years)(4) - ---------------------------------- ---------------------------------------------- ------------------- --------- December 31, 2005 - ----------------- Floating rate Mortgage loans $ 66,471 $ 66,471 3 71.8% 6.90% 6.85% 2.8 Subordinate mortgage interests 527,497 526,435 51 64.3% 7.75% 7.82% 3.7 Mezzanine loans 230,174 229,998 14 70.4% 8.56% 8.59% 3.5 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 824,142 822,904 68 66.6% 7.91% 7.96% 3.6 Fixed rate Mortgage loans - - Subordinate mortgage interests 49,390 48,435 4 71.6% 7.78% 8.15% 16.9 Mezzanine loans 119,543 115,764 4 70.5% 9.00% 9.54% 5.9 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 168,933 164,199 8 70.8% 8.65% 9.13% 9.2 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average - December 31, 2005 993,075 987,103 76 67.1% 8.01% 8.13% 4.5 ============= ============= ========= ======== ========== ======== ========= Originations - Nine Months(5) - ----------------------------- Floating rate Mortgage loans 146,027 146,027 10 75.8% 8.76% 8.85% 3.9 Subordinate mortgage interests 206,280 206,280 4 77.5% 9.22% 9.37% 4.0 Mezzanine loans 392,480 392,480 8 74.8% 9.98% 10.18% 4.3 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 744,787 744,787 22 75.7% 9.53% 9.69% 4.1 Fixed rate Mortgage loans -- -- -- -- -- -- -- Subordinate mortgage interests -- -- -- -- -- -- -- Mezzanine loans 25,700 26,413 4 80.0% 11.49% 10.98% 4.6 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 25,700 26,413 4 80.0% 11.49% 10.98% 4.6 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 770,487 771,200 26 75.9% 9.60% 9.74% 4.1 ============= ============= ========= ======== ========== ======== ========= Repayments & Other(6) - Nine Months - ----------------------------------- Floating rate Mortgage loans 61,569 61,569 3 N/A N/A N/A N/A Subordinate mortgage interests 296,450 296,255 30 N/A N/A N/A N/A Mezzanine loans 68,795 68,763 4 N/A N/A N/A N/A ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 426,814 426,587 37 N/A N/A N/A N/A Fixed rate Mortgage loans -- -- -- N/A N/A N/A N/A Subordinate mortgage interests 159 61 -- N/A N/A N/A N/A Mezzanine loans 578 392 -- N/A N/A N/A N/A ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 737 453 -- N/A N/A N/A N/A ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 427,551 427,040 37 N/A N/A N/A N/A ============= ============= ========= ======== ========== ======== ========= September 30, 2006 - ------------------ Floating rate Mortgage loans 150,929 150,929 10 74.9% 8.64% 8.98% 3.8 Subordinate mortgage interests 437,327 436,460 25 69.0% 8.92% 9.01% 3.5 Mezzanine loans 553,859 553,715 18 72.7% 9.85% 10.01% 4.0 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 1,142,115 1,141,104 53 71.5% 9.34% 9.49% 3.8 Fixed rate Mortgage loans -- -- -- -- -- -- -- Subordinate mortgage interests 49,231 48,374 4 70.2% 7.78% 7.86% 16.2 Mezzanine loans 144,665 141,785 8 69.5% 9.30% 9.59% 5.1 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average 193,896 190,159 12 69.7% 8.91% 9.15% 7.9 ------------- ------------- --------- -------- ---------- -------- --------- Total/Average - September 30, 2006 $ 1,336,011 $ 1,331,263 65 71.2% 9.27% 9.44% 4.4 ============= ============= ========= ======== ========== ======== =========
(1) Does not include one non-performing loan with a face value of $8,000 and a book value of $2,751 and $3,039 on September 30, 2006 and December 31, 2005, respectively. (2) Loan to value is based upon appraised values determined by third parties. (3) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of 4.39% as of December 31, 2005. (4) Represents the maturity of the investment assuming all extension options are executed. (5) Includes additional fundings on prior period originations. The figures shown in "Investments" represents the actual number of originations during the period. (6) Includes full repayments, sale, partial repayments and the impact of premium and discount amortization and losses, if any. The figures shown in "Investments" represents the full repayments/sales, if any. -10- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) We continue to have one defaulted loan, an $8.0 million first mortgage at September 30, 2006. We received $288,000 in cash on the loan during the nine months ended September 30, 2006. The cash collections reduced the carrying value to $2.8 million at September 30, 2006. In some instances, we have a further obligation to fund additional amounts under our loan arrangements, or Unfunded Commitments. At September 30, 2006, we had five such Unfunded Commitments for a total future funding obligation of $218.9 million. At September 30, 2006, we had $6.2 million included in deposits and other receivables which represented loans that were satisfied and repaid prior to September 30, the proceeds of which had not been remitted to us by our servicers. Quarterly, we reevaluate the reserve for possible credit losses based upon our current portfolio of loans. At September 30, 2006, a detailed review of the entire portfolio was completed, and we concluded that a reserve for possible credit losses was not warranted. 5. Total Return Swaps Total return swaps are derivative contracts in which one party agrees to make payments that replicate the total return of a defined underlying asset, typically in return for another party agreeing to bear the risk of performance of the defined underlying asset. Under our current total return swaps, we bear the risk of performance of the underlying asset and receive payments from our counterparty as compensation. In effect, these total return swaps allow us to receive the leveraged economic benefits of asset ownership without our acquiring, or our counterparty selling, the actual underlying asset. Our total return swaps reference commercial real estate loans and contain a put provision whereby our counterparty has the right to require us to buy the reference loan at its par value under certain reference loan performance scenarios. The put obligation imbedded in these arrangements constitutes a recourse obligation for us to perform under the terms of the contract. Activity relating to our total return swaps for the nine months ended September 30, 2006 was as follows ($ values in thousands):
Weighted Average ------------------------ Asset Type Fair Market Cash Reference Number Maturity Value Loan/ of (Book Value) Collateral Participation Investments Yield(1) (Years) - ----------------------------------------- --------------- ------------- ----------- ------------ ------------ December 31, 2005 $ 4,000 $ 4,000 $ 20,000 1 18.14% 0.6 Originations- Nine Months(2) 4,138 4,138 40,000 2 19.55% 1.9 Repayments- Nine Months 5,138 5,138 20,000 1 N/A N/A ------------ --------------- ------------- ----------- ------------ ------------ September 30, 2006(2) $ 3,000 $ 3,000 $ 40,000 2 20.55% 1.0 ============ =============-- ============= =========== ============ ============
(1) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of 4.39% as of December 31, 2005. (2) One total return swap currently has no outstanding balance and a $3.0 million Unfunded Commitment exists. The total return swaps are treated as non-hedge derivatives for accounting purposes and, as such, changes in their market value are recorded through the consolidated statements of income. At September 30, 2006, our total return swaps were valued at par and no such consolidated statement of income impact was recorded. -11- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 6. Equity Investment in Unconsolidated Subsidiaries Pursuant to a venture agreement with Citigroup Alternative Investments, LLC, or the Venture Agreement, entered into in 2000 and subsequently amended in 2003, we have co-sponsored two funds: CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., or Fund II and Fund III. We are an investor in the funds and our wholly-owned subsidiary, CT Investment Management Co., LLC, serves as the investment manager to the funds. Both funds have concluded their respective investment periods and are liquidating in the ordinary course. In connection with entering into the Venture Agreement and the formation of the funds, we capitalized certain costs. These costs are being amortized over the expected life of each fund with respect to each of the funds. During the second quarter, management concluded that it no longer intends to co-sponsor investment management vehicles pursuant to the Venture Agreement. Accordingly, the costs related to the Venture Agreement were accelerated and fully amortized during the quarter ended June 30, 2006. Included in depreciation and amortization for the quarter ended June 30, 2006, was $1.8 million of the accelerated amortization of these costs. In September of 2006, we made a founding investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, a newly formed net lease commercial real estate company located and operating in Brazil. Our total commitment is $15.0 million and at September 30, 2006, we funded $3.2 million. Bracor is owned 24% by us, 47% by Equity International Properties, Ltd., or EIP, and 29% by third parties. Our Chairman, Sam Zell, is the Chairman of EIP and has an ownership position in EIP. Bracor's operations will be conducted in Brazilian Reais and changes in the USD/Reais exchange rate will impact the carrying value of our investment. At September 30, 2006, the currency valuation adjustment for our investment was $1,000 and was recorded as an adjustment to accumulated other comprehensive income/(loss) in shareholders' equity. Our share of profits and losses from Bracor will be reported one quarter subsequent to the period earned by Bracor. Activity relating to our equity investment in unconsolidated subsidiaries for the nine months ended September 30, 2006 was as follows ($ values in thousands):
Venture Fund II Fund II Fund III Bracor Total Agrmt. GP(1) ----------- ---------- ---------- ---------- ---------- ---------- Equity Investment Beginning Balance $ -- $1,278 $692 $7,754 $ -- $9,724 Equity investment -- -- -- -- 3,209 3,209 Company portion of fund income -- 410 (70) 804 -- 1,144 Amortization of capitalized costs -- (93) -- -- -- (93) Investment/(Distributions) from funds -- (106) -- (4,656) -- (4,762) ----------- ---------- ---------- ---------- ---------- ---------- Ending Balance $ -- $1,489 $622 $3,902 $3,209 $9,222 =========== ========== ========== ========== ========== ========== Capitalized Costs Beginning Balance $2,020 $2,036 $ -- $521 $ -- $4,577 Amortization of capitalized costs (2,020) (481) -- (113) -- (2,614) ----------- ---------- ---------- ---------- ---------- ---------- Ending Balance $ -- $1,555 $ -- $408 $ -- $1,963 =========== ========== ========== ========== ========== ========== Total Beginning Balance $2,020 $3,314 $692 $8,275 $ -- $ 14,301 Equity investment -- -- -- -- 3,209 3,209 Company portion of fund income -- 410 (70) 804 -- 1,144 Amortization of capitalized costs (2,020) (574) -- (113) -- (2,707) Distributions from funds -- (106) -- (4,656) -- (4,762) ----------- ---------- ---------- ---------- ---------- ---------- Ending Balance $ -- $3,044 $622 $4,310 $3,209 $11,185 =========== ========== ========== ========== ========== ==========
(1) $420,000 of the equity investment consists of capitalized costs at Fund II GP which are being amortized over the expected life of the Fund. -12- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 7. Debt At September 30, 2006 and December 31, 2005 we had approximately $1.6 billion and $1.2 billion, respectively, of total debt outstanding. The balances of each category of debt and their respective all-in effective cost, including the amortization of fee and expenses, as of September 30, 2006 and December 31, 2005 were as follows ($ values in thousands):
September 30, 2006 December 31, 2005 ---------------------------------------------- ----------------------------------------------- All-In All-In Face Value Book Value Coupon(1) Cost Face Value Book Value Coupon(1) Cost ----------- ----------- ---------- ----- ---------- ---------- --------- ---- Repurchase Obligations $351,433 $351,433 6.51% 6.81% $369,751 $369,751 5.33% 5.57% Collateralized Debt Obligations CDO I (Floating) 252,778 252,778 5.94% 6.36% 252,778 252,778 5.01% 5.43% CDO II (Floating) 298,913 298,913 5.81% 6.03% 298,913 298,913 4.88% 5.10% CDO III (Fixed) 269,594 271,830 5.22% 5.25% 269,594 272,053 5.22% 5.25% CDO IV(Floating)(2) 418,428 418,428 5.52% 5.62% -- -- -- -- ----------- ----------- ---------- ----- ---------- ---------- --------- ---- Total CDOs 1,239,713 1,241,949 5.61% 5.79% 821,285 823,744 5.03% 5.25% Junior subordinated debentures 51,550 51,550 7.45% 7.53% -- -- -- -- ----------- ----------- ---------- ----- ---------- ---------- --------- ---- Total $1,642,696 $1,644,932 5.86% 6.06% $1,191,036 $1,193,495 5.12% 5.35% =========== =========== ========== ===== ========== ========== ========= =====
(1) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of 4.39% as of December 31, 2005. (2) Comprised of $402.2 million of floating rate notes sold and $16.2 million of fixed rate notes sold. Repurchase Obligations At September 30, 2006, we were a party to eight repurchase agreements with six counterparties that provide total commitments of $950.0 million. At September 30, 2006, we borrowed $351.4 million under these agreements and had the ability to borrow $77.5 million without pledging additional collateral. In February 2006, we amended and restated our repurchase agreements with Bear Stearns increasing the combined commitment by $75 million to $200 million. The agreements expire in August 2008 and are designed to finance, on a recourse basis, our general investment activity as well as assets designated for one or more of our CDOs. Under the agreements, advance rates are up to 85.0% and cash costs of funds range from LIBOR plus 0.55% to LIBOR plus 2.00%. At September 30, 2006, we had incurred borrowings under the agreements of $88.3 million and had the ability to borrow an additional $31.6 million against the assets collateralizing the borrowings under the agreement. In March 2006, we extended our $200 million repurchase agreement with Liquid Funding, LTD., an affiliate of Bear Stearns. The agreement, which we originally entered into in February 2002, is designed to provide us with non-recourse financing for our general securities investment activity. Under the agreement, advance rates are up to 85.0% and cash costs of funds range from LIBOR plus 0.40% to LIBOR plus 1.70%. At September 30, 2006, we had incurred borrowings under the agreement of $25.7 million. In March 2006, we entered into a loan-specific repurchase obligation representing borrowings of $6.0 million with Lehman Brothers. The obligation is non-recourse, has a term of one year and the advance rate is 60.0% with a cash cost of LIBOR plus 2.50%. In June 2006, we extended our $100 million repurchase agreement with Goldman Sachs Mortgage Company to June 2009 and in August we amended and restated the agreement to increase the commitment to $150 million. The agreement, which we originally entered into in May 2003, is designed to finance, on a recourse basis, our general -13- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) investment activity. Under the agreement, advance rates are up to 88.0% and cash costs of funds range from LIBOR plus 0.60% to LIBOR plus 1.95%. At September 30, 2006, we had incurred borrowings under the agreement of $71.0 million and had the ability to borrow an additional $24.6 million against the assets collateralizing the borrowings under the agreement. Collateralized Debt Obligations At September 30, 2006, we had collateralized debt obligations, or CDOs, outstanding from four separate issuances with a total face value of $1.2 billion. Our existing CDOs are financing vehicles for our assets and, as such, are consolidated on our balance sheet at $1.2 billion, representing the amortized sales price of the securities sold to third parties. In total, our two floating rate reinvesting CDOs provide us with $551.7 million of debt financing at a cash cost of LIBOR plus 0.55% (5.87% at September 30, 2006) and an all-in effective interest rate (including the amortization of issuance costs) of LIBOR plus 0.87% (6.19% at September 30, 2006). Our two fixed rate static CDOs provide us with $690.3 million of financing with a cash cost of 5.40% and an all-in effective interest rate of 5.47%. On a combined basis, our CDOs provide us with $1.2 billion of non-recourse, non-mark-to-market, index matched financing at a weighted average cash cost of 0.49% over the applicable index (5.61% at September 30, 2006) and a weighted average all-in cost of 0.69% over the applicable index (5.79% at September 30, 2006). Junior Subordinated Debentures In February 2006, we sold $50 million of trust preferred securities through a subsidiary, CT Preferred Trust I. The trust preferred securities have a 30-year term, maturing in April 2036, are redeemable at par on or after April 30, 2011 and pay distributions at a fixed rate of 7.45% for the first ten years ending April 2016, and thereafter, at a floating rate of three month LIBOR plus 2.65%. The all-in cost of the junior subordinated debentures is 7.53%. Our interest in CT Preferred Trust I is accounted for using the equity method and the assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust I is a variable interest entity under FIN 46 and that we are not the primary beneficiary of the entity. Interest on the junior subordinated debentures is included in interest expense on our consolidated statements of income while the junior subordinated notes are presented as a separate item in our consolidated balance sheet. 8. Participations Sold Participations sold represent interests in loans that we originated and subsequently sold to third parties. We present these sold interests as secured borrowings in conformity with GAAP on the basis that these arrangements do not qualify as sales under FAS 140. At September 30, 2006, we had three such participations sold with a total book balance of $248.1 million at a weighted average yield of LIBOR plus 3.64% (8.96% at September 30, 2006). The income earned on the loans is recorded as interest income and an identical amount is recorded as interest expense on the consolidated statements of income. -14- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 9. Derivative Financial Instruments To manage interest rate risk, we typically employ interest rate swaps or other arrangements, to convert a portion of our floating rate debt to fixed rate debt in order to index match our assets and liabilities. The net payments due under these swap contracts are recognized as interest expense over the life of the contracts. During the nine month period ended September 30, 2006, we entered into nine new cash flow hedge agreements with a total current notional balance of $404.1 million. Additionally, during the nine months ended September 30, 2006, we received $1.2 million from counterparties in settlement of seven interest rate swaps. Recognition of these settlements has been deferred and is being amortized over the remaining life of the previously hedged item using an approximation of the level yield basis. The following table summarizes the notional and fair values of our derivative financial instruments as of September 30, 2006. The notional value provides an indication of the extent of our involvement in the instruments at that time, but does not represent exposure to credit or interest rate risk ($ values in thousands):
Hedge Type Notional Value Interest Rate Maturity Fair Value ---------- --------------------- -------------------- ------------------ ------------- ------------- Swap Cash Flow Hedge $340,895 5.10% 2015 ($662) Swap Cash Flow Hedge 74,094 4.58% 2014 1,495 Swap Cash Flow Hedge 19,037 3.95% 2011 794 Swap Cash Flow Hedge 16,894 4.83% 2014 181 Swap Cash Flow Hedge 16,377 5.52% 2018 (635) Swap Cash Flow Hedge 15,278 5.05% 2016 (29) Swap Cash Flow Hedge 8,007 4.77% 2011 44 Swap Cash Flow Hedge 7,410 5.31% 2011 (124) Swap Cash Flow Hedge 7,062 5.10% 2016 (48) Swap Cash Flow Hedge 6,328 4.78% 2007 26 Swap Cash Flow Hedge 5,384 3.12% 2007 82 Swap Cash Flow Hedge 5,104 5.18% 2016 (62) Swap Cash Flow Hedge 4,134 4.76% 2007 18 Swap Cash Flow Hedge 3,325 5.45% 2015 (104) Swap Cash Flow Hedge 2,870 5.08% 2011 (17) -------------------- ------------------ ------------- ------------- Total/Weighted Average $532,199 4.96% 2014 $959 ==================== ================== ============= =============
As of September 30, 2006, the derivative financial instruments were reported at their fair value of $959,000 as interest rate hedge assets. Income and expense associated with these instruments is recorded as interest expense on the company's consolidated statements of income. -15- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 10. Earnings Per Share The following table sets forth the calculation of Basic and Diluted EPS for the nine months ended September 30, 2006 and 2005 (in thousands, except share and per share amounts):
Nine months Ended September 30, 2006 Nine months Ended September 30, 2005 ----------------------------------------------------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount ---------------- ------------- -------------- ------------- ----------------- ----------- Basic EPS: Net earnings per share of common stock $ 38,577 15,327,855 $ 2.52 $ 27,797 15,110,227 $ 1.84 ============== =========== Effect of Dilutive Securities: Options outstanding for the purchase of common stock -- 147,643 -- 172,744 Stock units outstanding convertible to shares of common stock -- 66,808 -- 56,562 ---------------- -------------- -------------- ----------------- Diluted EPS: Net earnings per share of common stock and assumed conversions $ 38,577 15,542,306 $ 2.48 $ 27,797 15,339,533 $ 1.81 ================ ============== ============= ============= ================= ===========
The following table sets forth the calculation of Basic and Diluted EPS for the three months ended September 30, 2006 and 2005 (in thousands, except share and per share amounts):
Three months Ended September 30, 2006 Three months Ended September 30, 2005 ----------------------------------------------------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount ---------------- ------------- -------------- ------------- ----------------- ----------- Basic EPS: Net earnings per share of common stock $ 13,437 15,337,325 $ 0.88 $ 9,799 15,125,443 $ 0.65 ============== =========== Effect of Dilutive Securities: Options outstanding for the purchase of common stock -- 178,748 -- 173,900 Stock units outstanding convertible to shares of common stock -- 69,807 -- 59,600 ------------------------------- -------------- ----------------- Diluted EPS: Net earnings per share of common stock and assumed conversions $ 13,437 15,585,880 $ 0.86 $ 9,799 15,358,943 $ 0.64 ================ ============== ============= ============= ================= ===========
-16- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 11. Income Taxes We made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ended December 31, 2003. As a REIT, we are generally not subject to federal income tax. To maintain qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on taxable income at regular corporate rates. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. At September 30, 2006, we were in compliance with all REIT requirements. During the three and nine months ended September 30, 2006, we recorded $984,000 and $2.5 million of income tax benefit for losses of $2.2 million and $5.3 million, respectively, attributable to our taxable REIT subsidiary. Our effective tax rate for the three and nine months ended September 30, 2006 attributable to the taxable REIT subsidiary was 44.4% and 46.2%, respectively. 12. Shareholders' Equity On September 15, 2006, we declared a dividend of approximately $11.5 million, or $0.75 per share of common stock applicable to the three-month period ended September 30, 2006, which was paid on October 15, 2006 to shareholders of record on September 30, 2006. All dividends paid during the period presented were ordinary income. 13. Employee Benefit Plans We had three benefit plans in effect at September 30, 2006: (1) the Second Amended and Restated 1997 Long-Term Incentive Stock Plan, or 1997 Employee Plan, (2) the Amended and Restated 1997 Non-Employee Director Stock Plan, or 1997 Director Plan, and (3) the Amended and Restated 2004 Long-Term Incentive Plan, or 2004 Employee Plan. Activity under these three plans for the nine month period ended September 30, 2006 is summarized in the chart below in share and share equivalents:
1997 Employee 1997 Director 2004 Employee Plan Plan Plan Total ------------------ -------------------- ------------------- -------------------- Options(1) Beginning Balance 352,960 85,002 -- 437,962 Granted 2006 -- -- -- -- Exercised 2006 (13,169) (8,334) -- (21,503) Canceled 2006 -- -- -- -- ------------------ -------------------- ------------------- -------------------- Ending Balance 339,791 76,668 -- 416,459 Restricted Stock(2) Beginning Balance -- -- 405,790 405,790 Granted 2006 -- -- 119,504 119,504 Vested 2006 -- -- (23,366) (23,366) Forfeited 2006 -- -- (16,929) (16,929) ------------------ -------------------- ------------------- -------------------- Ending Balance -- -- 484,999 484,999 Stock Units(3) Beginning Balance 62,384 -- 62,384 Granted 2006 9,047 -- 9,047 Converted 2006 -- -- -- ------------------ -------------------- ------------------- -------------------- Ending Balance 71,431 -- 71,431 ------------------ -------------------- ------------------- -------------------- Total Outstanding Shares 339,791 148,099 484,999 972,889 ================== ==================== =================== ====================
(1) All options are fully vested as of September 30, 2006. (2) Comprised of both performance based awards that vest upon the attainment of certain common equity return thresholds and time based awards that vest based upon an employee's continued employment on vesting dates. (3) Stock units are given to certain members of our board of directors in lieu of cash compensation for services and in lieu of dividends earned on previously granted stock units. -17- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) Compensation expense for stock awards is recognized on the accelerated attribution method under FASB Interpretation No. 28. The following table summarizes the outstanding options as of September 30, 2006:
Exercise Price Options Weighted Average Weighted per Share Outstanding Exercise Price per Share Average Remaining Life --------------------- ----------------------------- ----------------------------- -------------------------------- 1997 1997 Employee Director 1997 Employee 1997 1997 Employee 1997 Director Plan Plan Plan Director Plan Plan Plan --------------- ------------- -------------- -------------- --------------- ---------------- $10.00 - $15.00 55,939 -- $ 13.34 $ -- 4.20 -- $15.00 - $20.00 197,184 8,334 16.85 18.00 3.72 0.79 $20.00 - $25.00 -- -- -- -- -- -- $25.00 - $30.00 86,668 68,334 28.85 30.00 1.54 1.33 --------------- ------------- -------------- -------------- --------------- ---------------- Total/W. Average 339,791 76,668 $ 19.33 $ 28.70 3.24 1.27 =============== ============= ============== ============== =============== ================
In addition to the equity interests detailed above, we have granted percentage interests in the incentive compensation received by us from the Funds. At September 30, 2006, we had granted, net of forfeitures, 24% and 43% of the Fund II and fund III incentive compensation received by us, respectively. 14. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on our outstanding debt during the nine months ended September 30, 2006 and 2005 was $70.6 million and $21.7 million, respectively. We paid income taxes during the nine months ended September 30, 2006 and 2005 of $197,000 and $5,000, respectively. At September 30, 2006, we had $6.2 million included in deposits and other receivables which represented loans that were satisfied and repaid prior to September 30, 2006, the proceeds of which had not been remitted to us by our servicers. The reclassification from loans receivable to deposits and other receivables resulted in a non-cash investing activity. -18- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 15. Segment Reporting We operate two reportable segments. We have an internal information system that produces performance and asset data for the two segments along business lines. The Balance Sheet Investment segment includes all activities related to direct investment activities (including direct investments in Funds) and the financing thereof. The Investment Management segment includes all activities related to investment management services provided to us and third-party funds under management and includes our taxable REIT subsidiary, CT Investment Management Co., LLC and its subsidiaries. The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the nine months ended, and as of, September 30, 2006, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ------------------ ------------------- ------------------- Income from loans and other investments: Interest and related income $ 123,862 $ -- $ -- $ 123,862 Less: Interest and related expenses 72,374 -- -- 72,374 ------------------- ------------------ ------------------- ------------------- Income from loans and other investments, net 51,488 -- -- 51,488 ------------------- ------------------ ------------------- ------------------- Other revenues: Management and advisory fees -- 8,058 (5,862) 2,196 Income/(loss) from equity investments in Funds 1,120 (70) -- 1,050 Other interest income 830 (7) (33) 790 ------------------- ------------------ ------------------- ------------------- Total other revenues 1,950 7,981 (5,895) 4,036 ------------------- ------------------ ------------------- ------------------- Other expenses: General and administrative 9,467 13,101 (5,862) 16,706 Other interest expense 33 -- (33) -- Depreciation and amortization 2,501 195 -- 2,696 ------------------- ------------------ ------------------- ------------------- Total other expenses 12,001 13,296 (5,895) 19,402 ------------------- ------------------ ------------------- ------------------- Income (loss) before income taxes 41,437 (5,315) -- 36,122 Benefit for income taxes -- (2,455) -- (2,455) ------------------- ------------------ ------------------- ------------------- Net (loss) income allocable to $ 41,437 $ (2,860) $ -- $ 38,577 class A common stock =================== ================== =================== =================== Total Assets $ 2,269,723 $ 6,481 $ (6,539) $ 2,269,665 =================== ================== =================== ===================
All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $5.9 million for management of the segment for the nine months ended September 30, 2006, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. -19- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the nine months ended, and as of, September 30, 2005, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ------------------ ------------------- ------------------- Income from loans and other investments: Interest and related income $ 57,359 $ -- $ -- $ 57,359 Less: Interest and related expenses 23,709 -- -- 23,709 ------------------- ------------------ ------------------- ------------------- Income from loans and other investments, net 33,650 -- -- 33,650 ------------------- ------------------ ------------------- ------------------- Other revenues: Management and advisory fees -- 15,718 (3,574) 12,144 Income/(loss) from equity investments in Funds 628 (1,463) -- (835) Other interest income 318 64 (8) 374 ------------------- ------------------ ------------------- ------------------- Total other revenues 946 14,319 (3,582) 11,683 ------------------- ------------------ ------------------- ------------------- Other expenses: General and administrative 6,710 13,248 (3,574) 16,384 Other interest expense 8 -- (8) -- Depreciation and amortization 633 204 -- 837 ------------------- ------------------ ------------------- ------------------- Total other expenses 7,351 13,452 (3,582) 17,221 ------------------- ------------------ ------------------- ------------------- Income before income taxes 27,245 867 -- 28,112 Provision for income taxes -- 315 -- 315 ------------------- ------------------ ------------------- ------------------- Net income allocable to class A common stock $ 27,245 $ 552 $ -- $ 27,797 =================== ================== =================== =================== Total Assets $ 1,331,130 $ 11,469 $ (9,844) $ 1,332,755 =================== ================== =================== ===================
All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $3.6 million for management of the segment for the nine months ended September 30, 2005, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. -20- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the three months ended, and as of, September 30, 2006, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ------------------ ------------------- ------------------- Income from loans and other investments: Interest and related income $ 46,011 $ -- $ -- $ 46,011 Less: Interest and related expenses 28,838 -- -- 28,838 ------------------- ------------------ ------------------- ------------------- Income from loans and other investments, net 17,173 -- -- 17,173 ------------------- ------------------ ------------------- ------------------- Other revenues: Management and advisory fees -- 2,604 (1,856) 748 Income/(loss) from equity investments in Funds 348 (20) -- 328 Other interest income 500 (27) (33) 440 ------------------- ------------------ ------------------- ------------------- Total other revenues 848 2,557 (1,889) 1,516 ------------------- ------------------ ------------------- ------------------- Other expenses: General and administrative 3,027 4,708 (1,856) 5,879 Other interest expense 33 -- (33) -- Depreciation and amortization 292 65 -- 357 ------------------- ------------------ ------------------- ------------------- Total other expenses 3,352 4,773 (1,889) 6,236 ------------------- ------------------ ------------------- ------------------- Income before income taxes 14,669 (2,216) -- 12,453 Benefit for income taxes -- (984) -- (984) ------------------- ------------------ ------------------- ------------------- Net income allocable to class A common stock $ 14,669 $ (1,232) $ -- $ 13,437 =================== ================== =================== =================== Total Assets $ 2,269,723 $ 6,481 $ (6,539) $ 2,269,665 =================== ================== =================== ===================
All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $1.9 million for management of the segment for the three months ended September 30, 2006, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. -21- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the three months ended, and as of, September 30, 2005, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ------------------ ------------------- ------------------- Income from loans and other investments: Interest and related income $ 22,751 $ -- $ -- $ 22,751 Less: Interest and related expenses 10,325 -- -- 10,325 ------------------- ------------------ ------------------- ------------------- Income from loans and other investments, net 12,426 -- -- 12,426 ------------------- ------------------ ------------------- ------------------- Other revenues: Management and advisory fees -- 2,711 (1,194) 1,517 Income/(loss) from equity investments in Funds 528 (61) -- 467 Other interest income 111 26 -- 137 ------------------- ------------------ ------------------- ------------------- Total other revenues 639 2,676 (1,194) 2,121 ------------------- ------------------ ------------------- ------------------- Other expenses: General and administrative 2,026 4,484 (1,194) 5,316 Other interest expense -- -- -- -- Depreciation and amortization 211 67 -- 278 ------------------- ------------------ ------------------- ------------------- Total other expenses 2,237 4,551 (1,194) 5,594 ------------------- ------------------ ------------------- ------------------- Income before income taxes 10,828 (1,875) -- 8,953 Benefit for income taxes -- (846) -- (846) ------------------- ------------------ ------------------- ------------------- Net income allocable to class A common stock $ 10,828 $ (1,029) $ -- $ 9,799 =================== ================== =================== =================== Total Assets $ 1,331,130 $ 11,469 $ (9,844) $ 1,332,755 =================== ================== =================== ===================
All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $1.2 million for management of the segment for the three months ended September 30, 2005, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. -22- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Historical results set forth are not necessarily indicative of our future financial position and results of operations. Introduction We are a fully integrated, self-managed finance and investment management company that specializes in credit-sensitive structured financial products. To date, our investment programs have focused on loans and securities backed by commercial real estate assets. We invest for our own account and for private equity funds that we manage on behalf of third parties. From the commencement of our finance business in 1997 through September 30, 2006 we have completed $7.2 billion of investments both directly and on behalf of our managed funds. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes and we are headquartered in New York City. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results could differ from these estimates. There have been no material changes to our Critical Accounting Policies described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2006. Balance Sheet Overview At September 30, 2006, total assets were $2.3 billion, an increase of $712.1 million or 46% from year end 2005. Asset growth was driven predominantly by growth in CMBS, Loans and total return swaps, which we refer to collectively as Interest Earning Assets. Interest Earning Assets grew by $700.4 million or 47% from $1.5 billion at year end 2005 to $2.2 billion at September 30, 2006. At September 30, 2006, Interest Earning Assets had a weighted average yield of 8.67% (based upon LIBOR of 5.32% as of September 30, 2006). During the nine months ended September 30, 2006, we made 38 investments in CMBS, with a total purchase price of $384.7 million ($386.7 million face value) with a weighted average yield of 6.39%. Four investments with a purchase price of $25.5 million ($25.5 million face value) bear interest at floating rates with a yield of LIBOR plus 1.89% (7.21% at September 30, 2006). Thirty four investments with a purchase price of $359.3 million ($361.3 million face value) bear interest at fixed rates with a yield of 6.33%. At September 30, 2006, we held 79 investments in 57 separate issues of CMBS with an aggregate book value of $845.5 million that yield 7.41%. Floating rate CMBS with a book value of $111.7 million yields LIBOR plus 2.47% (7.79% at September 30, 2006). The remaining CMBS, $733.7 million book value, earns interest at fixed rates and yields 7.35%. At September 30, 2006, the expected average life for the CMBS portfolio was 94 months. During the nine months ended September 30, 2006, we originated $771.2 million of Loans with a weighted average yield of 9.74%. Originations were comprised of ten mortgage loans for $146.0 million, four subordinate mortgage interests for $206.3 million and twelve mezzanine loans for $418.9 million. Twenty two of the loans we originated with a balance of $744.8 million bear interest at floating rates with a yield of LIBOR plus 4.37% (9.69% at September 30, 2006). Four loans with a balance of $26.4 million bear interest at fixed rates with a yield of 10.98%. At September 30, 2006, we had 65 performing loans with a current book value of $1.3 billion and a yield of 9.44%. Twelve of the loans totaling $190.2 million bear interest at fixed rates with a yield of 9.15%. The 53 remaining loans, totaling $1.1 billion, bear interest at variable rates with a yield of LIBOR plus 4.17% (9.49% at September 30, 2006). One mortgage loan with an original principal balance of $8.0 million matured on July 15, 2000 but has not been repaid with respect to principal and interest, all other loans were performing in accordance with their terms. At September 30, 2006, we had five outstanding unfunded loan commitments for $218.9 million. -23- At September 30, 2006, we had two total return swaps with total market value of $3.0 million that earned interest at floating rates with a yield of LIBOR plus 15.24% (20.55% at September 30, 2006). The total return swaps are treated as non-hedge derivatives for accounting purposes and, as such, changes in their market value are recorded through the consolidated statements of income. At September 30, 2006, we had $3.0 million of unfunded commitments on our total return swaps. At September 30, 2006, equity investments in unconsolidated subsidiaries consisted of our co-investments in Fund II and Fund III, associated capitalized costs and a new investment in Bracor Investimentos Imobiliarios Ltda., or Bracor. Bracor is a newly formed net lease commercial real estate company located and operating in Brazil. Our total commitment to Bracor is $15.0 million and, at September 30, 2006, we had funded $3.2 million of that commitment. Bracor's operations will be conducted in local currency and, as such, changes in local currency value will impact the carrying value of our investment. At quarter end, the currency valuation adjustment for our investment was $1,000 and was recorded as an adjustment to accumulated other comprehensive income/(loss) in shareholders' equity. At quarter end, total equity investments were $11.2 million, including $2.0 million of unamortized costs capitalized in connection with raising Fund II and Fund III. These costs are being amortized over the expected lives of the funds. At September 30, 2006, we had $11.8 million of unfunded commitments associated with our equity investments in unconsolidated subsidiaries. We were party to 15 cash flow interest rate swaps with a total notional value of $532.2 million as of September 30, 2006. These cash flow interest rate swaps effectively convert floating rate debt to fixed rate debt, which is utilized to finance assets that earn interest at fixed rates. Under these swaps, we receive a rate equal to LIBOR (5.32% at September 30, 2006) and pay a weighted average rate of 4.96%. The market value of the swaps at September 30, 2006 was $959,000, which is recorded as an interest rate hedge asset and as a component of accumulated other comprehensive income/(loss) in shareholders' equity. At September 30, 2006, total liabilities were $1.9 billion, an increase of $703.4 million or 58% from year end 2005. Liability growth, the vast majority of which was in the form of repurchase obligations, CDOs and junior subordinated debentures which we refer to collectively as Interest Bearing Liabilities, was the primary source of funds used to finance new originations. At September 30, 2006, Interest Bearing Liabilities had a weighted average all-in cost of 6.06% (based upon LIBOR of 5.32% as of September 30, 2006). At September 30, 2006 we were a party to eight repurchase agreements with six counterparties that provide for total commitments of $950.0 million. At quarter end we borrowed $351.4 million under these agreements and had the ability to borrow an additional $77.5 million without pledging additional collateral. The weighted average cash borrowing cost for all the repurchase agreements outstanding at September 30, 2006 was LIBOR plus 1.19% (6.51% at September 30, 2006). Assuming no additional utilization under the repurchase agreements and including the amortization of all fees paid and capitalized over the remaining term of the repurchase agreements, the all-in effective borrowing cost was LIBOR plus 1.49% (6.81% at September 30, 2006). At September 30, 2006, we had CDOs outstanding from four separate issuances with a total face value of $1.2 billion. Our existing CDOs are financing vehicles for our assets and, as such, are consolidated on our balance sheet at $1.2 billion, representing the amortized sales price of the securities sold to third parties. In total, our two floating rate reinvesting CDOs provide us with $551.7 million of debt financing at a cash cost of LIBOR plus 0.55% (5.87% at September 30, 2006) and an all-in effective interest rate (including the amortization of issuance costs) of LIBOR plus 0.87% (6.19% at September 30, 2006). Our two fixed rate static CDOs provide us with $690.3 million of financing with a cash cost of 5.40% and an all-in effective interest rate of 5.47%. On a combined basis, our CDOs provide us with $1.2 billion of non-recourse, non-mark-to-market, index matched financing at a weighted average cash cost of 0.49% over the applicable index (5.61% at September 30, 2006) and a weighted average all-in cost of 0.69% over the applicable index (5.79% at September 30, 2006). In February 2006, we sold $50.0 million of trust preferred securities through a subsidiary, CT Preferred Trust I. The trust preferred securities have a 30-year term ending April 2036, are redeemable at par on or after April 30, 2011 and pay distributions at a fixed rate of 7.45% for the first ten years ending April 2016, and thereafter, at a floating rate of three month LIBOR plus 2.65%. The all-in cost of the junior subordinated debentures is 7.53%. At September 30, 2006, total shareholders' equity was $347.6 million, an increase of $8.7 million or 3% from the year ended 2005. The increase in shareholders' equity was primarily due to an increase in retained earnings as our net income exceeded our dividends declared which was offset by a decrease in accumulated other comprehensive income/(loss) as the value of our interest rate swaps decreased by $1.3 million. -24- At September 30, 2006, we had 15,397,525 shares of our class A common stock outstanding including unearned restricted stock. Investment Management Overview In addition to our balance sheet investment activities, we act as an investment advisor for third parties. The purpose of the investment management business is to create additional revenue sources for us and to broaden our platform to include investment activities complimentary to those executed directly on our balance sheet. We currently manage three private equity funds through our wholly-owned, taxable, investment management subsidiary, CT Investment Management Co., LLC, or CTIMCO. Two of these funds, CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., were co-sponsored vehicles under a joint venture with Citigroup Alternative Investments, or CAI. We have a co-investment in each of these vehicles. The third fund, CT Large Loan 2006, Inc., or the Large Loan Fund, is exclusively sponsored by us and we do not have a co-investment in this vehicle. At September 30, 2006, Fund II had one investment, total assets of $47.9 million and invested equity of $27.7 million. Our equity co-investment at quarter end totaled $2.1 million (5.88%). CTIMCO earns base management fees of 1.29% per annum on invested capital and is entitled to incentive compensation payments on a 50/50 basis with our co-sponsor. We have agreed to pay up to 25% of the incentive compensation we receive to employees. If Fund II's assets were sold and liabilities were settled on October 1, 2006 at the recorded book value, and the fund's equity and income were distributed, we would record approximately $2.3 million of additional gross incentive fees. At September 30, 2006, Fund III had six investments, total assets of $216.3 million and invested equity of $71.5 million. Our equity co-investment at quarter end totaled $3.9 million (4.71%). CTIMCO earns base management fees of 1.42% per annum on invested capital and is entitled to incentive compensation payments on a 62.5/37.5 basis with our co-sponsor. We have agreed to pay up to 43% of the incentive compensation we receive to employees. If Fund III's assets were sold and liabilities were settled on October 1, 2006 at the recorded book value, and the fund's equity and income were distributed, we would record approximately $7.1 million of additional gross incentive fees. At September 30, 2006, Large Loan Fund had two investments, total assets of $195.2 million and invested equity of $98.0 million. Large Loan Fund's investment mandate is to co-invest with us in large mezzanine transactions that exceed the appetite of the balance sheet. Large Loan Fund has a one year investment period that expires in May 2007. CTIMCO earns management fees of 0.75% per annum of invested assets. Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 We reported net income of $13.4 million for the three months ended September 30, 2006, an increase of $3.6 million, or 37%, from net income of $9.8 million for the three months ended September 30, 2005. The increase was primarily the result of an increase in net interest income from Interest Earning Assets (due to both higher levels of aggregate investments and increases in average LIBOR). Interest and related income from Interest Earning Assets amounted to $46.0 million for the three months ended September 30, 2006, an increase of $23.3 million or 102.2% from the $22.8 million for the three months ended September 30, 2005. The increase in interest income was due to the growth in Interest Earning Assets and a higher average LIBOR rate, which increased by 1.75% from 3.60% for the three months ended September 30, 2005 to 5.35% for the three months ended September 30, 2006. Interest and related expenses on Interest Bearing Liabilities amounted to $28.8 million for the three months ended September 30, 2006, an increase of $18.5 million from the $10.3 million for the three months ended September 30, 2005. The increase in expense was due to an increase in the amount of Interest Bearing Liabilities outstanding in connection with our asset growth as well as an increase in LIBOR. The increase in interest expense was partially offset by the increased use of lower cost collateralized debt obligations and more favorable terms under our repurchase agreements. Other revenues decreased $605,000 from $2.1 million for the three months ended September 30, 2005 to $1.5 million for the three months ended September 30, 2006. The decrease was primarily due to the lower level of fund management fees received during the three months ended September 30, 2006. -25- General and administrative expenses increased $563,000 to $5.9 million for the three months ended September 30, 2006 from approximately $5.3 million for the three months ended September 30, 2005. The increase in general and administrative expenses was primarily due to increased employee compensation expense and professional fees. We have made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ended December 31, 2003. As a REIT, we generally are not subject to federal income tax. To maintain qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable three months, we will be subject to federal income tax on our taxable income at regular corporate rates. We may also be subject to certain state and local taxes on our income and property. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. At September 30, 2006 and 2005, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense on our REIT taxable income for the three months ended September 30, 2006 and 2005. We also have taxable REIT subsidiaries which are subject to tax at regular corporate rates. During the three months ended September 30, 2006 and 2005, we recorded a $984,000 and $846,000 income tax benefit, respectively. The income tax benefits resulted from a net operating loss for the period in our taxable REIT subsidiaries. Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005 We reported net income of $38.6 million for the nine months ended September 30, 2006, an increase of $10.8 million, or 39%, from net income of $27.8 million for the nine months ended September 30, 2005. The increase was primarily the result of an increase in net interest income from Interest Earning Assets (due to both higher levels of aggregate investments and increases in average LIBOR), partially offset by decreases in fund base management and incentive management fees. Interest and related income from Interest Earning Assets amounted to $123.9 million for the nine months ended September 30, 2006, an increase of $66.5 million or 115.9% from the $57.4 million for the nine months ended September 30, 2005. The increase in interest income was due to the growth in Interest Earning Assets and a higher average LIBOR rate, which increased by 1.89% from 3.13% for the nine months ended September 30, 2005 to 5.02% for the nine months ended September 30, 2006. Interest and related expenses on Interest Bearing Liabilities amounted to $72.4 million for the nine months ended September 30, 2006, an increase of $48.7 million from the $23.7 million for the nine months ended September 30, 2005. The increase in expense was due to an increase in the amount of Interest Bearing Liabilities outstanding in connection with our asset growth as well as an increase in LIBOR. The increase in interest expense was partially offset by the increased use of lower cost collateralized debt obligations and more favorable terms under our repurchase agreements. Other revenues decreased $7.6 million from $11.7 million for the nine months ended September 30, 2005 to $4.0 million for the nine months ended September 30, 2006. The decrease was primarily due to the receipt of $7.8 million of incentive management fees from Fund II during the nine months ended September 30, 2005 offset by the acceleration of $1.0 million of previously capitalized fund related expenses in that same period as well as the lower level of fund management fees received during the nine months ended September 30, 2006. General and administrative expenses increased $322,000 to $16.7 million for the nine months ended September 30, 2006 from approximately $16.4 million for the nine months ended September 30, 2005. The increase in general and administrative expenses was primarily due to generally higher employee compensation expense and professional fees offset by the allocation in March 2005 of Fund II incentive management fees for payment to employees (representing 25% of the total received by us, or $2.0 million). Depreciation and amortization increased by $1.9 million from $837,000 to $2.7 million for the nine months ended September 30, 2006 as a result of our expensing an additional $1.8 million of the capitalized costs relating to the Venture Agreement. At September 30, 2006 and 2005, we were in compliance with all REIT requirements and, therefore, have not provided for income tax expense on our REIT taxable income for the nine months ended September 30, 2006 and 2005. We also have taxable REIT subsidiaries which are subject to tax at regular corporate rates. During the nine months ended September 30, 2006 and 2005, we recorded a $2.5 million income tax benefit and a $315,000 income -26- tax expense, respectively. The income tax benefit resulted from a net operating loss for the period in our taxable REIT subsidiaries. Liquidity and Capital Resources We expect that during the balance of 2006, we will use a significant amount of our available capital resources to originate or purchase new loans and investments for our balance sheet. We intend to continue to employ leverage on our balance sheet assets to enhance our return on equity. At September 30, 2006, we had $26.7 million in cash, $8.2 million in restricted cash and $77.5 million of immediately available liquidity from our repurchase agreements. Our primary sources of liquidity for the remainder of 2006 are expected to be cash on hand, cash generated from operations, principal and interest payments received on loans and investments, additional borrowings under our repurchase agreements, and capital raised through CDO issuances, stock offerings, junior subordinated debenture issuances and other capital raising activities. We believe these sources of capital will be adequate to meet future cash requirements. We experienced a net increase in cash of $1.7 million for the nine months ended September 30, 2006, compared to a net decrease of $10.2 million for the nine months ended September 30, 2005. Cash provided by operating activities during the nine months ended September 30, 2006 was $52.0 million, compared to cash provided by operating activities of $27.9 million during the same period of 2005. The change was primarily due to increased net interest income due to our increased investment originations. For the nine months ended September 30, 2006, cash used in investing activities was $713.2 million, compared to $447.2 million during the same period in 2005. The change was primarily due to our increased investment originations. For the nine months ended September 30, 2006, cash provided by financing activities was $662.9 million, compared to $409.2 million during the same period in 2005. The change was primarily due to our increased investment originations. At September 30, 2006, we had outstanding repurchase obligations totaling $351.4 million. At September 30, 2006, we had pledged assets that enable us to obtain an additional $77.5 million of financing under our repurchase agreements without pledging additional collateral. At September 30, 2006, we had $598.6 million of credit available for the financing of new and existing unpledged assets pursuant to our repurchase agreements. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Impact of Inflation Our operating results depend in part on the difference between the interest income earned on our interest-earning assets and the interest expense incurred in connection with our 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 our income by affecting the spread between our interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of our interest-earning assets and our ability to realize gains from the sale of assets and the average life of our 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 our control. We employ the use of correlated hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps and interest rate caps to minimize our exposure to changes in interest rates. There can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit from any hedging contract into which we enter. -27- Note on Forward-Looking Statements Except for historical information contained herein, this quarterly report on Form 10-Q 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 our current business plan, business and investment strategy and portfolio management. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and similar expressions. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that we believe might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q, which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q. -28- ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The principal objective of our asset/liability management activities is to maximize net interest income, while managing levels of interest rate risk. Net interest income and interest expense are subject to the risk of interest rate fluctuations. In certain instances, to mitigate the impact of fluctuations in interest rates, we use interest rate swaps to effectively convert variable rate liabilities to fixed rate liabilities for proper matching with fixed rate assets. The swap agreements are generally held-to-maturity and we do not use interest rate derivative financial instruments for trading purposes. The differential to be paid or received on these agreements is recognized as an adjustment to the interest expense related to debt and is recognized on the accrual basis. Our loans and investments, including our fund investments, are also subject to credit risk. The ultimate performance and value of our loans and investments depends upon the owner's ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due us. To monitor this risk, our asset management team continuously reviews the investment portfolio and in certain instances is in constant contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. The following table provides information about our financial instruments that are sensitive to changes in interest rates at September 30, 2006. For financial assets and debt obligations, the table presents cash flows (in certain cases, face adjusted for expected losses) to the expected maturity and weighted average interest rates based upon the current carrying values of the remaining assets and liabilities. 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 ----------------------------------------------------------------------------------------------------- 2006 2007 2008 2009 2010 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ----------- Assets: (dollars in thousands) Commercial Mortgage-backed Securities Fixed Rate $ 1,509 $ 21,745 $ 48,802 $ 7,784 $ 17,639 $ 653,988 $ 751,467 $ 724,205 Average interest rate 6.66% 6.66% 6.67% 6.71% 6.70% 6.50% 6.52% Variable Rate $ 146 $ 34,752 $ 57,689 $ 19,195 -- $ 1,583 $ 113,365 $ 112,301 Average interest rate 7.62% 7.54% 7.42% 7.20% -- 11.26% 7.47% Loans receivable Fixed Rate $ 404 $ 15,890 $ 61,102 $ 1,538 $ 1,671 $ 113,291 $ 193,896 $ 194,198 Average interest rate 8.91% 8.79% 8.30% 7.75% 7.74% 7.34% 7.77% Variable Rate $ 80,505 $ 264,897 $ 515,197 $ 106,863 $ 87,261 $ 90,142 $ 1,144,865 $ 1,145,082 Average interest rate 9.37% 9.49% 9.40% 9.91% 10.56% 11.16% 9.69% Total Return Swaps Variable Rate -- $ 3,000 -- -- -- -- $ 3,000 $ 3,000 Average interest rate -- 20.55% -- -- -- -- 20.55% Interest rate swaps Notional amounts $ 6,694 $ 36,343 $ 41,375 $ 37,425 $ 14,107 $ 396,255 $ 532,199 $ 959 Average fixed pay rate 5.07% 4.68% 5.08% 4.69% 5.04% 5.00% 4.96% Average variable receive rate 5.32% 5.32% 5.32% 5.32% 5.32% 5.32% 5.32% Liabilities: Repurchase obligations Variable Rate $ 56,161 $ 71,021 $ 224,251 -- -- -- $ 351,433 $ 351,433 Average interest rate 6.08% 6.40% 6.64% -- -- -- 6.49% Collateralized debt obligations Fixed Rate $ 324 $ 5,976 $ 5,030 $ 4,396 $ 2,603 $ 267,460 $ 285,789 $ 265,082 Average interest rate 6.82% 5.37% 5.65% 5.69% 5.28% 5.29% 5.31% Variable Rate $ 8,052 $ 24,255 $ 121,225 $201,424 $ 151,803 $ 453,524 $ 960,283 $ 960,283 Average interest rate 5.69% 5.69% 5.34% 5.55% 5.74% 5.83% 5.69%
-29- ITEM 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Controls There have been no significant changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) under the Securities Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. -30- PART II. OTHER INFORMATION ITEM 1: Legal Proceedings None ITEM 1A: Risk Factors There have been no material changes to the risk factors previously disclosed in Item 1A of our annual report on Form 10-K for the year ended December 31, 2005, filed on March 10, 2006 with the Securities and Exchange Commission, except that the Company has determined to add the following risk factors: We are subject to risks related to our international investments. We make investments in foreign countries. Investing in foreign countries involves certain risks that may not exist when investing in the United States. The risks involved in foreign investments include: o exposure to local economic conditions, foreign exchange restrictions and restrictions on the withdrawal of foreign investment and earnings, investment restrictions or requirements, expropriations of property and changes in foreign taxation structures; o potential adverse changes in the diplomatic relations of foreign countries with the United States and government policies against investments by foreigners; o changes in foreign regulations; o hostility from local populations, potential instability of foreign governments and risks of insurrections, terrorist attacks, war or other military action; o fluctuations in foreign exchange rates; o changes in social, political, legal and other conditions affecting our international investment; o logistical barriers to our timely receiving the financial information relating to our international investments that may need to be included in our periodic reporting obligations as a public company; and o lack of uniform accounting standards (including availability of information in accordance with U.S. generally accepted accounting principles). Unfavorable legal, regulatory, economic or political changes such as those described above could adversely affect our financial condition and results of operations. There are increased risks involved with construction lending activities. We originate loans for the construction of commercial and residential use properties. Construction lending generally is considered to involve a higher degree of risk than to other types of lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion or operation of the project for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity. Some of our investments and investment opportunities are in synthetic form. Synthetic investments are contracts between parties whereby payments are exchanged based upon the performance of an underlying reference obligation. These investments can take the form of either a total return swap, contracts in which one party agrees to make payments that replicate the total return of a defined underlying asset, typically in return for an upfront payment from the counterparty who essentially bears the risk of performance of the referenced asset, or a credit default swap, where one counterparty receives payments in return for assuming the risk of defaults and losses corresponding to the reference obligation. In addition to the performance of the reference obligation, these synthetic interests carry the risk of the counterparty not performing its contractual obligations. Market standards, the GAAP accounting methodology and tax regulations related to these investments are evolving, and we cannot be certain that their evolution will not adversely impact the value or sustainability of these investments. Furthermore, our ability to invest in synthetic investments, other than through a taxable REIT subsidiary, may be severely limited by the REIT qualification requirements because total return swaps and other synthetic investment contracts generally are not qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests. -31- ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds None ITEM 3: Defaults Upon Senior Securities None ITEM 4: Submission of Matters to a Vote of Security Holders None ITEM 5: Other Information None -32- ITEM 6: Exhibits 3.1 Charter of Capital Trust, Inc. (filed as Exhibit 3.1.a to the Company's Current Report on Form 8-K (File No. 1-14788) filed on April 2, 2003 and incorporated herein by reference). 3.2 Amended and Restated Bylaws of Capital Trust, Inc. (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 3.3 First Amendment to Amended and Restated Bylaws of Capital Trust, Inc. (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (File No. 1-14788) filed on August 16, 2004 and incorporated herein by reference). o10.1.a Amended and Restated Master Repurchase Agreement, dated as of August 15, 2006, by and between Goldman Sachs Mortgage Company and Capital Trust, Inc. o10.1.b Annex I to Amended and Restated Master Repurchase Agreement, dated as of August 15, 2006, by and between Goldman Sachs Mortgage Company and Capital Trust, Inc. o10.1.c Letter, dated as of August 15, 2006, by and between Goldman Sachs Mortgage Company and Capital Trust, Inc. +10.2 Employment Agreement, dated as of August 4, 2006, by and among Capital Trust, Inc., CT Investment Management Co., LLC and Thomas C. Ruffing (filed as Exhibit 10.2 to Capital Trust, Inc.'s Quarterly Report on Form 10-Q (File No. 1-14788) filed on August 8, 2006 and incorporated herein by reference). o+10.3 Employment Agreement, dated as of September 29, 2006, by and among Capital Trust, Inc., CT Investment Management Co., LLC and Geoffrey G. Jervis. 11.1 Statements regarding Computation of Earnings per Share (Data required by Statement of Financial Accounting Standard No. 128, Earnings per Share, is provided in Note 10 to the consolidated financial statements contained in this report). o31.1 Certification of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o31.2 Certification of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o32.1 Certification of John R. Klopp, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. o32.2 Certification of Geoffrey G. Jervis, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. o99.1 Risk Factors ------------------------ o Filed herewith + Represents a management contract or compensatory plan or arrangement -33- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITAL TRUST, INC. October 30, 2006 /s/ John R. Klopp - ---------------- ----------------- Date John R. Klopp Chief Executive Officer October 30, 2006 /s/ Geoffrey G. Jervis - ---------------- ----------------------- Date Geoffrey G. Jervis Chief Financial Officer -34- EX-10 2 ex10-1a.htm EX. 10.1(A)

 

Exhibit 10.1.a

Amended and Restated Master

Repurchase

Agreement

Bond Market Association September 1996 Version

 

 

Dated as of: August 15, 2006

Between: Goldman Sachs Mortgage Company (“Buyer”)

and Capital Trust, Inc. (“Seller”)

1.

Applicability

This Agreement amends and restates that certain Master Repurchase Agreement dated as of May 28, 2003 between Buyer and Seller (as such agreement was amended from time to time, “Original Agreement”). From time to time the parties hereto may enter into transactions in which one party (“Seller”) agrees to transfer to the other (“Buyer”) securities or other assets (“Securities”) against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a “Transaction” and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder.

 

2.

Definitions

(a)

“Act of Insolvency”, with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratori­um, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commence­ment of any such case or proceeding against such party, or another seeking such an appoint­ment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appoint­ment or election, the issuance of such a protective decree or the entry of an order having a sim­ilar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party’s inability to pay such party’s debts as they become due;

 

(b)

“Additional Purchased Securities”, Securities provided by Seller to Buyer pursuant to Paragraph 4 (a) hereof,

 

 

 

 

1

 

 

 

 

(c)

“Buyer’s Margin Amount”, with respect to any Transaction as of any date, the amount obtained by application of the Buyer’s Margin Percentage to the Repurchase Price for such Transaction as of such date;

 

(d)

“Buyer’s Margin Percentage”, with respect to any Transaction as of any date, a percentage (which may be equal to the Seller’s Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction;

 

(e)

“Confirmation”, the meaning specified in Paragraph 3(b) hereof;

 

(f)

“Income”, with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon;

 

(g)

“Margin Deficit”, the meaning specified in Paragraph 4(a) hereof;

 

(h)

“Margin Excess”, the meaning specified in Paragraph 4(b) hereof;

 

(i)

“Margin Notice Deadline”, the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfac­tion of margin maintenance obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice);

 

(j)

“Market Value”, with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any Income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities);

 

(k)

“Price Differential”, with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction);

 

(1)

“Pricing Rate”, the per annum percentage rate for determination of the Price Differential;

 

(m)

“Prime Rate”, the prime rate of U.S. commercial banks as published in The Wall Street Journal (or, if more than one such rate is published, the average of such rates);

 

(n)

“Purchase Date”, the date on which Purchased Securities are to be transferred by Seller to Buyer;

 

(o)

“Purchase Price”, (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree oth­erwise, such price increased by the amount of any cash transferred by Buyer to Seller pur­suant to Paragraph 4(b) hereof and decreased by the amount of any cash

 

   

 

2

 

 

 

 

transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller’s obligations under clause (ii) of Paragraph 5 hereof;

 

(p)

“Purchased Securities”, the Securities transferred by Seller to Buyer in a Transaction here­under, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term “Purchased Securities” with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4(b) hereof;

 

(q)

“Repurchase Date”, the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof;

 

(r)

“Repurchase Price”, the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination;

 

(s)

“Seller’s Margin Amount”, with respect to any Transaction as of any date, the amount obtained by application of the Seller’s Margin Percentage to the Repurchase Price for such Transaction as of such date;

 

(t)

“Seller’s Margin Percentage”, with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer’s Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction.

 

3.

Initiation; Confirmation; Termination

(a)

An agreement to enter into a Transaction may be made orally or in writing at the initia­tion of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller.

 

(b)

Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a “Confirmation”). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail.

 

(c)

In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market prac­tice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termina­tion in the case of Transactions having a fixed term, termination of

 

   

 

3

 

 

 

 

the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer.

 

4.

Margin Maintenance

(a)

If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggre­gate Buyer’s Margin Amount for all such Transactions (a “Margin Deficit”), then Buyer may by notice to Seller require Seller in such Transactions, at Seller’s option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer (“Additional Purchased Securities”), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer’s Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller).

 

(b)

If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller’s Margin Amount for all such Transactions at such time (a “Margin Excess”), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer’s option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller’s Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer).

 

(c)

If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased Securities as provided in such subpara­graph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice.

 

(d)

Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller.

 

(e)

Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions).

 

(f)

Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement).

 

 

   

 

4

 

 

 

 

5.

Income Payments

Seller shall be entitled to receive an amount equal to all Income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would be so entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agree with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, if any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed.

 

6.

Security Interest

Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all Income thereon and other proceeds thereof.

 

7.

Payment and Transfer

Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer.

 

8.

Segregation of Purchased Securities

To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller’s interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer’s obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof.

 

Required Disclosure for Transactions in Which the Seller Retains Custody of the Purchased Securities

Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer’s securities segregated at all times unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants

 

 

   

 

5

 

 

 

 

 

the right to substitute, this means that Buyer’s securities will likely be commingled with Seller’s own securities during the trading day. Buyer is advised that during any trading day that Buyer’s securities are commingled with Seller’s securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]” and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller’s ability to resegregate substitute securities for Buyer will be subject to Seller’s ability to satisfy [the clear­ing] * [any]** lien or to obtain substitute securities.

 

 

*

Language to be used under 17 C.F.R, §403.4 (e) if Seller is a government securities broker or dealer other than a financial institution.

 

**

Language to be used under 17 C.F.R. §403.5 (d) if Seller is a financial institution.

 

9.

Substitution

(a)

Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities.

 

(b)

In Transactions in which Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; provided, however, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted.

 

10. Representations

Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing, in the form of an annex hereto or otherwise, in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, bylaw or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it.

 

11. Events of Default

In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof, (iv) Buyer fails, after one business day’s notice, to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated,

 

   

 

6

 

 

 

 

or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an “Event of Default”):

 

(a)

The nondefaulting party may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Insolvency) give notice to the defaulting party of the exercise of such option as promptly as practicable.

 

(b)

In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party’s obligations in such Transactions to repurchase all Purchased Securities, at the Repurchase Price therefor on the Repurchase Date deter­mined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party’s posses­sion or control.

 

(c)

In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party.

 

(d)

If the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, the nondefaulting party, without prior notice to the defaulting party, may:

 

 

(i)

as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and

 

 

(ii)

as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities (“Replacement Securities”) of the same

 

   

 

7

 

 

 

 

class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source.

 

Unless otherwise provided in Annex 1, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities).

 

(e)

As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder.

 

(f)

For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in sub­paragraph (a) of this Paragraph.

 

(g)

The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction.

 

(h)

To the extent permitted by applicable law, the defaulting party shall be liable to the non­defaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party’s rights hereunder. Interest on any sum payable by the default­ing party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate.

 

(i)

The nondefaulting party shall have, in addition to its rights hereunder, any rights other­wise available to it under any other agreement or applicable law.

 

12. Single Agreement

Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i)

 

   

 

8

 

 

 

 

to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted.

 

13. Notices and Other Communications

Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex 11 hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence.

 

14. Entire Agreement; Severability

This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.

 

15. Non-assignability; Termination

(a)

The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding.

 

(b)

Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof.

 

16. Governing Law

This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof.

 

17. No Waivers, Etc.

No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on an of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date.

 

   

 

9

 

 

 

 

 

18. Use of Employee Plan Assets

(a)

If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 (“ERISA) are intended to be used by either party hereto (the “Plan Party”) in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed.

 

(b)

Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition.

 

(c)

By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller’s latest such financial statements, there has been no material adverse change in Seller’s financial condition which Seller has not dis­closed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any out­standing Transaction involving a Plan Party.

 

19. Intent

(a)

The parties recognize that each Transaction is a “repurchase agreement” as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a “securities contract” as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplica­ble).

 

(b)

It is understood that either party’s right to liquidate Securities delivered to it in connec­tion with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended.

 

(c)

The parties agree and acknowledge that if a party hereto is an “insured depository insti­tution,” as such term is defined in the Federal Deposit Insurance Act, as amended (“FDIA"), then each Transaction hereunder is a “qualified financial contract,” as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplica­ble).

 

 

(d)

It is understood that this Agreement constitutes a “netting contract” as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA") and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a “covered contractual payment entitlement” or 11 “covered contractual payment obligation”, respectively, as defined in and subject to FDI­CIA (except insofar as one or both of the parties is not a “financial institution” as that term is defined in FDICIA).

 

20. Disclosure Relating to Certain Federal Protections

The parties acknowledge that they have been advised that:

 

 

   

 

10

 

 

 

 

 

(a)

in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission (“SEC”) under Section 15 of the Securities Exchange Act of 1934 (“1934 Act”), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 (“SIPA") do not protect the other party with respect to any Transaction hereunder;

 

(b)

in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and

 

(c)

in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE
FOLLOWS]

 

   

 

11

 

 

 

 

 

 

CAPITAL TRUST, INC.,

 

/s/ Geoffrey G. Jervis  

Name: Geoffrey G. Jervis

Title: Chief Financial Officer

Date: 8/15/06

 

 

GOLDMAN SACHS MORTGAGE COMPANY,

 

By:

Goldman Sachs Real Estate Funding Corp.,

 

its general partner

 

 

By:

/s/ Leo Huang

 

Name:

Leo Huang

 

Title:

Authorized Signatory

 

Date:

8/8/06

 

 

 

 

 

 

 

 

 

 

Annex I

 

 

 

 

 

 

 

 EX-10 3 ex10-1b.htm EX. 10.1(B)

Exhibit 10.1.b

 

ANNEX I to

AMENDED AND RESTATED MASTER REPURCHASE AGREEMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

APPLICABILITY

1

2.

DEFINITIONS

1

3.

INITIATION; CONFIRMATION; TERMINATION; FEES

18

4.

MANDATORY PAYMENT OR DELIVERY OF ADDITIONAL ASSETS

25

5.

INCOME PAYMENTS AND PRINCIPAL PAYMENTS

26

6.

SECURITY INTEREST

27

7.

PAYMENT, TRANSFER AND CUSTODY

28

8.

CERTAIN RIGHTS OF BUYER WITH RESPECT TO THE LOANS

35

9.

SUBSTITUTION

36

10.

REPRESENTATIONS

36

11.

NEGATIVE COVENANTS OF SELLER

40

12.

AFFIRMATIVE COVENANTS OF SELLER

41

13.

[NTENTIONALLY OMITTED]

44

14.

EVENTS OF DEFAULT; REMEDIES

46

15.

[INTENTIONALLY OMITTED.]

51

16.

NOTICES AND OTHER COMMUNICATIONS

51

17.

NON-ASSIGNABILITY

52

18.

CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL

52

19.

NO RELIANCE; DISCLAIMERS

53

20.

INDEMNITY AND EXPENSES

53

21.

DUE DILIGENCE

54

22.

SERVICING

55

23.

TREATMENT FOR TAX PURPOSES

56

24.

INTENT

56

25.

SINGLE AGREEMENT

56

26.

MISCELLANEOUS

56

 

SCHEDULE 1

Purchase Percentages And Applicable Spreads

1-1

SCHEDULE 2

Initial Portfolio Loans

2-1

SCHEDULE 3

Purchased Loan Information

3-1

SCHEDULE 4

Approved Appraisers

4-1

SCHEDULE 5

Approved Engineers

5-1

SCHEDULE 6

Approved Environmental Consultants

6-1

SCHEDULE 7-A

Form of UCC Financing Statement

7-A-1

 

 

 

i

 

 

 

 

SCHEDULE 7-B

Form of UCC Financing Statement Amendment

7-B-1

 

 

 

 

ii

 

 

 

 

EXHIBITS

EXHIBIT I

Form of Confirmation

EXHIBIT II

Intentionally Omitted

EXHIBIT III

Form of Custodial Delivery Certificate

EXHIBIT IV-1

Form of Power of Attorney to Buyer

EXHIBIT IV-2

Form of Power of Attorney to Seller

EXHIBIT V

Representations and Warranties Regarding Purchased Loans

EXHIBIT VI

Form of Blocked Account Agreement

EXHIBIT VII

Form of Direction Letter

EXHIBIT VIII

Form of Bailee Agreement

 

 

 

 

iii

 

 

 

 

Supplemental Terms and Conditions

This Annex I forms a part of the Amended and Restated Master Repurchase Agreement dated as of June 30, 2006 between Capital Trust, Inc., as seller, and Goldman Sachs Mortgage Company, as buyer (together with Annex I, the “Agreement”) and amends and restates that certain Master Repurchase Agreement dated as of May 28, 2003, as such agreement was amended from time to time, between Seller and Buyer (“Original Agreement”). Capitalized terms used in this Annex I without definition shall have the respective meanings assigned to such terms in the Agreement. This Annex I is intended to supplement the Agreement and shall, wherever possible, be interpreted so as to be consistent with the Agreement; however, in the event of any conflict or inconsistency between the provisions of this Annex I, on the one hand, and the provisions of the Agreement, on the other, the provisions of this Annex I shall govern and control. All references in the Agreement and in this Annex I to “the Agreement” shall be deemed to mean and refer to the Agreement, as supplemented and modified by this Annex I or as otherwise modified after the date hereof.

1.

APPLICABILITY; OTHER APPLICABLE ANNEXES

(a) Paragraph 1 of the Agreement (“Applicability”) is hereby deleted and replaced with the following:

Seller and Buyer entered into the Original Agreement pursuant to which Buyer and Seller agreed to enter into Transactions from time to time. The parties have agreed to amend and restate the Original Agreement as set forth herein.

From time to time the parties hereto may enter into transactions in which Seller agrees to transfer to Buyer one or more Mezzanine Loans, First Mortgage B-Notes, Stabilized Mortgage Loans, Transitional Mortgage Loans, or Other Mezzanine Investments against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such loans or investments at a date certain (or such earlier date, in accordance with the terms hereof), against the transfer of funds by Seller. Each such transaction shall be referred to herein as a “Transaction” and, unless otherwise agreed in writing, shall be governed by the Agreement, including any supplemental terms or conditions contained in this Annex I and in any other annexes identified herein or therein as applicable hereunder.

As of the date hereof, the Purchased Loans on Schedule 2 have been purchased by Purchaser from Seller and shall be subject to the terms hereof.

(b) In addition to this Annex I and the Schedules hereto, the following Annexes and any Schedules thereto shall form a part of the Agreement and shall be applicable thereunder:

Annex II – Names and Addresses for Communications Between Parties.

2.

ADDITIONAL AND SUBSTITUTE DEFINITIONS

(a) The following capitalized terms in Paragraph 2 of the Agreement (“Definitions”) are hereby deleted in their entirety:

 

(i)

“Additional Purchased Securities”;

 

(ii)

“Buyer’s Margin Amount”;

 

(iii)

“Buyer’s Margin Percentage”;

 

 

 

1

 

 

 

 

 

(iv)

“Margin Notice Deadline”;

 

(v)

“Prime Rate”;

 

(vi)

“Purchased Securities”;

 

(vii)

“Seller’s Margin Amount”; and

 

(viii)

“Seller’s Margin Percentage”.

 

(b)           The following capitalized terms shall have the respective meanings set forth below, in lieu of the meanings for such terms set forth in Paragraph 2 of the Agreement (“Definitions”):

“Act of Insolvency” shall mean, with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the making by such party of a general assignment for the benefit of creditors, or (iii) the admission in writing by such party of such party’s inability to pay such party’s debts as they become due.

“Confirmation” shall have the meaning specified in Section 3(d) of this Annex I.

“Income” shall mean, with respect to any Purchased Loan at any time, any payment or other cash distribution thereon of principal, interest, dividends, fees, reimbursements or proceeds or other cash distributions thereon (including casualty or condemnation proceeds).

“Margin Deficit” shall have the meaning specified in Section 4(a) of this Annex I.

“Margin Excess” shall have the meaning specified in Section 4(c) of this Annex I.

“Market Value” shall mean, with respect to any Purchased Loan as of any relevant date, the lesser of (x) market value of such Purchased Loan on such date, as determined by Buyer in its good faith but sole discretion, and (y) the par amount of such Purchased Loan.

For purposes of Buyer’s determination, (i) the Market Value may be determined by reference to an Appraisal, discounted cash flow analysis or other method (which method shall be selected by Buyer in good faith), (ii) any amounts or claims secured by related Eligible Property or Properties ranking senior to or pari passu with the lien of the Purchased Loan may be deducted from the Market Value of the Purchased Loan, (iii) the Market Value of any Defaulted Loan shall be zero (unless Buyer otherwise specifies), (iv) Buyer may consider the representations and warranties set forth in Exhibit V (including a breach thereof), and exceptions thereto in its determination of the Market Value of the Purchased Loans and (iv) for the avoidance of doubt, Buyer may reduce Market Value for any actual or potential risks (including risk of delay) posed by any liens or claims on the related Eligible Property or Properties. Seller shall cooperate with Buyer in its determination of the Market Value of each item of underlying collateral (including, without limitation, providing all information and documentation in the possession of Seller

 

 

2

 

 

 

 

regarding such item of underlying collateral or otherwise required by Buyer in its commercially reasonable judgment).

“Pricing Rate” shall mean, for any Purchased Loan and any Pricing Rate Period, an annual rate equal to the LIBO Rate for such Pricing Rate Period plus the Applicable Spread for the applicable Loan Type and shall be subject to adjustment and/or conversion as provided in Sections 3(j) and 3(k) of this Annex I.

“Purchase Price” shall mean, with respect to any Purchased Loan the price at which such Purchased Loan is transferred by Seller to Buyer on the applicable Purchase Date. The Purchase Price as of any Purchase Date for any Purchased Loan of a particular Loan Type shall be an amount (expressed in dollars) equal to the product obtained by multiplying (i) the Market Value of such Purchased Loan (or the par amount of such Purchased Loan, if lower than the Market Value) by (ii) the Purchase Percentage for the related Loan Type.

“Purchase Date” shall mean with respect to any Purchased Loan, the date on which such Purchased Loan is transferred by Seller to Buyer.

“Repurchase Date” with respect to any Purchased Loan shall mean the Facility Termination Date or such earlier date specified in the related Confirmation, or if applicable, the related Early Repurchase Date or Accelerated Repurchase Date.

“Repurchase Price” shall mean, with respect to any Purchased Loan as of any date, the price at which such Purchased Loan is to be transferred from Buyer to Seller upon termination of the related Transaction; such price will be determined in each case as the sum of the Purchase Price of such Purchased Loan and the accrued Price Differential with respect to such Purchased Loan as of the date of such determination, minus all Income and cash actually received by Buyer in respect of such Transaction and applied towards the Repurchase Price and/or Price Differential pursuant to Sections 3(i), 3(j), 4(a), 4(c),5(b), 5(c), 5(d) and 5(e) of this Annex I.

(c)           In addition to the terms defined in Paragraph 2 of the Agreement (“Definitions”) not otherwise deleted pursuant to Section 2(a) of this Annex I and the terms defined in Section 2(b) of this Annex I, the following capitalized terms shall have the respective meanings set forth below:

“Accelerated Repurchase Date” shall have the meaning specified in Section 14(c)(i) of this Annex I.

“Accepted Servicing Practices” shall mean with respect to any Purchased Loan, in conformity with those accepted and prudent servicing practices in the industry for loans of the same type and in a manner at least equal in quality to the servicing the applicable servicer provides for assets similar to such Purchased Loans which it owns.

“Affiliate” shall mean, when used with respect to any specified Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. Control shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise and “controlling” and “controlled” shall have meanings correlative thereto.

“Agreement” shall have the meaning specified in the introductory paragraph of this Annex I.

 

 

3

 

 

 

 

“Alternative Rate” shall have the meaning specified in Section 3(m) of this Annex I.

“Alternative Rate Transaction” shall mean, with respect to any Pricing Rate Period, any Transaction with respect to which the Pricing Rate for such Pricing Rate Period is determined with reference to the Alternative Rate.

“Applicable Spread” shall mean, with respect to a Purchased Loan, (i) so long as no Event of Default shall have occurred and be continuing, the per annum rate specified in Schedule 1 attached hereto as being the “Applicable Spread” for the Purchased Loans in such Loan Type, and (ii) after the occurrence and during the continuance of an Event of Default, the applicable per annum rate described in clause (i) of this definition, plus 400 basis points (4.0%).

“Appraisal” shall mean an appraisal of any Eligible Property prepared by a licensed appraiser listed on Schedule 4 attached hereto, as such schedule may be amended from time to time by Seller or Buyer upon approval by Buyer 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 Base” shall mean, as of any date of determination, the aggregate Asset Base Components of all Purchased Loans transferred by the Seller to the Buyer hereunder.

“Asset Base Component” shall mean, with respect to each Purchased Loan, the product of its Market Value multiplied by the Purchase Percentage applicable to such Purchased Loan.

“Assignment of Leases” shall mean, with respect to any Purchased Loan which is a mortgage loan, any assignment of leases, rents and profits or equivalent instrument, whether contained in the related Mortgage or executed separately, assigning to the holder or holders of such Mortgage all of the related Mortgagor’s interest in the leases, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of the related Mortgaged Property as security for repayment of such Purchased Loan.

“Assignment of Mortgage” shall mean, with respect to any Mortgage, an assignment of the mortgage, notice of transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related property is located to reflect the assignment and pledge of the Mortgage.

“Bailee” shall mean Paul, Hastings, Janofsky & Walker LLP or such other third party as Buyer may approve in its sole discretion.

“Bailee Agreement” shall mean the Bailee Agreement among Seller, Buyer and Bailee in the form of Exhibit VIII hereto.

“Blocked Account” shall have the meaning specified in Section 5 of this Annex I.

“Blocked Account Agreement” shall mean the Amended and Restated Blocked Account Agreement, in the form attached hereto as Exhibit VI (or such other form as shall have been approved by Buyer, such approval not to be unreasonably withheld, delayed or conditioned),

 

 

4

 

 

 

 

dated as of the date hereof and executed by Buyer, Seller and the Depository Bank (and any successor thereto or replacement thereof executed by Buyer, Seller and the Depository Bank).

“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 the Custodian is authorized or obligated by law or executive order to be closed.

“Buyer” shall mean Goldman Sachs Mortgage Company, and any successor or assign.

“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 the Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP.

“Change of Control” shall mean either of the following events have occurred:

(i)             a majority of the members of the board of directors of Seller changes during any twelve (12) month period after the date hereof; or

(ii)            a merger, consolidation or other transaction in which a Person which is not an Affiliate acquires in excess of 50% of the voting common equity of Seller.”

“Collection Period” shall mean with respect to the Remittance Date in any month, the period beginning on but excluding the Cut-off Date in the month preceding the month in which such Remittance Date occurs and continuing to and including the Cut-off Date immediately preceding such Remittance Date.

“Costs” shall mean, with respect to any Purchased Loan, all out-of-pocket obligations, costs, fees, indemnities and expenses in respect of such Purchased Loan actually incurred by Buyer, that (i) arise out of Seller’s conduct or (ii) (A) are required to be paid by the lender under the applicable Purchased Loan Documents and (B) do not arise out of the gross negligence or willful misconduct of the Buyer.

“Custodial Agreement” shall mean, with respect to Transactions involving Purchased Loans, the Amended and Restated Custodial Agreement, dated as of the date hereof, by and among Custodian, Seller and Buyer.

“Custodial Delivery” shall mean the delivery certificate, a form of which is attached hereto as Exhibit III, executed by Seller in connection with its delivery of a Purchased Loan File to Buyer or its designee (including the Custodian) pursuant to Section 7 of this Annex I.

“Custodian” shall mean Deutsche Bank Trust Company Americas or any successor Custodian appointed by Buyer.

“Cut-off Date” shall mean the last Business Day of the calendar month preceding each Remittance Date.

“Debt to Equity Ratio” shall mean the ratio of Total Indebtedness to Tangible Net Worth.

 

 

5

 

 

 

 

“Debt Yield” shall mean, with respect to any Eligible Property or Properties directly or indirectly securing a proposed New Loan, the quotient (expressed as a percentage) of (i) net operating income for the trailing twelve-month period for the most recently ended fiscal quarter divided by, (ii) the total amount of indebtedness secured directly or indirectly by such Eligible Property or Properties which is senior to or pari passu with the proposed New Loan.

“Default” shall mean any event which, with the giving of notice, the passage of time, or both, would constitute an Event of Default.

“Defaulted Loan” shall mean any Purchased Loan as to which (A) there is a breach beyond any applicable cure period of a representation, warranty or covenant by the related borrower or obligor under the applicable Purchased Loan Documents or by Seller under Exhibit V, (B) there is a default beyond any applicable cure period under the related Purchased Loan Documents in the payment when due of interest, principal or any other amounts which default continues, (C) any other “Event of Default” under the related Purchased Loan Document, (D) to the extent that the related Transaction is deemed a loan under federal, state or local law Buyer ceases to have a first priority perfected security interest or (E) the related Purchased Loan File or any portion thereof has been released from the possession of the Custodian under the Custodial Agreement to anyone other than Buyer or any Affiliate of Buyer except in accordance with the terms of the Custodial Agreement.

“Depository Bank” shall mean PNC Bank, N.A. or any successor Depository Bank appointed by Seller with the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned) which delivers a deposit account agreement in the form of the Blocked Account Agreement or another form reasonably acceptable to Buyer.

“Diligence Fee” shall mean fees payable by Seller to Buyer in respect of Buyer’s legal and other expenses incurred in connection with its review of the Diligence Materials which amount shall not exceed $10,000 for non-table funded Purchased Loans and $15,000 for table funded Purchased Loans.

“Diligence Materials” shall mean the Preliminary Due Diligence Package together with the Supplemental Due Diligence List.

“Disqualified Transferee” shall mean any one of the following:

(a) iStar Financial and its Affiliates;

(b) Anthracite Carbon Fund, together with any successor funds, to the extent such funds are in the same business as their predecessor fund and its Affiliates;

(c) DB Realty Mezzanine Investment Fund I LLC and DB Realty Mezzanine Investment Fund II LLC, together with any successor funds, to the extent such funds are in the same business as their predecessor fund;

(d) Brascan and its Affiliates;

(e) Fortress/Draw Bridge and its Affiliates;

(f) Whitehall;

 

 

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(g) Five Mile Capital and its Affiliates;

(h) Fillmore Capital and its Affiliates;

(i) Resource America and its Affiliates;

 

(j) Northstar and its Affiliates, and

 

(k) Guggenheim and its Affiliates.

“Draft Appraisal” shall mean a short form appraisal, “letter opinion of value,” or any other form of draft appraisal reasonably acceptable to Buyer.

“Early Repurchase Date” shall have the meaning specified in Section 3(g) of this Annex I.

“Early Repurchase Deposit” shall have the meaning specified in Section 3(j) of this Annex I.

“Early Repurchase Deposit Application Date” shall have the meaning specified in Section 3(j) of this Annex I.

“Early Repurchase Deposit Funding Date” shall have the meaning specified in Section 3(j) of this Annex I.

“Eligible Loans” shall mean any of the following types of loans listed in (i) through (v) below, (v) acceptable to Buyer in the exercise of its sole and absolute discretion, (w) secured directly or indirectly by an Eligible Property, (x) having a remaining term (after giving effect to the exercise of any extension options) not to exceed seven (7) years, (y) as to which the applicable representations and warranties set forth in Exhibit V are true and correct as of the applicable Purchase Date and (z) has a maximum LTV of 85% (unless provided below or is approved by Buyer on a case by case basis).

(i)             performing Mezzanine Loans which are secured by pledges of the equity ownership interests in entities that directly or indirectly own Eligible Properties (the “Mezzanine Loans”).

(ii)            senior participation interests (or a senior promissory note that is, in effect, similar in nature to a senior participation interest) in performing Mortgage Loans secured by first liens on Eligible Properties that also may secure a junior promissory note (or junior interest) in such loan (the “Senior First Mortgage B Notes”).

(iii)           junior participation interests (or a junior promissory note that is, in effect, similar in nature to a junior participation interest) in performing Mortgage Loans secured by first liens on Eligible Properties that also secure a senior promissory note (or senior interest) in such loan (the “Junior First Mortgage B Notes”).

(iv)          any other performing loan, participation interest, or other junior mezzanine or subordinate investment which has a maximum LTV of [90%] and which

 

 

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does not otherwise conform to the criteria set forth in clauses (i) through (iii) above that Buyer elects in its sole discretion to purchase (the “Other Mezzanine Investments”).

(v)           any performing Stabilized Mortgage Loans with a maximum LTV of 85% or any performing Transitional Mortgage Loans with a maximum LTV of 80%, in each case secured by first liens on Eligible Properties.

“Eligible Property” shall mean a property that is a multifamily, retail, office, industrial, warehouse, condominium or hospitality property or such other property type acceptable to Buyer in the exercise of its good faith business judgment; provided, however, that Buyer shall determine in its sole and absolute discretion, on a case-by-case basis, whether any healthcare related property, such as assisted living, nursing homes, acute care, rehabilitation centers, diagnostic centers and psychiatric centers, qualifies as an Eligible Property.

“EBITDA” shall mean, for each fiscal quarter, with respect to Seller and its consolidated Subsidiaries, an amount equal to (a) Net Income for such period (excluding the effect of any extraordinary gains or losses resulting from the sale of property or non-cash gains or losses outside the ordinary course of business) plus (b), without duplication, an amount which, in the determination of Net Income for such period, has been deducted for (i) interest expense for such period, (ii) total federal, state, foreign or other income or franchise taxes for such period, and (iii) all depreciation and amortization for such period, all as determined with respect to any consolidated subsidiary in accordance with the methodology specified in the definition of Net Income, plus (c) any nonrecurring fees and expenses incurred on or prior to the date of the execution and delivery of the Agreement, excluding (d) any non-cash reserve activity.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Annex I and, as of the relevant date, any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor.

“ERISA Affiliate” means any corporation or trade or business (whether or not incorporated) that is a member of any group of organizations described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA of which Seller is a member at any relevant time.

“Event of Default” shall have the meaning specified in Section 14(a) of this Annex I.

“Facility Amount” shall mean $150,000,000.

“Facility Termination Date” shall mean June 29, 2009 unless extended pursuant to Section 3(r) of this Annex I.

“Federal Funds Rate” shall mean, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day, (or, if such day is not a Business Day, for the immediately preceding 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 at approximately 10 a.m. (New York time) on such day or such transactions received by the Buyer from three Federal funds brokers of recognized standing selected by the Buyer in its sole discretion.

 

 

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“Fee Letter” shall mean that certain letter agreement, dated the date hereof, between Buyer and Seller, as the same may be amended, supplemented or otherwise modified from time to time.

“Filings” shall have the meaning specified in Section 6(e) of this Annex I.

“Financing Transaction” shall mean a repurchase transaction or a financing transaction between Buyer (or an Affiliate of Buyer) and a counterparty.

“First Mortgage B Note” shall mean any Senior First Mortgage B Note or Junior First Mortgage B Note.

“Fitch” means Fitch Inc.

“Fixed Charge Ratio” shall mean, with respect to any period, the ratio of (a) EBITDA for such period to (b) the sum of (i) interest expense and (ii) preferred dividends (specifically excluding any convertible trust preferred dividends) paid by Seller during such period.

“GAAP” shall mean United States generally accepted accounting principles consistently applied as in effect from time to time.

“Governmental Authority” shall mean any national or federal government, any state, regional, local or other political subdivision thereof with jurisdiction and any Person with jurisdiction exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Hedging Transactions” shall mean, with respect to any or all of the Purchased Loans, any short sale of U.S. Treasury Securities or mortgage-related securities, futures contract (including Eurodollar futures) or options contract or any 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 Seller or the underlying obligor with respect to any Purchased Loan and pledged to Seller as collateral for such Purchased Loan, with one or more counterparties whose unsecured debt is rated at least AA (or its equivalent) by any Rating Agency or, with respect to any Hedging Transaction pledged to Seller as additional collateral for a Purchased Loan, such other rating requirement applicable to such Hedging Transaction set forth in the related Purchased Loan Documents or which is otherwise reasonably acceptable to Buyer; provided that Seller shall not grant or permit any liens, security interests, charges, or encumbrances with respect to any such hedging arrangements for the benefit of any Person other than Buyer.

“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

 

 

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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.

“Indemnified Amounts” and “Indemnified Parties” shall have the meaning specified in Section 20 of this Annex I.

“Insured Closing Letter and Escrow Instructions” shall mean a letter addressed to Seller and Buyer from the title insurance underwriter (or any agent thereof) acting as an agent for each Table Funded Purchased Loan and related escrow instructions, which letter and instructions shall be in form and substance reasonably acceptable to Buyer and Seller.

“LIBO Rate” shall mean, with respect to any Pricing Rate Period pertaining to a Transaction, a rate per annum determined for such Pricing Rate Period in accordance with the following formula (rounded upward to the nearest 1/100th of 1%):

LIBOR

1 – Reserve Requirement

“LIBOR” shall mean the rate per annum calculated as set forth below:

(i)             On each Pricing Rate Determination Date, LIBOR for the next Pricing Rate Period will be the rate for deposits in United States dollars for a one-month period which appears on Telerate Page 3750 as of 11:00 a.m., London time, on such date; or

(ii)            On any Pricing Rate Determination Date on which no such rate appears on Telerate Page 3750 as described above, LIBOR for the next Pricing Rate Period will be determined on the basis of the arithmetic mean of the rates at which deposits in United States dollars are offered by the Reference Banks at approximately 11:00 a.m., London time, on such date to prime banks in the London interbank market for a one-month period.

All percentages resulting from any calculations or determinations referred to in this definition will be rounded upwards, if necessary, to the nearest multiple of 1/100th of 1% and all U.S. dollar amounts used in or resulting from such calculations will be rounded to the nearest cent (with one-half cent or more being rounded upwards).

 

“LIBOR Transaction” shall mean, with respect to any Pricing Rate Period, any Transaction with respect to which the Pricing Rate for such Pricing Rate Period is determined with reference to the LIBO Rate.

“Loan Type” shall mean, with respect to any Purchased Loan, each of the loan types listed in Schedule 1 attached hereto with respect to Purchased Loans.

“LTV” shall mean, with respect to any Eligible Property or Properties, the ratio of the aggregate outstanding debt (which shall include the related Eligible Loan and all debt senior to or pari passu with such Eligible Loan) secured, directly or indirectly, by such Eligible Property or Properties to the aggregate value of such Eligible Property or Properties as determined by Buyer in its sole and absolute discretion. For purposes of Buyer’s determination, (i) the value may be determined by reference to an Appraisal, discounted cash flow analysis or other commercially

 

 

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reasonable method and (ii) for the avoidance of doubt, Buyer may reduce value for any actual or potential risks (including risk of delay) posed by any liens or claims on the related Eligible Property or Properties.

“Margin Excess Advance” shall have the meaning specified in Section 4(c) of this Annex I.

“Material Adverse Effect” shall mean a material adverse effect on (a) the property, business, operations, financial condition or prospects of Seller, (b) the ability of Seller to perform its obligations under any of the Transaction Documents to which it is a party, (c) the validity or enforceability of any of the Transaction Documents, (d) the rights and remedies of Buyer under any of the Transaction Documents, (e) the timely payment of the Repurchase Price of or accrued Price Differential in respect of the Purchased Loans or other amounts payable in connection therewith, or (f) the aggregate value of the Purchased Loans.

“Mezzanine Loan” shall mean any loan secured by a pledge of the direct or indirect equity ownership interests in a Person that owns a Mortgaged Property that also secures a Mortgage Note.

“Mezzanine Note” shall mean a note or other evidence of indebtedness of the owner or owners of direct or indirect equity ownership interests in an underlying real property owner secured by a pledge of such ownership interests.

“Modified Debt” shall mean, with respect to Seller, as of any date of determination, the aggregate Indebtedness of Seller as of such date less (i) the amount of any nonspecific balance sheet reserves maintained in accordance with GAAP as of such date, (ii) the amount of liabilities resulting from the sale of participation interests, provided that the related asset in which a participation has been sold is reduced by the value of the participation interest, (iii) liabilities resulting from the consolidation of Indebtedness associated with any securitization where neither Seller nor any of its affiliates was an issuer and where Seller has no recourse obligation for the Indebtedness, and (iv) liabilities resulting from the consolidation of vehicles managed by Seller or a Subsidiary of Seller in connection with a securitization where Seller has less than a 50% equity interest.

“Modified Debt to Equity Ratio” shall mean the ratio of Modified Debt to Tangible Net Worth.

“Monthly Statement” shall mean, for each calendar month during which the Agreement shall be in effect, Seller’s or Servicer’s, as applicable reconciliation in arrears of beginning balances, interest, principal, paid-to-date and ending balances for each Purchased Loan, together with (a) an Officer's Certificate with respect to all Purchased Loans sold to Buyer 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 Purchased Loan Documents, (d) a written report of any delinquency and loss experience with respect to any Purchased Loan and (e) such other internally prepared reports as mutually agreed by Seller and Buyer which reconciliation, Officer's Certificate and reports shall be delivered to Buyer for each calendar month during the term of the Agreement within ten (10) days following the end of each such calendar month.

“Moody’s” shall mean Moody’s Investor Service, Inc.

 

 

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“Mortgage” shall mean the mortgage, deed of trust, deed to secure debt or other instruments, creating a valid and enforceable first or second lien, as applicable, on or a first or second priority ownership interest in a Mortgaged Property.

“Mortgage Loan” shall mean a commercial mortgage loan secured by a lien on real property.

“Mortgage Note” shall mean a note or other evidence of indebtedness of a Mortgagor secured by a Mortgage.

“Mortgaged Property” shall mean the real property or properties securing repayment of the debt evidenced by a Mortgage Note, or, in the case of any Mezzanine Loan or Other Mezzanine Investment, owned indirectly by the related obligor.

“Mortgagor” shall mean the obligor on a Mortgage Note, the grantor of the related Mortgage and the owner of the related Mortgaged Property.

“Net Income” shall mean, for any period, the consolidated net income for such period of Seller as reported in Seller’s public financial statements prepared in accordance with GAAP.

“New Loan” shall mean an Eligible Loan that Seller proposes to be included as a Purchased Loan.

“Officer’s Certificate” shall mean, as to any Person, a certificate of the chief executive officer, any vice chairman and the chief financial officer of such Person or, for the purpose of executing certificates, the president, the vice president and counsel responsible therefor.

“Originated Loan” shall mean any loan that is an Eligible Loan and whose related loan documents were prepared by Seller or an Affiliate controlled by Seller.

“Permitted Transferee” shall mean any of the following which is not a Disqualified Transferee:

 

(x)

any Affiliate of Buyer; or

(y)           any Person that is an insurance company, bank, savings and loan association, trust company, commercial credit corporation, pension plan, pension fund or pension fund advisory firm, mutual fund or other investment company, governmental entity or plan, or a financial institution substantially similar to any of the foregoing and being experienced in making commercial loans and which holds at least $600,000,000 of real estate or other assets (including, without limitation, loans secured directly or indirectly by real estate assets) located in the United States (or any entity wholly-owned by any one or more institutions meeting the foregoing criteria).

“Person” shall mean an individual, corporation, limited liability company, business trust, partnership, joint tenant or tenant-in-common, trust, unincorporated organization, or other entity, or a federal, state or local government or any agency or political subdivision thereof.

“Plan” shall mean an employee benefit or other plan established or maintained during the five year period ended prior to the date of the Agreement or to which Seller or any ERISA Affiliate makes, is obligated to make or has, within the five year period ended prior to the date of

 

 

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the Agreement, been required to make contributions and that is covered by Title IV of ERISA or Section 302 of ERISA or Section 412 of the Code.

“Plan Assets” shall mean assets of any (i) employee benefit plan (as defined in Section 3(3) of ERISA) subject to Title I of ERISA, (ii) plan (as defined in Section 4975(e)(l) of the Code) subject to Section 4975 of the Code, or (iii) governmental plan (as defined in Section 3(32) of ERISA) subject to any other federal, state or local laws, rules or regulations substantially similar to Title I of ERISA or Section 4975 of the Code.

“Portfolio Loans” shall mean all of the Purchased Loans. As of the date of the Agreement, the Eligible Loans identified on Schedule 2 hereto have been approved by Buyer as Portfolio Loans.

“Pre-Existing Loans” shall mean any loan that is an Eligible Loan and is not an Originated Loan.

“Preliminary Due Diligence Package” shall mean with respect to any New Loan, the following due diligence information relating to such New Loan to be provided by Seller to Buyer pursuant to this Annex I:

(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 buyer would consider material;

 

(ii)

current rent roll, if applicable;

 

(iii)

cash flow pro-forma, plus historical information, if available;

 

(iv)

indicative debt service coverage ratios;

 

(v)

indicative loan-to-value ratio;

(vi)         Seller’s or any Affiliate's relationship with its potential underlying borrower or any affiliate;

(vii)        if applicable, Phase I environmental report (including asbestos and lead paint report);

 

(viii)

if applicable, engineering and structural reports;

 

(ix)

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;

 

 

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(x)          analyses and reports with respect to such other matters concerning the New Loan as Buyer may in its sole discretion require;

(xi)         documents evidencing such New Loan, or current drafts thereof, including, without limitation, underlying debt and security documents, guaranties, underlying borrower's organizational documents, warrant agreements, loan and collateral pledge agreements, and intercreditor agreements, as applicable;

(xii)        a list that specifically and expressly identifies any Purchased Loan Documents that relate to such Purchased Loan but are not in Seller’s possession;

(xiii)       in the case of a participation interest, all information described in this definition which would otherwise be provided for the underlying Mortgage Loan if it constituted an Eligible Loan except that, as to items set forth in subparagraphs (ix), to the extent Seller possesses such information or has access to such information because it was provided to the related lead lender and made available to Seller, and in addition, all documentation evidencing the participation interest; and

 

(xiv)

insurance documentation as shall be satisfactory to Buyer in its sole discretion.

“Pricing Rate Determination Date” shall mean with respect to any Pricing Rate Period, the second (2nd) Business Day preceding the first day of the Pricing Rate Period.

“Pricing Rate Period” shall mean (a) in the case of the first Pricing Rate Period with respect to any Transaction, the period commencing on and including the Purchase Date for such Transaction and ending on and including the last day of the calendar month in which the Purchase Date occurs, and (b) in the case of any subsequent Pricing Rate Period, the period commencing on and including the first day of a calendar month and ending on and including the last day of such calendar month; provided, however, that in no event shall any Pricing Rate Period end subsequent to the Repurchase Date.

“Principal Payment” shall mean, with respect to any Purchased Loans, any payment or prepayment of principal received in respect thereof (including casualty or condemnation proceeds to the extent such proceeds are not required under the underlying loan documents to be reserved, escrowed, readvanced or applied for the benefit of the obligor or the underlying real property). For purposes of clarification, prepayment premiums or penalties shall not be deemed principal.

“Purchase Percentage” shall mean, with respect to any Purchased Loan, the applicable “Purchase Percentage” specified in Schedule 1 and approved by Buyer for a Loan Type (or as otherwise specified in the applicable Confirmation).

“Purchased Loan Documents” shall mean, with respect to a Purchased Loan, the documents comprising the Purchased Loan File for such Purchased Loan.

“Purchased Loan File” shall mean the documents specified as the “Purchased Loan File” in Section 7(b) of this Annex I, together with any additional documents and information required to be delivered to Buyer or its designee (including the Custodian) pursuant to this Annex I.

“Purchased Loan Information” shall mean, with respect to each Purchased Loan, the information set forth in Schedule 3 attached hereto.

 

 

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“Purchased Loan Schedule” shall mean a schedule of Purchased Loans attached to each Trust Receipt and Custodial Delivery Certificate containing information substantially similar to the Purchased Loan Information.

“Purchased Loans” shall mean (i) with respect to any Transaction, the Eligible Loans sold by Seller to Buyer in such Transaction and (ii) with respect to the Transactions in general, all Eligible Loans sold by Seller to Buyer and any additional cash and/or other assets delivered by Seller to Buyer pursuant to Section 4(a) of this Annex I.

“Rating Agency” shall mean any of Fitch, Moody’s and Standard & Poor’s.

“Reference Banks” shall mean banks each of which shall (i) be a leading bank engaged in transactions in Eurodollar deposits in the international Eurocurrency market and (ii) have an established place of business in London. Initially, the Reference Bank shall be JPMorgan Chase Bank. If any such Reference Bank should be unwilling or unable to act as such or if Buyer shall terminate the appointment of any such Reference Bank or if any of the Reference Banks should be removed from the Reuters Monitor Money Rates Service or in any other way fail to meet the qualifications of a Reference Bank, Buyer in the exercise of its good faith business judgment may designate alternative banks meeting the criteria specified in clauses (i) and (ii) above.

“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.

“Remittance Date” shall mean the first (1st) calendar day of each month, or the next succeeding Business Day, if such calendar day shall not be a Business Day.

“Requirement of Law” shall mean any law, treaty, rule, regulation, code, directive, policy, order or requirement or determination of an arbitrator or a court or other governmental authority whether now or hereafter enacted or in effect.

“Reserve Requirement” shall mean, with respect to any Pricing Rate Period, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect during such Pricing Rate Period (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 of Governors) maintained by Buyer.

“Reset Date” shall mean, with respect to any Pricing Rate Period, the second Business Day preceding the first day of such Pricing Rate Period with respect to any Transaction.

“Scheduled Purchase Date” shall mean the date agreed between the parties or specified in the applicable Confirmation as the “Purchase Date” or the “Scheduled Purchase Date”.

“Seller” shall mean Capital Trust, Inc., a Maryland corporation and its permitted successors and assigns.

“Servicing Agreement” has the meaning specified in Section 22(b) of this Annex I.

 

 

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“Servicing Fee” shall mean the “Servicing Fees” as defined in the Servicing Agreement payable to the Servicer thereunder.

“Servicing Records” has the meaning specified in Section 22(b) of this Annex I.

“Significant Modification” shall mean (a) any modification or amendment of a Purchased Loan which:

(i)             reduces the principal amount of the Purchased Loan in question other than (1) with respect to a dollar-for-dollar principal payment or (2) reductions of principal to the extent of deferred, accrued or capitalized interest added to principal which additional amount was not taken into account by Buyer in determining the related Purchase Price;

(ii)            increases the principal amount of a Purchased Loan other than increases which are derived from accrual or capitalization of deferred interest which is added to principal or protective advances;

(iii)           modifies the payments of principal and interest when due of the Purchased Loan in question;

(iv)           changes the frequency of scheduled payments of principal and interest in respect of a Purchased Loan;

(v)            subordinates the lien priority of the Purchased Loan or the payment priority of the Purchased Loan other than subordinations expressly required under the then existing terms and conditions of the Purchased Loan (provided, however, the foregoing shall not preclude the execution and delivery of subordination, nondisturbance and attornment agreements with tenants, subordination to tenant leases, easements, plats of subdivision and condominium declarations and similar instruments which in the commercially reasonable judgment of Seller do not materially adversely affect the rights and interest of the holder of the Purchased Loan in question);

(vi)           releases any collateral for the Purchased Loan other than releases required under the then existing Purchased Loan documents or releases in connection with eminent domain or under threat of eminent domain;

(vii)          waives, amends or modifies any cash management or reserve account requirements of the Purchased Loan other than changes required under the then existing Purchased Loan documentation;

(viii)         waives any due-on-sale or due-on-encumbrance provisions of the Purchased Loan other than waivers required to be given under the then existing Purchased Loan documents; and

(b)           any modification, amendment or other material action with respect to a Purchased Loan (or the related mortgage loan, if such Purchased Loan is Mezzanine Loan or Other Mezzanine Investment) which under the terms of the related intercreditor agreement or participation agreement, as the case may be, requires the consent of Seller or its “operating advisor” or the agent (as distinct from consultation rights).

 

 

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“Stabilized” shall refer to a Mortgage Loan that has a Debt Yield (as calculated by Buyer) of greater than 10%.

“Standard & Poor’s” shall mean Standard & Poor’s Ratings Services, Inc., a division of the McGraw Hill Companies Inc.

“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” shall mean, with respect to any New Loan, information or deliveries concerning such New Loan that Buyer 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 loan-to-value ratio computation and a final debt service coverage ratio computation for such proposed New Loan.

“Survey” shall mean a certified ALTA/ACSM (or applicable state standards for the state in which a Mortgaged Property is located) survey of a Mortgaged Property prepared by a registered independent surveyor and in form and content reasonably satisfactory to Buyer and the company issuing the Title Policy for such Mortgaged Property.

“Table Funded Purchased Loan” shall mean a Purchased Loan which is sold to Buyer simultaneously with the origination or acquisition thereof, which origination or acquisition is financed with the Purchase Price, pursuant to Seller’s request, paid directly to a title company or other settlement agent, in each case, approved by Buyer, for disbursement in connection with such origination or acquisition. A Purchased Loan shall cease to be a Table Funded Purchased Loan after the Custodian has delivered a Trust Receipt to Buyer certifying its receipt of the Purchased Loan File therefor.

“Tangible Net Worth” shall mean, as of any date of determination, (a) all amounts which would be included under capital (it being agreed that any convertible trust preferred securities and any unfunded commitments or capital which can be drawn will be included as capital) on the balance sheet of Seller at such date, determined in accordance with GAAP as of such date, less (b)(i) amounts owing to Seller from Affiliates and (ii) intangible assets of the Seller as of such date.

“Table Funded Trust Receipt” shall have the meaning given to such term in the Custodial Agreement.

“Telerate Page 3750” shall mean the display page currently so designated on the Dow Jones Telerate Service (or such other page as may replace that page on that service for the purpose of displaying comparable rates or prices).

“Title Policy” shall have the meaning specified in paragraph 2(d) of Exhibit V.

 

 

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“Total Indebtedness” shall mean, with respect to Seller, as of any date of determination, the aggregate Indebtedness of Seller as of such date less (i) the amount of any nonspecific balance sheet reserves maintained in accordance with GAAP as of such date, (ii) the amount of liabilities resulting from the sale of participation interests, provided that the related asset in which a participation has been sold is reduced by the value of the participation interest, (iii) liabilities resulting from the consolidation of Indebtedness associated with any securitization where Seller has no recourse obligation for the Indebtedness and (iv) liabilities resulting from the consolidation of vehicles managed by Seller or a Subsidiary of Seller in connection with a securitization where Seller has less than a 50% equity interest.

“Transaction” shall have the meaning specified in Section 1(a) of this Annex I.

“Transaction Conditions Precedent” shall have the meaning specified in Section 3(e) of this Annex I.

“Transaction Costs” shall mean, with respect to any Purchased Loan, all actual out-of-pocket reasonable costs and expenses paid or incurred by Buyer and payable by Seller relating to the purchase of such Purchased Loan (including legal fees and other fees described in Section 20(b) of this Annex I). Transaction Costs shall not include costs incurred by Buyer for overhead and general administrative expenses.

“Transaction Documents” shall mean, collectively, the Agreement (including this Annex I and any other annexes and schedules attached to the Agreement), the Fee Letter, the Blocked Account Agreement, the Custodial Agreement, the Servicing Agreement, the Transfer Documents, all Confirmations executed pursuant to this Annex I in connection with specific Transactions and all other documents executed in connection herewith and therewith.

“Transfer Documents” shall mean, with respect to any Purchased Loan, all applicable documents described in Section 7(b) of this Annex I necessary to transfer all of Seller’s right, title and interest in such Purchased Loan to Buyer in accordance with the terms of this Annex I.

“Transitional” shall refer to a Mortgage Loan that has a Debt Yield (as calculated by Buyer) of less than or equal to 10% but greater than or equal to 5%.

“Trust Receipt” shall mean a trust receipt issued by the Custodian, or the Bailee, as applicable, to Buyer confirming the Bailee’s or the Custodian’s, as applicable, possession of certain Purchased Loan Files which are the property of and held by the Bailee or the Custodian, as applicable, on behalf of Buyer (or any other holder of such trust receipt) in the form required under the Custodial Agreement or the Bailee Agreement.

“UCC” shall mean the Uniform Commercial Code as in effect from time to time 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 any security interest 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 of this Annex I relating to such perfection or effect of perfection or non-perfection.

“Underwriting Issues” shall mean, with respect to any Eligible Loan as to which Seller intends to request a Transaction, all material information that has come to Seller’s attention that, based on the making of reasonable inquiries and the exercise of reasonable care and diligence

 

 

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under the circumstances, would, in the context of the totality of the Transaction in question, be considered a materially “negative” factor (either separately or in the aggregate with other information), (including, but not limited to, whether any of the Eligible Loans were repurchased from any warehouse loan facility or a repurchase transaction due to the breach of a representation and warranty or a material defect in loan documentation or closing deliveries (such as any absence of any material Purchased Loan Document(s)), to a reasonable institutional mortgage or mezzanine loan buyer in determining whether to originate or acquire the Eligible Loan in question.

3.

INITIATION; CONFIRMATION; TERMINATION; FEES

The provisions of Paragraph 3 of the Agreement (“Initiation; Confirmation; Termination”) are hereby deleted and replaced in their respective entireties by the following provisions of this Section 3:

(a)           Seller may, from time to time, prior to the Facility Termination Date, request that Buyer enter into a Transaction with respect to one or more New Loans. Seller shall initiate each request by submitting a Preliminary Due Diligence Package for Buyer’s review and approval. Notwithstanding anything to the contrary herein, Buyer shall have no obligation to consider for purchase any proposed Transaction which has an aggregate Repurchase Price (excluding the Price Differential with respect to the Purchased Loans as of the date of determination) that when combined with all Purchased Loans which have not been repurchased by Seller exceeds the Facility Amount. Buyer shall determine, in its sole and absolute discretion, whether a New Loan qualifies as an Eligible Loan. Buyer shall have the right to review all New Loans proposed to be sold to Buyer in any Transaction and to conduct its own due diligence investigation of such New Loans as Buyer determines is reasonably necessary. Seller agrees to promptly reimburse Buyer for its Diligence Fees upon request for payment or reimbursement thereof. Notwithstanding any provision to the contrary herein or any other Transaction Document, Buyer shall be entitled to make a determination, in its sole and absolute discretion, that it shall not purchase any or all of the New Loans proposed to be sold to Buyer by Seller.

(b)           Upon Buyer’s receipt of a complete Preliminary Due Diligence Package with respect to a proposed Transaction, Buyer shall have the right within five (5) Business Days, to request in a Supplemental Due Diligence List such additional Diligence Materials and deliveries that Buyer deems necessary to properly evaluate the New Loans. Buyer’s failure to respond to Seller shall be deemed to be a denial of Seller’s request to enter into the proposed Transaction, unless Buyer and Seller have agreed otherwise in writing. Notwithstanding anything to the contrary herein, Buyer may deny, in Buyer’s sole and absolute discretion, Seller’s request for a Transaction at any time prior to the issuance of a Confirmation irrespective of Buyer’s request for additional Diligence Materials.”

(c)           Seller shall, if Seller desires to enter into such Transaction with respect to the related New Loans upon the terms set forth by Buyer with respect to its determination of Market Value and Purchase Price for the related New Loans, satisfy the conditions set forth below with respect to each New Loan as a condition precedent to Buyer’s Final Approval (as defined below), all in a manner reasonably satisfactory to Buyer and pursuant to documentation reasonably satisfactory to Buyer:

(i)             Delivery of Purchased Loan Documents. Seller shall deliver to Buyer: (x) with respect to any New Loan that is a Pre-Existing Loan, copies of the Purchased Loan Documents, except for such Purchased Loan Documents that Seller expressly and specifically disclosed in Seller’s Preliminary Due Diligence Package were not in Seller’s possession; and (y) with respect to any New Loan that is an Originated Loan, drafts of the Purchased Loan Documents.

 

 

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(ii)          Environmental and Engineering. Buyer shall have received a “Phase 1” (and, if necessary, “Phase 2”) environmental report, an asbestos survey, if applicable, and an engineering report, each in form reasonably satisfactory to Buyer, by an engineer and an environmental consultant, each as listed on Schedules 5 and 6, respectively, as such schedules may be amended from time to time by Seller or Buyer upon approval by Buyer in its reasonable discretion.

(iii)           Appraisal. If obtained by Seller, Buyer shall have received either an Appraisal or a Draft Appraisal of the related Eligible Property or Properties. If Buyer receives only a Draft Appraisal prior to entering into a Transaction, Seller shall deliver an Appraisal on or before thirty (30) days after the Purchase Date.

(iv)          Insurance. Buyer shall have received certificates or other evidence of insurance detailing insurance coverage in respect of the related Eligible Property or Properties of types (including but not limited to casualty, general liability and terrorism insurance coverage), in amounts, with insurers and otherwise in compliance with the terms, provisions and conditions set forth in the Purchased Loan Documents and otherwise reasonably satisfactory to Buyer. Such certificates or other evidence shall indicate that Seller (or as to a New Loan that is a participation interest, the lead lender on the related whole loan in which Seller is a participant) 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 policies required to be maintained under the Purchased Loan Documents.

(v)           Survey. Buyer shall have received all surveys of the related Eligible Property or Properties that are in Seller’s possession.

(vi)          Lien Search Reports. Buyer or Buyer’s counsel shall have received, as reasonably requested by Buyer, satisfactory reports of UCC, tax lien, judgment and litigation searches and any existing Title Policies relating to the New Loan, Eligible Property or Properties, Seller and related underlying obligor, such searches to be conducted in each location Buyer shall reasonably designate.

(vii)         Opinions of Counsel. Buyer shall have received copies of all legal opinions with respect to the New Loan which shall be in form and substance reasonably satisfactory to Buyer.

 

(viii)

Title Policy.

(a)           With respect to any New Loan that is a Mortgage Loan, Seller shall have delivered to Buyer (1) an unconditional commitment to issue a Title Policy or Policies in favor of Seller and Seller’s successors and/or assigns with respect to Seller’s interest in the related real property with an amount of insurance that shall be not less than the related Repurchase Price or such other amount as Buyer shall require in its reasonable discretion or (2) an endorsement or confirmatory letter from the existing title company to an existing Title Policy (in an amount not less than the related Repurchase Price or such other amount as Buyer shall require in its reasonable discretion) in favor of Seller and Seller’s successors and/or assigns that adds such parties as an additional insured.

 

 

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(b)          With respect to any New Loan that is a First Mortgage B-Note, Seller shall have delivered to Buyer a copy of an unconditional commitment to issue a Title Policy or endorse an existing Title Policy in favor of the lead lender to whom the related obligor issued the related Mortgage Note, in an amount not less than the amount of such Mortgage Note and, if the First Mortgage B-Note is evidenced by a separate promissory note rather than a participation certificate, in an amount not less than the amount of all Mortgage Notes secured by the Mortgage that secures the related promissory notes.

(c)           With respect to a Mezzanine Loan or Other Mezzanine Investment, (i) Seller shall have delivered to Buyer such evidence as Buyer on a case-by-case basis, in its sole discretion, shall require of the ownership of the real property underlying New Loan including, without limitation, (i) a copy of a Title Policy, issued by a title insurer and with such endorsements (including, without limitation, a “Mezzanine Lender’s Endorsement”, if obtained by Seller), in each case acceptable to Buyer in its sole discretion, showing that title is vested in the related obligor or in an entity in whom such obligor holds an equity interest and (ii) if obtained by Seller, Seller shall have delivered to Buyer an Eagle 9 UCC Title Policy which policy shall (x) provide an amount of insurance that shall be not less than the related Repurchase Price or such other amount as Buyer shall require in its sole discretion, (y) shall insure Seller’s security interest in the equity interests pledged and (z) be assignable by its terms with a transfer of the Mezzanine Loan or Other Mezzanine Investment, as applicable.

(ix)          Additional Real Estate Matters. To the extent obtained by Seller, Seller shall have delivered to Buyer such other real estate related certificates and documentation as may have been requested by Buyer, such as: (y) certificates of occupancy issued by the appropriate Governmental Authority and either letters certifying that the related Eligible Property or Properties is in compliance with all applicable zoning laws issued by the appropriate Governmental Authority or evidence that the related Title Policy includes a zoning endorsement and (z) abstracts of all leases in effect at the Mortgaged Property delivered in connection with the New Loan.

(x)           First Mortgage B-Notes. In the case of a First Mortgage B-Note, in addition to the delivery of the items in clauses (vi), (vii) and (viii), Buyer shall have received all documentation specified in clauses (i) through (v) and (ix) as if the underlying Mortgage Loan were the direct collateral to the extent Seller possesses such documentation or has access to such documentation because it was provided to the related lead lender and made available to Seller and, to the extent applicable, all documents evidencing a participation interest, including, but not limited to, an original participation certificate, if applicable, and the related participation agreement and/or the related intercreditor agreement.

(xi)          Other Documents. Buyer shall have received such other documents as Buyer or its counsel shall reasonably deem necessary.

Within five (5) Business Days of Seller’s satisfaction of all of the conditions enumerated in clauses (i) through (xi) above, Buyer shall either (A) if the Purchased Loan Documents with respect to the New Loan are not reasonably satisfactory in form and substance to Buyer, notify Seller that Buyer has not approved the New Loan or (B) notify Seller that Buyer agrees to purchase the New Loan, subject to satisfaction (or waiver by Buyer) of the Transaction Conditions Precedent (such notice, a “Final Approval”). Buyer’s failure to respond to Seller within five (5) Business Days shall be deemed to be a

 

 

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denial of Seller’s request that Buyer purchase the New Loan, unless Buyer and Seller have agreed otherwise in writing.

(d)           Upon issuing a Final Approval with respect to a proposed Transaction, Buyer shall promptly deliver to Seller a written confirmation in the form of Exhibit I attached hereto of each proposed Transaction (a “Confirmation”); provided, that unless otherwise agreed by Seller, Buyer shall deliver a separate Confirmation with respect to each New Loan (and, in this connection, shall set forth (a) the name of the borrower with respect to the New Loan, (b) the loan agreement (including the date) or other document or instrument pursuant to which the related New Loan is made or governed, and (c) the initial or then outstanding principal amount of the related New Loan), shall identify Buyer and Seller, and shall set forth (i) the Purchase Date, (ii) the Purchase Price for such New Loan (which based on Buyer’s diligence may be different than the Purchase Price set forth in the Preliminary Approval delivered to Seller), (iii) the Repurchase Date, (iv) the Pricing Rate applicable to such New Loan (including the Applicable Spread) and (v) any additional terms or conditions not inconsistent with the Agreement reasonably and in good faith requested by Buyer which do not have the effect of materially changing the terms and conditions of the Agreement. Each Confirmation shall be deemed incorporated herein by reference with the same effect as if set forth herein at length. With respect to any Transaction, the Pricing Rate shall be determined initially on the Pricing Rate Determination Date applicable to the first Pricing Rate Period for such Transaction, and shall be reset on each Reset Date for the next succeeding Pricing Rate Period for such Transaction. Buyer or its agent shall determine in accordance with the terms of the Agreement the Pricing Rate on each Pricing Rate Determination Date for the related Pricing Rate Period and notify Seller of such rate for such period on the Reset Date.

(e)           Provided each of the Transaction Conditions Precedent set forth in this Section 3(e) shall have been satisfied (or waived by Buyer), and subject to Seller’s rights under Section 3(f), Buyer shall transfer the Purchase Price to Seller with respect to each New Loan for which it has issued a Confirmation on the Purchase Date specified in such Confirmation (provided Seller has not objected to such Confirmation within the time frame permitted under Section 3(f)), which shall be not more than three (3) Business Days following the issuance of such Confirmation of a Transaction by Buyer in accordance with this Section 3, and the related Purchased Loan shall be concurrently transferred by Seller to Buyer or its nominee. For purposes of this Section 3(e), the “Transaction Conditions Precedent” shall be satisfied with respect to any proposed Transaction if:

(1)           No (x) monetary or material non-monetary Default or (y) Event of Default under the Agreement shall have occurred and be continuing as of the Purchase Date for such proposed Transaction;

(2)           Seller shall have a Fixed Charge Ratio of at least 2:1, a Debt to Equity Ratio of less than 5:1 and a Modified Debt to Equity Ratio of less than 10:1 for the fiscal quarter most recently ended;

(3)           The Seller shall have delivered to the Buyer an Officer’s Certificate of the Seller certifying that (A) the representations and warranties made by Seller in any of the Transaction Documents are true and correct in all material respects as of the Purchase Date for such Transaction and unless waived by Buyer (except (i) such representations which by their terms speak as of a specified date and (ii) to the extent such representations and warranties have been previously qualified and such qualifications have been accepted by Buyer), (B) Seller is in compliance with all governmental licenses and authorizations, (C) Seller is qualified to do business, validly existing and, to the extent determinable, in good standing, in all required jurisdictions, (D) the facts set forth in the Diligence Materials related to the collateral for the Purchased Loan are, to the best knowledge of Seller after diligent inquiry, true and correct (or

 

 

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shall fully explain all adverse changes from the information previously supplied to Buyer), (E) there has been no change in the organizational and authority documents provided to Buyer pursuant to Section 7(d)(ii) of this Annex I since the date of the most recent certification thereof to Buyer, and (F) there has been no Material Adverse Effect since the last Purchase Date. If requested by Buyer, Seller shall also receive an Officer’s Certificate covering such matters as Buyer may request;

(4)           Buyer shall have (A) determined, in accordance with the applicable provisions of Section 3(a) of this Annex I that the New Loan proposed to be sold to Buyer by Seller in such Transaction is an Eligible Loan and (B) obtained internal credit approval for the inclusion of such New Loan as a Purchased Loan in a Transaction;

(5)           The applicable Purchased Loan File described in Section 7(b) shall have been delivered to Custodian or Bailee and Buyer shall have received a Trust Receipt from Custodian or Bailee with respect to such Purchased Loan File;

(6)           Seller shall have delivered to each Mortgagor or obligor under any Purchased Loan a direction letter in accordance with Section 5(a) of this Annex I unless such Mortgagor or obligor or related servicer or senior lender is already remitting payments to the Servicer whereupon Seller shall direct the Servicer to remit all such amounts into the Blocked Account in accordance with Section 5(a) and to service such payments in accordance with the Servicing Agreement and the provisions of this Annex I;

(7)           Seller shall have paid to Buyer any unpaid Diligence Fees in respect of such Purchased Loan;

(8)           Buyer shall have determined that after giving effect to the proposed Transaction, (i) the Repurchase Price (exclusive of accrued and unpaid Pricing Differential) of no single Purchased Loan exceeds 30% of the Facility Amount and (ii) the aggregate Repurchase Price (exclusive of accrued and unpaid Pricing Differential) of Purchased Loans secured directly or indirectly by Eligible Properties which are hospitality assets does not exceed 30% of the Facility Amount;

 

(9)

No Purchased Loan shall be a Defaulted Loan;

(10)         Buyer shall have received an opinion of counsel of Seller, in form and substance reasonably satisfactory to Buyer, covering the enforceability, authority, execution, delivery and perfection of the assignment of the Purchased Loan and all Transfer Documents, and such other matters as Buyer may reasonably require;

(11)         No event shall have occurred or circumstance shall exist which has a Material Adverse Effect;

(12)         There shall not have occurred (i) a material change in financial markets, an outbreak or escalation of hostilities or a material change in national or international political, financial or economic conditions, (ii) a general suspension of trading on major stock exchanges or suspension of trading in Seller’s stock and (iii) a disruption in or moratorium on commercial banking activities or securities settlement services.

(f)           Each Confirmation, together with the Agreement, shall be conclusive evidence of the terms of the Transaction covered thereby unless objected to in writing by Seller no more than two (2)

 

 

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Business Days after the date such Confirmation is received by Seller. An objection sent by Seller with respect to any Confirmation must state specifically that the writing is an objection, must specify the provision(s) of such Confirmation being objected to by Seller, must set forth such provision(s) in the manner that Seller believes such provisions should be stated, and must be received by Buyer no more than two (2) Business Days after such Confirmation is received by Seller. Buyer, in its sole discretion, may issue another Confirmation addressing Seller’s objections or may elect not to proceed with the proposed Transaction.

(g)           Seller shall be entitled to terminate a Transaction on demand, and repurchase the related Purchased Loan on any Business Day prior to the Repurchase Date (an “Early Repurchase Date”); provided, however, that:

(i)             No Event of Default shall be continuing or would occur or result from such early repurchase,

(ii)            Seller notifies Buyer in writing of its intent to terminate such Transaction and repurchase the related Purchased Loan no later than five (5) Business Days prior to the Early Repurchase Date, and

(iii)           On the Early Repurchase Date, Seller shall pay to Buyer an amount equal to the sum of the Repurchase Price for such Transaction, all Costs and any other amounts payable by Seller and outstanding under the Agreement (including, without limitation, Section 3(n) of this Annex I) with respect to such Transaction against transfer to Seller or its agent of the related Purchased Loan.

(h)           On the Repurchase Date (or the Early Repurchase Date, as applicable), termination of the applicable Transactions will be effected by transfer to Seller or, if requested by Seller, its designee of the related Purchased Loans, and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Section 4(a) or Section 5) against the simultaneous transfer of the Repurchase Price, all Costs and any other amounts payable and outstanding under the Agreement (including without limitation, Sections 3(l) and 3(n) of this Annex I, if any) to an account of Buyer.

(i)            So long as no Default or Event of Default has occurred and is then continuing, the Repurchase Price with respect to one or more Purchased Loans may be paid in part at any time upon two (2) Business Days prior written notice; provided, however, that any such payment shall be accompanied by an amount representing accrued Price Differential with respect to such Purchased Loan(s) on the amount of such payment and all other amounts then due under the Transaction Documents. Each partial payment of the Repurchase Price that is voluntary (as opposed to mandatory under the terms of the Agreement) shall be in an amount of not less than One Hundred Thousand Dollars ($100,000).

(j)            In lieu of repaying the Repurchase Price, in whole or in part, with respect to the Transactions when and as otherwise required or permitted by the Agreement, Seller may elect to deposit any such amount (the “Early Repurchase Deposit”) with Buyer (the date of such deposit, the “Early Repurchase Deposit Funding Date”) until such date as the application of the Early Repurchase Deposit towards the Repurchase Price would not cause Buyer to incur such costs (the “Early Repurchase Deposit Application Date”). The Early Repurchase Deposit shall be held in an interest-bearing account controlled by Buyer and, at Buyer’s option, shall be accompanied by a payment (as estimated by Buyer) equal to the difference between the interest earned on the Early Repurchase Deposit and the Price Differential that will accrue on a portion of the relevant Transaction equal to the Early Repurchase Deposit during the

 

 

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period from the Early Repurchase Deposit Funding Date to the Early Repurchase Deposit Application Date.

(k)           Concurrently with its execution and delivery of the Agreement and on such other dates specified in the Fee Letter, Seller shall pay Buyer the amounts specified in the Fee Letter.

(l)            If prior to the first day of any Pricing Rate Period with respect to any Transaction, (i) Buyer shall have reasonably determined (which determination shall be conclusive and binding upon Seller absent manifest error) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBO Rate for such Pricing Rate Period, or (ii) the LIBO Rate determined or to be determined for such Pricing Rate Period will not adequately and fairly reflect the cost to Buyer (as reasonably determined and certified to Seller by Buyer) of making or maintaining Transactions during such Pricing Rate Period, Buyer shall give telecopy or telephonic notice thereof to Seller as soon as practicable thereafter. If such notice is given, the Pricing Rate with respect to such Transaction for such Pricing Rate Period, and for any subsequent Pricing Rate Periods until such notice has been withdrawn by Buyer, shall be a per annum rate equal to the sum of (i) the Federal Funds Rate, (ii) 0.25% and (iii) the Applicable Spread (the “Alternative Rate”).

(m)         Notwithstanding any other provision herein, if after the date of the Agreement, the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for Buyer to effect LIBOR Transactions as contemplated by the Transaction Documents, (a) the commitment of Buyer hereunder to enter into new LIBOR Transactions and to continue LIBOR Transactions as such shall forthwith be canceled, and (b) the LIBOR Transactions then outstanding shall be converted automatically to Alternative Rate Transactions on the last day of the then current Pricing Rate Period or within such earlier period as may be required by law. If any such conversion of a LIBOR Transaction occurs on a day which is not the last day of the then current Pricing Rate Period with respect to such LIBOR Transaction, Seller shall pay to Buyer such amounts, if any, as may be required pursuant to Section 3(n).

(n)           Upon demand by Buyer, Seller shall indemnify Buyer and hold Buyer harmless from any net loss or expense (not to include any lost profit or opportunity) (including, without limitation, reasonable attorneys’ fees and disbursements) which Buyer actually sustains or incurs as a consequence of (i) default by Seller in terminating any Transaction after Seller has given a notice in accordance with Section 3(g) of a termination of a Transaction, (ii) any payment of all or any portion of the Repurchase Price, as the case may be, on any day other than a Remittance Date (including, without limitation, any such loss or expense arising from the reemployment of funds obtained by Buyer to maintain Transactions hereunder or from fees payable to terminate the deposits from which such funds were obtained, provided Seller shall not be obligated to reimburse Buyer for the incremental cost of reemploying funds or terminating deposits which arise solely as a result of Buyer depositing funds or employing funds at a rate calculated other than by reference to LIBOR (as defined herein)) or (iii) default by Seller in selling Eligible Loans after Seller has notified Buyer of a proposed Transaction and Buyer has agreed to purchase such Eligible Loans in accordance with the provisions of the Agreement. A certificate as to such costs, losses, damages and expenses, setting forth the calculations therefor shall be submitted promptly by Buyer to Seller and shall be conclusive and binding on Seller in the absence of manifest error.

(o)           If (A) the Transactions are characterized by a U.S. Federal, state or local taxing authority in a manner other than as described in Section 23 of this Annex I, or (B) after the date of the Agreement, the adoption of or any change in any Requirement of Law or in the interpretation or application thereof by any Governmental Authority or compliance by Buyer with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority having jurisdiction over Buyer made subsequent to the date hereof:

 

 

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(i)           shall subject Buyer to any tax of any kind whatsoever with respect to the Transaction Documents, any Purchased Loan or any Transaction, or change the basis of taxation of payments to Buyer in respect thereof (except for changes in the rate of tax on Buyer’s overall net income);

(ii)            shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of Buyer which is not otherwise included in the determination of the LIBO Rate hereunder; or

(iii)           shall impose on Buyer any other condition due to the Agreement or the Transactions;

and the result of any of the foregoing is to increase the cost to Buyer of entering into, continuing or maintaining Transactions or to reduce any amount receivable under the Transaction Documents in respect thereof; then, in any such case, Seller shall pay Buyer, within ten (10) Business Days after written demand therefor is received by Seller, any additional amounts necessary to compensate Buyer for such increased cost payable or reduced amount receivable. If Buyer becomes aware that it is entitled to claim any additional amounts pursuant to this Section 3(o), it shall notify Seller in writing of the event by reason of which it has become so entitled. A certificate as to the calculation of any additional amounts payable pursuant to this subsection shall be submitted by Buyer to Seller and shall be conclusive and binding upon Seller in the absence of manifest error. This covenant shall survive the termination of the Agreement and the repurchase by Seller of any or all of the Purchased Loans.

(p)           If Buyer shall have reasonably determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by Buyer or any corporation controlling Buyer with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof does have the effect of reducing the rate of return on Buyer’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which Buyer or such corporation could have achieved but for such adoption, change or compliance (taking into consideration Buyer’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by Buyer to be material, then from time to time, after submission by Buyer to Seller of a written request therefor, Seller shall pay to Buyer such additional amount or amounts as will compensate Buyer for such reduction. A certificate as to the calculation of any additional amounts payable pursuant to this subsection shall be submitted by Buyer to Seller and shall be conclusive and binding upon Seller in the absence of manifest error. This covenant shall survive the termination of the Agreement and the repurchase by Seller of any or all of the Purchased Loans.

(q)           If any of the events described in Section 3(k), Section 3(l), Section 3(n) or Section 3(o) result in Buyer’s election to use the Alternative Rate or Buyer’s request for additional amounts, then Seller shall have the option to notify Buyer in writing of its intent to terminate the Transactions and repurchase the Purchased Loans no later than one (1) Business Day after notice is given to Buyer in accordance with Section 3(g). The election by Seller to terminate the Transactions in accordance with this Section 3(q) shall not relieve Seller for liability with respect to any additional amounts or increased costs actually incurred by Buyer prior to the actual repurchase of the Purchased Loans.

(r)           The facility under the Agreement shall terminate on June 29, 2009; provided that Seller may make a written request not later than 45 days prior to such Facility Termination Date for extension of the term thereof for a period to be agreed by Buyer and Seller, which extension request shall be subject to

 

 

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Buyer’s approval in its sole and absolute discretion. Buyer’s failure to respond to Seller’s written request within 15 days of such request shall be deemed an automatic denial to Seller’s request to extend the term of the facility hereunder.

4.

MANDATORY PAYMENT OR DELIVERY OF ADDITIONAL ASSETS

Paragraphs 4 (e) and (f) of the Agreement (“Margin Maintenance”) shall be deleted in their entirety and Paragraphs 4(a), (b), (c) and (d) of the Agreement are hereby deleted and replaced in their entirety with the following provisions of this Section 4:

(a)           Buyer may determine and re-determine the Asset Base on any Business Day and on as many Business Days as it may elect. If at any such time the aggregate Repurchase Price of the Portfolio Loans is greater than the aggregate Asset Base as determined by Buyer in its sole discretion and notified to Seller on any Business Day (a “Margin Deficit”), then Seller shall, no later than one (1) Business Day after receipt of such notice, either deliver to Buyer (A) cash (which shall be applied to reduce the Repurchase Price of each Purchased Loan pro rata) or (B) additional assets acceptable to Buyer in its sole and absolute discretion in such amounts that after giving effect to such delivery of cash or other assets, the aggregate Repurchase Price of the Portfolio Loans does not exceed the Asset Base as re-determined by Buyer after giving effect to the delivery of cash (or other assets) by Seller to Buyer pursuant to this Section 4(a).

(b)           If at any time a Purchased Loan becomes a Defaulted Loan, Buyer may, in its sole discretion and without regard to any determination of the Market Value of such Defaulted Loan, notify Seller that such Purchased Loan has become a Defaulted Loan and require that the related Repurchase Price be paid in whole or in part, in the sole discretion of Buyer. Not later than one (1) Business Day after the receipt of such notice, Seller shall prepay in whole or in part, as applicable, the related Repurchase Price of such Defaulted Loan. Buyer may, in its sole discretion, determine and re-determine the amount to be prepaid irrespective of whether or not any statement of fact contained in any Officer's Certificate delivered pursuant to Section 3(e)(3) or (ii) any representation of Seller set forth in Section 10(a)(xix) was true to Seller's actual knowledge.

(c)           If at any time the aggregate Repurchase Price of the Portfolio Loans is less than the aggregate Asset Base as determined by Buyer in its sole discretion and notified to Seller on any Business Day Seller requests such notification (a “Margin Excess”), then Seller may, upon providing written notice to Buyer by 3 p.m. on the Business Day prior to the date funds are requested, request that Buyer advance additional funds (not to exceed such Margin Excess) (a “Margin Excess Advance”) to Seller in respect of the Purchased Loans. On the date set forth in such request, Buyer shall transfer cash to Seller in the amount of such Margin Excess Advance. Each Margin Excess Advance by Buyer to Seller shall increase the Repurchase Price of one or more Purchased Loans (such aggregate increase not to exceed such Margin Excess Advance) as Buyer shall determine in its sole discretion.

(d)           To the extent Seller has an obligation to advance additional funds under one or more Purchased Loans, provided a Margin Deficit does not then exist, Buyer agrees to transfer to Seller cash in an amount equal to the product of (i) the amount being advanced by Seller and (ii) the Purchase Percentage for the related Purchased Loan or such lesser amount determined by Buyer, such that after giving effect to the cash transfer, a Margin Deficit would not result. The transfer of cash under this Section 4(d) shall be accounted for as a Margin Excess Advance.

5.

INCOME PAYMENTS AND PRINCIPAL PAYMENTS

 

 

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Paragraph 5 of the Agreement (“Income Payments”) is hereby deleted and replaced in its entirety by the following provisions of this Section 5:

(a)           On or before the date hereof, Seller and Buyer shall establish and maintain with the Depository Bank a deposit account owned by, in the name of and under the sole control of Buyer with respect to which the Blocked Account Agreement shall have been executed (such account, together with any replacement or successor thereof, the “Blocked Account”) and deliver to Buyer a Blocked Account Agreement. Seller shall cause all Income with respect to the Purchased Loans or other assets (if cash) delivered under Section 4(a) to be deposited in the Blocked Account no later than the next Business Day following its collection and receipt thereof. Simultaneously with the transfer of any Purchased Loan under Section 3, Seller shall deliver to each Mortgagor or obligor (or the related collection account bank, as applicable), or the related lead lender or servicer under a Purchased Loan an irrevocable direction letter in the form attached as Exhibit VII to this Annex I instructing such Person to remit to the Blocked Account all amounts payable to Seller under the related Purchased Loan (unless such Mortgagor or obligor or related servicer or lender is already remitting payments to the Servicer, whereupon Seller shall direct Servicer to remit all such amounts into the Blocked Account and service such payments in accordance with the Servicing Agreement and the provisions hereof) and shall provide to Buyer written proof of such delivery. If a Mortgagor or obligor (or the related collection account bank) or the related lead lender or servicer under a Purchased Loan forwards any Income with respect to such Purchased Loan to Seller rather than directly to the Blocked Account, Seller shall (i) deliver an additional irrevocable direction letter to the applicable Person and make other commercially reasonable efforts to cause such Person to forward such amounts directly to the Blocked Account and (ii) hold such amounts in trust for Buyer and immediately deposit in the Blocked Account any such amounts. All Income in respect of the Portfolio Loans, which may include payments in respect of associated Hedging Transactions entered into by an underlying obligor with respect to a Purchased Loan and pledged to Seller as collateral for a Purchased Loan, shall be deposited directly into, or, if applicable, remitted directly from the applicable underlying collection account to, the Blocked Account. So long as no Event of Default shall have occurred and be continuing, all Income on deposit in the Blocked Account in respect of the Portfolio Loans and the associated Hedging Transactions during each Collection Period shall be remitted to Seller on a daily basis. Upon the occurrence of an Event of Default, Buyer may terminate such remittances and amounts on deposit in the Blocked Account will be applied in accordance with Section 5(d).

(b)           Seller shall pay to Buyer on each Remittance Date, an amount equal to the aggregate Price Differential which has accrued and is outstanding in respect of the Transactions as of each such Remittance Date and shall pay to Servicer its Servicing Fees and any “Servicing Expenses”, “Additional Servicing Compensation” and “Servicing Advances” (as such terms are defined in the Servicing Agreement) in accordance with the terms of the Servicing Agreement.

(c)           If Seller shall receive a Principal Payment in respect of any Purchased Loan, not later than one (1) Business Day after receipt of such Principal Payment, Seller shall (subject to the provisions of Section 3(j)) pay the Repurchase Price in respect of such Purchased Loan in an amount equal to the greater of (i) the product of the amount of such Principal Payment multiplied by the Purchase Percentage applicable to the related Purchased Loan and (ii) such greater amount, such that after giving effect to such payment of the applicable Repurchase Price, the aggregate Repurchase Price of the Portfolio Loans does not exceed the Asset Base, as determined by Buyer after giving effect to such payment. Seller shall pay to Buyer on the Remittance Date, the full Repurchase Price of any Purchased Loan in respect of which a Principal Payment has been received, or, if the Principal Payment is less than the Repurchase Price, an amount equal to such Principal Payment.

(d)           If an Event of Default shall have occurred and be continuing, all Income on deposit in the Blocked Account in respect of the Purchased Loans and the associated Hedging Transactions shall be

 

 

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applied on the Business Day next following the Business Day on which such funds are deposited in the Blocked Account as follows:

(i)             first, to make payment in respect of any outstanding Servicing Fees and “Servicing Expenses”, “Additional Servicing Compensation” (other than “Termination Fees”) and “Servicing Advances” (as such terms are defined in the Servicing Agreement);

(ii)            second, to remit to Buyer an amount equal to the Price Differential which has accrued and is outstanding in respect of the Transactions as of such Business Day;

(iii)           third, to make payment to Buyer in respect of Costs and all other amounts payable by Seller and outstanding hereunder;

(iv)          fourth, to make a payment to Buyer on account of the aggregate Repurchase Price of the Purchased Loans until the aggregate Repurchase Price for all of the Purchased Loans has been reduced to zero; and

 

(v)

fifth, to remit to Seller the remainder.

(e)           If at any time during the term of any Transaction any Income is distributed to Seller or Seller has otherwise received such Income or Buyer has made a payment in respect of such Income pursuant to this Section 5, and for any reason (other than a breach by Buyer of the Purchased Loan Documents) such amount is required to be returned to an obligor under such Purchased Loan (either before or after the Repurchase Date), Buyer may provide Seller with notice of such required return, and Seller shall pay the amount of such required return to Buyer by 11:00 a.m., New York time, on the Business Day following Seller’s receipt of such notice.

(f)           Subject to the other provisions hereof, Seller shall be responsible for all Costs in respect of any Purchased Loans to the extent it would be so obligated if the Purchased Loans had not been sold to Buyer. Buyer shall provide Seller with notice of any Costs promptly upon receiving such notice, and Seller shall pay the amount of any Costs to Buyer by 11:00 a.m., New York time, on the later of (i) five (5) Business Days after Buyer has informed Seller that such amount is due under the Purchased Loan Documents and (ii) three (3) Business Days following Seller’s receipt of such notice.

6.

SECURITY INTEREST

Paragraph 6 of the Agreement (“Security Interest”) is hereby deleted and replaced in its entirety by the following provisions of this Section 6:

(a)           Buyer and Seller intend that all Transactions hereunder be sales to Buyer of the Purchased Loans for all purposes (other than for U.S. Federal, state and local income or franchise tax purposes) and not loans from Buyer to Seller secured by the Purchased Loans. However, in the event any Transaction is deemed to be a loan, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under such Transaction and shall be deemed to have granted to Buyer a security interest in (i) the Blocked Account, (ii) all of the Purchased Loans (including those identified in Confirmations, (iii) all Income from the Purchased Loans and (iv) all proceeds of all of the foregoing.

(b)           To the extent Buyer is deemed to have a security interest with respect to the Purchased Loans, and with respect to the security interests granted in subsection (c) of this Section 6, Buyer shall have all of the rights and may exercise all of the remedies of a secured creditor under the UCC and any

 

 

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other applicable law. In furtherance of the foregoing, (1) Seller, at its sole cost and expense, shall cause to be filed as a protective filing with respect to the Purchased Loans and as a UCC filing with respect to the security interests granted in subsection (c)) of this Section 6 (i) a UCC financing statement in the form of Schedule 7-A attached hereto (to be filed in the filing office indicated therein), (ii) amendments to such UCC financing statement in the form of Schedule 7-B attached hereto and having attached to each such UCC financing statement amendment a description of the Purchased Loans which identifies the Purchased Loans by setting forth (a) the name of the borrower with respect to each Purchased Loan, (b) the loan agreement (including the date) or other document, agreement or instrument pursuant to which each Purchased Loan was made or is governed, and (c) the initial or then outstanding principal amount of each Purchased Loan, and (iii) such other UCC filings, in such locations as may be necessary to perfect and maintain perfection and priority of the outright transfer and the security interest granted hereby (including under Section 22 of this Annex I) and, in each case, continuation statements and any amendments thereto (collectively, the “Filings”), and shall forward copies of such Filings to Buyer upon completion thereof, and (b) Seller shall from time to time, at its own expense, deliver and cause to be duly filed all such further filings, instruments and documents and take all such further actions as may be necessary or desirable or as may be requested by Buyer with respect to the perfection and priority of the outright transfer of the Purchased Loans and the security interest deemed granted hereunder and in the Purchased Loans and the rights and remedies of the Buyer with respect to the Purchased Loans (including under Section 22 of this Annex I) (including the payments of any fees and taxes required in connection with the execution and delivery of the Agreement).

(c)           Seller hereby pledges to Buyer, as security for the performance by Seller of its obligations under all Transactions, all Hedging Transactions relating to Purchased Loans entered into by Seller and all proceeds thereof. Seller shall take all action as is necessary or desirable to obtain consent to assignment of any such Hedging Transaction to Buyer and shall cause the counterparty under each such Hedging Transaction to enter into such document or instrument satisfactory to Buyer, Seller and such counterparty, pursuant to which such counterparty will covenant and agree to accept notice from Buyer to redirect payments under such Hedging Transaction as Buyer may direct. So long as no Event of Default shall be continuing, Buyer agrees that it will not redirect payments under any Hedging Transaction pledged to Buyer pursuant to the terms of this Section 6(c).

7.

PAYMENT, TRANSFER AND CUSTODY

Paragraph 7 of the Agreement (“Payment and Transfer”) is hereby deleted and replaced in its entirety by the following provisions of this Section 7:

(a)           Subject to the terms and conditions of the Agreement, on the Purchase Date for each Transaction, ownership of the Purchased Loans and all rights thereunder shall be transferred to Buyer or its designee (including the Custodian) against the simultaneous transfer of the Purchase Price to an account of Seller specified in the Confirmation relating to such Transaction. On the Purchase Date for the first Transaction, Buyer will provide Seller with a power of attorney, substantially in the form attached as Exhibit IV-2 hereto, in recordable form, allowing Seller to administer, operate and service such Purchased Loans. The power of attorney shall be binding upon Buyer and Buyer’s successors and assigns.

(b)           With respect to each Table Funded Purchased Loan, Seller shall cause the Bailee to deliver to the Custodian (with a copy to Buyer) by no later than 1:00 p.m. (New York time), on the Purchase Date, by facsimile the related promissory note (or the participation certificate, as applicable), the Insured Closing Letter and Escrow Instructions, if any, the Bailee Agreement and a Trust Receipt issued by the Bailee thereunder on or before the related Purchase Date. In connection with the sale of each Purchased Loan, not later than 1:00 p.m., two (2) Business Days prior to the related Purchase Date (or on the related Purchase Date, as may be agreed by Buyer and Seller on a case by case basis) (or with respect

 

 

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to a Table Funded Purchased Loan not later than 1:00 p.m. (New York time) on the third Business Day following the applicable Purchase Date), Seller shall deliver or cause Bailee to deliver (with a copy to Buyer) and release to the Custodian (together with the Custodial Delivery in the form attached hereto as Exhibit III), and shall cause the Custodian to deliver a Trust Receipt on the Purchase Date (or in the case of a Table Funded Purchased Loan, not later than two (2) Business Days following the receipt by the Custodian) confirming the receipt of the following original documents (collectively, the “Purchased Loan File”), pertaining to each of the Purchased Loans identified in the Custodial Delivery delivered therewith:

(i)             With respect to each Purchased Loan that is a Mortgage Loan (including a First Mortgage B Note), the following documents, as applicable:

(A)         The original Mortgage Note bearing all intervening endorsements, endorsed “Pay to the order of _________ without recourse” and signed in the name of the last endorsee (the “Last Endorsee”) by an authorized Person (in the event that the Purchased Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: “[Last Endorsee], successor by merger to [name of predecessor]”; in the event that the Purchased Loan was acquired or originated by the Last Endorsee while doing business under another name, the signature must be in the following form: “[Last Endorsee], formerly known as [previous name]”) or a lost note affidavit in a form reasonably approved by Buyer, with a copy of the applicable Mortgage Note attached thereto.

(B)         The original or a copy of the loan agreement and the guarantee, if any, executed in connection with the Purchased Loan.

(C)         The original Mortgage with evidence of recording thereon, or a copy thereof together with an officer’s certificate of Seller certifying that such represents a true and correct copy of the original and that such original has been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located.

(D)         The originals of all assumption, modification, consolidation or extension agreements with evidence of recording thereon, or copies thereof together with an officer’s certificate of Seller certifying that such represent true and correct copies of the originals and that such originals have each been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located.

(E)         The original Assignment of Mortgage to Buyer for each Purchased Loan, in form and substance acceptable for recording and signed in the name of the Last Endorsee (in the event that the Purchased Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: “[Last Endorsee], successor by merger to [name of predecessor]”; in the event that the Purchased Loan was acquired or originated while doing business under another name, the signature must be in the following form: “[Last Endorsee], formerly known as [previous name]”).

(F)          The originals of all intervening assignments of mortgage with evidence of recording thereon, or copies thereof together with an officer’s certificate of Seller certifying that such represent true and correct copies of the originals and that such originals have each been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located.

 

 

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(G)        The original attorney’s opinion of title and abstract of title or the original mortgagee title insurance policy, or if the original mortgagee title insurance policy has not been issued, the irrevocable marked commitment to issue the same.

(H)         The original of any security agreement, chattel mortgage or equivalent document executed in connection with the Purchased Loan.

(I)           The original Assignment of Leases, if any, with evidence of recording thereon, or a copy thereof together with an officer’s certificate of Seller, certifying that such copy represents a true and correct copy of the original that has been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located.

(J)          The originals of all intervening assignments of assignment of leases and rents, if any, or copies thereof, with evidence of recording thereon, or copies thereof together with an officer’s certificate of Seller certifying that such represent true and correct copies of the originals and that such originals have each been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located.

(K)         A copy of the UCC financing statements, certified as true and correct by Seller, and all necessary UCC continuation statements with evidence of filing thereon or copies thereof certified by Seller to have been sent for filing, and UCC assignments to Buyer, which UCC assignments shall be in form and substance acceptable for filing in the applicable jurisdictions.

(L)         An environmental indemnity agreement or similar guaranty or indemnity, whether stand-alone or incorporated into the applicable loan documents (if any).

(M)        An omnibus assignment to Buyer or other documents necessary and sufficient to transfer to Buyer all of Seller’s right, title and interest in and to the Purchased Loan (if any).

(N)         A disbursement letter from the Mortgagor to the original mortgagee or other evidence that the Purchased Loan has been fully disbursed (if applicable).

 

(O)

Mortgagor’s certificate or title affidavit (if any).

(P)         A survey of the Mortgaged Property (if any) as accepted by the title company for issuance of the Title Policy.

(Q)         The original of any participation agreement, intercreditor agreement and/or servicing agreement executed in connection with such Purchased Loan.

(R)         A copy of all servicing agreements and Servicing Records related to such Purchased Loan, which Seller shall deliver to Servicer (with a copy to Buyer).

 

(S)

A copy of the Mortgagor’s opinions of counsel.

(T)         An assignment of any management agreements, permits, contracts and other material agreements (if any).

 

 

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(U)       Reports of UCC, tax lien, judgment and litigation searches as requested by Buyer, conducted by search firms reasonably acceptable to Buyer with respect to the Purchased Loan, Seller and the related underlying obligor, such searches to be conducted in each location Buyer shall reasonably designate and such reports reasonably satisfactory to Buyer.

(V)         If the Mortgagor is an Affiliate of Seller, pledge agreement and any UCC financing statements, executed by the owner(s) of all the equity interests of the Mortgagor as debtor in favor of Seller as secured party (which pledge agreement and UCC financing statements shall be assigned by Seller to Buyer), covering all equity interests in the Mortgagor, if not previously delivered to Buyer, together with any related original certificates of equity ownership and blank assignments thereof, all to give Buyer a security interest in such equity as additional collateral for Seller’s obligations.

(W)        The original or a copy of the intercreditor or loan coordination agreement (if any) executed in connection with the Purchased Loan to the extent the subject borrower, or an affiliate thereof, has encumbered its assets with senior, junior or similar financing, whether mortgage financing or mezzanine loan financing.

(X)         Copies of all documents relating to the formation and organization of the related obligor under such Purchased Loan, together with all consents and resolutions delivered in connection with such obligor’s obtaining such Purchased Loan.

(Y)         All other material documents and instruments evidencing, guaranteeing, insuring or otherwise constituting or modifying or otherwise affecting such Purchased Loan, or otherwise executed or delivered in connection with, or otherwise relating to, such Purchased Loan, including all documents establishing or implementing any lockbox pursuant to which Seller is entitled to receive any payments from cash flow of the underlying real property.

If Seller cannot deliver, or cause to be delivered, any of the documents and/or instruments required above to be delivered as originals, Seller shall deliver a photocopy thereof and, unless waived by Buyer, an Officer’s Certificate of Seller certifying that such copy represents a true and correct copy of the original. Seller shall then, in the event that Seller has a legitimate and reasonable opportunity to obtain the original documents in question if the document in question exists in original form (1) use reasonable efforts to obtain and deliver the original document within 180 days after the related Purchase Date (or such longer period after the related Purchase Date as Buyer may consent to, which consent shall not be unreasonably withheld so long as Seller is, as certified in writing to Buyer no less often than monthly, in good faith attempting to obtain the original) and (2) after the expiration of such reasonable efforts period, deliver to Buyer a certification that states, despite Seller’s reasonable efforts, Seller was unable to obtain such original document.

(ii)            With respect to each Purchased Loan which is a Mezzanine Loan secured by a pledge of the equity ownership interests in an entity that owns Eligible Property, the following, as applicable:

(A)         The original Mezzanine Note signed in connection with the Purchased Loan bearing all intervening endorsements, endorsed “Pay to the order of __________ without recourse” and signed in the name of the Last Endorsee by an authorized Person (in the event that the Mezzanine Note was acquired by the Last Endorsee in a merger, the signature must be in the following form: “[Last Endorsee], successor by merger to [name

 

 

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of predecessor]”; in the event that the Purchased Loan was acquired or originated by the Last Endorsee while doing business under another name, the signature must be in the following form: “[Last Endorsee], formerly known as [previous name]”) or a lost note affidavit in a form reasonably approved by Buyer with a copy of the applicable Mezzanine Note attached thereto.

(B)         The original or a copy of the loan agreement and the guarantee, if any, executed in connection with the Purchased Loan.

(C)         The original or a copy of the intercreditor or loan coordination agreement executed in connection with the Purchased Loan to the extent the subject borrower, or an affiliate thereof, has encumbered its assets with senior, junior or similar financing, whether mortgage financing or mezzanine loan financing.

(D)         The original security agreement executed in connection with the Purchased Loan.

(E)         Copies of all documents relating to the formation and organization of the borrower under such Purchased Loan, together with all consents and resolutions delivered in connection with such borrower’s obtaining the Purchased Loan.

(F)          All other material documents and instruments evidencing, guaranteeing, insuring or otherwise constituting or modifying or otherwise affecting such Purchased Loan, or otherwise executed or delivered in connection with, or otherwise relating to, such Purchased Loan, including all documents establishing or implementing any lockbox pursuant to which Seller is entitled to receive any payments from cash flow of the underlying real property.

(G)         An omnibus assignment to Buyer or other documents necessary and sufficient to transfer to Buyer all of Seller’s right, title and interest in and to the Purchased Loan.

(H)         The original of any participation agreement, intercreditor agreement and/or servicing agreement executed in connection with such Purchased Loan.

(I)           A copy of all servicing agreements and Servicing Records related to such Purchased Loan, which Seller shall deliver to Servicer (with a copy to Buyer).

 

(J)

A copy of the borrower’s opinions of counsel.

(K)         A copy of the UCC financing statements, certified as true and correct by Seller, and all necessary UCC continuation statements with evidence of filing thereon or copies thereof certified by Seller to have been sent for filing, and UCC assignments to Buyer, which UCC assignments shall be in form and substance acceptable for filing in the applicable jurisdictions.

(L)         The original certificates representing the pledged equity interests to the extent applicable.

(M)        Stock or similar powers relating to each pledged equity interest, executed in blank, if such equity interests are in certificated form.

 

 

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(N)       Assignment of any management agreements, agreements among equity interest holders or other material contracts.

(O)         If the pledged equity interests are not certificated, evidence (which may be an Officer’s Certificate confirming such circumstances or in the form of an executed instruction to register such pledge by the mezzanine borrower and acknowledgment by the entity in which such pledged equity interests are held) that the pledged equity interests have been transferred to, or otherwise made subject to a first priority security interest in favor of, Seller.

(P)         Copies of all material documents evidencing or securing the related mortgage loan and any other documents affecting the related mortgaged property to the extent in possession of Seller.

(Q)         If the mezzanine borrower is an Affiliate of Seller, a pledge agreement and any UCC financing statements, executed by the owner(s) of all the equity interests of the mezzanine borrower as debtor in favor of Seller as secured party (which pledge agreement and UCC financing statements shall be transferred by Seller to Buyer), covering all equity interests in the mezzanine borrower, if not previously delivered to Buyer, together with any related original certificates of equity ownership and blank assignments thereof, all to give Buyer a security interest in such equity as additional collateral for Seller’s obligations.

(R)         Evidence that the Purchased Loan has been fully disbursed (if applicable).

If Seller cannot deliver, or cause to be delivered, any of the documents and/or instruments referred to above, required to be delivered as originals, Seller shall deliver a photocopy thereof and, unless waived by Buyer, an Officer’s Certificate of Seller certifying that such copy represents a true and correct copy of the original. Seller shall then, in the event that Seller has a legitimate and reasonable opportunity to obtain the original documents in question if the document in question exists in original form (1) use reasonable efforts to obtain and deliver the original document within 180 days after the related Purchase Date (or such longer period after the related Purchase Date as Buyer may consent to, which consent shall not be unreasonably withheld so long as Seller is, as certified in writing to Buyer no less often than monthly, in good faith attempting to obtain the original) and (2) after the expiration of such reasonable efforts period, deliver to Buyer a certification that states, despite Seller’s reasonable efforts, Seller was unable to obtain such original document.

(iii)           With respect to each Purchased Loan which is of the type described in clause (iv) of the definition of Eligible Loan, any of the documentation referred to above in Section 7(b)(i) and (ii) which is reasonably determined by the Buyer to be necessary to effectuate the sale, transfer, conveyance and assignment of such Purchased Loan.

(c)           From time to time, Seller shall forward to the Custodian additional original documents or additional documents evidencing any assumption, modification, consolidation or extension of a Purchased Loan approved in accordance with the terms of the Agreement, and upon receipt of any such other documents, the Custodian shall hold such other documents on behalf of Buyer and as Buyer shall request from time to time. With respect to any documents which have been delivered or are being delivered to recording offices for recording and have not been returned to Seller in time to permit their delivery hereunder at the time required, in lieu of delivering such original documents, Seller shall deliver to Buyer a true copy thereof with an officer’s certificate certifying that such copy is a true, correct and complete

 

 

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copy of the original, which has been transmitted for recordation. Seller shall deliver such original documents to the Custodian promptly when they are received. With respect to all of the Purchased Loans delivered by Seller to Buyer or its designee (including the Custodian), Seller shall execute an omnibus power of attorney substantially in the form of Exhibit IV-1 attached hereto irrevocably appointing Buyer its attorney-in-fact with full power to (i) complete and record any Assignment of Mortgage, (ii) complete the endorsement of any Mortgage Note or Mezzanine Note and (iii) take such other steps as may be necessary or desirable to enforce Buyer’s rights against any Purchased Loans and the related Purchased Loan Files and the Servicing Records. Buyer shall deposit the Purchased Loan Files representing the Purchased Loans, or cause the Purchased Loan Files to be deposited directly, with the Custodian to be held by the Custodian on behalf of Buyer. The Purchased Loan Files shall be maintained in accordance with the Custodial Agreement. Any Purchased Loan Files not delivered to Buyer or its designee (including the Custodian) are and shall be held in trust by Seller or its designee for the benefit of Buyer as the owner thereof. Seller or its designee shall maintain a copy of the Purchased Loan File and the originals of the Purchased Loan File not delivered to Buyer or its designee. The possession of the Purchased Loan File by Seller or its designee is at the will of Buyer for the sole purpose of servicing the related Purchased Loan, and such retention and possession by Seller or its designee is in a custodial capacity only. The books and records (including, without limitation, any computer records or tapes) of Seller or its designee shall be marked appropriately to reflect clearly the transfer, subject to the terms and conditions of the Agreement, of the related Purchased Loan to Buyer. Seller or its designee (including the Custodian) shall release its custody of the Purchased Loan File only in accordance with written instructions from Buyer, unless such release is required as incidental to the servicing of the Purchased Loans or is in connection with a repurchase of any Purchased Loan by Seller or is pursuant to the order of a court of competent jurisdiction.

(d)           In addition to any documents or instruments that are required to be delivered by Seller to Buyer hereunder in connection with the transfer of Purchased Loans by Seller to Buyer, on the date of the Agreement, Buyer shall have received all of the following items and documents, each of which shall be satisfactory to Buyer in form and substance:

 

(i)

Transaction Documents.

(A)         The Agreement (including this Annex I), duly executed and delivered by Seller and Buyer;

(B)         The Custodial Agreement, duly executed and delivered by Seller, Buyer and Custodian;

 

(C)

The Fee Letter, duly executed and delivered by Seller and Buyer;

(D)         The Blocked Account Agreement, duly executed and delivered by Seller, Buyer and Depository Bank; and

(E)         The Servicing Agreement, duly executed and delivered by Seller, Buyer and Servicer.

(ii)            Organizational Documents. Certified copies of the Seller’s organizational documents and resolutions or other documents evidencing the authority of Seller with respect to the execution, delivery and performance of the Transaction Documents to which it is a party and each other document to be delivered by Seller from time to time in connection with the Transaction Documents (and Buyer may conclusively rely on such certifications until it receives notice in writing from Seller to the contrary);

 

 

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(iii)

Intentionally Omitted.

 

(iv)

Other Documents. Such other documents as Buyer may reasonably request.

8.

CERTAIN RIGHTS OF BUYER WITH RESPECT TO THE PURCHASED LOANS

Paragraph 8 of the Agreement (“Segregation of Purchased Securities”) is hereby deleted and replaced in its entirety by the following provisions of this Section 8:

(a)           Subject to the terms and conditions of the Agreement, title to all Purchased Loans shall pass to Buyer on the applicable Purchase Date, and Buyer shall have free and unrestricted use of its interest in the Purchased Loans in accordance with the terms and conditions of the Purchased Loans. Nothing in the Agreement or any other Transaction Document shall preclude Buyer from engaging in repurchase transactions with the Purchased Loans with Persons in conformity with the terms and conditions of the Purchased Loans or otherwise selling, transferring, pledging, repledging, hypothecating, or rehypothecating all or a portion of its interest in the Purchased Loans to Persons in conformity with the terms and conditions to the Purchased Loans, but no such transaction shall relieve Buyer of its obligations to transfer the Purchased Loans to Seller pursuant to Section 3 of this Annex I or of Buyer’s obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Section 5 of this Annex I or otherwise affect the rights, obligations and remedies of any party to the Agreement. Any such repurchase transaction and any pledge, repledge, hypothecation or rehypothecation in connection with a Financing Transaction may be to any Person other than a Disqualified Transferee; provided that Buyer, other than in connection with a Financing Transaction, may assign or participate its rights’ under the Transaction Documents or any Transaction only in accordance with Section 17 of this Annex I, unless an Event of Default shall have occurred and be continuing or the prior written consent of Seller has been obtained by Buyer.

(b)           Subject to the terms and conditions of the Agreement, any documents delivered to the Custodian pursuant to Section 7(b) and 7(c) of this Annex I shall only be released in accordance with the terms and conditions of the Custodial Agreement.

9.

SUBSTITUTION

Paragraph 9 of the Agreement (“Substitution”) is hereby deleted and replaced in its entirety by the following provisions of this Section 9:

(a)           In the case of any Transaction for which the Repurchase Date is other than the Business Day immediately following the Purchase Date, Seller shall have the right, subject to the proviso to this sentence, upon notice to Buyer, which notice shall be given at or prior to 10:00 a.m. (New York time) on such Business Day, to substitute substantially the same Eligible Loans for any Purchased Loans, provided, however, that Buyer may elect, by the close of business on the Business Day notice is received, or by the close of the next Business Day if notice is given after 10:00 a.m. (New York time) on such day, not to accept such substitution in its sole and absolute discretion. In the event such substitution is accepted by Buyer, such substitution shall be made by Seller’s transfer to Buyer of such other Eligible Loans and Buyer’s transfer to Seller of such Purchased Loans, and after substitution, the substituted Eligible Loans shall be deemed to be Purchased Loans subject to the terms of the Agreement (including but not limited to the margin provisions of Section 4 of this Annex I). Each such substitution shall be deemed to be a representation and warranty by Seller that each substitute loan is an Eligible Loan and that after giving effect to such substitution, the aggregate Repurchase Price of the Portfolio Loans shall not exceed the aggregate Asset Base. In the event Buyer elects not to accept such substitution, Buyer shall offer Seller the right to terminate the Transaction.

 

 

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(b)          In the event Seller exercises its right to substitute or terminate under sub-paragraph (a), Seller shall be obligated to pay to Buyer, by the close of the Business Day of such substitution or termination, as the case may be, an amount equal to (A) Buyer’s actual out-of-pocket cost (including all fees (including reasonable attorneys fees), expenses and commissions) of (i) entering into replacement transactions; (ii) entering into or terminating hedge transactions; and/or (iii) terminating transactions or substituting mortgage loans in like transactions with third parties in connection with or as a result of such substitution or termination, and (B) to the extent Buyer determines not to enter replacement transactions, the loss incurred by Buyer directly arising or resulting from such substitution or termination. The foregoing amounts shall be solely determined and calculated by Buyer in good faith.

 

10.

REPRESENTATIONS

Paragraph 10 of the Agreement (“Representations”) is hereby supplemented by the following:

(a)   Seller represents and warrants to Buyer that as of the Purchase Date for the purchase of any Purchased Loan by Buyer from Seller and any Transaction thereunder and as of the date of the Agreement and at all times while the Agreement and any Transaction thereunder is in full force and effect:

(i)             Organization. Seller is duly organized, validly existing and in good standing under the laws and regulations of the state of Seller’s organization and is duly licensed, qualified, and in good standing in every state where such licensing or qualification is necessary for the transaction of Seller’s business, except where lack of such licenses or qualifications would not be reasonably likely to result in a Material Adverse Effect. Seller has the power to own and hold the assets it purports to own and hold, and to carry on its business as now being conducted and proposed to be conducted, and has the power to execute, deliver, and perform its obligations under the Agreement and the other Transaction Documents.

(ii)            Due Execution; Enforceability. The Transaction Documents have been duly executed and delivered by Seller, for good and valuable consideration. The Transaction Documents constitute the legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms subject to bankruptcy, insolvency, and other limitations on creditors’ rights generally and to equitable principles.

(iii)           Non-Contravention; Consents. Neither the execution and delivery of the Transaction Documents, nor consummation by Seller of the transactions contemplated by the Transaction Documents (or any of them), nor compliance by Seller with the terms, conditions and provisions of the Transaction Documents (or any of them) will (x) conflict with or result in a breach or violation of any of the terms, conditions or provisions of any judgment or order, writ, injunction, decree or demand of any court applicable to Seller, or (y) result in the creation or imposition of any lien or any other encumbrance upon any of the assets of Seller, other than pursuant to the Transaction Documents. Seller has all necessary licenses, permits and other consents from Governmental Authorities necessary to acquire, own and sell the Portfolio Loans and for the performance of its obligations under the Transaction Documents except where the failure to have any such license, permit or consent would not be reasonably likely to result in a Material Adverse Effect.

(iv)          Litigation; Requirements of Law. There is no action, suit, proceeding, investigation, or arbitration pending or, to the best knowledge of Seller, threatened against Seller, or any of its assets which may result in any Material Adverse Effect, or which may have an

 

 

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adverse effect on the validity of the Transaction Documents or any action taken or to be taken in connection with the obligations of Seller under any of the Transaction Documents. Seller is in compliance in all material respects with all Requirements of Law. Seller is not in default in any material respect with respect to any judgment, order, writ, injunction, decree, rule or regulation of any arbitrator or Governmental Authority.

(v)           No Broker. Seller has not dealt with any broker, investment banker, agent or other Person (other than Buyer or an Affiliate of Buyer) who may be entitled to any commission or compensation in connection with the sale of the Purchased Loans pursuant to any Transaction Documents.

(vi)          Good Title to Purchased Loans. Immediately prior to the purchase of any Purchased Loans by Buyer from Seller, such Purchased Loans are free and clear of any lien, security interest, claim, option, charge, encumbrance or impediment to transfer (including any “adverse claim” as defined in Section 8-102(a)(1) of the UCC), and are not subject to any rights of setoff, any prior sale, transfer, assignment, or participation by Seller or any agreement by Seller to assign, convey, transfer or participate, in whole or in part, and Seller is the sole legal record and beneficial owner of and owns and has the right to sell and transfer such Purchased Loans to Buyer and, upon transfer of such Purchased Loans to Buyer, Buyer shall be the owner of such Purchased Loans (other than for U.S. Federal, state and local income and franchise tax purposes) free of any adverse claim, subject to Seller’s rights pursuant to the Agreement. In the event the related Transaction is recharacterized as a secured financing of the Purchased Loans and with respect to the security interests granted in Sections 6(c) and 6(d), the provisions of the Agreement are effective to create in favor of Buyer a valid security interest in all rights, title and interest of Seller in, to and under the Purchased Loans and the collateral specified in Sections 6(c) and 6(d), Buyer shall have a valid, perfected and enforceable first priority security interest in the Purchased Loans and such other collateral, subject to no lien or rights of others other than as granted herein.

(vii)         No Default. No Default or Event of Default exists under or with respect to the Transaction Documents.

(viii)        Representations and Warranties Regarding Purchased Loans; Delivery of Purchased Loan File. Seller represents and warrants to Buyer that each Purchased Loan sold hereunder and each pool of Purchased Loans sold in a Transaction hereunder, as of the applicable Purchase Date for the Transaction in question conforms to the applicable representations and warranties set forth in Exhibit V attached hereto, except shall have been disclosed to Buyer in writing prior to Buyer’s issuance of a Confirmation with respect to the related Purchased Loan. It is understood and agreed that the representations and warranties set forth in Exhibit V hereto, if any, shall survive delivery of the respective Purchased Loan File to Buyer or its designee (including the Custodian). With respect to each Purchased Loan, the Mortgage Note or Mezzanine Note, the Mortgage (if any), the Assignment of Mortgage (if any) and any other documents required to be delivered under the Agreement and the Custodial Agreement for such Purchased Loan have been delivered (or with respect to Table Funded Loans shall be delivered in accordance with Section 7(b)) to Buyer or the Custodian on its behalf or such requirement will have been expressly waived in writing by Buyer. Seller or its designee is in possession of a complete, true and accurate Purchased Loan File with respect to each Purchased Loan, except for such documents the originals of which have been delivered to the Custodian.

(ix)          Adequate Capitalization; No Fraudulent Transfer. Seller has, as of such Purchase Date, adequate capital for the normal obligations reasonably foreseeable in a business of its size

 

 

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and character and in light of its contemplated business operations. Seller is generally able to pay, and as of the date hereof is paying, its debts as they come due. Seller has not become, or is presently, financially insolvent nor will Seller be made insolvent by virtue of Seller’s execution of or performance under any of the Transaction Documents within the meaning of the bankruptcy laws or the insolvency laws of any jurisdiction. Seller has not entered into any Transaction Document or any Transaction pursuant thereto in contemplation of insolvency or with intent to hinder, delay or defraud any creditor. Seller has not received any written notice that any payment or other transfer made to or on account of Seller from or on account of any Mortgagor or any other person obligated under any Purchased Loan Documents is or may be void or voidable as an actual or constructive fraudulent transfer or as a preferential transfer.

(x)           Organizational Documents. Seller has delivered to Buyer certified copies of its organizational documents, together with all amendments thereto.

(xi)          No Encumbrances. There are (i) no outstanding rights, options, warrants or agreements on the part of Seller for a purchase, sale or issuance, in connection with the Purchased Loans and (ii) no agreements on the part of Seller to issue, sell or distribute the Purchased Loan.

(xii)         Federal Regulations. Seller is not (A) an “investment company,” or a company “controlled by an investment company,” within the meaning of the Investment Company Act of 1940, as amended, or (B) a “holding company,” or a “subsidiary company of a holding company,” or an “affiliate” of either a “holding company” or a “subsidiary company of a holding company,” as such terms are defined in the Public Utility Holding Company Act of 1935, as amended.

(xiii)        Taxes. Seller has filed or caused to be filed all tax returns which would be delinquent if they had not been filed on or before the date hereof and has paid all taxes due and payable on or before the date hereof and all other taxes, fees or other charges imposed on it and any of its assets by any Governmental Authority; no tax liens have been filed against any of Seller’s assets and, to Seller’s knowledge, no claims are being asserted with respect to any such taxes, fees or other charges.

(xiv)        ERISA. Neither Seller nor any ERISA Affiliate (a) sponsors or maintains any Plans or (b) makes any contributions to or has any liabilities or obligations (direct or contingent) with respect to any Plans. Seller does not, and would not be deemed to, hold Plan Assets and the consummation of the transactions contemplated by the Agreement will not constitute or result in any non-exempt prohibited transaction under Section 406 of ERISA, Section 4975 of the Code or substantially similar provisions under any other federal, state or local laws, rules or regulations.

(xv)         Judgments/Bankruptcy. Except as disclosed in writing to Buyer, there are no judgments against Seller or unsatisfied of record or docketed in any court located in the United States of America and no Act of Insolvency has ever occurred with respect to Seller.

(xvi)        Full and Accurate Disclosure. No information contained in the Transaction Documents, or any written statement furnished by or on behalf of Seller pursuant to the terms of the Transaction Documents, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made when such statements and omissions are considered in the totality of the circumstances in question.

 

 

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(xvii)      Financial Information. All financial data concerning Seller and to Seller’s knowledge after due inquiry, the Purchased Loans that has been delivered by or on behalf of Seller to Buyer is true, complete and correct in all material respects and has been prepared in accordance with GAAP. Since the delivery of such data, except as otherwise disclosed in writing to Buyer, there has been no change in the financial position of Seller or the Purchased Loans, or in the results of operations of Seller, which change is reasonably likely to have in a Material Adverse Effect on Seller.

(xviii)      Jurisdiction of Organization. The Seller’s jurisdiction of organization is the State of Maryland.

(xix)        Regulation T, U and X. Neither the entering into or consummation of any Transaction hereunder, nor the use of the proceeds thereof, will violate any provisions of Regulation T, U or X. If requested by Buyer, Seller, any applicable Affiliate of Seller and the recipient of any portion of the proceeds of, or any portion of, any Transaction shall furnish to Buyer a statement on Federal Reserve Form G-3 referred to in Regulation U.

(b)   On the Purchase Date for any Transaction, Seller shall be deemed to have made all of the representations set forth in Paragraph 10 of the Agreement and Section 10(a) of this Annex I as of such Purchase Date.

11.

NEGATIVE COVENANTS OF SELLER

On and as of the date hereof and each Purchase Date and until the Agreement is no longer in force with respect to any Transaction, Seller shall not without the prior written consent of Buyer:

(a)   subject to Seller’s right to repurchase, take any action which would directly or indirectly impair or adversely affect Buyer’s title to the Purchased Loans;

(b)   transfer, assign, convey, grant, bargain, sell, set over, deliver or otherwise dispose of, or pledge or hypothecate, directly or indirectly, any interest in the Purchased Loans (or any of them) to any Person other than Buyer, or engage in repurchase transactions or similar transactions with respect to the Purchased Loans (or any of them) with any Person other than Buyer, except where the Purchased Loans in question are simultaneously repurchased from Buyer;

(c)   create, incur or permit to exist any lien, encumbrance or security interest in or on the Purchased Loans, except as described in Section 6 of this Annex I;

(d)   create, incur or permit to exist any lien, encumbrance or security interest in or on any of the other collateral subject to the security interest granted by Seller pursuant to Section 6 of this Annex I;

(e)   create, incur or permit any lien, security interest, charges, or encumbrances with respect to any Hedging Transaction for the benefit of any Person other than Buyer;

 

(f)

terminate any of the organizational documents of Seller;

(g)   consent or assent to a Significant Modification or any extension or termination of any note, loan agreement, mortgage, pledge agreement or guaranty relating to the Purchased Loans or other material agreement or instrument relating to the Purchased Loans without the prior written consent of Buyer;

 

 

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(h)  take any action or permit such action to be taken which would result in a Change in Control;

(i)     after the occurrence and during the continuation of any Event of Default or monetary Default, make any distribution, 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 ownership interest of Seller, 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 Seller; or

(j)     sponsor or maintain any Plans or make any contributions to, or have any liability or obligation (direct or contingent) with respect to any Plan and shall not permit any ERISA Affiliate to sponsor or maintain any Plans or make any contributions to, or have any liability or obligation (direct or contingent) with respect to any Plan;

(k)   engage in any transaction that would cause any obligation or action taken or to be taken hereunder (or the exercise by Buyer of any of its rights under the Agreement, the Purchased Loans or any Transaction Document) to be a non-exempt prohibited transaction under Section 406 of ERISA, Section 4975 of the Code or substantially similar provisions under any other federal, state or local laws, rules or regulations; or

(l)     make any future advances under any Purchased Loan to any underlying obligor which are not permitted by the related Purchased Loan Documents.

12.

AFFIRMATIVE COVENANTS OF SELLER

(a)   Seller shall promptly notify Buyer of any event and/or condition which is likely to have a Material Adverse Effect.

(b)   Seller shall give notice to Buyer of the following (accompanied by an Officer’s Certificate setting forth details of the occurrence referred to therein and stating what actions Seller has taken or proposes to take with respect thereto):

(i)             promptly upon receipt of notice or knowledge of the occurrence of any Default or Event of Default;

(ii)            with respect to any Purchased Loan sold to Buyer hereunder, immediately upon receipt of any Principal Payment (in full or in part);

(iii)         with respect to any Purchased Loan sold to Buyer hereunder, immediately upon receipt of notice or knowledge that the related Mortgaged 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 value of such Mortgaged Property;

(iv)         promptly upon receipt of notice or knowledge of (i) any Purchased Loan which becomes a Defaulted Loan, (ii) any lien or security interest (other than security interests created hereby) on, or claim asserted against, any Purchased Loan or, to Seller’s knowledge, the underlying collateral therefor or (iii) any event or change in circumstances that has or could reasonably be expected to have an adverse affect on the Market Value of a Purchased Loan; and

(v)           promptly, and in any event within 10 days after service of process on any of the following, give to Buyer 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 Seller or affecting any of the assets of Seller before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of

 

 

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the Transaction 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, or (iii) which, individually or in the aggregate, if adversely determined could reasonably be likely to have a Material Adverse Effect.

(c)   Seller shall provide Buyer with copies of such documents as Buyer may reasonably request evidencing the truthfulness of the representations set forth in Section 10.

(d)   Seller shall defend the right, title and interest of Buyer in and to the Purchased Loans against, and take such other action as is necessary to remove, the liens, security interests, claims, encumbrances, charges and demands of all Persons (other than security interests granted to Buyer hereunder).

(e)   Seller will permit Buyer or its designated representative to inspect any of Seller’s records with respect to all or any portion of the Purchased Loans and the conduct and operation of its business related thereto, at such reasonable times and with reasonable frequency requested by Buyer or its designated representative, and to make copies of extracts of any and all thereof.

(f)    If any amount payable under or in connection with any of the Purchased Loans shall be or become evidenced by any promissory note, other instrument or chattel paper (as each of the foregoing is defined under the UCC), such note, instrument or chattel paper shall be immediately delivered to Buyer or its designee, duly endorsed in a manner satisfactory to Buyer or if any collateral or other security shall subsequently be delivered to Seller in connection with any Purchased Loan, Seller shall immediately deliver or forward such item of collateral or other security to Buyer or its designee, together with such instruments of assignment as Buyer may request.

(g)   Seller shall provide (or cause to be provided to) Buyer with the following financial and reporting information:

(i)             the Monthly Statement;

(ii)            within the later of 30 days after the end of each calendar quarter or 10 days of Seller’s receipt, all operating statements and occupancy information that Seller or Servicer has received for the previous quarter relating to the Portfolio Loans and within the later of 45 days after the last day of each calendar quarter or 10 days of Seller’s receipt, the remainder of the operating statements and occupancy information for the previous quarter relating to the Portfolio Loans;

(iii)           as soon as available and in any event within forty-five (45) days after the end of each of the first three quarterly fiscal periods of each fiscal year of Seller, the unaudited, consolidated balance sheets of Seller, which shall incorporate its consolidated subsidiaries, as at the end of such period and the related unaudited, consolidated statements of income and retained earnings and of cash flows for Seller, which shall incorporate its consolidated Subsidiaries, for such period and the portion of the fiscal year through the end of such period, accompanied by an Officer’s Certificate of Seller, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations Seller and its consolidated Subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments);

(iv)          as soon as available and in any event within ninety (90) days after the end of each fiscal year of Seller, the consolidated balance sheets of Seller, which shall incorporate its consolidated Subsidiaries, as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for Seller, which shall incorporate its

 

 

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consolidated Subsidiaries, for such year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of Seller and its consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP;

(v)           within forty-five (45) days following the end of each quarter, or within ninety (90) days following the end of each fiscal year, as the case may be, an Officer’s Certificate of Seller in form and substance reasonably satisfactory to Buyer that Seller during such fiscal period or year has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in the Agreement and the other Transaction Documents to be observed, performed or satisfied by it, and that there has been no Event of Default and no event or circumstance has occurred that is reasonably likely to result in a Material Adverse Effect;

(vi)          within fifteen (15) Business Days after Buyer’s request, such further information with respect to the operation of any Mortgaged Property, Purchased Loan, the financial affairs of the Seller and any Plan and Multiemployer Plan as may be requested by Buyer, including all business plans prepared by or for Seller; provided, however, that with respect to information not previously known to, or in the possession of, Seller relating to any Multiemployer Plan, Seller shall only be required to provide such information as may be obtained through good faith efforts;

(vii)         within sixty (60) Business Days after the end of each calendar year, such information as may be requested by Buyer, its successors and assigns, and transferees, in connection with the Portfolio Loans, and that are necessary for the party requesting such information in preparing its tax return and paying taxes in any country or jurisdiction where such tax return or taxes are due; and

 

(viii)

such other reports as Buyer shall reasonably require.

(h)   Seller shall at all times comply in all material respects with all laws, ordinances, rules and regulations of any federal, state, municipal or other public authority having jurisdiction over Seller or any of its assets and Seller shall do or cause to be done all things reasonably necessary to preserve and maintain in full force and effect its legal existence, and all licenses material to its business.

(i)     Seller shall at all times keep proper books of records and accounts in which full, true and correct entries shall be made of its transactions in accordance with GAAP and set aside on its books from its earnings for each fiscal year all such proper reserves in accordance with GAAP.

(j)     Seller shall observe, perform and satisfy all the terms, provisions, covenants and conditions required to be observed, performed or satisfied by it, and shall pay when due all costs, fees and expenses required to be paid by it, under the Transaction Documents. Seller shall pay and discharge all taxes, levies, liens and other charges, if any, on its assets and on the Purchased Loans that, in each case, in any manner would create any lien or charge upon the Purchased Loans, 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 in accordance with GAAP.

(k)   Seller shall maintain its existence as corporation, organized solely and in good standing under the law of the State of Maryland and shall not dissolve, liquidate, merge with or into any other Person or otherwise change its organizational structure or identity or incorporate in any other jurisdiction unless Seller shall have notified Buyer in writing at least 30 days prior to any intent not to so maintain its existence and, in connection with a merger, (i) the surviving or resulting entity shall be a corporation or

 

 

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partnership organized under the laws of the United States or any state thereof; (ii) such entity shall expressly assume by written agreement, in form and substance satisfactory to Buyer in Buyer’s sole discretion, the performance of all of Seller’s duties and obligations hereunder and the Transaction Documents and (iii) such entity shall be at least as creditworthy as Seller, as determined by Buyer in Buyer’s sole and absolute discretion; and provided, further, that after giving effect thereto, no Default or Event of Default would exist hereunder.

(l)    Seller shall maintain all records with respect to the Purchased Loans and the conduct and operation of its business with no less a degree of prudence than if the Purchased Loans were held by Seller for its own account and will furnish Buyer, upon request by Buyer or its designated representative, with information reasonably obtainable by Seller with respect to the Purchased Loans and the conduct and operation of its business.

(m)  Seller shall provide Buyer with notice of each modification of any Purchased Loan Documents consented to by Seller (including such modifications which do not constitute a Significant Modification).

(n)   Seller shall provide Buyer with notice of the occurrence of any “appraisal reduction event”, “control appraisal period” or similar event under any participation agreement related to any Purchased Loan.

(o)   Seller shall provide Buyer with reasonable access to operating statements, the occupancy status and other property level information, with respect to the Mortgaged Properties, plus any such additional reports as Buyer may reasonably request.

(p)   Seller may propose, and Buyer will consider but shall be under no obligation to approve, strategies for the foreclosure or other realization upon the security for any Purchased Loan that has become a Defaulted Loan.

(q)   Seller shall (or shall cause Servicer to) provide to Buyer 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 Buyer from time to time, on a loan-by-loan basis and in the aggregate, with respect to the Purchased Loans serviced hereunder by Seller or any Servicer. Seller shall not cause any Purchased Loan to be serviced by any servicer other than a servicer expressly approved in writing by Buyer.

(r)    Seller shall not engage in any transaction that would cause any obligation or action taken or to be taken hereunder (or the exercise by Buyer of any of its rights under the Agreement, the Purchased Loans or any Transaction Document) to be a non-exempt prohibited transaction under Section 406 of ERISA, Section 4975 of the Code or substantially similar provisions under any other federal, state or local laws, rules or regulations.

13.

[INTENTIONALLY OMITTED.]

14.

EVENTS OF DEFAULT; REMEDIES

Paragraph 11 (“Events of Default”) of the Agreement is hereby amended by the deletion of clauses (i), (ii) and (vi) in the first paragraph thereof, by the deletion in their entirety of Paragraphs 11(a) through (g) thereof and by the addition of the provisions (a) through (c) of this Section 14 set forth below; the words “Prime Rate” in Paragraph 11 (h) of the Agreement are hereby deleted and replaced with the words “Alternative Rate”:

 

 

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(a)          The following, together with clauses (iii) through (v) and clause (vii) of the first paragraph of Paragraph 11 of the Agreement, shall constitute an event of default hereunder (each an “Event of Default”):

(i)             failure of Seller to repurchase or the failure of Buyer to transfer the Purchased Loan on the applicable Repurchase Date (except when such failure to transfer is a result of Buyer’s inability to obtain necessary consents to, or fulfill restrictions on, such transfer);

(ii)            failure of Seller to apply any Income received by Seller in accordance with the provisions hereof;

(iii)           (A) the Transaction Documents shall for any reason not cause, or shall cease to cause, Buyer to be the owner or, if recharacterized as a secured financing, a secured party with respect to any of the Purchased Loans or the collateral specified in Sections 6(c) free of any adverse claim, liens and other rights of others (other than as granted herein) or (B) if a Transaction is recharacterized as a secured financing, the Transaction Documents with respect to any Transaction shall for any reason cease to create a valid first priority security interest in favor of Buyer in any of the Purchased Loans or the collateral specified in Sections 6(c) or (C) if the Transaction Documents shall cease to be in full force and effect or if their enforceability is challenged by Seller;

(iv)          failure of Seller to make the payments required under Section 5(b) on any Remittance Date which failure is not remedied within one (1) Business Day;

(v)           failure of Seller to make any other payment owing to Buyer which has become due, whether by acceleration or otherwise, under the terms of the Agreement which failure is not remedied within the applicable period (in the case of a failure pursuant to Section 4) or five Business Days after notice thereof to Seller; provided, however, that Buyer shall not be required to provide notice in the event of a failure by Seller to repurchase on the Repurchase Date;

(vi)          failure by Seller in the due performance or observance of any term, covenant or agreement contained in Section 11(j) or Section 12(p) of this Annex I;

 

(vii)

Change of Control shall have occurred with respect to the Seller;

(viii)        any representation made by Seller or Buyer (other than the representations and warranties set forth in Exhibit V hereto, which shall be considered, except as set forth below, solely for the purpose of determining the Market Value of the Purchased Loans) shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated (and, if susceptible to cure, the breach of such representation shall not have been cured within 10 Business Days of written notice of breach thereof); provided that the representations and warranties set forth in Section 10(a) (vi) or (viii) (in the case of (vi), with respect to the affected or Purchased Loans only) made by Seller shall not be considered an Event of Default if incorrect or untrue in any material respect, if Buyer terminates the related Transaction and Seller repurchases the related Purchased Loans on an Early Repurchase Date no later than ten (10) Business Days after receiving written notice of such incorrect or untrue representation (or if the breach of such representations and warranties is susceptible to cure, Seller effects a cure within such 10-Business Day period); provided, however, that if Seller shall have made any such representation (including the representations set forth in Exhibit V) with knowledge that it was materially incorrect or untrue at the time made, such misrepresentation shall constitute an Event of Default;

 

 

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(ix)         a final judgment by any competent court in the United States of America for the payment of money in an amount greater than $5,000,000 shall have been rendered against Seller, and remained undischarged or unpaid for a period of thirty (30) days, during which period execution of such judgment is not effectively stayed;

(x)           Seller shall have defaulted or failed to perform under any note, indenture, loan agreement, guaranty, swap agreement or any other contract, agreement or transaction to which it is a party, which default (A) involves the failure to pay a matured obligation in excess of $10,000,000, or (B) involving an obligation of at least $10,000,000 is a monetary default or a material non-monetary default and results in acceleration or permits the acceleration of the obligation by any other party to or beneficiary of such note, indenture, loan agreement, guaranty, swap agreement or other contract agreement or transaction; provided, however, that any such default, failure to perform or breach shall not constitute an Event of Default if Seller cures such default, failure to perform or breach, as the case may be, within the grace period, if any, provided under the applicable agreement; or

(xi)          Seller fails to maintain a Fixed Charge Ratio of at least 2:1, a Debt to Equity Ratio of less than 5:1 and a Modified Debt to Equity Ratio of less than 10:1 as of the end of any fiscal quarter;

(xii)         if Seller or Buyer shall breach or fail to perform any of the terms, covenants, obligations or conditions of the Agreement, other than as specifically otherwise referred to in this definition of “Event of Default”, and such breach or failure to perform is not remedied within ten (10) Business Days, or if such breach is not curable by the payment of a sum of money, thirty (30) days after notice thereof to Seller or Buyer from the applicable party or its successors or assigns.

(b)           If an Event of Default shall occur and be continuing with respect to Seller, the following rights and remedies shall be available to Buyer:

(i)             At the option of Buyer, exercised by written notice to Seller (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (the date on which such option is exercised or deemed to have been exercised being referred to hereinafter as the “Accelerated Repurchase Date”) (and any Transaction for which the related Purchase Date has not yet occurred shall be canceled).

(ii)            If Buyer exercises or is deemed to have exercised the option referred to in Section 14(b)(i):

 

(A)

Seller’s obligations hereunder to repurchase all Purchased Loans shall become immediately due and payable on and as of the Accelerated Repurchase Date and all Income deposited in the Blocked Account shall be retained by Buyer and applied to the aggregate unpaid Repurchase Price and any other amounts owing by Seller hereunder; and

 

(B)

to the extent permitted by applicable law, the Repurchase Price with respect to each Transaction (determined as of the Accelerated Repurchase Date) shall be increased by the aggregate amount obtained by daily application of, on a 360 day per year basis for the actual number

 

 

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of days during the period from and including the Accelerated Repurchase Date to but excluding the date of payment of the Repurchase Price (as so increased), (x) the Pricing Rate applicable upon an Event of Default for such Transaction multiplied by (y) the Repurchase Price for such Transaction (decreased by (I) any amounts actually remitted to Buyer by Seller from time to time pursuant to Section 5 and applied to such Repurchase Price to the extent such amounts are not already included in the computation of the Repurchase Price and (II) any amounts applied to the Repurchase Price pursuant Section 14(b)(iii) of this Annex I); and

 

(C)

the Custodian shall, upon the request of Buyer (with simultaneous copy of such request to Seller), deliver to Buyer all instruments, certificates and other documents then held by the Custodian relating to the Purchased Loans.

(iii)           Buyer may, after ten (10) days notice to Seller of Buyer’s intent to take such action (which notice may be the notice given under subsection (b)(i) of this Section 14), (A) immediately sell, at a public or private sale in a commercially reasonable manner and at such price or prices as Buyer may reasonably deem satisfactory any or all of the Purchased Loans or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Loans, to give Seller credit for such Purchased Loans in an amount equal to the Market Value of such Purchased Loans against the aggregate unpaid Repurchase Price for such Purchased Loans and any other amounts owing by Seller under the Transaction Documents. The proceeds of any disposition of Purchased Loans effected pursuant to this Section 14(b)(iii) shall be applied, (v) first, to the costs and expenses incurred by Buyer in connection with Seller’s default; (w) second, to costs of cover and/or Hedging Transactions, if any; (x) third, to the Repurchase Price; (y) fourth, to any other outstanding obligation of Seller to Buyer or its Affiliates pursuant to the Transaction Documents, and (z) the balance, if any, to Seller.

(iv)          The parties recognize that it may not be possible to purchase or sell all of the Purchased Loans on a particular Business Day, or in a transaction with the same purchaser, or in the same manner because the market for such Purchased Loans may not be liquid. In view of the nature of the Purchased Loans, the parties agree that, to the extent permitted by applicable law, liquidation of a Transaction or the Purchased Loans shall not require a public purchase or sale and that a good faith private purchase or sale shall be deemed to have been made in a commercially reasonable manner. Accordingly, Buyer may elect, in its sole discretion, the time and manner of liquidating any Purchased Loans, and nothing contained herein shall (A) obligate Buyer to liquidate any Purchased Loans on the occurrence and during the continuance of an Event of Default or to liquidate all of the Purchased Loans in the same manner or on the same Business Day or (B) constitute a waiver of any right or remedy of Buyer.

(v)           Seller shall be liable to Buyer for the amount of all reasonable expenses, including reasonable legal fees and expenses, actually incurred by Buyer in connection with or as a consequence of an Event of Default with respect to Seller, (B) all costs incurred in connection with covering transactions or Hedging Transactions (including short sales) or entering into replacement transactions (C) all damages, losses, judgment costs and expenses of any kind which may be imposed on, incurred by or asserted against Buyer relating to or arising out of such Hedging Transactions or covering transactions and (D) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default with respect to Seller.

 

 

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(vi)         Buyer may exercise any or all of the remedies available to Buyer immediately upon the occurrence of an Event of Default and at any time during the continuance thereof. All rights and remedies arising under the Transaction Documents, as amended from time to time, are cumulative and not exclusive of any other rights or remedies which Buyer may have.

(vii)         Buyer may enforce its rights and remedies hereunder without prior judicial process or hearing, and Seller hereby expressly waives any defenses Seller might otherwise have to require Buyer to enforce its rights by judicial process. Seller also waives any defense Seller might otherwise have arising from the use of nonjudicial process, disposition of any or all of the Purchased Loans, or from any other election of remedies. Seller recognizes that nonjudicial remedies are consistent with the usages of the trade, are responsive to commercial necessity and are the result of a bargain at arm’s length.

(viii)        Without limiting any other rights or remedies of Buyer, Buyer 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 Buyer or Buyer’s Affiliates on behalf of Seller to any obligations of Seller hereunder to Buyer to the credit or for the account of Seller against any and all of such obligations, irrespective of whether Buyer shall have made any demand under the Agreement or the other Transaction Documents.

Notwithstanding anything to the contrary in the Agreement, Buyer shall not be required, prior to exercising any remedy in respect of any Event of Default by Seller, to give notice otherwise required hereunder, if Buyer reasonably believes that (A) the Purchased Loans then held by Buyer threaten to decline speedily in value or are of a type customarily sold in a recognized market or (B) any delay occasioned by the giving of such notice will jeopardize Buyer’s ability to recover, by sale or otherwise, all or part of the then-outstanding amount of the Repurchase Price or of any other amounts owed to Buyer in connection therewith.

(c)           If an Event of Default occurs and is continuing with respect to Buyer, the following rights and remedies shall be available to Seller:

(i)             Upon tender by Seller of payment of the aggregate Repurchase Price for all Purchased Loans, together with all other amounts due hereunder to Buyer, Buyer’s right, title and interest in such Purchased Loans shall be deemed transferred to Seller, and Buyer shall simultaneously deliver such Purchased Loans to Seller.

(ii)            Seller shall have all the rights and remedies provided herein or provided by applicable federal, state, foreign, local and any other applicable laws, in equity, and under any other agreement between Buyer and Seller (including the right to offset any debt or claim).

15.

SINGLE AGREEMENT

Clause (ii) of Paragraph 12 of the Agreement (“Single Agreement”) is hereby deleted.

16.

NOTICES AND OTHER COMMUNICATIONS

Paragraph 13 of the Agreement (“Notices and Other Communications”) is hereby deleted and replaced in its entirety by the following provisions of this Section 16:

All notices, consents, approvals and requests required or permitted hereunder shall be given in writing and shall be effective for all purposes if hand delivered or sent by (a) hand delivery, with proof of

 

 

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attempted delivery, (b) certified or registered United States mail, postage prepaid, (c) expedited prepaid delivery service, either commercial or United States Postal Service, with proof of attempted delivery, or (d) by telecopier (with answerback acknowledged); provided that such telecopied notice must also be delivered by one of the means set forth in (a), (b) or (c) above, to the addresses specified in Annex II hereto or at such other address and person as shall be designated from time to time by any party hereto, as the case may be, in a written notice to the other parties hereto in the manner provided for in this Section 16. A notice shall be deemed to have been given: (a) in the case of hand delivery, at the time of delivery, (b) in the case of registered or certified mail, when delivered or the first attempted delivery on a Business Day, (c) in the case of expedited prepaid delivery upon the first attempted delivery on a Business Day; or (d) in the case telecopier, upon receipt of answerback confirmation, provided that such telecopied notice was also delivered as required in this Section. A party receiving a notice which does not comply with the technical requirements for notice under this Section may elect to waive any deficiencies and treat the notice as having been properly given.

17.

NON-ASSIGNABILITY

The provisions of Paragraph 15 of the Agreement (“Nonassignability; Termination”) are hereby deleted and replaced in their respective entireties by the following provisions of this Section 17:

(a)           The rights and obligations of Seller under the Transaction Documents, the Hedging Transactions and under any Transaction shall not be assigned by Seller without the prior written consent of Buyer. Buyer may assign or participate (other than pursuant to a Financing Transaction) its rights and obligations under the Transaction Documents and under any Transaction without the prior written consent of Seller only to a Permitted Transferee. Buyer may assign its rights and interests in any Hedging Transaction without the prior written consent of Seller.

Notwithstanding anything to the contrary contained herein, with respect to Seller, (A) Buyer shall remain responsible for reviewing and determining the eligibility of any New Loan for purposes of any Transaction and (B) Seller shall continue to deal solely and directly with Buyer in connection with any Transaction.

As long as an Event of Default on the part of Seller shall have occurred and be continuing, Buyer may assign or participate its rights and obligations under the Transaction Documents and/or any Transaction (including in connection with any Financing Transaction) to any Person.

(b)           The Buyer shall maintain a record of ownership identifying all assignees. If any assignee is a non-U.S. Person, such assignee shall timely provide Seller with such forms as may be required to establish the assignee’s status for U.S. withholding tax purposes.

(c)           With respect to any issuance by Buyer of a participation in any Transaction, (i) Buyer shall act as exclusive agent for all participants in any dealings with Seller in connection with such Transactions and will maintain, on behalf of Seller, a record of ownership that identifies all participants, and (ii) Seller shall not be obligated to deal directly with any party other than Buyer in connection with such Transactions, or to pay or reimburse Buyer for any costs that would not have been incurred by Buyer had no participation interests in such Transactions been issued.

(d)           Subject to the foregoing, the Transaction Documents and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and permitted assigns. Nothing in the Transaction Documents, express or implied, shall give to any Person, other than the parties to the Transaction Documents and their respective successors, any benefit or any legal or equitable right, power, remedy or claim under the Transaction Documents.

 

 

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18.          GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL

The language in Paragraph 16 of the Agreement (“Governing Law”) which reads “without giving effect to the conflict of law principals thereof” is hereby deleted. Paragraph 18 of the Agreement (“Use of Employee Plan Assets”) is hereby deleted in its entirety. Paragraph 17 (“No Waivers, Etc.”) is hereby deleted and replaced in its entirety by the following provisions of this Section 18:

(a)           Each party irrevocably and unconditionally submits to the non-exclusive jurisdiction of any United States Federal or New York State court sitting in Manhattan, and any appellate court from any such court, solely for the purpose of any suit, action or proceeding brought to enforce its obligations under the Agreement or relating in any way to the Agreement or any Transaction under the Agreement.

(b)           To the extent that either party has or hereafter may acquire any immunity (sovereign or otherwise) from any legal action, suit or proceeding, from jurisdiction of any court or from set off or any legal process (whether service or notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise) with respect to itself or any of its property, such party hereby irrevocably waives and agrees not to plead or claim such immunity in respect of any action brought to enforce its obligations under the Agreement or relating in any way to the Agreement or any Transaction under the Agreement.

(c)           Each party hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court and any right of jurisdiction on account of its place of residence or domicile and irrevocably consents to the service of any summons and complaint and any other process by the mailing of copies of such process to them at their respective address specified herein. Each party hereby agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Section 18 shall affect the right of Buyer to serve legal process in any other manner permitted by law or affect the right of Buyer to bring any action or proceeding against Seller or its property in the courts of other jurisdictions.

(d)           EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THE AGREEMENT, ANY OTHER TRANSACTION DOCUMENT OR ANY INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER OR THEREUNDER.

19.

NO RELIANCE; DISCLAIMERS

(a)           Each of Buyer and Seller hereby acknowledges, represents and warrants to the other that, in connection with the negotiation of, the entering into, and the performance under, the Transaction Documents and each Transaction thereunder:

(i)             It is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the other party to the Transaction Documents, other than the representations expressly set forth in the Transaction Documents;

(ii)            It has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisors to the extent that it has deemed necessary, and it has made its own investment, hedging and trading decisions (including decisions regarding the suitability of any Transaction) based upon its own judgment and upon any advice from such advisors as it has deemed necessary and not upon any view expressed by the other party;

 

 

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(iii)         It is a sophisticated and informed Person that has a full understanding of all the terms, conditions and risks (economic and otherwise) of the Transaction Documents and each Transaction thereunder and is capable of assuming and willing to assume (financially and otherwise) those risks;

(iv)          It is entering into the Transaction Documents and each Transaction thereunder for the purposes of managing its borrowings or investments or hedging its underlying assets or liabilities and not for purposes of speculation;

(v)           It is not acting as a fiduciary or financial, investment or commodity trading advisor for the other party and has not given the other party (directly or indirectly through any other Person) any assurance, guaranty or representation whatsoever as to the merits (either legal, regulatory, tax, business, investment, financial accounting or otherwise) of the Transaction Documents or any Transaction thereunder;

(b)           Each determination by Buyer of the Market Value with respect to each New Loan or Purchased Loan or the communication to Seller of any information pertaining to Market Value under the Agreement shall be subject to the following disclaimers:

(i)             Buyer has assumed and relied upon, with Seller’s consent and without independent verification, the accuracy and completeness of the information provided by Seller and reviewed by Buyer. Buyer has not made any independent inquiry of any aspect of the New Loans or Purchased Loans or the underlying collateral. Buyer’s view is based on economic, market and other conditions as in effect on, and the information made available to Buyer as of, the date of any such determination or communication of information, and such view may change at any time without prior notice to Seller.

(ii)            Market Value determinations and other information provided to Seller constitute a statement of Buyer’s view of the value of one or more loans or other assets at a particular point in time and neither (x) constitute a bid for a particular trade, (y) indicate a willingness on the part of Buyer or any Affiliate thereof to make such a bid, nor (z) reflect a valuation for substantially similar assets at the same or another point in time, or for the same assets at another point in time.

(iii)           Market Value determinations and other information provided to Seller may vary significantly from valuation determinations and other information which may be obtained from other sources.

(iv)          Market Value determinations and other information provided to Seller are communicated to Seller solely for its use and may not be relied upon by any other person and may not be disclosed or referred to publicly or to any third party without the prior written consent of Buyer, which consent Buyer may withhold or delay in its sole and absolute discretion.

(v)           Buyer makes no representations or warranties with respect to any Market Value determinations or other information provided to Seller. Buyer shall not be liable for any incidental or consequential damages arising out of any inaccuracy in such valuation determinations and other information provided to Seller, including as a result of any act of gross negligence or breach of any warranty.

(vi)          Market Value indications and other information provided to Seller in connection with Section 3(b) are only indicative of the initial Market Value of the New Loan submitted to Buyer for consideration thereunder, and may change without notice to Seller prior to, or

 

 

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subsequent to, the transfer by Seller of the New Loan pursuant to Section 3(e). No indication is provided as to Buyer’s expectation of the future value of such Purchased Loan or the underlying collateral.

(vii)         Initial Market Value indications and other information provided to Seller in connection with Section 3(b) are to be used by Seller for the sole purpose of determining whether to proceed in accordance with Section 3 and for no other purpose.

20.

INDEMNITY AND EXPENSES

(a)           Seller hereby agrees to hold Buyer and its Affiliates and each of their respective officers, directors, employees and agents (“Indemnified Parties”) harmless from and indemnify the Indemnified Parties against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, taxes (including stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Purchased Loans or in connection with any of the transactions contemplated by the Agreement (or the recharacterization of any Transaction) and the documents delivered in connection herewith and therewith, other than net income taxes of Buyer), fees, costs, expenses (including reasonable attorneys fees and disbursements and any and all servicing and enforcement costs with respect to the Purchased Loans) or disbursements (all of the foregoing, collectively “Indemnified Amounts”) which may at any time (including, without limitation, such time as the Agreement shall no longer be in effect and the Transactions shall have been repaid in full) be imposed on or asserted against any Indemnified Party in any way whatsoever arising out of or in connection with, or relating to, the Agreement or any Transactions thereunder or any action taken or omitted to be taken by any Indemnified Party under or in connection with any of the foregoing; provided, that Seller shall not be liable for Indemnified Amounts resulting from the gross negligence or willful misconduct of any Indemnified Party. Without limiting the generality of the foregoing, Seller agrees to hold Buyer harmless from and indemnify Buyer against all Indemnified Amounts with respect to all Purchased Loans 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 ERISA, that, in each case, results from anything other than Buyer’s gross negligence or willful misconduct. In any suit, proceeding or action brought by Buyer in connection with any Purchased Loan for any sum owing thereunder, or to enforce any provisions of any Purchased Loan Documents, Seller will save, indemnify and hold Buyer 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 Seller 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 Seller. Seller 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 the Agreement and any other Transaction Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. Seller hereby acknowledges its obligations hereunder are recourse obligations of Seller.

(b)           Seller agrees to pay as and when billed by Buyer all of the out-of-pocket costs and expenses incurred by Buyer in connection with the development, preparation and execution of, and any amendment, supplement or modification to, the Agreement and the other Transaction Documents or any other documents prepared in connection herewith or therewith. Seller agrees to pay as and when billed by Buyer 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 Buyer and (ii) all the Due Diligence Fees, testing and review costs and expenses incurred by Buyer in connection with the evaluation of any New Loan and with respect to any Transaction.

 

 

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21.

DUE DILIGENCE

Seller acknowledges that Buyer has the right to perform continuing due diligence reviews with respect to the Purchased Loans, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or determining or re-determining the Asset Base for purposes of Section 4(a) of this Annex I, or otherwise, and Seller agrees that Buyer, at its option, has the right at any time to conduct a partial or complete due diligence review on any or all of the Purchased Loans, including, without limitation, ordering new credit reports and Appraisals on the applicable collateral and otherwise regenerating the information used to originate such Purchased Loans. Upon reasonable (but no less than one (1) Business Day) prior notice to Seller, Buyer or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Purchased Loan Files and any and all documents, records, agreements, instruments or information relating to any Purchased Loan in the possession or under the control of Seller, any servicer or sub-servicer and/or Custodian. Seller also shall make available to Buyer a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Purchased Loan Files and the Purchased Loans. Seller agrees to cooperate with Buyer and any third party underwriter designated by Buyer in connection with such underwriting, including, but not limited to, providing Buyer and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Purchased Loans in the possession, or under the control, of such Seller.

22.

SERVICING

(a)           Notwithstanding the purchase and sale of the Purchased Loans by Seller to Buyer hereunder, Midland Loan Services, Inc. or, with the consent of Buyer (which consent shall not unreasonably be withheld), an Affiliate of Seller (“Servicer”) shall continue to service the Purchased Loans at Seller’s sole cost and for the benefit of Buyer and, if Buyer shall exercise its rights to pledge or hypothecate the Purchased Loans prior to the Repurchase Date pursuant to Section 8 or 17 of this Annex I, Buyer’s assigns; provided, however, that the obligations of Seller to service any of the Purchased Loans shall cease automatically upon the earliest of (i) an Event of Default, (ii) the date on which the aggregate Repurchase Price for the Portfolio Loans together with all accrued and unpaid Price Differential, unpaid Costs and other amounts payable by Seller to Buyer hereunder have been paid in full or (iii) the transfer of servicing approved by Seller and Buyer, which Buyer’s consent shall not be unreasonably withheld. Seller shall service and shall cause the Servicer to service the Purchased Loans in accordance with Accepted Servicing Practices.

(b)           Seller agrees that Buyer is the owner of all servicing records, including but not limited to any and all servicing agreements (the “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 Purchased Loans (the “Servicing Records”) so long as the Purchased Loans are subject to the Agreement. Seller covenants to safeguard such Servicing Records and to deliver them promptly to Buyer or its designee (including the Custodian) at Buyer’s request.

(c)           Upon the occurrence and continuance of an Event of Default, Buyer may, in its sole discretion, (i) sell its right to the Purchased Loans on a servicing released basis or (ii) terminate Servicer or any sub-servicer of the Purchased Loans with or without cause, in each case without payment of any termination fee or such other costs or expenses to Buyer, it being agreed that Seller will pay any and all fees, costs and expenses required to terminate the Servicing Agreement and to effectuate a transfer of servicing to a designee of the Buyer; provided, however, that Buyer shall cause any successor servicer to deliver to Seller reports generated for Buyer relating to the Purchased Loans.

 

 

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(d)         Seller shall not, and shall not permit Servicer to, employ sub-servicers to service the Purchased Loans without the prior written approval of Buyer which shall not be unreasonably withheld. If the Purchased Loans are serviced by a sub-servicer, Seller shall irrevocably assign all rights, title and interest in the Servicing Agreements with such sub-servicer to Buyer.

(e)           Seller shall cause Servicer and any sub-servicers engaged by Seller to execute a letter agreement with Buyer acknowledging Buyer’s security interest in the Purchased Loans and the Servicing Agreements and agreeing that each such sub-servicer shall deposit all Income with respect to the Purchased Loans in the Blocked Account, all in such manner as shall be reasonably acceptable to Buyer.

(f)           In the event Seller or its Affiliate is servicing any Purchased Loan, Seller shall permit Buyer to inspect Seller’s or its Affiliate's servicing facilities, as the case may be, for the purpose of satisfying Buyer that Seller or its Affiliate, as the case may be, has the ability to service such Purchased Loans as provided in the Agreement.

(g)           Seller shall cause the Servicer to provide a copy of each report and notice sent to Seller to be sent to Buyer concurrently therewith.

23.

TREATMENT FOR TAX PURPOSES

It is the intention of the parties that, for U.S. Federal, state and local income and franchise tax purposes, the Transactions constitute a financing, and that the Seller is, and, so long as no Event of Default shall have occurred and be continuing, will continue to be, treated as the owner of the Purchased Loans for such purposes. Unless prohibited by applicable law, Seller and Buyer agree to treat the Transactions as described in the preceding sentence on any and all filings with any U.S. Federal, state or local taxing authority.

24.

INTENT

The provisions of Paragraph 19 of the Agreement (“Intent”) are hereby deleted and replaced in their respective entireties by the following provisions of this Section 24:

The parties recognize that each Transaction is a “repurchase agreement” as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except in so far as the type of asset subject to the Transaction or the term of that Transaction would render such definition inapplicable). The parties recognize that each Transaction is a “securities contract” as that term is defined in Section 741 of Title 11 of the United States Code, as amended.

25.

INTENTIONALLY OMITTED

26.

MISCELLANEOUS

The provisions of Paragraph 20 of the Agreement (“Disclosure Relating to Certain Federal Protections”) are hereby deleted in their entirety and replaced by the following provisions of this Section 26:

(a)           Time is of the essence under the Transaction Documents and all Transactions thereunder and all references to a time shall mean New York time in effect on the date of the action unless otherwise expressly stated in the Transaction Documents.

 

 

55

 

 

 

 

(b)          All rights, remedies and powers of Buyer hereunder and in connection herewith are irrevocable and cumulative, and not alternative or exclusive, and shall be in addition to all other rights, remedies and powers of Buyer whether under law, equity or agreement. In addition to the rights and remedies granted to it in the Agreement to the extent applicable, Buyer shall have all rights and remedies of a secured party under the UCC and any other applicable law.

(c)           The Transaction Documents may be executed in counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument.

(d)           The headings in the Transaction Documents are for convenience of reference only and shall not affect the interpretation or construction of the Transaction Documents.

(e)           Each provision of the Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Agreement shall be prohibited by or be invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of the Agreement.

(f)           This Annex I, together with the Agreement contain a final and complete integration of all prior expressions by the parties with respect to the subject matter hereof and thereof and shall constitute the entire agreement among the parties with respect to such subject matter, superseding all prior oral or written understandings.

(g)           The parties understand that the Agreement is a legally binding agreement that may affect such party’s rights. Each party represents to the other that it has received legal advice from counsel of its choice regarding the meaning and legal significance of the Agreement and that it is satisfied with its legal counsel and the advice received from it.

(h)           Should any provision of the Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that all parties have participated in the preparation of the Agreement.

(i)            Buyer agrees not to seek before any court or governmental agency to have any director or officer of the Seller held personally liable for any action or inactions of the Seller or any obligations of the Seller under the Agreement or the related Transaction Documents, except if such actions or inactions are the result of the gross negligence, fraud or willful misconduct of such director or officer.

 

[SIGNATURES COMMENCE ON NEXT PAGE]

 

 

56

 

 

 

 

IN WITNESS WHEREOF, the parties have executed this Annex I as of the 15th day of August 2006.

BUYER:

GOLDMAN SACHS MORTGAGE COMPANY,

a New York limited partnership

 

By:

Goldman Sachs Real Estate Funding Corp.,

 

its general partner

 

By:

/s/ Leo Huang

 

Name: Leo Huang

 

Title: Authorized Signatory

SELLER:

CAPITAL TRUST, INC., a Maryland corporation

 

 

By:

/s/ Geoffrey G. Jervis  

 

Name: Geoffrey G. Jervis

 

Title: Chief Financial Officer

 

 

 

 

 

 

1

 

 

 

 

SCHEDULE 1

Purchase Percentages and Applicable Spreads

 

Loan Type: Senior First Mortgage B Notes, Junior First Mortgage B Notes, Mezzanine Loans And Participation Interests Therein

LTV

Purchase Percentage

Spread

 

 

 

55% or less

[****]

[****]

56% to 60%

[****]

[****]

61% to 70% LTV

[****]

[****]

 

[****]

[****]

 

[****]

[****]

71% to 75% LTV

[****]

[****]

 

[****]

[****]

 

[****]

[****]

76% to 80% LTV

[****]

[****]

 

[****]

[****]

 

[****]

[****]

81% to 85% LTV

[****]

[****]

 

[****]

[****]

 

[****]

[****]

86% to 90% LTV

[****]

[****]

 

[****]

[****]

 

[****]

[****]

 

Loan Type: Transitional and Stabilized Mortgage Loans

LTV

Purchase Percentage

Spread

> 10% NOI &

[****]

[****]

< 85% LTV

 

 

<10% NOI &

[****]

[****]

< 80% LTV

 

 

 

 

 

 

 

 

 

 

**** Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

 

 

Schedule 1-1

 

 

 

 

SCHEDULE 2

Initial Portfolio Loans

 

Applicable Margin

1. P HF-Ruby Senior Mezzanine - $16,560,000 original balance

[****]

2. GE/Kimco- Participation Interest in First Mortgage Loan (50 W. 23rd Street, NY)

[****]

3. Marriot-Waikiki – Participation Interest in Mezzanine Loan

[****]

4. Mervyn’s-Participation in Mezzanine Loan

[****]

5. Woodfin- Mezzanine Loan

[****]

 

 

 

 

 

 

 

 

**** Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

 

 

Schedule 2-1

 

 

 

 

SCHEDULE 3

Purchased Loan Information

(a)

Loan Number/Loan Type

(b)

Obligor Name

(c)

Property Address

(d)

Original Balance

(e)

Original Coupon

(f)

Outstanding Balance

(g)

Maturity Date

(h)

Table Funding (Yes/No)

(i)

If Participation, the name of the lead lender under the Purchased Loan

(j)             Such information as Buyer and Custodian shall agree and that the Buyer shall set forth in writing, on a case-by-case basis.

 

 

Schedule 3-1

 

 

 

 

SCHEDULE 4

APPROVED APPRAISERS

1.

KTR Appraisal Services

2.

Cushman & Wakefield, Inc.

3.

Grubb & Ellis

4.

CB Richard Ellis

5.

The Weitzman Group

6.

Greenwich Group

7.

Joseph Blake

8.

HVS International

9.

PWC

 

 

 

Schedule 4-1

 

 

 

 

SCHEDULE 5

APPROVED ENGINEERS

1.

KTR Realty Services

2.

Merritt & Harris, Inc.

3.

C.A. Rich, Inc.

4.

IVI

5.

Dames & Moore

6.

Law Environmental

7.

Eckland

8.

EM&CA

9.

Aqua Terra

10.

ATC (BCM Engineers)

11.

Horn Chandler & Thomas

12.

National Assessment Corporation

13.

EMG

14.

Property Solutions Inc.

15.

Aaron & Wright

16.

PSI

 

 

 

Schedule 5-1

 

 

 

 

SCHEDULE 6

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.

Eckland

10.

EM&CA

11.

ATC (BCM Engineers)

12.

IVI

13.

Aaron & Wright

14.

Certified Environmental Inc.

15.

Environ Business, Inc.

16.

Property Solutions, Inc.

17.

National Assessment Corporation

18.

Hillman Environmental Group

19.

Front Royal

20.

PSI

 

 

Schedule 6-1

 

 

 

 

SCHEDULE 7-A

Form of UCC Financing Statement

Debtor:

Secured Party:

Capital Trust, Inc.
410 Park Avenue, 14th Floor
New York, New York 1002

Goldman Sachs Mortgage Company
85 Broad Street

New York, New York 10004

 

ATTACHMENT A TO UCC FINANCING STATEMENT

 

This filing is for protective purposes only with respect to the Purchased Loans and the Blocked Account in case the sale of any Purchased Loan under the Repurchase Agreement is re-characterized as a grant of a security interest in any such Purchased Loan.

 

The collateral covered by this financing statement is all of the Debtor’s right, title and interest in, to and under the following property, whether now owned or existing, hereafter acquired or arising, or in which the Debtor now or hereafter has any rights, and wheresoever located (the “Collateral”):

 

(a) the Blocked Account, all of the Purchased Loans including those identified in Schedule I hereto, all Income from such Purchased Loans and all proceeds of all of the foregoing, and

 

(b) all Hedging Transactions relating to Purchased Loans entered into by Seller and all proceeds thereof.

 

The following terms shall have the following meanings. Such definition shall be equally applicable to the singular and plural forms of the terms defined.

 

“Blocked Account” means that certain Account No. _____ established and maintained by Debtor at PNC Bank pursuant to Section 5(a) of the Repurchase Agreement (and any successor thereto or replacement thereof established and maintained pursuant to Section 5(a) of the Repurchase Agreement and a Blocked Account Agreement).

 

“Blocked Account Agreement” means the Amended and Restated Blocked Account Agreement, dated as of June 30, 2006 and executed by Buyer, Seller and the Depository Bank (and any successor thereof or replacement thereof extended by Buyer, Seller and the Depository Bank).

 

“Buyer” means Secured Party.

 

“Custodian” means Deutsche Bank Trust Company Americas or any successor Custodian appointed by Buyer.

 

“Depository Bank” shall mean PNC Bank, N.A. or any successor Depository Bank appointed by Seller with the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned) which delivers a deposit account agreement in the form of the Blocked Account Agreement or another form reasonably acceptable to Buyer.

“Eligible Loans” shall mean any of the following types of loans listed in (i) through (v) below:

 

 

Schedule 7-A-1

 

 

 

 

(i)           performing mezzanine loans which are secured by pledges of the equity ownership interests in entities that directly or indirectly own Eligible Properties;

(ii)            senior participation interests (or a senior promissory note that is, in effect, similar in nature to a senior participation interest) in performing mortgage loans secured by first liens on Eligible Properties that also may secure a junior promissory note (or junior interest) in such loan;

(iii)           junior participation interests (or a junior promissory note that is, in effect, similar in nature to a junior participation interest) in performing mortgage loans secured by first liens on Eligible Properties that also secure a senior promissory note (or senior interest) evidencing such loan;

(iv)          any other performing loan, participation interest, preferred equity investment or other junior mezzanine or subordinate investment which does not conform to the criteria set forth in clauses (i) through (iii) above that Buyer elects in its sole discretion to purchase; and

(v)           any performing stabilized mortgage loans or any performing transitional mortgage loans, in each case secured by first liens on Eligible Properties.

“Eligible Property” shall mean a property that is a multifamily, retail, office, industrial, warehouse, condominium or hospitality property or such other property type acceptable to Buyer in the exercise of its good faith business judgment; provided, however, that Buyer shall determine in its sole and absolute discretion, on a case-by-case basis, whether any healthcare related property, such as assisted living, nursing homes, acute care, rehabilitation centers, diagnostic centers and psychiatric centers, qualifies as an Eligible Property.

 

“Hedging Transactions” means, with respect to any or all of the Purchased Loans, any short sale of U.S. Treasury Securities or mortgage-related securities, futures contract (including Eurodollar futures) or options contract or any 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 Seller or the underlying obligor with respect to any Purchased Loan and pledged to Seller as collateral for such Purchased Loan, with one or more counterparties whose unsecured debt is rated at least AA (or its equivalent) by any Rating Agency or, with respect to any Hedging Transaction pledged to Seller as additional collateral for a Purchased Loan, such other rating requirement applicable to such Hedging Transaction set forth in the related Purchased Loan Documents or which is otherwise reasonably acceptable to Buyer; provided that Seller shall not grant or permit any liens, security interests, charges, or encumbrances with respect to any such hedging arrangements for the benefit of any Person other than Buyer.

 

“Income” means, with respect to any Purchased Loan at any time, any payment or other cash distribution thereon of principal, interest, dividends, fees, reimbursements or proceeds or other cash distributions thereon (including casualty or condemnation proceeds).

 

“Person” means an individual, corporation, limited liability company, business trust, partnership, joint tenant or tenant-in-common, trust, unincorporated organization, or other entity, or a federal, state or local government or any agency or political subdivision thereof.

 

 

 

Schedule 7-A-2

 

 

 

 

“Purchased Loan Documents” shall mean, with respect to a Purchased Loan, the documents comprising the Purchased Loan File for such Purchased Loan.

“Purchased Loan File” shall mean the documents specified as the “Purchased Loan File” in Section 7(b) of the Repurchase Agreement, together with any additional documents and information required to be delivered to Buyer or its designee (including the Custodian) pursuant to the Repurchase Agreement.

“Purchased Loans” means all Eligible Loans sold by Seller to Buyer and any additional cash and/or other assets delivered by Seller to Buyer pursuant to Section 4(a) of the Repurchase Agreement, including, without limitation, all Purchased Loans, the Purchased Loan File of which is held by the Custodian. Additional information with respect to the Purchased Loans may be obtained from the Secured Party.

 

“Rating Agency” means any of Fitch Inc., Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services, Inc., a division of McGraw Hill Companies Inc.

 

“Repurchase Agreement” means that certain Amended and Restated Master Repurchase Agreement dated as of June 30, 2006, between Goldman Sachs Mortgage Company and Capital Trust, Inc., (together with Annex I and such other annexes and schedules attached thereto) as the same may be amended, restated or otherwise modified from time to time.

 

 

“Seller” means Debtor.

 

 

SCHEDULE 1

 

1.

[B] Participation Interest, dated _____ issued to __________. in the amount of $__________, in that certain Mortgage Loan [(in the original principal amount of $__________)], dated as of _______, made by ___________. to _________ under and pursuant to that certain Loan Agreement dated as of ________ between _________ and _________ and secured by that certain property located in _________, [as such B Participation Interest was assigned by _________ to _________ pursuant to that certain Assignment and Assumption Agreement (Participation B) dated as of _________].

 

2.

[$__________ [Senior/Junior] Mezzanine Loan, dated as of _________ made by _________ to _________, under and pursuant to that certain [Loan Agreement] dated as of _________ between _________ and _________, [as assigned (together with such loan agreement and all of the other loan documents evidencing and securing such senior mezzanine loan) by _________ to _________, pursuant to that certain Omnibus Assignment dated as of _________].

 

 

 

Schedule 7-A-3

 

 

 

 

SCHEDULE 7-B

Form of UCC Financing Statement

Debtor:

Secured Party:

Capital Trust, Inc.
410 Park Avenue, 14th Floor
New York, New York 1002

Goldman Sachs Mortgage Company
85 Broad Street

New York, New York 10004

 

ATTACHMENT A TO UCC FINANCING STATEMENT AMENDMENT

 

This filing is for protective purposes only with respect to the Purchased Loans and the Blocked Account in case the sale of any Purchased Loan under the Repurchase Agreement is re-characterized as a grant of a security interest in any such Purchased Loan.

 

The collateral covered by this financing statement is all of the Debtor’s right, title and interest in, to and under the following property, whether now owned or existing, hereafter acquired or arising, or in which the Debtor now or hereafter has any rights, and wheresoever located (the “Collateral”):

 

(a) the Blocked Account, all of the Purchased Loans including those identified in Schedule I hereto, all Income from such Purchased Loans and all proceeds of all of the foregoing, and

 

(b) all Hedging Transactions relating to Purchased Loans entered into by Seller and all proceeds thereof.

 

The following terms shall have the following meanings. Such definition shall be equally applicable to the singular and plural forms of the terms defined.

 

“Blocked Account” means that certain Account No. _____ established and maintained by Debtor at PNC Bank pursuant to Section 5(a) of the Repurchase Agreement (and any successor thereto or replacement thereof established and maintained pursuant to Section 5(a) of the Repurchase Agreement and a Blocked Account Agreement).

 

“Blocked Account Agreement” means the Blocked Account Agreement, dated as of the date hereof and executed by Buyer, Seller and the Depository Bank (and any successor thereto or replacement thereof extended by Buyer, Seller and the Depository Bank).

 

“Buyer” means Secured Party.

 

“Custodian” means Deutsche Bank Trust Company Americas or any successor Custodian appointed by Buyer.

 

“Depository Bank” shall mean PNC Bank, N.A. or any successor Depository Bank appointed by Seller with the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned) which delivers a deposit account agreement in the form of the Blocked Account Agreement or another form reasonably acceptable to Buyer.

“Eligible Loans” means any of the following types of loans listed in (i) through (v) below:

 

 

Schedule 7-B-1

 

 

 

 

(i)            performing mezzanine loans which are secured by pledges of the equity ownership interests in entities that directly or indirectly own Eligible Properties;

 

(ii)

performing mortgage loans secured by second liens on Eligible Properties;

(iii)           junior participation interests (or a junior promissory note that is, in effect, similar in nature to a junior participation interest) in performing mortgage loans secured by first liens on Eligible Properties that also secure a senior promissory note (or senior interest) evidencing such loan; and

(iv)           any other performing loan, participation interest, preferred equity investment or other junior mezzanine or subordinate investment which does not conform to the criteria set forth in clauses (i) and (iii) above that Buyer elects in its sole discretion to purchase.

“Eligible Property” shall mean a property that is a multifamily, retail, office, industrial, warehouse, condominium or hospitality property or such other property type acceptable to Buyer in the exercise of its good faith business judgment; provided, however, that Buyer shall determine in its sole and absolute discretion, on a case-by-case basis, whether any healthcare related property, such as assisted living, nursing homes, acute care, rehabilitation centers, diagnostic centers and psychiatric centers, qualifies as an Eligible Property.

 

“Hedging Transactions” means, with respect to any or all of the Purchased Loans, any short sale of U.S. Treasury Securities or mortgage-related securities, futures contract (including Eurodollar futures) or options contract or any 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 Seller or the underlying obligor with respect to any Purchased Loan and pledged to Seller as collateral for such Purchased Loan, with one or more counterparties whose unsecured debt is rated at least AA (or its equivalent) by any Rating Agency or, with respect to any Hedging Transaction pledged to Seller as additional collateral for a Purchased Loan, such other rating requirement applicable to such Hedging Transaction set forth in the related Purchased Loan Documents or which is otherwise reasonably acceptable to Buyer; provided that Seller shall not grant or permit any liens, security interests, charges, or encumbrances with respect to any such hedging arrangements for the benefit of any Person other than Buyer.

 

“Income” means, with respect to any Purchased Loan at any time, any payment or other cash distribution thereon of principal, interest, dividends, fees, reimbursements or proceeds or other cash distributions thereon (including casualty or condemnation proceeds).

 

“Person” means an individual, corporation, limited liability company, business trust, partnership, joint tenant or tenant-in-common, trust, unincorporated organization, or other entity, or a federal, state or local government or any agency or political subdivision thereof.

 

“Purchased Loan Documents” shall mean, with respect to a Purchased Loan, the documents comprising the Purchased Loan File for such Purchased Loan.

“Purchased Loan File” shall mean the documents specified as the “Purchased Loan File” in Section 7(b) of the Repurchase Agreement, together with any additional documents and information required to be delivered to Buyer or its designee (including the Custodian) pursuant to the Repurchase Agreement.

 

 

Schedule 7-B-2

 

 

 

 

“Purchased Loans” means all Eligible Loans sold by Seller to Buyer and any additional cash and/or other assets delivered by Seller to Buyer pursuant to Section 4(a) of the Repurchase Agreement, including, without limitation, all Purchased Loans, the Purchased Loan File of which is held by the Custodian. Additional information with respect to the Purchased Loans may be obtained from the Secured Party.

 

“Rating Agency” means any of Fitch Inc., Moody’s Investor Service, Inc. and Standard & Poor’s Rating Services, Inc., a division of McGraw Hill Companies Inc.

 

“Repurchase Agreement” means that certain Amended and Restated Master Repurchase Agreement dated as of May 28, 2003, between Goldman Sachs Mortgage Company and Capital Trust, Inc., (together with Annex I and such other annexes and schedules attached thereto) as the same may be amended, restated or otherwise modified from time to time.

 

 

“Seller” means Debtor.

 

 

SCHEDULE 1

 

1.

[B] Participation Interest, dated _____ issued to __________. in the amount of $__________, in that certain Mortgage Loan [(in the original principal amount of $__________)], dated as of _______, made by ___________. to _________ under and pursuant to that certain Loan Agreement dated as of ________ between _________ and _________ and secured by that certain property located in _________, [as such B Participation Interest was assigned by _________ to CTMP III GS Finance Sub, LLC pursuant to that certain Assignment and Assumption Agreement (Participation B) dated as of _________].

 

2.

[$__________ [Senior/Junior] Mezzanine Loan, dated as of _________ made by _________ to _________, under and pursuant to that certain [Loan Agreement] dated as of _________ between _________ and _________, [as assigned (together with such loan agreement and all of the other loan documents evidencing and securing such senior mezzanine loan) by _________ to CTMP III GS Finance Sub, LLC pursuant to that certain Omnibus Assignment dated as of _________].

 

 

 

Schedule 7-B-3

 

 

 

 

EXHIBIT I

CONFIRMATION STATEMENT

GOLDMAN SACHS MORTGAGE COMPANY

Ladies and Gentlemen:

Goldman Sachs Mortgage Company is pleased to deliver our written CONFIRMATION of our agreement (subject to satisfaction of the Transaction Conditions Precedent) to enter into the Transaction pursuant to which Goldman Sachs Mortgage Company shall purchase from you the Purchased Loans identified in Schedule  I attached hereto, pursuant to the Amended and Restated Master Repurchase Agreement between Goldman Sachs Mortgage Company (the “Buyer”) and Capital Trust, Inc. (“Seller”), dated as of June 30, 2006 (as amended from time to time the “Agreement”; capitalized terms used herein without definition have the meanings given in the Agreement), as follows below and on the attached Schedule 1:

Purchase Date:

__________, 200_

Purchased Loans:

As identified on attached Schedule 1

Aggregate Principal Amount of Purchased Loans:

As identified on attached Schedule 1

Repurchase Date:

__________, 200_

Purchase Price:

$

Pricing Rate:

One-month LIBOR plus ______%

Purchase Percentage:

 

Applicable Spread:

 

Governing Agreements:

As identified on attached Schedule 1

Name and address for communications:

Buyer:      Goldman Sachs Mortgage Company

85 Broad Street

New York, New York 10004

Attention:        Mr. Marc Flamino

Telephone:       (212) 357-4727

Telecopy:         (212) 902-1691

with a copy to:

 

Cleary Gottlieb Steen & Hamilton

One Liberty Plaza

New York, New York 10006

Attention: Kimberly Brown Blacklow

Telephone: (212) 225-2018

Telecopy: (212) 902-1691

 

 

Seller:

 

 

 

Exhibit I-1

 

 

 

 

 

 

Capital Trust, Inc.

410 Park Avenue, 14th Floor

New York, NY 10022

Attention: Geoffrey Jervis

Telephone: 212-655-0247

Telecopy: 212-655-0044

 

 

 

with a copy to

 

Paul Hastings Janofsky & Walker LLP

75 East 55th Street, New York, NY 10022

Attention: Robert J. Grados

Telephone: 212-318-6923

Telecopy: 212-230-7830

 

GOLDMAN SACHS MORTGAGE COMPANY,

a New York limited partnership

 

By:

Goldman Sachs Real Estate Funding Corp.,

 

its general partner

 

 

By:

_______________________________

 

Name:

 

Title:

AGREED AND ACKNOWLEDGED:

CAPITAL TRUST, INC.,

a Maryland corporation

 

By:

__________________________________

 

Name:

 

Title:

 

 

Exhibit I-2

 

 

 

 

Schedule 1 to Confirmation Statement

 

Purchased Loans:

[Mezzanine Loan/ Participation Interest] dated as of [______] in the original principal amount of $[___], made by [____] to [____] under and pursuant to that certain [loan agreement/participation agreement/ applicable document].

Aggregate Principal Amount:

 

Purchase Price:

 

 

 

 

Exhibit I-3

 

 

 

 

EXHIBIT II

 

INTENTIONALLY OMITTED

 

 

Exhibit II-1

 

 

 

 

EXHIBIT III

 

FORM OF CUSTODIAL DELIVERY CERTIFICATE

 

On this _____ day of _____________ 200_, CAPITAL TRUST, INC. ("Seller"), under that certain Amended and Restated Custodial Agreement, dated as of June 30, 2006_ (the "Custodial Agreement"), among Seller, DEUTSCHE BANK TRUST COMPANY AMERICAS, as Custodian, and GOLDMAN SACHS MORTGAGE COMPANY, as Buyer, does hereby deliver to, and instruct, the Custodian to hold, in its capacity as Custodian for the benefit of Buyer, the documents comprising the Purchased Loan File and listed on Attachment A hereto with respect to each Purchased Loan to be purchased by Buyer, which Purchased Loans are listed on the Purchased Loan Schedule attached hereto as Attachment B and which Purchased Loans shall be subject to the terms of the Custodial Agreement as of the date hereof.

With respect to the Purchased Loan Files delivered herewith, for purposes of issuing the Trust Receipt, the Custodian shall review the Purchased Loan Files to confirm receipt of each of the documents identified on Attachment A.

Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Custodial Agreement.

IN WITNESS WHEREOF, Seller has caused this Custodial Delivery Certificate to be executed and delivered by its duly authorized officer as of the day and year first above written.

CAPITAL TRUST, INC.

 

 

By:

 

Name:

Title:

 

 

Exhibit III-1

 

 

 

 

Attachment B

Purchased Loan Schedule

(a)

Loan Number/Loan Type

(b)

Obligor Name

(c)

Property Address

(d)

Original Balance

(e)

Original Coupon

(f)

Outstanding Balance

(g)

Maturity Date

(h)

Table Funding (Yes/No)

(i)

If Participation, the name of the lead lender under the Purchased Loan

(j)

Such information as Buyer and Custodian shall agree and that the Buyer shall set forth in writing, on a case-by-case basis.

 

 

 

Exhibit III-2

 

 

 

 

EXHIBIT IV-1

FORM OF POWER OF ATTORNEY TO BUYER

“Know All Men by These Presents, that Capital Trust, Inc. (“Seller”), does hereby appoint Goldman Sachs Mortgage Company (“Buyer”), in connection with the Repurchase Agreement (defined below) its attorney-in-fact to act in Seller’s name, place and stead in any way which Seller could do with respect to (i) the completion of the endorsements of the Mortgage Notes, the promissory notes, participation certificates and membership or other equity interests, in each case related to the Purchased Loans and the Assignments of Mortgages, (ii) the recordation of the Assignments of Mortgages and (iii) the enforcement of Seller’s rights under the Purchased Loans purchased by Buyer pursuant to the Amended and Restated Master Repurchase Agreement dated as of June 30, 2006 , as amended from time to time, between Seller and Buyer (the “Repurchase Agreement”) and to take such other steps as may be necessary or desirable to enforce Buyer’s rights against such Purchased Loans, the related Purchased Loan Files, the Servicing Records and the Hedging Transactions to the extent that Seller is permitted by law to act through an agent. Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in the Repurchase Agreement.

TO INDUCE ANY THIRD PARTY TO ACT HEREUNDER, SELLER HEREBY AGREES THAT ANY THIRD PARTY RECEIVING A DULY EXECUTED COPY OF FACSIMILE OF THIS INSTRUMENT MAY ACT HEREUNDER, AND THAT REVOCATION OR TERMINATION HEREOF SHALL BE INEFFECTIVE AS TO SUCH THIRD PARTY UNLESS AND UNTIL ACTUAL NOTICE OR KNOWLEDGE OR SUCH REVOCATION OR TERMINATION SHALL HAVE BEEN RECEIVED BY SUCH THIRD PARTY, AND SELLER ON ITS OWN BEHALF AND ON BEHALF OF SELLER’S ASSIGNS, HEREBY AGREES TO INDEMNIFY AND HOLD HARMLESS ANY SUCH THIRD PARTY FROM AND AGAINST ANY AND ALL CLAIMS THAT MAY ARISE AGAINST SUCH THIRD PARTY BY REASON OF SUCH THIRD PARTY HAVING RELIED ON THE PROVISIONS OF THIS INSTRUMENT.

IN WITNESS WHEREOF Seller has caused this Power of Attorney to be executed and the Seller’s seal to be affixed this _____ day of June, 2006.

 

CAPITAL TRUST, INC.

 

 

By:

________________________________

 

Name:

 

Title:

 

 

Exhibit IV-1-1

 

 

 

 

STATE OF NEW YORK

)

COUNTY OF NEW YORK

)

 

On this _____ of ____________, before me, the undersigned, a Notary Public in and for said state, personally appeared _______________________________, personally known to me or proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument.

 

 

________________________

 

Notary Public

 

(Seal)

 

 

Exhibit III-2

 

 

 

 

EXHIBIT IV-2

FORM OF POWER OF ATTORNEY TO SELLER

Know All Men by These Presents, that Goldman Sachs Mortgage Company (“Buyer”) does hereby appoint Capital Trust, Inc. (“Seller”), its attorney-in-fact to act in Buyer’s name, place and stead in any way which Buyer could with respect to modifications described below, to mortgage loan documents with respect to Purchased Loans sold by Seller to Buyer under that certain Amended and Restated Master Repurchase Agreement, dated as of June 30, 2006 (as amended from time to time, the “Repurchase Agreement”). Capitalized terms used herein and not otherwise defined shall have the meaning given such terms in the Repurchase Agreement.

Seller is permitted to administer and service the Purchased Loans without the consent of Buyer, any assignee or any other Person, pursuant to this power of attorney delivered by Buyer, which power of attorney shall not be revoked by Buyer unless an Event of Default under the Repurchase Agreement has occurred and is then continuing. Notwithstanding the foregoing, Seller shall not consent or assent to a Significant Modification to or any extension or termination of any note, loan agreement, mortgage, pledge agreement or guaranty relating to the Purchased Loans or other material agreement or instrument relating to the Purchased Loans without the prior written consent of Buyer. All waivers or material actions entered into or taken in respect of the Purchased Loans pursuant to this power of attorney shall be in writing. Seller shall notify Buyer and the Custodian, in writing, of any waiver or other action entered into or taken thereby in respect of any such Purchased Loan pursuant to this power of attorney, and shall deliver to Custodian (with a copy to Buyer) for deposit in the related Purchased Loan File, an original counterpart of the agreement, if any, relating to such waiver or other action, within three (3) Business Days following the execution thereof. Actions taken under the foregoing power of attorney shall be binding upon each holder of the Purchased Loans.

“Purchased Loan” shall mean any loan or other mezzanine investment sold by Seller to Buyer and any additional assets delivered by Seller to Buyer pursuant to the Repurchase Agreement.

“Significant Modification” shall mean any modification or amendment of a Purchased Loan which:

(i)             reduces the principal amount of the Purchased Loan in question other than (1) with respect to a dollar-for-dollar principal payment or (2) reductions of principal to the extent of deferred, accrued or capitalized interest added to principal which additional amount was not taken into account by Buyer in determining the related Purchase Price,

(ii)            increases the principal amount of a Purchased Loan other than increases which are derived from accrual or capitalization of deferred interest which is added to principal or protective advances,

(iii)           modifies the payments of principal and interest when due of the Purchased Loan in question,

(iv)           changes the frequency of scheduled payments of principal and interest in respect of a Purchased Loan,

 

 

Exhibit IV-2-1

 

 

 

 

(v)          subordinates the lien priority of the Purchased Loan or the payment priority of the Purchased Loan other than subordinations expressly required under the then existing terms and conditions of the Purchased Loan (provided, however, the foregoing shall not preclude the execution and delivery of subordination, nondisturbance and attornment agreements with tenants, subordination to tenant leases, easements, plats of subdivision and condominium declarations and similar instruments which in the commercially reasonable judgment of Seller do not materially adversely affect the rights and interest of the holder of the Purchased Loan in question),

(vi)           releases any collateral for the Purchased Loan other than releases required under the then existing Purchased Loan documents or releases in connection with eminent domain or under threat of eminent domain,

(vii)          waives, amends or modifies any cash management or reserve account requirements of the Purchased Loan other than changes required under the then existing Purchased Loan documentation, or

(viii)         waives any due-on-sale or due-on-encumbrance provisions of the Purchased Loan other than waivers required to be given under the then existing Purchased Loan documents.

 

 

Exhibit IV-2-2

 

 

 

 

THIS POWER OF ATTORNEY MAY BE REVOKED BY BUYER BY DELIVERY OF WRITTEN NOTICE TO SELLER DURING THE CONTINUANCE OF ANY EVENT OF DEFAULT UNDER THE REPURCHASE AGREEMENT. IF THIS POWER OF ATTORNEY HAS NOT BEEN REVOKED AND IF REQUESTED BY SELLER, BUYER WILL PROMPTLY CONFIRM IN WRITING TO SELLER, AND ANY OTHER PERSON OR ENTITY REASONABLY DESIGNATED BY SELLER, THAT THIS POWER OF ATTORNEY HAS NOT BEEN REVOKED AND IS IN FULL FORCE AND EFFECT.

IN WITNESS WHEREOF Seller has caused this Power of Attorney to be executed and the Buyer’s seal to be affixed this __ day of June, 2006.

GOLDMAN SACHS MORTGAGE COMPANY,

a New York limited partnership

 

By:

Goldman Sachs Real Estate Funding Corp.,

 

its general partner

 

 

By:

_______________________________

 

Name:

 

Title:

 

 

Exhibit IV-2-3

 

 

 

 

EXHIBIT V

REPRESENTATIONS AND WARRANTIES

REGARDING THE PURCHASED LOANS

 

With respect to each Purchased Loan, Seller represents and warrants on each Purchase Date as follows, other than as set forth on the exception report provided to Buyer in accordance with the Agreement:

 

1.              Ownership of Purchased Loans. Immediately prior to the transfer to Buyer of the Purchased Loan, Seller had good title to, and was the sole owner of, the Purchased Loan. Seller has full right, power and authority to transfer and assign the Purchased Loans to or at the direction of Buyer and has validly and effectively conveyed (or caused to be conveyed) to Buyer or its designee all of Seller’s legal and beneficial interest in and to the Purchased Loan free and clear of any and all pledges, liens, charges, security interests and/or other encumbrances. The sale of the Purchased Loan to Buyer or its designee does not require Seller to obtain any approval or consent that has not been obtained. No Purchased loan sold to Buyer hereunder was acquired by Seller from an Affiliate of Seller unless otherwise approved by Buyer in writing.

 

2.              Additional Representations: As to each Purchased Loan that is a Mortgage Loan or a First Mortgage B-Note and to the extent applicable, each Mezzanine Loan and Other Mezzanine Investment and the related Mortgaged Properties on a Purchase Date and each date on which Market Value is determined, Seller shall be deemed to make the following representations and warranties to Buyer as of such date:

 

(a)          Purchased Loan Schedule and Purchased Loan Information. The information set forth in the Purchased Loan Schedule and the Purchased Loan Information is complete, true and correct in all material respects.

(b)          Payment Record. The Purchased Loan has not been since the date of origination, and currently is not, thirty (30) or more days delinquent, and the underlying obligor is not in default thereunder beyond any applicable grace period for the payment of any obligation to pay principal and interest, taxes, insurance premiums and required reserves.

(c)          Purchased Loan Document Status. (i) The Purchased Loan Documents have been, to the extent necessary, duly and properly executed, and the Purchased Loan Documents, to the extent applicable, are legal, valid and binding obligations of the underlying obligor, and their terms are enforceable against the underlying obligor, subject only to bankruptcy, insolvency, moratorium, fraudulent transfer, fraudulent conveyance and similar laws affecting rights of creditors generally and to the application of general principles of equity; (ii) the Purchased Loan Documents contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against each related Mortgaged Property of the material benefits of the security, including realization by judicial or, if applicable, non-judicial foreclosure, and there is no exemption available to the underlying obligor which would materially interfere with such right to foreclosure; and (iii) there is no valid defense, counterclaim or right of offset or rescission available to the related underlying obligor with respect to any Purchased Loan Document.

(d)          Title Insurance. Each Mortgaged Property is covered by an American Land Title Association (or an equivalent form thereof as adopted in the applicable jurisdiction) owner’s and lender’s title

 

 

Exhibit V-1

 

 

 

 

insurance policy (the “Title Policy”) in the original principal amount of the related Purchased Loan after all advances of principal. Each lender’s Title Policy insures that the related Mortgage is a valid first or second, as applicable, priority lien on such Mortgaged Property, subject only to (i) the lien of current real property taxes, ground rents, water charges, sewer rents and assessments not yet due and payable; (ii) covenants, conditions and restrictions, rights of way, easements and other matters of public record, none of which, individually or in the aggregate, in the reasonable judgment of Seller, materially interferes with the current use of the related Mortgaged Property or the security intended to be provided by such Mortgage or with the underlying obligor’s ability to pay its obligations when they become due or the value of the related Mortgaged Property; (iii) the exceptions (general and specific) set forth in such policy, none of which, individually or in the aggregate, in the reasonable judgment of Seller, materially interferes with the current use of the related Mortgaged Property or security intended to be provided by such Mortgage, with the underlying obligor’s ability to pay its obligations when they become due or the value of the related Mortgaged Property; and (iv) in the event such Title Policy has yet to be issued, an escrow letter or a marked up title insurance commitment on which the required premium has been paid exists which evidences that such Title Policy will be issued. Each Title Policy (or, if it has yet to be issued, the coverage to be provided thereby) is in full force and effect, all premiums thereon have been paid and, to Seller’s knowledge, no material claims have been made thereunder and no claims have been paid thereunder. No holder of the related Mortgage has done, by act or omission, anything that would materially impair the coverage under such Title Policy. Immediately following the transfer and assignment of the related Purchased Loan to Buyer, such Title Policy (or, if it has yet to be issued, the coverage to be provided thereby) will inure to the benefit of Buyer as its interest may appear without the consent of or notice to the insurer. In the case of a Mezzanine Loan, if obtained, an Eagle 9 UCC Title Policy (“UCC Policy”) insures Seller’s security interest in the equity interest pledged thereunder. Each UCC Policy insures that Seller has a first priority perfected security interest in the pledged equity interests and provides coverage in an amount equal to the original principal amount of the related Purchased Loan and immediately following the transfer and assignment of the related Purchased Loan to Buyer, such UCC Policy (or, if it has yet to be issued, the coverage to be provided thereby) will inure to the benefit of Buyer as its interest may appear without the consent of or notice to the insurer.

(e)          No Mechanics’ Liens. There are no mechanics’, materialman’s or other similar liens or claims which have been filed for work, labor or materials affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage, unless such lien is insured against under the related title insurance policy.

(f)          Insurance. Each Mortgaged Property, including any buildings or other improvements thereon, is, and is required pursuant to the related Mortgage to be, insured by (a) a fire and extended perils insurance policy issued by an insurer meeting the requirements of such Purchased Loan providing coverage against loss or damage sustained by reason of fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, terrorism, aircraft, vehicles and smoke, and, to the extent required as of the date of origination by the originator of such Purchased Loan consistent with its normal commercial mortgage lending practices, against other risks, insured against by persons operating like properties in the locality of the Mortgaged Property in an amount not less than the replacement cost of the Mortgaged Property; (b) a business interruption or rental loss insurance policy, in an amounts generally required by institutional lenders for similar properties (including coverage for terrorism); (c) a flood insurance policy (if any portion of the Mortgaged Property is located in an area identified by the Federal Emergency Management Agency as having special flood hazards) and (d) a comprehensive general liability insurance policy in amounts as are generally required by commercial mortgage lenders. Such insurance policy contains a standard mortgagee clause that names Seller as an additional insured and that requires at least thirty days’ (in the case of termination or cancellation other than for nonpayment of premiums) and at least ten days’ (in the case of termination or cancellation for nonpayment of premiums) prior notice to the holder of the Mortgage, and no such notice has been received, including any notice of

 

 

Exhibit V-2

 

 

 

 

nonpayment of premiums, that has not been cured. The Purchased Loan Documents obligate the underlying obligor to maintain or cause to be maintained all such insurance and, at the underlying obligor’s failure to do so, authorize the holder of the Mortgage to maintain such insurance at the underlying obligor’s cost and expense and to seek reimbursement therefor from such underlying obligor.

(g)          Condition of the Property; Condemnation. No building or other improvement on any Mortgaged Property has been affected in any material manner or suffered any material loss as a result of any fire, wind, explosion, accident, riot, war, or act of God or the public enemy, and each Mortgaged Property is free of any material damage that would affect materially and adversely the value of the Mortgaged Property as security for the Purchased Loan and is in good repair. Seller has neither received notice, nor is otherwise aware, of any proceedings pending for the total condemnation of any Mortgaged Property or a partial condemnation of any portion material to the related underlying obligor’s ability to perform its obligations under the related Purchased Loan.

(h)          Encroachments; Zoning. None of the improvements located on any Mortgaged Property lies outside of the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties materially encroach upon the Mortgaged Property except those which are insured against by the title insurance policy (including endorsements thereto) issued in connection with the Purchased Loan and all improvements on the Mortgaged Property comply with the applicable zoning laws and/or set-back ordinances in force when improvements were added.

(i)           Compliance with Usury Laws. The Purchased Loan, and all parties involved in the origination and servicing of the Purchased Loan, complied as of the date of origination with, or is exempt from, applicable state or federal laws, regulations and other requirements pertaining to usury. Any and all other requirements of any federal, state or local laws, including, without limitation, truth-in-lending, real estate settlement procedures, equal credit opportunity or disclosure laws, applicable to the Purchased Loan have been complied with.

(j)           Mortgage Status; Waivers and Modifications. Since the date of origination of the Purchased Loan, the terms of the Purchased Loan have not been impaired, waived, altered, satisfied, canceled, subordinated or modified in any respect (except with respect to modifications the economic terms of which are reflected in the Purchased Loan Schedule and which are evidenced by documents in the Purchased Loan File delivered to the Custodian) and no portion of the Mortgaged Property has been released from the lien of the Mortgage or other Purchased Loan Document in any manner.

(k)          Mortgage Recording Taxes. All applicable Mortgage recording taxes and other filing fees have been paid in full or deposited with the issuer of the title insurance policy issued in connection with the Mortgage Loan for payment upon recordation of the relevant documents.

(l)           Assignment of Leases. Each Assignment of Leases, if any, creates a valid assignment of, or a valid first or second priority, as applicable, security interest in the related underlying obligor’s interest in all leases, sub-leases, licenses or other agreements pursuant to which any Person is entitle to occupy, use or possess all of any portion of the related Mortgage, subject only to a license granted to the relevant underlying obligor to exercise certain rights and to perform certain obligations of the lessor under such leases, including the right to operate the related Mortgage Property, subject only to those exceptions described in clause (e) above. No person other than the relevant underlying obligor owns any interest in any payments due under such leases that is superior to or of equal priority with the mortgagee’s interest therein, subject only to those exceptions described in clause (d) above.

(m)        Underlying Representations and Warranties. Seller has taken no action, nor has the underlying obligor taken any action, that would cause the representations and warranties made by the underlying obligor in any of the Purchased Loan Documents not to be true.

 

 

Exhibit V-3

 

 

 

 

(n)         No Holdbacks. The proceeds of the Purchased Loan have been fully disbursed and there is no obligation for future advances with respect thereto. With respect to each Purchased Loan, any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any funds escrowed for such purpose that were to have been complied with on or before the Purchase Date have been complied with, or any such funds so escrowed have not been released.

(o)          Inspections. Seller or its representative has inspected or caused to be inspected each Mortgaged Property within six (6) months preceding the related Purchase Date. The Purchased Loan File for Mortgaged Property constituting real property includes a property survey, certified to the Seller, its successors and assigns, and the title insurance company, reciting that it is in accordance with most recent minimum standards for title surveys as determined by the ALTA, with the signature and seal of a licensed engineer or surveyor affixed thereto.

(p)          Contingent Interest; Convertible Notes. The Purchased Loan does not have a shared appreciation feature, other contingent interest feature or negative amortization. The indebtedness evidenced by the Mortgage Note is not convertible to an ownership interest in the Mortgaged Property or the Mortgage, and Seller has not financed, nor does it own, directly or indirectly, any equity of any form in the Mortgaged Property or the underlying obligor. The Mortgage Note or Mezzanine Note, as applicable, does not by its terms provide for the capitalization or forbearance of interest.

(q)          Cross-Collateralization; Cross-Default. The Purchased Loan is not cross-collateralized or cross-defaulted with any other loan other than another Purchased Loan, is a whole loan and contains no equity participation by the lender.

(r)          Fraud. No fraudulent acts were committed by Seller in connection with the origination process of the Purchased Loan.

(s)          Taxes and Assessments. All taxes, water charges, sewer rates, governmental assessments, insurance premiums, leasehold payments and any other outstanding fees or charges that prior to the date of origination of the Purchased Loan became due and owing in respect of the related Mortgaged Property have been paid, or an escrow of funds in an amount sufficient to cover such payments has been established or are insured against by the title insurance policy issued in connection with the origination of the Purchased Loan.

(t)           No Material Default. No loan is a Defaulted Loan and there is no material default, breach, violation or event of acceleration existing under any of the Purchased Loan Documents and Seller has not received actual notice of any event (other than payments due but not yet delinquent) which, with the passage of time or with notice and the expiration of any grace or cure period, would and does constitute a default, breach, violation or event of acceleration; no waiver of the foregoing exists and no person other than the holder of the Mortgage Note or Mezzanine Note, as the case may be, may declare any of the foregoing.

(u)          Environmental Conditions. With respect to each Mortgaged Property, a environmental site assessment conducted by a licensed qualified engineer. Seller has reviewed each such report and update. Where such environmental report disclosed the existence of a material and adverse environmental condition or circumstance affecting any Mortgaged Property, (i) a party not related to the underlying obligor was identified as the responsible party for such condition or circumstance, (ii) the related underlying obligor was required either to provide additional security and/or to obtain an operations and maintenance plan or (iii) the related underlying obligor provided evidence that applicable federal, state or local governmental authorities would not take any action, or require the taking of any action, in respect of such condition or circumstance. The related Purchased Loan Documents contain provisions pursuant to which the related underlying obligor or a principal of such underlying obligor has agreed to indemnify the mortgagee for damages resulting from violations of any applicable environmental laws. Seller, having

 

 

Exhibit V-4

 

 

 

 

made no independent inquiry other than reviewing the environmental reports and updates referenced herein and without other investigation or inquiry, has no knowledge of any material and adverse environmental condition or circumstance affecting any Mortgaged Property that was not disclosed in the related report and/or update. Each Mortgage requires the related Mortgagor to comply with all applicable federal, state and local environmental laws and regulations in all material respects. Seller has not received any actual notice of a material violation of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or any applicable federal, state or local environmental law with respect to any Mortgaged Property that was not disclosed in the related report and/or update. Seller has not taken any actions which would cause any Mortgaged Property not to be in compliance with all federal, state and local laws pertaining to environmental hazards.

(v)          Acceleration. The Purchased Loan Documents contain provisions for the acceleration of the payment of the unpaid principal balance of the Purchased Loan if (A) the underlying obligor voluntarily transfers or encumbers all or any portion of any related Mortgaged Property; or (B) any direct or indirect interest in underlying obligor is voluntarily transferred or assigned, other than, in each case, as permitted under the terms and conditions of the Purchased Loan Documents.

(w)         Actions Concerning Purchased Loans. There is no pending action, suit or proceeding, arbitration or governmental investigation against the underlying obligor or any Mortgaged Property an adverse outcome of which is reasonably likely to result in a Material Adverse Effect.

(x)          Servicing. The servicing and collection practices used by Seller, and the origination practices of Seller, to the extent applicable, have been in all respects legal, proper and prudent and have met customary industry standards.

(y)          Assignability. In connection with the assignment, transfer or conveyance of any individual Mortgage, the Mortgage Note and Mortgage contain no provision limiting the right or ability of Seller to assign, transfer and convey the Mortgage to any person or entity.

(z)          Buyer under a Deed of Trust. If a Mortgage is a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the deed of trust, and no fees or expenses are or will become payable to the trustee under the deed of trust, except in connection with the sale or release of the Mortgaged Property following default or payment of the Purchased Loan.

(aa)        Insurance Proceeds. The Mortgage provides that any insurance proceeds in respect of a casualty loss or taking will be applied either to the repair or restoration of all or part of the related Mortgaged Property, with the mortgagee or a trustee appointed by it having the right to hold and disburse such proceeds (provided that such proceeds exceed the threshold amount described in the loan documents) as the repair or restoration progresses, or to the payment of the outstanding principal balance of the Purchased Loan together with any accrued interest thereon, except to the extent of any excess proceeds after restoration.

(bb)       Flood Zone. No Mortgaged Property is located in a special flood hazard area as defined by the Federal Emergency Management Agency or if it is, flood insurance is required and has been received under the Mortgage.

(cc)        Ground Lease. No Mortgage is secured in whole or in part by the interest of a borrower as a lessee under a ground lease.

(dd)        Certificate of Occupancy. Certificates of occupancy and building permits, as applicable, have been issued with respect to Mortgaged Property.

 

 

Exhibit V-5

 

 

 

 

(ee)       Escrow Deposits. Any escrow accounts for taxes or other reserves required to be funded on the date of origination of the Purchased Loan pursuant to the Purchased Loan Documents have been funded and all such escrow accounts required to have been funded as of the Purchase Date (taking into account any applicable notice and grace period) have been funded.

(ff)         Valid Assignment of Mortgage. The related Assignment of Mortgage constitutes a legal, valid and binding assignment of such Mortgage to Buyer, and the related reassignment of Assignment of Leases, rents and profits, if any, constitutes a legal, valid and binding assignment thereof to Buyer.

(gg)        Related Collateral. The related Mortgage Note, Mezzanine Note or B-Note, as applicable, is not, and has not been since the date of origination of the Purchased Loan, secured by any collateral except the lien of the related Mortgage, any related Assignment of Leases, any related security agreement and escrow agreement or other applicable Purchased Loan Document; and the related Mortgaged Property or Properties or other securities, as applicable, do not secure any loan other than the Purchased Loan being sold to Buyer hereunder (except for Purchased Loans, if any, which are cross-collateralized with other Purchased Loans being conveyed to Buyer hereunder and identified on the Purchased Loan Schedule).

(hh)        Licenses and Permits. As of the date of origination of the Purchased Loan, the related underlying obligor was in possession of all material licenses, permits and franchises required by applicable law for the ownership and operation of the related Mortgaged Property as it was then operated.

(ii)         Improvements; Origination. The Purchased Loan is directly (or in the case of an participation interest, indirectly) secured by a first or second lien on one or more parcels of real estate upon which is located one or more multifamily or commercial structures; and the Purchased Loan was originated by a savings and loan association, savings bank, commercial bank, credit union, insurance company, or similar institution which is supervised and examined by a Federal or State authority, or by a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act.

(jj)         Tenants. As to each Purchased Loan secured by Mortgaged Property which is leased to tenants:

(i)          the Mortgaged Property is not subject to any leases other than the leases described in the rent roll contained in the Purchased Loan Documents (hereinafter referred to as the “Leases”), and such rent roll is accurate and complete in all material respects, including description of the rent and term and any extraordinary rights of tenants (such as option, rights of first refusal and rights of termination). No Person has any possessory interest in the Mortgaged Property or right to occupy the same except under and pursuant to the provisions of the Leases. Each Lease of all or any portion of the Mortgaged Property is subordinate to the Mortgage, unless otherwise approved by the Buyer;

(ii)         each such commercial tenant is conducting business, and each such residential tenant is residing, only in that portion of the Mortgaged Property covered by its lease; (B) no leases contain any option to purchase, any right of first refusal to lease or purchase, any right to terminate the lease or vacate the premises prior to expiration of the lease term, or any other similar provisions which adversely affect the Mortgaged Property or which might adversely affect the rights of any holder of the Purchased Loan;

 

(iii)

no Lease contains a non-disturbance or similar recognition agreement;

(iv)        (A) except as otherwise disclosed to Buyer in writing, there are no prior recorded assignments of the Leases or of any portion of the rents, additional rents, charges, issues or profits due and payable or to become due and payable thereunder (hereinafter collectively referred to as the “Rents”) which are now outstanding and have priority over the assignment of

 

 

Exhibit V-6

 

 

 

 

leases contained in the Purchased Loan Documents and given in connection with the Purchased Loan; (B) except as may be disclosed in the rent roll contained in the Purchased Documents, no tenant is more than twenty-nine (29) days delinquent in the payment of rent nor in default under any material provision of its Lease, all material conditions and obligations on the underlying obligor’s part to be fulfilled under the terms of any Lease of the Mortgaged Property have been satisfied or fully performed, and all Leases are in full force and effect; and (C)  each Lease provides for payment of rent by check on a monthly basis; no tenant has advanced more than one (1) month’s payment under any Lease; and no Person affiliated with the underlying obligor is a tenant under any Lease; and

(v)         the underlying obligor is the owner and holder of the landlord’s interest under any leases, and the related Mortgage and assignment of leases, rents and profits, if any, provides for the appointment of a receiver for rents or allows the mortgagee to enter into possession to collect rent or provide for rents to be paid directly to mortgagee in the event of a default, subject to the exceptions described in clause (e) of this Exhibit V.

(kk)        Bankruptcy. Seller has not been served with notice that any underlying obligor is a debtor in any state or federal bankruptcy or insolvency proceeding.

(ll)         Access; Separate Tax Parcels. At the time of origination, (i) all amenities, access routes or other items crucial to the related appraised value of the Mortgaged Property were under the direct control of the underlying obligor or, subject to easements for the benefit of the underlying obligor, are public property; and (ii) the Mortgaged Property was contiguous to a physically open, dedicated all-weather public street, had all necessary permits and approvals for ingress and egress, was adequately serviced by public water, sewer systems and utilities and was on a separate Tax parcel, separate and apart from any other property owned by the underlying obligor or any other person. The Mortgaged Property has all necessary access by public roads or by easements which in each case are not terminable and are not subordinated to any mortgage other the related Mortgage.

(mm)     Appraisal. The Purchased Loan File contains an Appraisal that is signed by a qualified appraiser, duly appointed by Seller, who, to Seller’s knowledge, had no interest, direct or indirect, in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Purchased Loan, and the Appraisal and appraiser both satisfy the requirements of Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated thereunder, all as in effect on the date the Purchased Loan was originated.

(nn)        Junior Liens. The Purchased Loan does not permit the related Mortgaged Property to be encumbered by any lien junior to or of equal priority with the lien of the related Mortgage without the prior written consent of the holder thereof or the satisfaction of debt service coverage or similar criteria specified therein. To Seller’s knowledge, except as disclosed, the related Mortgaged Property is not encumbered by any lien junior to the lien of the related Mortgage. The Purchased Loan contains a “due on sale” clause that provides for the acceleration of the payment of the unpaid principal balance of the Purchased Loan if, without the prior written consent of the holder of the Purchased Loan, the related Mortgaged Property is transferred or sold.

(oo)        Defeasance. Any Purchased Loan containing provisions for defeasance of mortgage collateral either (i) requires the prior written consent of, and compliance with the conditions set by, the holder of the Purchased Loan, or (ii) requires that (A) defeasance may not occur prior to the time permitted by applicable “real estate mortgage investment conduit” rules and regulations (if applicable), (B) the replacement collateral consist of U.S. governmental securities in an amount sufficient to make all scheduled payments under the Mortgage Note when due, (C) independent public accountants certify that the collateral is sufficient to make such payments, (D) counsel provide an opinion that Buyer has a

 

 

Exhibit V-7

 

 

 

 

perfected security interest in such collateral prior to any other claim or interest, and (E) all costs and expenses arising from the defeasance of the mortgage collateral shall be borne by the borrower.

(pp)        Operating or Financial Statement. The related Purchased Loan Documents require the related borrower to furnish to the mortgagee at least annually an operating statement with respect to the related Mortgaged Property.

(qq)        No Advances of Funds. No party to the Purchased Loan Documents has advanced funds on account of any default under the Purchased Loan or under the underlying real property mortgage documents.

(rr)         Perfection of Security Interests. A Uniform Commercial Code financing statement has been filed and/or recorded in all places necessary to perfect a valid security interest in such personal property, and such security interest is a first or second priority security interest, subject to any prior purchase money security interest in such personal property and any personal property leases applicable to such personal property. The pledge of ownership interests securing any Purchased Loan that is a Mezzanine Loan relates to direct or indirect equity or ownership interests in the underlying real property owner and has been fully perfected in favor of Seller as mezzanine lender. To the extent the pledged ownership interests have not been certificated pursuant to the terms of any Purchased Loan that is a Mezzanine Loan, the terms of such Mezzanine Loan and the related organizational documents of the underlying real property owner prohibit the subsequent certification thereof.

(ss)        Lockbox. The lockbox administrator with respect to the related Purchased Loan, if any, is not an Affiliate of Seller.

(tt)         No Plan Assets. The borrower under the Purchased Loan does not, and would not be deemed to, hold Plan Assets at any time.

 

 

 

Exhibit V-8

 

 

 

 

EXHIBIT VI

FORM OF AMENDED AND RESTATED BLOCKED ACCOUNT AGREEMENT

Amended and Restated Blocked Account Agreement

 

June 30, 2006

PNC Bank, National Association

Treasury Management

Two PNC Plaza, 31st Floor

620 Liberty Avenue

Pittsburgh, PA 15222

Attn: Jacqueline Rizzo

 

Re:

Blocked Account established by Capital Trust, Inc. (“Seller”) and Midland Loan Services, Inc. (“Servicer”) pursuant to the Amended and Restated Master Repurchase Agreement dated as of June 30, 2006 (as amended, supplemented or otherwise modified from time to time, the “Repurchase Agreement”) among the Seller and Goldman Sachs Mortgage Company (“Buyer”)

Ladies and Gentlemen:

We refer to the collection account established by the Seller and the Buyer, pursuant to the Repurchase Agreement, at PNC Bank, National Association (“Depository Bank”), entitled “Goldman Sachs Mortgage Company, as Buyer under that certain Amended and Restated Master Repurchase Agreement, dated June 30, 2006” Account No. 1015527379, ABA # 043000096, PNC Bank, Pittsburgh, PA, (the “Collection Account” or the “Blocked Account”). This Blocked Account Agreement amends and restates that certain Blocked Account Agreement between the parties dated May 28, 2003. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Repurchase Agreement. In the event of a conflict between the terms of the Repurchase Agreement or any Transaction entered into thereunder and this Blocked Account Agreement, the Repurchase Agreement shall prevail. Notwithstanding the previous sentence, this Blocked Account Agreement will govern and control the performance of Depository Bank.

1.             Seller shall, and shall cause the Servicer, from time to time, to deposit or cause to be deposited directly into, or if applicable, remitted directly from the applicable underlying collection account to, the Collection Account all Income (including Principal Payments) with respect to the Portfolio Loans, which may include payments in respect of associated Hedging Transactions pledged to Buyer and related to the Portfolio Loans. The Buyer has established a repurchase arrangement with the Seller. By its execution of this letter, the Seller acknowledges that it has transferred all of the Seller’s right, title and interest in and to the Blocked Account and any funds from time to time on deposit therein, that such funds are received by Depository Bank for Buyer and are for application against the Seller’s liabilities to the Buyer under the Repurchase Agreement.

 

 

Exhibit VI-1

 

 

 

Error! Unknown document property name.

 

 

 

2.             Funds in the Blocked Account shall be remitted in accordance with the most recent instructions originated by the Buyer without the further consent of the Seller (the “Distribution Instructions”), which the Buyer agrees, for the benefit of the Seller only, shall be in compliance with the provisions of the Repurchase Agreement. Until Depository Bank shall receive contrary instructions from Buyer, on each Business Day, the Depository Bank shall remit funds on deposit in the Blocked Account to the account of Seller as set forth in Schedule A hereto.

3.             Buyer shall deliver the Distribution Instructions to the Depository Bank, Seller and Servicer by facsimile by no later than 12:00 p.m. (New York City time) on the Business Day prior to each Remittance Date.

4.             Depository Bank may rely upon any Distribution Instructions originated by Buyer, and Depository Bank shall not have any liability to Buyer for actions taken in reliance on such Distribution Instructions. All distributions made by the Servicer pursuant to this Section shall be (subject to any decree of any court of competent jurisdiction) final, and the Servicer shall have no duty to inquire as to the application by Buyer of any amounts distributed to it.

5.             The Blocked Account shall be an interest bearing account. All income and gains from the investment of funds in the Blocked Account shall be retained in the Blocked Account until disbursed in accordance with Section 2 hereof. As between Seller and Buyer, Seller shall treat all income, gains and losses from the investment of amounts in the Blocked Account as its income or loss for federal, state and local income tax purposes.

6.             The Blocked Account shall be subject to the sole control of the Buyer and, neither Seller nor Servicer shall have any right of withdrawal from the Blocked Account nor any right to deliver instructions to Depository Bank in respect of the Blocked Account. The Depositary Bank shall accept Distribution Instructions only from the Buyer at all times and shall comply with all instructions of Buyer without any further consent of Seller or Servicer being required.

7.             The undersigned parties agree: (a) that Depository Bank will not exercise any right of set off, banker's lien or any similar right in connection with such funds, provided that Depository Bank may set off against the Blocked Account for fees and expenses payable hereunder, for returned deposit items and for adjustments and corrections in respect of transactions in the Blocked Account, including, without limitation, returned checks and other deposits with respect to which Depository Bank fails to receive final payment or settlement; (b) that Depository Bank shall not withdraw, transfer or otherwise dispose of funds from the Blocked Account or permit any other person or entity to withdraw, transfer or otherwise dispose of funds in the Blocked Account except in accordance with the terms of Section 2 hereof, the Distribution Instructions originated by Buyer, and the terms of this Section 7; (c) that for the purposes of the Uniform Commercial Code as in effect from time to time in the State of New York (the “UCC”), the Blocked Account is a “deposit account”, as defined in Article 9 of the UCC; and (d) upon receipt of written notice of any lien, encumbrance or adverse claim against the Blocked Account or any funds credited thereto, Depository Bank will make reasonable efforts promptly to notify Seller, Buyer and Servicer thereof. The undersigned further agree that if there are insufficient collected funds in the Blocked Account to cover the amount of any returned check or other adjustment or correction to be debited thereto, Seller shall repay Depository Bank the amount of such debit immediately upon demand. If Seller fails to so repay Depository Bank, then, only after the occurrence and continuance of an Event of Default under the Repurchase Agreement, Buyer shall repay Depository Bank for such debit immediately upon demand to the extent that Buyer received the proceeds of the check or other deposit or credit to which the debit relates.

 

 

 

Exhibit VI-2

 

 

 

 

8.             In the event of a conflict between this Blocked Account Agreement and any other agreement between Depository Bank and Seller, the terms of this Blocked Account Agreement will prevail.

9.             This Blocked Account Agreement shall continue in effect until Buyer has notified Depository Bank in writing that this Blocked Account Agreement is terminated. Notwithstanding the foregoing, Depository Bank may terminate this Agreement upon thirty (30) days written notice to the other parties ; provided that it may terminate this Agreement immediately upon prior written notice to the Buyer and Seller, in the event Depository Bank has a reasonable basis to suspect fraud or other illegal activity in connection with the Blocked Account or this Agreement. In the event of immediate termination by Depository Bank, Depository Bank shall transfer all funds in the Blocked Account to Buyer or to its designee, as directed in writing by Buyer.

10.           This Blocked Account Agreement and the instructions and notices required or permitted to be executed and delivered hereunder set forth the entire agreement of the parties with respect to the subject matter hereof and supersede any prior agreement and contemporaneous oral agreements of the parties concerning its subject matter.

11.           No amendment, modification or (except as otherwise specified in Section 9 above) termination of this Blocked Account Agreement, nor any assignment of any rights hereunder (except to the extent contemplated under Section 13 below), shall be binding on any party hereto unless it is in writing and is signed by each of the parties hereto, and any attempt to so amend, modify, terminate or assign except pursuant to such a writing shall be null and void. No waiver of any rights hereunder shall be binding on any party hereto unless such waiver is in writing and signed by the party against whom enforcement is sought.

12.           If any term or provision set forth in this Blocked Account Agreement shall be invalid or unenforceable, the remainder of this Blocked Account Agreement, other than those provisions held invalid or unenforceable, shall be construed in all respects as if such invalid of unenforceable term or provision were omitted.

13.           The terms of this Blocked Account Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective corporate successors. This Blocked Account Agreement may be assigned by Buyer, Seller and Servicer to any assignee of Buyer, Seller or Servicer, respectively, permitted under the Repurchase Agreement, provided that written notice thereof is given by the applicable assignor to Depository Bank.

14.           This Blocked Account Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instruments, and any party hereto may execute this Blocked Account Agreement by signing and delivering one or more counterparts.

15.           This Blocked Account Agreement shall be governed by and construed in accordance with the law of the State of New York. The parties agree that New York is the “bank’s jurisdiction” for purposes of the UCC.

16.           Depository Bank may rely, and Depository Bank shall be protected in acting, or refraining from acting, upon any notice (including but not limited to electronically confirmed facsimiles of such notice) believed by Depository Bank to be genuine and to have been given by the proper party or parties.

 

 

Exhibit VI-3

 

 

 

 

17.           Depository Bank's duties and obligations shall be determined solely by the provisions of this Agreement and Depository Bank shall not be liable except for the performance of its duties and obligations as are set forth herein. Depository Bank shall have no obligation to review, or confirm that any actions taken pursuant to this Agreement comply with, any other agreement or document. Depository Bank shall have no liability to any party to this Agreement or to any other party arising out of or in connection with this Agreement other than for its gross negligence or willful misconduct. Substantial compliance by Depository Bank with its standard procedures for the services Depository Bank is providing hereunder shall be deemed to be the exercise by it of ordinary care. In no event shall Depository Bank be liable for any lost profits or for any indirect, special, consequential or punitive damages even if advised of the possibility or likelihood of such damages.

18.           Seller agrees to indemnify, defend and hold harmless Depository Bank and its affiliates and parent(s) and its and their respective officers, directors, employees, representatives and agents (each an "Indemnified Party") from and against all liabilities, losses, claims, damages, demands, costs and expenses of every kind ("Losses") including, without limitation, Losses incurred as a result of items being deposited in the Blocked Account and being unpaid for any reason, reasonable attorney's fees and the reasonable charges of Depository Bank's in-house counsel, incurred or sustained by any Indemnified Party arising out of Depository Bank's performance of the services contemplated by this Agreement, except to the extent such Losses are the direct result of the gross negligence or willful misconduct of Depository Bank.

19.           If at any time Depository Bank is served with legal process which it in good faith believes prohibits the disbursement of the funds deposited in the Blocked Account, then Depository Bank shall have the right (i) to place a hold on the funds in the Blocked Account until such time as it receives an appropriate court order or other assurance satisfactory to it as to the disposition of the funds in the Blocked Account, or (ii) to commence, at Seller's expense, an interpleader action in any competent Federal or State Court located in the Commonwealth of Pennsylvania, and otherwise to take no further action except in accordance with joint written instructions from Seller and Buyer or in accordance with the final order of a competent court, served on Depository Bank.

20.           All bank statements in respect to the Blocked Account shall be sent to Buyer and Seller as follows:

Seller:

 

Capital Trust, Inc.

410 Park Avenue, 14th Floor

New York, New York 10022

Attn: Mr. Geoffrey Jervis, Vice President

 

Buyer:

 

Goldman Sachs Mortgage Company

85 Broad Street

New York, New York 10004

Attn: Marc Flamino

 

All notices to Depository Bank are to be sent to:

 

 

PNC Bank, National Association

 

Treasury Management

 

 

Exhibit VI-4

 

 

 

 

 

Two PNC Plaza, 31st Floor

 

620 Liberty Avenue

 

Pittsburgh, PA 15222

 

Attn: Risk Manager and Jacqueline Rizzo

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

Exhibit VI-5

 

 

 

 

Kindly acknowledge your agreement with the terms of this agreement by signing the enclosed copy of this letter and returning it to the undersigned.

Very truly yours,

GOLDMAN SACHS MORTGAGE

COMPANY, a New York limited partnership

 

By:

Goldman Sachs Real Estate Funding Corp., its general partner

 

By:

 

 

Title:

 

Agreed and acknowledged:

PNC BANK, NATIONAL ASSOCIATION, a
national banking association, as
Depository Bank

By:__________________________

 

Title:

 

 

CAPITAL TRUST, INC., a Maryland
corporation, as Seller

 

By:___________________________

 

Title:

 

 

MIDLAND LOAN SERVICES, INC., a
Delaware corporation, as Servicer

 

By:____________________________

 

Title:

 

 

 

Exhibit VI-6

 

 

 

 

SCHEDULE A

 

(Seller’s Account Information)

 

JP Morgan Chase Bank

380 Madison Avenue

11th Floor

New York, NY 10017-2591

ABA #:

021-000021

Account #

230254632

Account Name:

Capital Trust, Inc.

Attention: Brian H. Oswald (212) 655-0256

 

 

 

Exhibit VI-7

 

 

 

 

EXHIBIT VII

FORM OF DIRECTION LETTER

 

 

 

Exhibit VII-1

 

 

 

 

 

 

Exhibit VIII-1

 

 

 

 

EXHIBIT VIII

FORM OF BAILEE AGREEENT

 

[CAPITAL TRUST, INC.

NAME AND ADDRESS]

_______________ __, 20__

 

Paul, Hastings, Janofsky & Walker LLP

75 East 55th Street

New York, New York 10022

 

 

Re:

Bailee Agreement (the "Bailee Agreement") in connection with the sale of ______________ by Capital Trust, Inc. (the "Seller") to Goldman Sachs Mortgage Company (the "Buyer")

 

Gentlemen and Mesdames:

 

In consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Seller, the Buyer and Paul, Hastings, Janofsky & Walker LLP (the "Bailee") hereby agree as follows:

1.             The Seller shall deliver to the Bailee in connection with any Purchased Loans delivered to the Bailee hereunder an Identification Certificate in the form of Attachment 1 attached hereto to which shall be attached a Purchased Loan Schedule identifying which Purchased Loans are being delivered to the Bailee hereunder. Such Purchased Loan Schedule shall contain the following fields of information: (a) the loan identifying number; (b) the obligor's name; (c) the street address, city, state and zip code for the applicable real property; (d) the original balance; and (e) the current principal balance if different from the original balance and such other information as the Seller and Buyer shall require.

2.             On or prior to the date indicated on the Custodial Delivery Certificate delivered by the Seller (the "Funding Date"), the Seller shall have delivered to the Bailee, as bailee for hire, the original documents set forth on Schedule A attached hereto (collectively, the "Purchased Loan File") for each of the Purchased Loans (each a "Purchased Loan" and collectively, the "Purchased Loans") listed in Exhibit A to Attachment 1 attached hereto (the "Purchased Loan Schedule").

3.             The Bailee shall issue and deliver to the Buyer and the Custodian on or prior to the Funding Date by facsimile (a) in the name of the Buyer, an initial trust receipt and certification in the form of Attachment 2 attached hereto (the "Trust Receipt ") which Trust Receipt shall state that the Bailee has received the documents comprising the Purchased Loan File as set forth in the Custodial Delivery Certificate (as defined in that certain Amended and Restated Custodial Agreement dated as of June 30, 2006, among Seller, Buyer and Custodian (as defined in Section 5 below), in addition to such other documents required to be delivered to Buyer and/or Custodian pursuant to the Amended and Restated Master Repurchase Agreement dated as of June 30, 2006, between Seller and Buyer (the "Repurchase Agreement").

4.             On the applicable Funding Date, in the event that the Buyer fails to purchase any New Loan from the Seller that is identified in the related Custodial Delivery Certificate, the Buyer shall deliver

 

 

Exhibit VIII-2

 

 

 

 

by facsimile to the Bailee at (212) 655-0044 to the attention of Robert Grados, Esq., an authorization (the "Facsimile Authorization") to release the Purchased Loan Files with respect to the Purchased Loans identified therein to the Seller. Upon receipt of such Facsimile Authorization, the Bailee shall release the Purchased Loan Files to the Seller in accordance with the Seller's instructions.

5.             Following the Funding Date, the Bailee shall forward the Purchased Loan Files to Deutsche Bank Trust Company Americas, 1761 St. Andrew Place, Santa Ana, California 92705, Attention: Mortgage Custody-QT020C (the "Custodian") by insured overnight courier for receipt by the Custodian no later than 1:00 p.m. on the third Business Day following the applicable Funding Date (the "Delivery Date").

6.             From and after the applicable Funding Date until the time of receipt of the Facsimile Authorization or the applicable Delivery Date, as applicable, the Bailee (a) shall maintain continuous custody and control of the related Purchased Loan Files as bailee for the Buyer and (b) is holding the related Purchased Loan Loans as sole and exclusive bailee for the Buyer unless and until otherwise instructed in writing by the Buyer.

7.             The Seller agrees to indemnify and hold the Bailee and its partners, directors, officers, agents and employees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including reasonable attorney's fees, that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of this Bailee Agreement or any action taken or not taken by it or them hereunder unless such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (other than special, indirect, punitive or consequential damages, which shall in no event be paid by the Bailee) were imposed on, incurred by or asserted against the Bailee because of the breach by the Bailee of its obligations hereunder, which breach was caused by negligence, lack of good faith or willful misconduct on the part of the Bailee or any of its partners, directors, officers, agents or employees. The foregoing indemnification shall survive any resignation or removal of the Bailee or the termination or assignment of this Bailee Agreement.

8.             (a) In the event that the Bailee fails to produce a Mortgage Note, Mezzanine Note, assignment of Purchased Loan or any other document related to a Purchased Loan that was in its possession within ten (10) business days after required or requested by the Seller or Buyer (a "Delivery Failure"), the Bailee shall indemnify the Seller or Buyer in accordance with the succeeding paragraph of this Section 8.

(b) The Bailee agrees to indemnify and hold the Buyer and Seller, and their respective affiliates and designees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including reasonable attorney's fees, that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of a Custodial Delivery Failure or the Bailee's negligence, lack of good faith or willful misconduct. The foregoing indemnification shall survive any termination or assignment of this Bailee Agreement.

9.             The Seller hereby represents, warrants and covenants that the Bailee is not an affiliate of or otherwise controlled by the Seller. Notwithstanding the foregoing, the parties hereby acknowledge that the Bailee hereunder may act as Counsel to the Seller in connection with a proposed loan and Paul, Hastings, Janofsky & Walker LLP, if acting as Bailee, has represented the Seller in connection with negotiation, execution and delivery of the Repurchase Agreement.

 

 

Exhibit VIII-3

 

 

 

 

10.           The agreement set forth in this Bailee Agreement may not be modified, amended or altered, except by written instrument, executed by all of the parties hereto.

11.           This Bailee Agreement may not be assigned by the Seller or the Bailee without the prior written consent of the Buyer.

12.           For the purpose of facilitating the execution of this Bailee Agreement as herein provided and for other purposes, this Bailee Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute and be one and the same instrument.

13.           This Bailee Agreement shall be construed in accordance with the laws of the State of New York, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws.

14.           Capitalized terms used herein and defined herein shall have the meanings ascribed to them in the Repurchase Agreement.

[signatures begin on next page]

 

 

 

Exhibit VIII-4

 

 

 

 

Very truly yours,

CAPITAL TRUST, INC., a Maryland corporation

 

By:___________________________

Name:

Title:

ACCEPTED AND AGREED:

PAUL, HASTINGS, JANOFSKY & WALKER LLP,

Bailee

 

By:__________________________

Name:

Title:

 

ACCEPTED AND AGREED:

GOLDMAN SACHS MORTGAGE COMPANY,

Buyer

By:

Goldman Sachs Real Estate Funding Corp.,

 

its general partner

By:__________________________

Name:

Title:

 

 

 

Exhibit VIII-5

 

 

 

 

Attachment 1 to Bailee Agreement

 

IDENTIFICATION CERTIFICATE

 

 

 

Exhibit VIII-6

 

 

 

 

Attachment 2 to Bailee Agreement

 

TRUST RECEIPT

 

 

Exhibit VIII-7

 

 

 

 

ANNEX II

 

 

 

 

1.

Names and Addresses for Communications Between Parties:

 

BUYER

 

Goldman Sachs Mortgage Company

85 Broad Street- 26th Floor

 

New York, New York

10004

Attn: Marc L. Flamino

Telephone: (212) 357-4727

 

Telecopier:

(212) 902-1691

 

 

 

with a copy to:

 

Cleary Gottlieb Steen & Hamilton

One Liberty Plaza

New York, New York 10006

Attn: Kimberly B. Blacklow

Telephone: (212) 225-2018

Telecopier: (212) 225-3999

 

SELLER

 

Capital Trust, Inc.

410 Park Avenue, 14th Floor

New York, NY 10022

Attn: Geoffrey Jervis

Telephone: (212) 655-0247

Telecopier: (212) 655-0044

 

with a copy to:

 

Paul Hastings Janofsky & Walker, LLP

75 East 55th Street

New York, NY 10022

Attn: Robert J. Grados, Esq.

Telephone: (212) 318-6923

Telecopier: (212) 230-7830

 

 

2.

Payments to Buyer: Payments to Buyer under the Agreement shall be made by transfer, via wire transfer, to the following account of the Buyer: Citibank, N.A., ABA #: 021000089, Account #: 40711421, Account Name: Goldman Sachs Mortgage Company, Ref: Capital Trust, Inc.,

 

 

Exhibit VIII-1

 

 

 

 

Attention: John Makrinos and Mike Forbes. Buyer may consider on a case-by-case-basis in its sole and absolute discretion alternative funding arrangements.

 

 

3.

Payments to Seller: Payments to Seller under the Agreement shall be made by transfer, via wire transfer, to the following account of the Seller: JP Morgan Chase Bank, 380 Madison Avenue, 11th Floor, New York, NY 10017-2591, ABA #: 021-000021, Account #:230254632, Account Name: Capital Trust, Inc., Attention: Geoffrey G. Jervis, (212) 655-0247 or to such other account designated by Seller to Buyer in a written notice, provided that such written notice is countersigned by two (2) authorized representatives of Seller.

 

 

 

Exhibit VIII-2

 

 

 

 

 EX-10 4 ex10-1c.htm EX. 10.1(C)

Exhibit 10.1.c

Execution Version

 

August 15, 2006

Goldman Sachs Mortgage Company

85 Broad Street

New York, New York 10004

Attention: Mr. Marc Flamino

Ladies and Gentlemen:

In connection with the Amended and Restated Master Repurchase Agreement (as amended from time to time, the “Repurchase Agreement”), dated as of the date hereof, between Capital Trust, Inc., as seller (“we”), and Goldman Sachs Mortgage Company, as buyer (“GSMC” and also herein, “you”), we hereby agree as follows:

1.

In consideration for, among other matters, entering into the Repurchase Agreement, we shall pay to you an amount equal to $[****] (the “Commitment Fee”) (such Commitment Fee representing [****] basis points ([****]%) of $150,000,000 (the “Facility Amount”).

2.

In the event you elect to not purchase a New Loan solely as a result of the failure of the conditions in Section 3(e)(12) of the Repurchase Agreement to be satisfied (a “Material Adverse Condition”; and the date you reject a New Loan as a result of a Material Adverse Condition is referred to herein as the “Rejection Date”), we shall be entitled to, on the earlier to occur of (i) date (the “Reinstatement Date”) on which the Material Adverse Condition shall no longer exist or such condition is waived by you and you provide notice to us that you are ready to purchase one or more New Loans, in accordance with the terms of the Agreement or (ii) the Facility Termination Date, a refund of a portion of the Commitment Fee (a “Commitment Fee Refund”) in an amount equal to the product of (1) $[****] multiplied by (2) the quotient of (y) the unused portion of the Facility Amount as of the Rejection Date divided by (z) the Facility Amount, multiplied by (3) the quotient of (y) the number of days occurring from the Rejection Date, as determined by you, to the earlier to occur of (A) the Reinstatement Date and (B) the Facility Termination Date, divided by (z) the number of days from the execution and delivery of the Repurchase Agreement to and including the Facility Termination Date.

All capitalized terms used and not defined herein shall have the meanings ascribed thereto in the Agreement.

 

**** Material omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act of 1934. Material filed separately with the Securities and Exchange Commission.

 

 

 

Execution Version

 

This letter contains a final and complete integration of all prior expressions by you and us with respect to the subject matter hereof and thereof and shall constitute the entire agreement among us with respect to such subject matter, superseding all prior oral or written understandings.

Each provision of this letter shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this letter shall be prohibited by or be invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this letter.

This letter may be signed, acknowledged and agreed to in any number of counterparts, each of which shall be an original, and all of which together shall constitute but one and the same instrument.

This letter shall be governed by and construed in accordance with the laws of the State of New York.

[SIGNATURES FOLLOW ON THE NEXT PAGE]

 

 

 

2

 

 

 

Very truly yours,

 

CAPITAL TRUST, INC., a Maryland corporation

By: /s/ Geoffrey G. Jervis                               
Name: Geoffrey G. Jervis
Title: Chief Financial Officer

 

Acknowledged and Agreed to By:

 

GOLDMAN SACHS MORTGAGE COMPANY,
a New York limited partnership

 

By: GOLDMAN SACHS REAL ESTATE FUNDING CORP.,
its general partner

 

By: /s/ Leo Huang                                                
Name: Leo Huang
Title: Authorized Signatory

 

 

Fee Letter Re: Amended and Restated Master

Repurchase Agreement

 

 

 

 EX-10 5 ex10-3.htm EX. 10.3

 

Exhibit 10.3

 

EMPLOYMENT AGREEMENT

I, Geoffrey G. Jervis, agree to the terms and conditions of employment with Capital Trust, Inc. (“CT”) and CT Investment Management Co., LLC (“CTIMCO,” and together with CT, the “Company”) set forth in this Employment Agreement (this “Agreement”) dated as of September 29, 2006 (“Effective Date”).

 

1.

Term of Employment.

(a)           Term.  My employment under this Agreement shall commence effective as of the Effective Date and shall end on December 31, 2009 (“Expiration Date”) or such earlier date on which my employment is terminated under Section 5 of this Agreement (the period from the Effective Date through the Expiration Date, or such earlier termination as provided for herein being referred to herein as the “Term”). If the Company continues to employ me beyond the Expiration Date without entering into a written agreement extending the term of this Agreement, except as provided in a new written employment agreement between the Company and me, I shall continue to receive the base salary in effect as of the Expiration Date for as long as I remain employed by the Company, but all other obligations and rights under this Agreement shall prospectively lapse as of the Expiration Date, except my right to payment of compensation accrued or earned prior to the Expiration Date or any other rights which by their terms extend beyond the Expiration Date, including the Company’s ongoing indemnification obligation under Section 4, any post-termination payment provisions under Section 5(a), my confidentiality and other obligations under Section 6, and our mutual arbitration obligations under Section 8, and I thereafter shall be an at-will employee of the Company.

(b)           Company’s Option to Extend Expiration Date. The Company shall have the option, but not the obligation, to extend the Expiration Date by one year (i.e., to December 31, 2010) by providing notice of such extension no later than September 1, 2009.

2.             Nature of Duties. I shall be the Company’s Chief Financial Officer and shall have all of the customary powers and duties associated with those positions. I shall devote my full business time and effort to the performance of my duties for the Company. I shall be subject to the Company’s policies, procedures and approval practices, as generally in effect from time to time and made known to me, to the extent consistent with this Agreement. I shall not, while employed by the Company, engage in, accept employment from or provide services to any other person, firm, corporation, governmental agency or other entity; provided, however, that subject to Section 6(c) hereof, I may (a) devote a reasonable amount of time to civic activities, provided that such activities do not conflict with or detract from my diligent performance of my duties hereunder. I shall report to the Company’s Chief Executive Officer. I shall not, while employed by the Company, engage in, accept employment from, or provide services to any other person, firm, corporation, organization, governmental agency, or other entity; provided, however, that subject to Section 6 hereof, I may (a)  serve as an outside director with one company or organization that does not compete with the Company, subject to the prior consent of the Company’s Board of Directors (“Board”), which consent shall not be unreasonably withheld, and (b) serve as a trustee, consultant, fiduciary, or advisor to family trusts or foundations, provided with respect to each of (a) and (b) that such service does not conflict with

 

 

or detract from my diligent performance of my duties hereunder or otherwise compromise the best interests of the Company.

3.             Place of Performance.   I shall be based in New York City, except for required travel on the Company’s business.

 

4.

Compensation and Related Matters.

(a)           Base Salary.   The Company shall pay me base salary at an annual rate of $350,000, subject to future upward adjustments at the discretion of the Board. My base salary shall be paid in conformity with the Company’s salary payment practices generally applicable to senior Company executives. If the Company elects to extend the Expiration Date in accordance with Section 1(b), above, my base salary shall be increased to $425,000 for the calendar year 2010.

(b)           Annual Bonuses.   The Company shall pay me annual bonuses, determined as follows:

(i)             For calendar year 2006, I shall receive an annual cash bonus from the Company in the amount of $650,000, payable no later than March 15, 2007.

(ii)            For calendar year 2007 and each subsequent full calendar year of the Term, I shall receive pursuant to Section 10(b) of the Company’s 2004 Long Term Incentive Plan (the “LTIP”), a Performance Compensation Award grant that provides for an annual cash bonus opportunity for that calendar year ranging from 100% of my base salary at threshold performance to 200% of my base salary at maximum performance (with a target of 150% of my base salary at target performance) achieved in respect of Annual Performance Measures (as defined below) established for the calendar year as the Performance Period. Before March 31 of each such calendar year, the Performance Measures containing threshold, target and maximum performance criteria shall be set by the Compensation Committee of the Board (the “Compensation Committee”), but only after consultation with me in advance and only when the performance measures are substantially uncertain to be satisfied (the “Annual Performance Measures”). Any cash bonus earned pursuant to such Performance Compensation Award shall be paid in conformity with the Company’s bonus payment practices generally applicable to senior Company executives.

(iii)           I shall be eligible for such other bonuses and other incentive compensation under bonus and incentive stock plans (including plans that provide for performance compensation tied to carried interest and incentive investment management fees from funds under management) generally available to other senior Company executives as the Compensation Committee determines in its sole discretion.

 

(c)

Restricted Stock.

(i)             As of the Effective Date, pursuant to the 2004 Long Term Incentive Plan (the “LTIP”), the Company shall grant to me 50,000 Restricted Shares of Class A common stock of CT (the “Initial Grant”). The Initial Grant shall (unless my employment has earlier terminated or as otherwise provided for herein) vest as follows: (I) 50% of the shares

 

 

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shall vest in eight equal installments at the end of each calendar quarter in 2008 and 2009, and (II) 50% of the shares shall be structured as a “Performance Compensation Award” pursuant to Section 10(b) of the LTIP, and shall vest on December 31, 2009, subject to satisfaction of the Grant Performance Hurdle (as defined below), measured for the period commencing on the Effective Date and ending on December 31, 2009. For purposes of this Agreement, “Grant Performance Hurdle” shall mean a total shareholder return of 13% per annum (consisting of declared dividends, plus share price growth (or minus share price loss, as the case may be), plus any other property or consideration received by shareholders in connection with their ownership of Class A common stock of CT). All dividends that are earned and accrue with respect to all vested and unvested Restricted Shares issued pursuant to the Initial Grant shall be currently paid to me. For the purpose of calculating whether the Grant Performance Hurdle has been achieved for purposes of this Initial Grant, the starting and ending share price shall be determined based on the average closing price of the Class A common stock of CT for the 60 trading-day periods which end on the Effective Date and on December 31, 2009, respectively.

(ii)            If the Company exercises its option to extend the Expiration Date to December 31, 2010 under Section 1(b), above, the Company shall grant to me on or about January 1, 2010, pursuant to the LTIP, an additional 16,875 Restricted Shares of Class A common stock of the Company (the “Additional Grant”). The Additional Grant shall (unless my employment has terminated or as otherwise provided for herein) vest as follows: (I) 50% of the shares shall vest on December 31, 2010, and (II) 50% of the shares shall be structured as a “Performance Compensation Award” pursuant to Section 10(b) of the LTIP, and shall vest on December 31, 2010, subject to satisfaction of the Grant Performance Hurdle, measured for the one-year period commencing on January 1, 2010 and ending on December 31, 2010. For the purpose of calculating whether the Grant Performance Hurdle has been achieved, the starting and ending share price shall be determined based on the average closing price of the Class A common stock of the Company for the 60 trading-day periods which end on January 1, 2010 and December 31, 2010, respectively. All dividends that are earned and accrue with respect to all vested and unvested Restricted Shares issued pursuant to the Additional Grant shall be paid to me upon issuance.

(d)           Standard Benefits.   During my employment, I shall be entitled to participate in all employee benefit plans and programs, including paid vacations, to the same extent generally available to other senior Company executives, in accordance with the terms of those plans and programs.

(e)           Indemnification.   The Company shall extend to me the same indemnification arrangements as are generally provided to other senior Company executives, including after the termination of my employment. Notwithstanding the foregoing, during the Term, the Company shall continue in effect, at a minimum, the same level of indemnification and the same level of Directors and Officers insurance coverage as were in effect immediately prior to the Effective Date.

(f)            Expenses.   I shall be entitled to receive prompt reimbursement, which the Company shall make within two and one-half months after I submit adequate documentation, for all reasonable and customary travel and business expenses I incur in

 

 

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connection with my employment but I must incur and account for those expenses in accordance with the policies and procedures established by the Company.

(g)           Sarbanes-Oxley Act Loan Prohibition.   To the extent that any Company benefit, program, practice, arrangement, or this Agreement would or might otherwise result in my receipt of an illegal loan (“Loan”), the Company shall use reasonable efforts to provide me with a substitute for the Loan that is lawful and of at least equal value to me.

(h)           Legal Fees.  The Company shall reimburse Executive for up to $5,000 in reasonable and customary legal expenses incurred in connection with the review, revision, and negotiation of this Agreement.

 

5.

Termination.

(a)           Rights and Duties.   If my employment is terminated, I shall be entitled to the amounts or benefits shown on the applicable row of the following table, subject to the balance of this Section 5 and to the terms and conditions set forth in Section 13, below. The Company and I shall have no further obligations to each other, except the Company’s ongoing indemnification obligation under Section 4, my confidentiality and other obligations under Section 6, and our mutual arbitration obligations under Section 8, or as set forth in any written agreement I subsequently enter into with the Company.

DISCHARGE
FOR CAUSE

Payment or provision when due of (1) any unpaid base salary, expense reimbursements, and vacation days accrued prior to termination of employment, and (2) other unpaid vested amounts or benefits under Company compensation, incentive, and benefit plans (including, without limitation vested interests I may have with respect to Fund II and Fund III or any previous grant of equity). In addition, I may continue to exercise my vested options for up to the earlier of (a) the expiration date of such options or (b) the date 90 days following my termination.

DISABILITY

Same as for “Discharge for Cause” EXCEPT that (1) my base salary, less any payments I receive under any state-mandated or other disability insurance policy, shall continue for six months following my termination, (2) I shall be entitled to receive a pro-rated annual bonus under Section 4(b), above, for the year in which my disability became effective hereunder, based on the number of days I worked for the Company that year (and, if in respect of calendar year 2007 or later, calculated at “target”), (3) the Company shall pay the COBRA premiums associated with continuing medical insurance coverage for my benefit and the benefit of my spouse and dependent children for one year following my disability effective date, and (4) I will continue to vest for one year following my disability effective date in all awards previously granted to me, and in determining the Grant Performance Hurdle for any remaining performance vesting period, I will be credited with the shareholder return for the full year preceding the year of my disability effective date. In addition, I may continue to exercise

 

 

 

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my options that are granted or first vest after 2004 until the later of December 31 of the year in which my employment terminates and the date two and one-half months after my employment terminates (but in no event after the expiration date of such options).

DISCHARGE OTHER THAN
FOR CAUSE
OR
DISABILITY

Same as for “Discharge for Cause” EXCEPT that, in exchange for my execution of a release in accordance with this section, (1) I shall be entitled to receive a lump-sum payment equal to the greater of (x) the sum of my then-current base salary and annual bonus (calculated at “target” with respect to 2007 and later) payable through December 31, 2009 or (y) the sum of (I) one year of my then-current base salary and (II) the highest annual bonus paid to me during the Term (or during the extended Term, if the Company elects to extend the Expiration Date in accordance with Section 1(b)), (2) all restricted stock grants made prior thereto, the Initial Grant, and, if already granted to me, the Additional Grant, shall immediately vest in full, (3) I may continue to exercise my options that are granted or first vest after 2004 until the later of December 31 of the year in which my employment terminates and the date two and one-half months after my employment terminates (but in no event after the expiration date of such options, and (4) the Company shall pay the COBRA premiums associated with continuing medical insurance coverage for my benefit and the benefit of my spouse and dependent children for 18 months following my date of discharge or such earlier time I shall obtain comparable coverage through another employer.

RESIGNATION WITHOUT GOOD REASON

Same as for “Discharge for Cause.”

RESIGNATION WITH GOOD REASON

Same as for “Discharge Other Than for Cause or Disability.”

DEATH

Same as for “Discharge for Cause” EXCEPT that (1) my legal representative shall be entitled to receive any death benefits payable under the life insurance maintained on my behalf by the Company as well as any earned but as of yet unpaid bonus amounts from the year preceding the date of my death, (2) any equity and performance compensation awards I have shall continue to vest for one year following the date of my death, and in determining the Grant Performance Hurdle for any remaining performance vesting period, my estate will be credited with the shareholder return for the full year preceding the year of my death, (3) the Company shall pay the COBRA premiums associated with continuing medical insurance coverage for the benefit of my spouse and dependent children for one year following my date of death, and (4) my options that are granted or first vest after 2004 may continue to be exercised until the later of December 31 of the year in which my employment terminates and the date two and one-half months after my employment terminates (but in

 

 

 

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no event after the expiration date of such options.

 

 

(b)           Discharge for Cause.   The Company may terminate my employment at any time if the Board has Cause to terminate me. For purposes of this Agreement, “Cause” is defined as:

(i)             Fraud and Dishonesty.   My commission of a willful act of fraud, embezzlement or misappropriation of any money or properties of the Company or its affiliates (other than an insubstantial and unintentional misappropriation that has been remedied within 10 days after the Company provides me with notice of such misappropriation).

(ii)            Criminal Act.   My conviction of a felony or any material violation of any federal or state securities law (whether by plea of nolo contendere or otherwise) or my being enjoined from violating any federal or state securities law or being determined to have violated any such law.

(iii)           Reckless Conduct.   My engaging in willful or reckless misconduct in connection with any property or activity, the purpose or effect of which materially and adversely affects the Company and/or its subsidiaries and affiliates, and/or their predecessors and successors (collectively, the “Group”).

(iv)          Substance Abuse.   My repeated and intemperate use of alcohol or illegal drugs after written notice from the Board that such use, if continued, would result in the termination of my employment hereunder.

(v)           Breach of Agreement.   My failure to cure my material breach of any of my obligations under this Agreement (other than by reason of physical or mental illness, injury, or condition) after having received 10 days’ notice from the Board of the breach.

(vi)          Barred from Office.   My becoming barred or prohibited by the SEC from holding my position with the Company.

(vii)         Material Breach of Company Policy or Code of Ethics.   My material breach of any Company policy (provided that I have been provided with a copy of or access to, or am otherwise aware of, the policy) or of the Company’s Code of Ethics.

(viii)        Failure to Perform Duties.    My continued failure or refusal to perform any material duty or responsibility under this Agreement (other than by reason of physical or mental illness, injury, or condition) after having received 10 days’ notice from the Board.

(c)          Termination for Disability.   Except as prohibited by applicable law, the Company may terminate my employment on account of Disability, or may transfer me to inactive employment status, which shall have the same effect under this Agreement as a termination for Disability. “Disability” means a physical or mental illness, injury, or condition

 

 

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that prevents me from performing substantially all of my duties under this Agreement for at least 120 consecutive calendar days or for at least 180 calendar days, whether or not consecutive, in any 365 calendar day period, or is likely to do so, as certified by a physician selected by the Board.

(d)           Discharge Other Than for Cause or Disability.   The Company may terminate my employment at any time for any reason, and without advance notice. If I am terminated by the Company other than for Cause under Section 5(b) or Disability under Section 5(c), I will only receive the special benefits provided for a Discharge other than for Cause or Disability under Section 5(a) if I sign a separation agreement and general release in the form attached hereto as Schedule A and do not thereafter revoke the release.

(e)           Resignation.   If I resign other than for Good Reason, the Company may accept my resignation effective on the date set forth in my notice or any earlier date. If I resign other than for Good Reason, I agree that the Restricted Period (as defined in Section 6(b)) shall begin on the date of my resignation. If I resign for Good Reason, my employment will end on my last date of work and I will receive the benefits to which I am entitled under Section 5(a), but only if I sign the separation agreement and general release described in Section 5(d), above, and I do not thereafter revoke the release. “Good Reason” means that, without my express written consent and through no fault of my own, one or more of the following events occurred after my execution of this Agreement:

(i)             Demotion.   My title and responsibilities are substantially and adversely diminished during the Term.

(ii)            Compensation Reduction.   My cash compensation provided for under this Agreement is materially reduced.

(iii)           Relocation.   The Company requires me, without my consent, to be based at any office or location outside of a 40-mile radius of midtown Manhattan, New York, New York.

(iv)          Breach of Promise.   The Company fails to cure its material breach of this Agreement within thirty business days after I give it written notice thereof.

(v)           Discontinuance of Benefits.   The Company stops providing me with benefits that, in the aggregate, are substantially as valuable to me as those I enjoyed immediately prior to the Effective Date, other than a result of across-the-board benefit reductions affecting similarly-situated employees.

 

 

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(vi)          No Comparable Offer Following Change of Control.    The Company is involved in a Change in Control (as defined below) and I am not offered a position by the acquiring entity (or the Company’s successor, as the case may be) comparable to the position I held with the Company prior to the Change in Control, including with respect to general responsibilities, and with the same title. For purposes of this section, “Change in Control” shall mean:

(1)           a merger or acquisition in which 50% or more of the Company’s voting stock outstanding after the merger or acquisition is held by holders different from those who held the Company’s voting stock immediately prior to such merger or acquisition;

(2)           the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company;

(3)           a transfer of all or substantially all of the Company’s assets pursuant to a partnership or joint venture agreement or similar arrangement where the Company’s resulting interest is or becomes less than 50%;

(4)           on or after the Effective Date, a change in ownership of the Company through an action or series of transactions, such that any person is or becomes the beneficial owner, directly or indirectly, of 50% or more of the Company’s voting stock; or

(5)           a change occurs in the composition of the Board during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two-year period, whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided further, however, that any such individual whose initial assumption of office occurs as a result of or in connection with a solicitation subject to Rule 14a-12(c) of Regulation 14A promulgated under the Exchange Act of 1934, as amended, or other actual or threatened solicitation of proxies or consents by or on behalf of an entity other than the Board shall not be so considered as a member of the Incumbent Board.

However, an event that is or would constitute Good Reason shall cease to be Good Reason if: (1) I do not give the Company written notice of my intent to terminate my employment within 45 days after I have objective notice that a Good Reason event has occurred; (2) the Company reverses the action or cures the default that constitutes Good Reason within 30 days after I notify it in writing that Good Reason exists before I terminate employment; or (3) I was a primary instigator of the Good Reason event and the circumstances make it inappropriate for me to receive Good Reason resignation benefits under this Agreement.

 

 

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(f)            Death. If I die while employed under this Agreement, the payments required by Section 5(a) in the event of my death shall be made.

 

6.

Confidentiality and Other Obligations.

(a)          Confidential Information. During the term of my employment, in exchange for my promises to use such information solely for the Company’s benefit, the Company has provided and will continue to provide me with Confidential Information concerning, among other things, its business, operations, clients, investors, and business partners. “Confidential Information” refers to information not generally known by others in the form in which it is used by the Company, and which gives the Company a competitive advantage over other companies which do not have access to this information, including secret, confidential, or proprietary information or trade secrets of the Company and its subsidiaries and affiliates, conveyed orally or reduced to a tangible form in any medium, including information concerning the operations, future plans, customers, business models, strategies, and business methods of the Company and its subsidiaries and affiliates, as well as information about the Company’s active and prospective investors, clients and business partners and their respective investment preferences, risk tolerances, portfolio allocations and amounts, cash flow requirements, contact information, and other information about how to best serve their needs and preferences. “Confidential Information” does not include information that (i) I knew prior to my employment with the Company, (ii) subsequently came into my possession other than through my work for the Company and not as a result of a breach of any duty owed to the Company, or (iii) is generally known within the relevant industry.

(b)           Promise Not to Disclose. I promise never to use or disclose any Confidential Information before it has become generally known within the relevant industry through no fault of my own. I agree that this promise shall never expire.

(c)           Promise Not to Solicit. Because my position enables me to learn Confidential Information regarding the investors in the Company and its funds and how best to serve them, I further agree that, during the “Restricted Period” (as defined below) (1) as to any investor in the Company (or in any investment fund or vehicle owned, managed, or established by the Company) with whom I had dealings or about whom I acquired proprietary information during my employment, I will not solicit or attempt to solicit (or assist others to solicit) the investor to invest in or do business with any person, entity, or investment fund or vehicle other than the Company (or its funds or vehicles); and (2) I will not solicit or attempt to solicit (or assist others to solicit) for employment any person who is, or within the preceding six months was, an officer, manager, employee, or consultant of the Company. I agree that the restrictions set forth in this paragraph should not prohibit me from engaging in my livelihood and do not foreclose my working with investors not identified in this paragraph.

The “Restricted Period” shall mean the period of my employment with the Company and:

 

(i)             Twelve (12) months after my termination for Cause under Section 5(b), resignation without Good Reason under Section 5(e), or resignation with Good Reason under Section 5(e)(vi);

 

 

 

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(ii)            Six (6) months after my resignation with Good Reason under Section 5(e)(i) through (v); and

(iii)         Zero (0) months after my termination other than for Cause under Section 5(d).

 

(d)           Promise Not to Engage in Certain Employment.   I agree that, during the Restricted Period, I will not, without the prior written consent of the Board, accept any employment, provide any services, advice or information; or assist or engage in any activity (whether as an employee, consultant, or in any other capacity, whether paid or unpaid) with (1) any specialty finance firm or investment management company focused on commercial real estate-related debt instruments or (2) any business that, as of the date of my termination, directly competes with the Company.

(e)           Return of Information.   When my employment with the Company ends, I will promptly deliver to the Company, or, at its written instruction, destroy, all documents, data, drawings, manuals, letters, notes, reports, electronic mail, recordings, and copies thereof, of or pertaining to it or any other Group member in my possession or control. In addition, during my employment with the Company or the Group and thereafter, I agree to meet with Company personnel and, based on knowledge or insights I gained during my employment with the Company and the Group, answer any question they may have related to the Company or the Group.

(f)            Intellectual Property.   Intellectual property (including such things as all ideas, concepts, inventions, plans, developments, software, data, configurations, materials (whether written or machine-readable), designs, drawings, illustrations, and photographs, that may be protectable, in whole or in part, under any patent, copyright, trademark, trade secret, or other intellectual property law), developed, created, conceived, made, or reduced to practice during my Company employment (except intellectual property that has no relation to the Group or any Group customer that I developed, etc., purely on my own time and at my own expense), shall be the sole and exclusive property of the Company, and I hereby assign all my rights, title, and interest in any such intellectual property to the Company.

(g)           Enforcement of This Section.   This section shall survive the termination of this Agreement for any reason. I acknowledge that (a) my services are of a special, unique, and extraordinary character and it would be very difficult or impossible to replace them, (b) this section’s terms are reasonable and necessary to protect the Company’s legitimate interests, (c) this section’s restrictions will not prevent me from earning or seeking a livelihood, (d) this section’s restrictions shall apply wherever permitted by law, and (e) my violation of any of this section’s terms would irreparably harm the Company. Accordingly, I agree that, if I violate any of the provisions of this section, the Company or any Group member may be entitled to seek, in addition to other remedies available to it, an injunction to be issued by any court of competent jurisdiction restraining me from committing or continuing any such violation.

 

 

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7.

Notice.

(a)           To the Company.   I will send all communications to the Company in writing, by mail, hand delivery or facsimile, addressed as follows (or in any other manner the Company notifies me to use):

 

Capital Trust, Inc.

Attention: Mr. John R. Klopp

410 Park Avenue, 14th Floor

New York, New York 10022

Fax: (212) 655-0044

Tel.: (212) 655-0220

 

 

With copy to:

Martin L. Edelman, Esq.

Michael L. Zuppone, Esq.

Paul, Hastings, Janofsky & Walker LLP

75 East 55th Street

 

New York, New York 10022-3205

 

(b)           To Me.   All communications from the Company to me relating to this Agreement must be sent to me in writing at my Company office or in any other manner I notify the Company to use, with a copy to:

 

Josiah M. Black, Esq.

 

Bello Black & Welsh LLP

 

One Exeter Plaza, 10th Floor

 

Boston, Massachusetts 02116

 

(c)           Time Notice Deemed Given.   Notice shall be deemed to have been given when delivered or, if earlier (1) when mailed by United States certified or registered mail, return receipt requested, postage prepaid, or (2) faxed with confirmation of delivery, in either case, addressed as required in this section.

8.             Arbitration of Disputes.   Except for the Company’s right to seek injunctive relief in accordance with Section 6(g), above, all disputes between the Company and me are to be resolved by final and binding arbitration in accordance with the separate Arbitration Agreement attached as Schedule B to this Agreement. This section shall remain in effect after the termination of this Agreement.

9.             Amendment.   No provisions of this Agreement may be modified, waived, or discharged except by a written document signed by a duly authorized Company officer and me. Thus, for example, promotions, commendations, and/or bonuses shall not, by themselves, modify, amend, or extend this Agreement. A waiver of any conditions or provisions of this Agreement in a given instance shall not be deemed a waiver of such conditions or provisions at any other time.

 

 

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10.          Interpretation; Exclusive Forum.   The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the state of New York (excluding any that mandate the use of another jurisdiction’s laws). Any litigation, arbitration, or similar proceeding with respect to such matters only may be brought within that state, and all parties to this Agreement consent to that state’s jurisdiction and agree that venue anywhere in that state would be proper.

11.          Successors.   This Agreement shall be binding upon, and shall inure to the benefit of, me and my estate, but I may not assign or pledge this Agreement or any rights arising under it, except to the extent permitted under the terms of the benefit and compensation plans in which I participate.

12.          Taxes.   I am solely responsible for the payment of any tax liabilities (including any taxes and penalties arising under Section 409A of the Internal Revenue Code (the “Code”) that may result from any payments or benefits that I receive pursuant to this Agreement. The Company shall not have any obligation to pay, mitigate, or protect me from any such tax liabilities. Nevertheless, if the Company reasonably determines that my receipt of payments or benefits pursuant to Section 5 above would cause me to incur liability for additional tax under Section 409A of the Code, then the Company may in its discretion suspend such payments or benefits until the end of the six-month period following termination of my employment (the “409A Suspension Period”). As soon as reasonably practical after the end of the 409A Suspension Period, the Company will make a lump sum payment to me, in cash, in an amount equal to any payments and benefits that the Company does not make during the 409A Suspension Period. Thereafter, I will receive any remaining payments and benefits due pursuant to Section 5 in accordance with the terms of that Section (as if there had not been any suspension beforehand). The Company shall withhold taxes from payments it makes pursuant to this Agreement as it determines to be required by applicable law.

13.          Validity.   The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

14.          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 shall constitute the same instrument.

15.          Entire Agreement.   All oral or written agreements or representations, express or implied, with respect to the subject matter of this Agreement are set forth in this Agreement. Notwithstanding the foregoing, I agree to comply with the Company’s policies and Code of Ethics.

 

 

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I ACKNOWLEDGE THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THIS AGREEMENT ARE CONTAINED IN IT AND THAT I HAVE ENTERED INTO THIS AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF.

I FURTHER ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ALL OF IT, AND THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISHED TO DO SO. I UNDERSTAND THAT BY SIGNING THIS AGREEMENT I AM GIVING UP MY RIGHT TO A JURY TRIAL.

 

Date: September 29, 2006

CAPITAL TRUST, INC.

 

 

By:/s/ John R. Klopp

 

Name: John R. Klopp

 

Title: Chief Executive Officer

 

 

Date: September 29, 2006

CT INVESTMENT MANAGEMENT CO., LLC

 

 

By:/s/ John R. Klopp

 

Name: John R. Klopp

 

Title:                                                     

 

 

Date: September 29, 2006

/s/ Geoffrey G. Jervis

 

GEOFFREY G. JERVIS

 

 

 

- 13 -

 

 

SCHEDULE A

 

SEPARATION AGREEMENT AND GENERAL RELEASE

 

This SEPARATION AGREEMENT AND GENERAL RELEASE (“Release”) made this ___ day of _________, ____ by and between Capital Trust, Inc. (“CT”) and CT Investment Management Co., LLC (“CTIMCO,” and together with CT, the “Company”), on the one part, and Geoffrey G. Jervis (“Executive”), on the other:

 

In exchange for the mutual promises exchanged herein and other good and valid consideration, the receipt of which is hereby acknowledged, the parties agree as follows:

 

 

1.

Employment Termination

 

Executive agrees that his employment with the Company has ended or will end on [date]. Executive will be entitled to those separation and other benefits as set forth in his Employment Agreement with the Company dated as of [date].

 

 

2.

Claims Released

 

In exchange for the benefits provided herein, Executive irrevocably and unconditionally releases the Company, its current or former parents, subsidiaries, or affiliates, their past, present, or future employees or agents, their successors, their benefit plans and the administrators of such plans (collectively, the “Released Parties”), from all known or unknown claims that Executive presently may have arising out of his employment with, or separation from, the Company, other than claims (i) seeking enforcement of this Release, (ii) for vested awards or benefits under the Company’s employee benefit plans, including the 2004 Long-Term Incentive Program, and (iii) to indemnification and coverage under the Company’s directors and officers’ insurance policies (“Claims”). The Claims Executive is releasing include, without limitation, claims under the Age Discrimination in Employment Act of 1967 (“ADEA”), Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Employee Retirement Income Security Act of 1974, the Fair Labor Standards Act, the Family and Medical Leave Act, the New York State Human Rights Law; the New York City Human Rights Law; or any other federal, state, or local common law, statute, regulation, or law of any other type. Executive acknowledges that he is releasing Claims he knows he has and Claims he may not know he has, and understands the significance of doing so.

 

 

3.

Pursuit of Released Claims

 

Executive agrees to withdraw with prejudice all complaints or charges, if any, he has filed against any Released Party with any agency or court. Executive agrees that he will never file any lawsuit or complaint against them based on the Claims purportedly released in this Release. Executive promises never to seek any damages, remedies, or other relief for himself personally (any right to which he hereby waives) by filing or prosecuting a charge with any administrative agency with respect to any Claim purportedly released by this Release. Executive

 

A-1

 

 

promises to request any administrative agency or other body assuming jurisdiction of any such lawsuit, complaint, or charge to withdraw from the matter or dismiss the matter with prejudice.

 

 

4.

Nonadmission of Liability

 

Executive agrees that this Release is not an admission of guilt or wrongdoing by the Released Parties and acknowledges that the Released Parties do not believe or admit that they have done anything wrong.

 

 

5.

Confidentiality and Non-Disparagement

 

Executive agrees to keep the fact and terms of this Release in strict confidence. Executive agrees not to disclose this document, its contents or subject matter to any person other than his immediate family, attorney, accountant or income tax preparer, or otherwise as required by law. Executive agrees that he will not denigrate, disparage, defame, impugn, or otherwise damage or assail the reputation or integrity of the Company or any Released Party.

 

 

6.

Consideration of Release

 

Executive acknowledges that, before signing this Release, he was given at least 21 calendar days to consider this Release. Executive waives any right he might have to additional time beyond this consideration period within which to consider this Release. Executive acknowledges that: (a) he took advantage of that time to consider this Release before signing it; (b) he carefully read this Release; (c) he fully understands what this Release means; (d) he is entering into it voluntarily; (e) he is receiving valuable consideration in exchange for his execution of this Release that he would not otherwise be entitled to receive; and (f) the Company, in writing, encouraged him to discuss this Release with his attorney (at his own expense) before signing it, and that he did so to the extent he deemed appropriate. Executive may revoke his release of claims under the ADEA within seven (7) days after he signs this Release, in which case he will not be entitled to receive all of the benefits set forth herein.

 

 

7.

Miscellaneous

 

This Release sets forth the entire agreement between Executive and the Company pertaining to the subject matter of this Release. This Release may not be modified or canceled in any manner except by a writing signed by both Executive and an authorized Company official. Executive acknowledge that the Company has made no representations or promises to him other than those in this Release. If any provision in this Release is found to be unenforceable, all other provisions will remain fully enforceable. It is not necessary that the Company sign this Release for it to become binding on both Executive and the Company. This Release binds Executive’s heirs, administrators, representatives, executors, successors, and assigns, and will inure to the benefit of the Released Parties and their heirs, administrators, representatives, executors, successors, and assigns. This Release shall be construed as a whole according to its fair meaning; it shall not be construed strictly for or against Executive or the Released Parties. Unless the context indicates otherwise, the term "or" shall be deemed to include the term "and" and the singular or plural number shall be deemed to include the other. Disputes under this

 

A-2

 

 

Release are to be resolved in accordance with the existing arbitration agreement between the parties. Except to the extent governed by federal law, this Release shall be governed by the statutes and common law of the State of New York (excluding any that mandate the use of another jurisdiction's laws). Section headings in this Agreement are included for convenience of reference only and shall not be a part of this Agreement for any other purpose.

 

TAKE THIS RELEASE HOME, READ IT, AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT. THIS RELEASE INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS.

 

Date: ________________________

CAPITAL TRUST, INC.

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

Date: ________________________

CT INVESTMENT MANAGEMENT CO., LLC

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

Date: ________________________

 

 

GEOFFREY G. JERVIS

 

A-3

 

 

SCHEDULE B

 

MUTUAL AGREEMENT TO ARBITRATE CLAIMS

 

I recognize that differences may arise between Capital Trust, Inc. (“CT”) and CT Investment Management Co., LLC (“CTIMCO,” and together with CT, the “Company”), on the one part, and me, on the other part, during or following my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims (“Agreement”), I anticipate gaining the benefits of a speedy, impartial dispute-resolution procedure.

Except as provided in this Agreement, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Agreement. To the extent that the Federal Arbitration Act either is inapplicable, or held not to require arbitration of a particular claim or claims, New York law pertaining to agreements to arbitrate shall apply.

I understand that any reference in this Agreement to the Company will be a reference also to all of its subsidiary and affiliated entities, all benefit plans, the benefit plans’ sponsors, fiduciaries, administrators, and affiliates, and all successors and assigns of any of them.

Claims Covered by the Agreement

The Company and I mutually consent to the resolution by arbitration of all claims or controversies (“claims”), past, present or future, which arise, directly or indirectly, out of my employment (or its termination) or the business of the Company, that the Company may have against me or that I may have against the Company or against its officers, directors, employees or agents in their capacity as such or otherwise. The claims covered by this Agreement include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, sexual orientation, religion, national origin, age, marital status, or medical condition, handicap or disability); and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except claims excluded elsewhere in this Agreement.

Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administrative action (other than an administrative charge of discrimination to the EEOC or similar fair employment practices agency, or an administrative charge within the jurisdiction of the National Labor Relations Board or U.S. Department of Labor), in any way related to any claim covered by this Agreement.

Claims Not Covered by the Agreement

This Agreement does not cover claims for workers’ compensation or unemployment compensation benefits; or any claim as to which final and binding arbitration cannot be required as a matter of law.

Claims, either by the Company or by me, seeking injunctive relief for alleged violations of intellectual property rights and non-disclosure and non-solicitation covenants also

 

B-1

 

 

are not covered by this Agreement (although all other aspects of such claims, including any claims for damages, are covered by this Agreement).

Required Notice of All Claims and Statute of Limitations

The Company and I agree that the aggrieved party must give written notice of any claim to the other party no later than the applicable Statute of Limitations as may be prescribed by law.

Written notice to the Company, or its officers, directors, employees or agents, shall be sent to the addresses set forth in my Employment Agreement. I will be given written notice at the last address recorded in my personnel file.

The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. The notice shall be sent to the other party by certified or registered mail, return receipt requested.

Representation

Any party may be represented by an attorney or other representative selected by the party.

Discovery

Each party shall have the right to take the deposition of three (3) individuals and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had where the arbitrator selected pursuant to this Agreement so orders, upon an appropriate showing of justification.

Designation of Witnesses

At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration.

Subpoenas

Each party shall have the right to subpoena witnesses and documents for the arbitration.

Arbitration Procedures

The arbitration will be held under the auspices of the American Arbitration Association (“AAA”).

The Company and I agree that, except as provided in this Agreement, the arbitration shall be in accordance with the AAA’s National Rules for Resolution of Employment Disputes (or other then-current employment arbitration procedures). The arbitrator shall be either a retired judge, or an attorney licensed to practice law in the state in which the arbitration is convened and with demonstrated experience and expertise in executive compensation matters (the “Arbitrator”). The arbitration shall take place in or near the city in which I am or was last employed by the Company.

 

B-2

 

 

The Arbitrator shall be selected as follows. The sponsoring organization shall give each party a list of 11 arbitrators drawn from its panel of employment dispute arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately from the list of common names until only one remains. The party who did not initiate the claim shall strike first. If no common name exists on the lists of all parties, the sponsoring organization shall furnish an additional list and the process shall be repeated. If no arbitrator has been selected after two lists have been distributed, then the parties shall strike alternately from a third list, with the party initiating the claim striking first, until only one name remains. That person shall be designated as the Arbitrator.

The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or federal law, or both, as applicable to the claim(s) asserted. If the parties’ dispute concerns a contract in which the parties have included a choice of law provision, the Arbitrator shall apply the law as designated by the parties. The Arbitrator is without jurisdiction to apply any different substantive law, or law of remedies. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement.

The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person, as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure.

Either party may obtain a court reporter to provide a stenographic record of proceedings.

Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator.

The Arbitrator shall render a written award and opinion in the form setting forth his/her findings and conclusions.

Either party shall have the right, within 20 days of issuance of the Arbitrator’s opinion, to file with the Arbitrator a motion to reconsider (accompanied by a supporting brief), and the other party shall have 20 days from the date of the motion to respond. The Arbitrator thereupon shall reconsider the issues raised by the motion and, promptly, either confirm or change the decision, which (except as provided by this Agreement) shall then be final and conclusive upon the parties.

 

 

B-3

 

 

Arbitration Fees and Costs

The Company will be responsible for paying any filing fee and the fees and costs of the Arbitrator and the arbitration; provided, however, that if I am the party initiating the claim, I am responsible for contributing an amount equal to the filing fee to initiate a claim in the court of general jurisdiction in the state in which I am (or was last) employed by the Company. Each party shall pay for its own costs and attorneys’ fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys’ fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party, under the standards for fee shifting provided by law.

Judicial Review

Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award.

Interstate Commerce

I understand and agree that the Company is engaged in transactions involving interstate commerce and that the Federal Arbitration Act applies to this Agreement.

Requirements for Modification or Revocation

This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify this Agreement.

Sole and Entire Agreement

This is the complete agreement of the parties on the subject of arbitration of disputes. This Agreement supersedes any prior or contemporaneous oral or written understandings on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement.

Severability

If any provisions of this Agreement are adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement, as the parties hereto intend to create a binding agreement to arbitrate regardless of the unenforceability of any particular term or terms.

Consideration

The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, provide consideration for each other.

 

B-4

 

 

 

Voluntary Agreement

I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF.

 

I UNDERSTAND THAT BY SIGNING THIS AGREEMENT I AM GIVING UP MY RIGHT TO A JURY TRIAL.

Employee initials:
______________

 

I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISH TO DO SO.

 

 

Dated:  September __, 2006

CAPITAL TRUST, INC.
 
By: ________________________
Name:   John R. Klopp
Title: Chief Executive Officer
 

Dated:  September __, 2006

 

CT INVESTMENT MANAGEMENT CO., LLC
 
By: ________________________
Name:   John R. Klopp
Title: _______________________
 

 

Dated:  September __, 2006

 

___________________________
GEOFFREY G. JERVIS

 

 

 

10/20/06

 

 

B-5

 

 

 EX-31 6 ex31-1.txt EX. 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John R. Klopp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 30, 2006 /s/ John R. Klopp ----------------- John R. Klopp Chief Executive Officer EX-31 7 ex31-2.txt EX. 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Geoffrey G. Jervis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 30, 2006 /s/ Geoffrey G. Jervis ---------------------- Geoffrey G. Jervis Chief Financial Officer EX-32 8 ex32-1.txt EX. 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Klopp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John R. Klopp ----------------- John R. Klopp Chief Executive Officer October 30, 2006 EX-32 9 ex32-2.txt EX. 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey G. Jervis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Geoffrey G. Jervis ---------------------- Geoffrey G. Jervis Chief Financial Officer October 30, 2006 EX-99 10 ex99-1.txt EX. 99.1 EXHIBIT 99.1 FORWARD-LOOKING INFORMATION AND RISK FACTORS Our Annual Report on Form l0-K for the year ended December 31, 2005, our 2005 Annual Report to Shareholders, any of our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K of the Company, or any other oral or written statements made in press releases or otherwise by or on behalf of Capital Trust, Inc., may contain 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 predict or describe our future operations, our business plans, our business and investment strategies and portfolio management and the performance of our investments and funds under management. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "seeks," "anticipates," "anticipated," "should," "could," "may," "will," "designed to," "foreseeable future," "believe," "believes" and "scheduled" and similar expressions. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results may differ significantly from any results expressed or implied by these forward-looking statements. Some, but not all, of the factors that might cause such a difference include, but are not limited to: o the general political, economic and competitive conditions, in the United States and foreign jurisdictions wherein we invest; o the level and volatility of prevailing interest rates and credit spreads, adverse changes in general economic conditions and real estate and debt capital markets, the deterioration of credit quality of borrowers and the risks associated with the ownership and operation of real estate; o a significant compression of the spreads of the interest rates earned on interest-earning assets over the interest rates paid on interest-bearing liabilities that adversely affects operating results; o 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; o adverse changes in local market conditions, competition, increases in operating expenses and uninsured losses affecting a property owner's ability to cover operating expenses and the debt service on financing provided by us; o authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission; and o the risk factors set forth below. Risks Related to Our Investment Program Our existing loans and investments expose us to a high degree of risk associated with investing in commercial real estate-related assets. Real estate historically has experienced significant fluctuations and cycles in performance that may result in reductions in the value of our real estate-related investments. The performance and value of our loans and investments once originated or acquired by us depends on many factors beyond our control. The ultimate performance and value of our investments is subject to the varying degrees of risk generally 1 incident to the ownership and operation of the commercial properties which collateralize or support our investments. The ultimate performance and value of our loans and investments depends upon the commercial property owner's ability to operate the property so that it produces cash flows necessary to pay the interest and principal due to us on our loans and investments. Revenues and cash flows may be adversely affected by: o changes in national economic conditions; o changes in local real estate market conditions due to changes in national or local economic conditions or changes in local property market characteristics; o competition from other properties offering the same or similar services; o changes in interest rates and in the availability of mortgage financing; o the ongoing need for capital improvements, particularly in older building structures; o changes in real estate tax rates and other operating expenses; o adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters, acts of war or terrorism, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; o adverse changes in zoning laws; o the impact of present or future environmental legislation and compliance with environmental laws; and o other factors that are beyond our control and the control of the commercial property owners. In the event that any of the properties underlying our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments, our profitability and the market price of our class A common stock would be negatively impacted. We may change our investment strategy without shareholder consent, which may result in riskier investments than our current investments. As part of our strategy, we may seek to expand our investment activities beyond real estate-related investments. We may change our investment activities at any time without the consent of our shareholders, which could result in our making investments that are different from, and possibly riskier than, our current real estate investments. New investments we may make outside of our area of historical expertise may not perform as well as our current portfolio of real estate investments. We are exposed to the risks involved with making subordinated investments. Our subordinated investments involve the risks attendant to investments consisting of subordinated loan positions. In many cases, management of our investments and our remedies with respect thereto, including the ability to foreclose on or direct decisions with respect to the collateral securing such investments, is subject to the rights of senior lenders and the rights set forth in inter-creditor or servicing agreements. We may not be able to obtain the level of leverage necessary to optimize our return on investment. Our return on investment depends, in part, upon our ability to grow our balance sheet portfolio of invested assets and those of our managed funds through the use of leverage at interest rates that are lower than the interest rates earned on our investments. We generally obtain leverage through the issuance of collateralized debt obligations, or CDOs, repurchase agreements and other borrowings. Our ability to obtain the necessary leverage on attractive terms ultimately depends upon the quality of the portfolio assets that are collateral for our indebtedness. Our failure to obtain and/or maintain leverage at desired levels, or to obtain leverage on attractive terms, could have a material adverse effect on our performance or that of our funds. Moreover, we are dependent upon a few lenders to provide repurchase agreements for our origination or acquisition of loans and investments. Our ability to obtain financing through CDOs is subject to conditions in the debt capital markets, which may be adverse from time to time, that affect the level of investor demand for such securities, which are impacted by factors beyond our control. We are subject to the risks of holding leveraged investments. -2- Leverage creates an opportunity for increased return on equity, but at the same time creates risk. For example, leveraging magnifies changes in the net worth of our managed funds. We and our funds will leverage assets only when there is an expectation that leverage will enhance returns, although we cannot assure you that the use of leverage will prove to be beneficial. Increases in credit spreads in the market generally may adversely affect the market value of our investments. Because borrowings under our repurchase agreements are secured by our investments, the borrowings available to us may decline if the market value of our investments decline. Moreover, we cannot assure you that we and our funds will be able to meet debt service obligations and, to the extent such obligations are not met, there is a risk of loss of some or all of our co-investments and their assets through foreclosure or a financial loss if we or they are required to liquidate assets at a commercially inopportune time to satisfy our debt obligations. Our success depends on the availability of attractive investments and our ability to identify, structure, consummate, manage and realize returns on attractive investments. Our operating results are dependent upon the availability of, as well as our ability to identify, structure, consummate, manage and realize returns on, credit-sensitive investment opportunities. In general, the availability of desirable credit sensitive investment opportunities and, consequently, our balance sheet returns and our funds' investment returns, will be affected by the level and volatility of interest rates, by conditions in the financial markets, by general economic conditions, by the market and demand for credit-sensitive investment opportunities, and by the supply of capital for such investment opportunities. We cannot assure you that we will be successful in identifying and consummating investments which satisfy our rate of return objectives or that such investments, once consummated, will perform as anticipated. In addition, if we are not successful in investing all available equity capital for our funds, the potential revenues we earn will be reduced. We may expend significant time and resources in identifying and pursuing targeted investments, some of which may not be consummated. The real estate investment business is highly competitive. Our success depends on our ability to compete with other providers of capital for real estate investments. Our business is highly competitive. We compete for attractive investments with traditional lending sources, such as insurance companies and banks, as well as other REITs, specialty finance companies and private equity funds with similar investment objectives, which may make it more difficult for us to consummate our target investments. Many of our competitors have greater financial resources than us, which provides them with greater operating flexibility. Our loans and investments may be subject to fluctuations in interest rates which may not be adequately protected, or protected at all, by our hedging strategies. Our current balance sheet investment program emphasizes loans with both "floating" interest rates and fixed interest rates. The fixed interest rate investments are subject to the risk of fluctuations in interest rates. Depending on market conditions, fixed rate assets may become a greater portion of our new loan originations. In such cases, we may employ various hedging strategies to limit the effects of changes in interest rates, including engaging in interest rate swaps, caps, floors and other interest rate derivative products. No strategy can completely insulate us or our funds from the risks associated with interest rate changes and there is a risk that they may provide no protection at all. Hedging transactions involve certain additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot assure you that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us or our funds against the foregoing risks. In addition, cash flow hedges which are not perfectly correlated with a variable rate financing will impact our reported income as gains, and losses on the ineffective portion of such hedges will be recorded. Our loans and investments may be illiquid which will constrain our ability to vary our portfolio of investments. Our real estate investments are relatively illiquid. Such illiquidity may limit our ability to vary our -3- portfolio or our funds' portfolios of investments in response to changes in economic and other conditions. Illiquidity may result from the absence of an established market for investments as well as the legal or contractual restrictions on their resale. In addition, illiquidity may result from the decline in value of a property securing one of our or our funds' investments. We cannot assure you that the fair market value of any of the real property serving as security will not decrease in the future, leaving our or our funds' investments under-collateralized or not collateralized at all, which could impair the liquidity and value, as well as our return on such investments. We may not have control over certain of our loans and investments. Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made. In certain situations, we or our funds may: o acquire investments subject to rights of senior classes and servicers under inter-creditor or servicing agreements; o acquire only a participation in an underlying investment; o co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or o rely on independent third party management or strategic partners with respect to the management of an asset. Therefore, we may not be able to exercise control over the loan or investment. Such financial assets may involve risks not present in investments where senior creditors, servicers or third party controlling investors are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior creditors or servicers whose interests may not be aligned with ours. A third party partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals which are inconsistent with ours and those of our funds, or may be in a position to take action contrary to our or our funds' investment objectives. In addition, we and our funds may, in certain circumstances, be liable for the actions of our third party partners or co-venturers. We may not achieve our targeted rate of return on our investments. We originate or acquire investments based on our estimates or projections of overall rates of return on such investments, which in turn are based on, among other considerations, assumptions regarding the performance of assets, the amount and terms of available financing to obtain desired leverage and the manner and timing of dispositions, including possible asset recovery and remediation strategies, all of which are subject to significant uncertainty. In addition, events or conditions that we have not anticipated may occur and may have a significant effect on the actual rate of return received on an investment. As we acquire or originate investments for our balance sheet portfolio, whether as new additions or as replacements for maturing investments, there can be no assurance that we will be able to originate or acquire investments that produce rates of return comparable to rates on our existing investments. We may not be able to acquire suitable investments for a CDO issuance, or we may not be able to issue CDO securities on attractive terms, which may require us to utilize more costly financing for our investments. We intend to capitalize on opportunities to finance certain of our investments through the issuance of CDOs. During the period that we are acquiring these investments, we intend to finance our purchases through repurchase agreements. We use these repurchase agreements to finance our acquisition of investments until we have accumulated a sufficient quantity of investments, at which time we may refinance these lines through a securitization, such as a CDO issuance. As a result, we are subject to the risk that we will not be able to acquire a sufficient amount of eligible investments to maximize the efficiency of a CDO issuance. In addition, conditions in the capital markets may make the issuance of CDOs less attractive to us when we do have a sufficient pool of collateral. If we are unable to issue a CDO to finance these investments, we may be required to utilize other forms of potentially less attractive financing. We may not be able to find suitable replacement investments for CDOs with reinvestment periods. -4- Some of our CDOs have periods where principal proceeds received from assets securing the CDO can be reinvested for a defined period of time, commonly referred to as a reinvestment period. Our ability to find suitable investments during the reinvestment period that meet the criteria set forth in the CDO documentation and by rating agencies may determine the success of our CDO investments. Our potential inability to find suitable investments may cause, among other things, lower returns, interest deficiencies, hyper-amortization of the senior CDO liabilities and may cause us to reduce the life of our CDOs and accelerate the amortization of certain fees and expenses. The use of CDO financings with over-collateralization and interest coverage requirements may have a negative impact on our cash flow. The terms of CDOs will generally provide that the principal amount of investments must exceed the principal balance of the related bonds by a certain amount and that interest income exceeds interest expense by a certain amount. Generally, CDO terms provide that, if certain delinquencies and/or losses or other factors cause a decline in collateral or cash flow levels, the cash flow otherwise payable on our retained subordinated classes may be redirected to repay classes of CDOs senior to ours until the issuer or the collateral is in compliance with the terms of the governing documents. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive net income from assets pledged to secure CDOs. We cannot assure you that the performance tests will be satisfied. With respect to future CDOs we may issue, we cannot assure you, in advance of completing negotiations with the rating agencies or other key transaction parties as to the actual terms of the delinquency tests, over-collateralization and interest coverage terms, cash flow release mechanisms or other significant factors upon which net income to us will be calculated. Failure to obtain favorable terms with regard to these matters may adversely affect the availability of net income to us. If our investments fail to perform as anticipated, our over-collateralization, interest coverage or other credit enhancement expense associated with our CDO financings will increase. We may be required to repurchase loans that we have sold or to indemnify holders of our CDOs. If any of the loans we originate or acquire and sell or securitize through CDOs do not comply with representations and warranties that we make about certain characteristics of the loans, the borrowers and the underlying properties, we may be required to repurchase those loans or replace them with substitute loans. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically require a significant allocation of working capital to carry on our books, and our ability to borrow against such assets is limited. Any significant repurchases or indemnification payments could adversely affect our financial condition and operating results. The commercial mortgage and mezzanine loans we originate or acquire and the commercial mortgage loans underlying the CMBS in which we invest are subject to delinquency, foreclosure and loss, which could result in losses to us. Our commercial mortgage and mezzanine loans are secured by commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged; any need to address environmental contamination at the property; changes in national, regional or local economic conditions and/or specific industry segments; declines in regional or local real estate values and declines in regional or local rental or occupancy rates; increases in interest rates, real estate tax rates and other operating expenses; and changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances. Our investments in subordinated CMBS and similar investments are subject to losses. In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, and then by the most junior security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and -5- any classes of securities junior to those in which we invest, we may not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related mortgage-backed securities, the securities in which we invest may incur significant losses. The prices of lower credit quality CMBS are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns and underlying borrower developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality CMBS because the ability of borrowers to make principal and interest payments on the mortgages underlying the mortgage-backed securities may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities. We may invest in troubled assets that are subject to a higher degree of financial risk. We may make investments in non-performing or other troubled assets that involve a higher degree of financial risk. We cannot assure you that our investment objectives will be realized or that there will be any return on our investment. Furthermore, investments in properties subject to work-out conditions or under bankruptcy protection laws may, in certain circumstances, be subject to additional potential liabilities that could exceed the value of our original investment, including equitable subordination and/or disallowance of claims or lender liability. The impact of the events of September 11, 2001 and the resulting effect on terrorism insurance expose us to certain risks. The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the U.S. and its allies may have a further adverse impact on the U.S. financial markets and the economy generally. We cannot predict the severity of the effect that such future events would have on the U.S. financial markets, the economy or our business. In addition, the events of September 11, 2001 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Insurance Act of 2002, or TRIA, and the subsequent enactment of the Terrorism Risk Insurance Extension Act of 2005, which extended the TRIA through the end of 2007, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market's overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties that we invest in are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment. The economic impact of any future terrorist attacks could also adversely affect the credit quality of some of our loans and investments. Some of our loans and investments will be more susceptible to such adverse effects than others, such as hotel loans, which may experience a significant reduction in occupancy rates following any future attacks. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our results of operations. We are subject to risks related to our international investments. We make investments in foreign countries. Investing in foreign countries involves certain risks that may not exist when investing in the United States. The risks involved in foreign investments include: o exposure to local economic conditions, foreign exchange restrictions and restrictions on the withdrawal of foreign investment and earnings, investment restrictions or requirements, expropriations of property and changes in foreign taxation structures; -6- o potential adverse changes in the diplomatic relations of foreign countries with the United States and government policies against investments by foreigners; o changes in foreign regulations; o hostility from local populations, potential instability of foreign governments and risks of insurrections, terrorist attacks, war or other military action; o fluctuations in foreign exchange rates; o changes in social, political, legal and other conditions affecting our international investment; o logistical barriers to our timely receiving the financial information relating to our international investments that may need to be included in our periodic reporting obligations as a public company; and o lack of uniform accounting standards (including availability of information in accordance with U.S. generally accepted accounting principles). Unfavorable legal, regulatory, economic or political changes such as those described above could adversely affect our financial condition and results of operations. There are increased risks involved with construction lending activities. We originate loans for the construction of commercial and residential use properties. Construction lending generally is considered to involve a higher degree of risk than to other types of lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion or operation of the project for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity. Some of our investments and investment opportunities are in synthetic form. Synthetic investments are contracts between parties whereby payments are exchanged based upon the performance of an underlying reference obligation. These investments can take the form of either a total return swap, contracts in which one party agrees to make payments that replicate the total return of a defined underlying asset, typically in return for an upfront payment from the counterparty who essentially bears the risk of performance of the referenced asset, or a credit default swap, where one counterparty receives payments in return for assuming the risk of defaults and losses corresponding to the reference obligation. In addition to the performance of the reference obligation, these synthetic interests carry the risk of the counterparty not performing its contractual obligations. Market standards, the GAAP accounting methodology and tax regulations related to these investments are evolving, and we cannot be certain that their evolution will not adversely impact the value or sustainability of these investments. Furthermore, our ability to invest in synthetic investments, other than through a taxable REIT subsidiary, may be severely limited by the REIT qualification requirements because total return swaps and other synthetic investment contracts generally are not qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests. Risks Related to Our Investment Management Business We are subject to risks and uncertainties associated with operating our investment management business, and we may not achieve from this business the investment returns that we expect. We will encounter risks and difficulties as we operate our investment management business. In order to achieve our goals as an investment manager, we must: -7- o manage our funds successfully by investing a majority of our funds' capital in suitable investments that meet the respective fund's specified investment criteria; o actively manage the assets in our portfolios in order to realize targeted performance; o incentivize our management and professional staff to the task of developing and operating the investment management business; and o structure, sponsor and capitalize future funds and other investment products under our management that provide investors with attractive investment opportunities. If we do not successfully operate our investment management business to achieve the investment returns that we or the market anticipates, our results of operations may be adversely impacted. We may pursue fund management opportunities related to other classes of investments where we do not have prior investment experience. We may expand our fund management business to involve other investment classes where we do not have prior investment experience. We may find it difficult to attract third party investors without a performance track record involving such investments. Even if we attract third party investment, there can be no assurance that we will be successful in deploying the capital to achieve targeted returns on the investments. We face substantial competition from established participants in the private equity market as we offer mezzanine and other funds to third party investors. We face significant competition from large financial and other institutions that have proven track records in marketing and managing private equity investment funds and otherwise have a competitive advantage over us because they have access to pre-existing third party investor networks into which they can channel competing investment opportunities. If our competitors offer investment products that are competitive with the mezzanine and other fund investments offered by us, we will find it more difficult to attract investors and to capitalize our mezzanine and other funds. Our funds are subject to the risk of defaults by third party investors on their capital commitments. The capital commitments made by third party investors to our funds represent unsecured promises by those investors to contribute cash to the funds from time to time as investments are made by the funds. Accordingly, we are subject to general credit risks that the investors may default on their capital commitments. If defaults occur, we may not be able to close loans and investments we have identified and negotiated which could materially and adversely affect the funds' investment program or make us liable for breach of contract, in either case to the detriment of our franchise in the private equity market. Risks Related to Our Company We are dependent upon our senior management team to develop and operate our business. Our ability to develop and operate our business depends to a substantial extent upon the experience, relationships and expertise of our senior management and key employees. We cannot assure you that these individuals will remain in our employ. The employment agreement with our chief executive officer, John R. Klopp, expires on December 31, 2008, unless further extended. The employment agreement with our chief operating officer, Stephen D. Plavin, expires on December 28, 2008, unless further extended by us to 2009. The employment agreement with our chief financial officer, Geoffrey G. Jervis, expires on December 31, 2009, unless further extended by us to 2010. The loss of the services of our senior management and key employees could have a material adverse effect on our operations. There may be conflicts between the interests of our third party investment management vehicles and us. -8- We are subject to a number of potential conflicts between our interests and the interests of our third party investment management vehicles. We are subject to potential conflicts of interest in the allocation of investment opportunities between our balance sheet and our third party investment management vehicles. In addition, we may make investments that are senior or junior to, participations in, or have rights and interests different from or adverse to, the investments made by our third party investment management vehicles. Our interests in such investments may conflict with the interests of our third party investment management vehicles in related investments at the time of origination or in the event of a default or restructuring of the investment. Finally, our officers and employees may have conflicts in allocating their time and services among us and our third party investment management vehicles. We must manage our portfolio in a manner that allows us to rely on an exclusion from registration under the Investment Company Act of 1940 in order to avoid the consequences of regulation under that Act. We rely on an exclusion from registration as an investment company afforded by Section 3(c)(5)(C) of the Investment Company Act of 1940. Under this exclusion, we are required to maintain, on the basis of positions taken by the SEC staff in interpretive and no-action letters, a minimum of 55% of the value of the total assets of our portfolio in "mortgages and other liens on and interests in real estate," which we refer to as "Qualifying Interests," and a minimum of 80% in Qualifying Interests and real estate-related assets. Because registration as an investment company would significantly affect our ability to engage in certain transactions or to organize ourselves in the manner we are currently organized, we intend to maintain our qualification for this exclusion from registration. In the past, when required due to the mix of assets in our balance sheet portfolio, we have purchased all of the outstanding interests in pools of whole residential mortgage loans, which we treat as Qualifying Interests based on SEC staff positions. Investments in such pools of whole residential mortgage loans may not represent an optimum use of our investable capital when compared to the available investments we target pursuant to our investment strategy. We continue to analyze our investments and may acquire other pools of whole loan residential mortgage-backed securities when and if required for compliance purposes. We treat our investments in CMBS, B Notes and mezzanine loans as Qualifying Interests for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C) to the extent such treatment is consistent with guidance provided by the SEC or its staff. In the absence of such guidance that otherwise supports the treatment of these investments as Qualifying Interests, we will treat them, for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C), as real estate-related assets or miscellaneous assets, as appropriate. If our portfolio does not comply with the requirements of the exclusion we rely upon, we could be forced to alter our portfolio by selling or otherwise disposing of a substantial portion of the assets that are not Qualifying Interests or by acquiring a significant position in assets that are Qualifying Interests. Altering our portfolio in this manner may have an adverse effect on our investments if we are forced to dispose of or acquire assets in an unfavorable market and may adversely affect our stock price. If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company. We may expand our franchise through business acquisitions and the recruitment of financial professionals, which may present additional costs and other challenges and may not prove successful. Our business plan contemplates expansion of our franchise into complementary investment strategies involving other credit-sensitive structured financial products. We may undertake such expansion through business acquisitions or the recruitment of financial professionals with experience in other products. We may also expend a substantial amount of time and capital pursuing opportunities to expand into complementary investment strategies that we do not consummate. The expansion of our operations could place a significant strain on our management, financial and other resources. Our ability to manage future expansion will depend upon our ability to monitor operations, maintain effective quality controls and significantly expand our internal management and technical and accounting systems, all of which could result in higher operating expenses and could adversely affect our current business, financial condition and results of operations. We cannot assure you that we will be able to identify and integrate businesses or professional teams we acquire to pursue complementary investment strategies and expand our business. Moreover, any decision to pursue -9- expansion into businesses with complementary investment strategies will be in the discretion of our management and may be consummated without prior notice or shareholder approval. In such instances, shareholders will be relying on our management to assess the relative benefits and risks associated with any such expansion. Risks Relating to Our Class A Common Stock Because a limited number of shareholders, including members of our management team, own a substantial number of our shares, they may make decisions or take actions that may be detrimental to your interests. By virtue of their direct and indirect share ownership, John R. Klopp, a director and our president and chief executive officer, Craig M. Hatkoff, a director and former officer, and other shareholders indirectly owned by trusts for the benefit of our chairman of the board, Samuel Zell, have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to shareholders for approval, including the election of our directors, amendments to our charter, mergers, sales of assets and other acquisitions or sales. The influence exerted by these shareholders over our affairs might not be consistent with the interests of some or all of our other shareholders. We cannot assure you that these shareholders will not exercise their influence over us in a manner detrimental to your interests. As of September 30, 2006, these shareholders collectively own and control 2,225,864 shares of our class A common stock representing approximately 14.2% of our outstanding class A common stock. This concentration of ownership may have the effect of delaying or preventing a change in control of our company, including transactions in which you might otherwise receive a premium for your class A common stock, and might negatively affect the market price of our class A common stock. W. R. Berkley Corporation owns 2,000,000 shares of our class A common stock which represents 13.0% of our outstanding class A common stock. An officer of W. R. Berkley serves on our board of directors and, therefore, has the power to significantly influence our affairs. Through its significant ownership of our class A common stock, W. R. Berkley may have the ability to influence matters submitted for shareholder approval. The influence exerted by W. R. Berkley over our affairs might not be consistent with the interests of some or all of our other shareholders. Some provisions of our charter and bylaws and Maryland law may deter takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price. Some of the provisions of our charter and bylaws and Maryland law discussed below could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders by providing them with the opportunity to sell their shares at a premium to the then current market price. Issuance of Preferred Stock Without Shareholder Approval. Our charter authorizes our board of directors to authorize the issuance of up to 100,000,000 shares of preferred stock and up to 100,000,000 shares of class A common stock. Our charter also authorizes our board of directors, without shareholder approval, to classify or reclassify any unissued shares of our class A common stock and preferred stock into other classes or series of stock and to amend our charter to increase or decrease the aggregate number of shares of stock of any class or series that may be issued. Our board of directors, therefore, can exercise its power to reclassify our stock to increase the number of shares of preferred stock we may issue without shareholder approval. Preferred stock may be issued in one or more series, the terms of which may be determined without further action by shareholders. These terms may include preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption. The issuance of any preferred stock, however, could materially adversely affect the rights of holders of our class A common stock and, therefore, could reduce the value of the class A common stock. In addition, specific rights granted to future holders of our preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The power of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current shareholders' control. Advance Notice Bylaw. Our bylaws contain advance notice procedures for the introduction of business and the nomination of directors. These provisions could discourage proxy contests and make it more difficult for you and other shareholders to elect shareholder-nominated directors and to propose and approve shareholder proposals opposed by management. Maryland Takeover Statutes. We are subject to the Maryland Business Combination Act which could delay or prevent an unsolicited takeover of us. The statute substantially restricts the ability of third parties who -10- acquire, or seek to acquire, control of us to complete mergers and other business combinations without the approval of our board of directors even if such transaction would be beneficial to shareholders. "Business combinations" between such a third party acquiror or its affiliate and us are prohibited for five years after the most recent date on which the acquiror or its affiliate becomes an "interested shareholder." An "interested shareholder" is defined as any person who beneficially owns 10 percent or more of our shareholder voting power or an affiliate or associate of ours who, at any time within the two-year period prior to the date interested shareholder status is determined, was the beneficial owner of 10 percent or more of our shareholder voting power. If our board of directors approved in advance the transaction that would otherwise give rise to the acquiror or its affiliate attaining such status, such as the issuance of shares of our class A common stock to W. R. Berkley, the acquiror or its affiliate would not become an interested shareholder and, as a result, it could enter into a business combination with us. Our board of directors could choose not to negotiate with an acquirer if the board determined in its business judgment that considering such an acquisition was not in our strategic interests. Even after the lapse of the five-year prohibition period, any business combination with an interested shareholder must be recommended by our board of directors and approved by the affirmative vote of at least: o 80% of the votes entitled to be cast by shareholders; and o two-thirds of the votes entitled to be cast by shareholders other than the interested shareholder and affiliates and associates thereof. The super-majority vote requirements do not apply if the transaction complies with a minimum price requirement prescribed by the statute. The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that an interested shareholder becomes an interested shareholder. Our board of directors has exempted any business combination involving family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell and his family. As a result, these persons and W. R. Berkley may enter into business combinations with us without compliance with the super-majority vote requirements and the other provisions of the statute. We are subject to the Maryland Control Share Acquisition Act. With certain exceptions, the Maryland General Corporation Law provides that "control shares" of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiring person or by our officers or directors who are our employees, and may be redeemed by us. "Control shares" are voting shares which, if aggregated with all other shares owned or voted by the acquirer, would entitle the acquirer to exercise voting power in electing directors within one of the specified ranges of voting power. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions, including an undertaking to pay expenses, may compel our board to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the "control shares" in question. If no request for a meeting is made, we may present the question at any shareholders' meeting. If voting rights are not approved at the shareholders' meeting or if the acquiring person does not deliver the statement required by Maryland law, then, subject to certain conditions and limitations, we may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. If voting rights for control shares are approved at a shareholders' meeting and the acquirer may then vote a majority of the shares entitled to vote, then all other shareholders may exercise appraisal rights. The fair value of the shares for purposes of these appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if we are a party to the transaction, nor does it apply to acquisitions approved or exempted by our charter or bylaws. Our bylaws contain a provision exempting certain holders identified in our bylaws from this statute which exemptions extend to W. R. Berkley, family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell and his family. We are also subject to the Maryland Unsolicited Takeovers Act which permits our board of directors, among other things and notwithstanding any provision in our charter or bylaws, to elect on our behalf to stagger the -11- terms of directors, to increase the shareholder vote required to remove a director and to provide that shareholder-requested meetings may be called only upon the request of shareholders entitled to cast at least a majority of the votes entitled to be cast at the meeting. Such an election would significantly restrict the ability of third parties to wage a proxy fight for control of our board of directors as a means of advancing a takeover offer. If an acquirer was discouraged from offering to acquire us, or prevented from successfully completing a hostile acquisition, you could lose the opportunity to sell your shares at a favorable price. The market value of our class A common stock may be adversely affected by many factors. As with any public company, a number of factors may adversely influence the price of our class A common stock, many of which are beyond our control. These factors include: o the level of institutional interest in us; o the perception of REITs generally and REITs with portfolios similar to ours, in particular, by market professionals; o the attractiveness of securities of REITs in comparison to other companies; and o the market's perception of our growth potential and potential future cash dividends. An increase in market interest rates may lead prospective purchasers of our class A common stock to expect a higher dividend yield, which would adversely affect the market price of our class A common stock. One of the factors that will influence the price of our class A common stock will be the dividend yield on our stock (distributions as a percentage of the price of our stock) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of our class A common stock to expect a higher dividend yield, which could adversely affect the market price of our class A common stock. Your ability to sell a substantial number of shares of our class A common stock may be restricted by the low trading volume historically experienced by our class A common stock. Although our class A common stock is listed on the New York Stock Exchange, the daily trading volume of our shares of class A common stock has historically been lower than the trading volume for certain other companies. As a result, the ability of a holder to sell a substantial number of shares of our class A common stock in a timely manner without causing a substantial decline in the market of the shares, especially by means of a large block trade, may be restricted by the limited trading volume of the shares of our class A common stock. Risks Related to our REIT Status Our charter does not permit any individual to own more than over 2.5% of our class A common stock, and attempts to acquire our class A common stock in excess of the 2.5% limit would be void without the prior approval of our board of directors. For the purpose of preserving our qualification as a REIT for federal income tax purposes, our charter prohibits direct or constructive ownership by any individual of more than 2.5% of the lesser of the total number or value of the outstanding shares of our class A common stock as a means of preventing ownership of more than 50% of our class A common stock by five or fewer individuals. The charter's constructive ownership rules are complex and may cause the outstanding class A common stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual. As a result, the acquisition of less than 2.5% of our outstanding class A common stock by an individual or entity could cause an individual to own constructively in excess of 2.5% of our outstanding class A common stock, and thus be subject to the charter's ownership limit. There can be no assurance that our board of directors, as permitted in the charter, will increase this ownership limit in the future. Any attempt to own or transfer shares of our class A common stock in excess of the ownership limit without the consent of our board of directors will be void, and will result in the shares being transferred by operation of law to a charitable trust, and the person who acquired such excess shares will not be entitled to any distributions thereon or to vote such excess shares. Our charter contains a provision that exempts certain of our officers, directors and their related persons from this ownership limit and we increased the limit for William R. Berkley to 6.0% and for one other major -12- shareholder of W. R. Berkley identified to us to 4.0%. The 2.5% ownership limit may have the effect of precluding a change in control of us by a third party without the consent of our board of directors, even if such change in control would be in the interest of our shareholders or would result in a premium to the price of our class A common stock (and even if such change in control would not reasonably jeopardize our REIT status). The ownership limit exemptions and the reset limits granted to date would limit our board of directors' ability to reset limits in the future and at the same time maintain compliance with the REIT qualification requirement prohibiting ownership of more than 50% of our class A common stock by five or fewer individuals. There are no assurances that we will be able to pay dividends in the future. We intend to pay quarterly dividends and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances that we will be able to pay dividends in the future. In addition, some of our distributions may include a return of capital, which would reduce the amount of capital available to operate our business. We will be dependent on external sources of capital to finance our growth. As with other REITs, but unlike corporations generally, our ability to finance our growth must largely be funded by external sources of capital because we generally will have to distribute to our shareholders 90% of our taxable income in order to qualify as a REIT, including taxable income where we do not receive corresponding cash. Our access to external capital will depend upon a number of factors, including general market conditions, the market's perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our class A common stock. If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and face a substantial tax liability. Our taxable REIT subsidiaries will be subject to income tax. We expect to continue to operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then: o we would be taxed as a regular domestic corporation, which under current laws, among other things, means being unable to deduct distributions to shareholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates; o any resulting tax liability could be substantial, could have a material adverse effect on our book value and would reduce the amount of cash available for distribution to shareholders; and o unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and thus, our cash available for distribution to shareholders would be reduced for each of the years during which we did not qualify as a REIT. Income from our fund management business is expected to be realized by one of our taxable REIT subsidiaries, and, accordingly, will be subject to income tax. Complying with REIT requirements may cause us to forego otherwise attractive opportunities. In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature of our investments in commercial real estate and related assets, the amounts we distribute to our shareholders and the ownership of our stock. We may also be required to -13- make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits. Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments. In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investments in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer unless we and such issuer jointly elect to be treated as a "taxable REIT subsidiary" under the Code. The total value of all of our investments in taxable REIT subsidiaries cannot exceed 20% of the value of our total assets. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. Complying with REIT requirements may force us to borrow to make distributions to shareholders. From time to time, our taxable income may be greater than our cash flow available for distribution to shareholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Internal Revenue Code. Thus, we could be required to borrow funds, sell a portion of our assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity. The "taxable mortgage pool" rules may limit the manner in which we effect future securitizations. Certain of our securitizations could be considered taxable mortgage pools for federal income tax purposes. Since we conduct our operations to qualify as a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we should not be adversely affected by the characterization of the securitization as a taxable mortgage pool (assuming that we do not have any shareholders who might cause a corporate income tax to be imposed upon us by reason of our owning a taxable mortgage pool). We would be precluded, however, from selling to outside investors equity interests in such securitizations or from selling any debt securities issued in connection with such securitizations that might be considered to be equity interests for tax purposes. These limitations will preclude us from using certain techniques to maximize our returns from securitization transactions. If the securitization vehicles in which we participate were considered a taxable mortgage pool, shareholders who are tax-exempt and shareholders who are not United States persons may be required to pay tax on their share of any excess inclusion income. -14- -----END PRIVACY-ENHANCED MESSAGE-----