-----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, AsPwfUhl4k0Ow1wnGbzPIWRrdtGscXfPIk7RJv+WNCtD5NYTNDfjEyascRTFX6ZN C52l92UNjaHEjhMSQbZdsg== 0000950123-97-008546.txt : 19971015 0000950123-97-008546.hdr.sgml : 19971015 ACCESSION NUMBER: 0000950123-97-008546 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971014 SROS: NONE GROUP MEMBERS: PRUDENTIAL INSURANCE CO OF AMERICA GROUP MEMBERS: STRATEGIC VALUE INVESORS INTERNATIONAL GROUP MEMBERS: STRATEGIC VALUE INVESTORS SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SMITH CHARLES E RESIDENTIAL REALTY INC CENTRAL INDEX KEY: 0000919004 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 541681655 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-48481 FILM NUMBER: 97695348 BUSINESS ADDRESS: STREET 1: 2345 CRYSTAL DR CITY: CRYSTAL CITY ARLINGT STATE: VA ZIP: 22202 BUSINESS PHONE: 7039208500 MAIL ADDRESS: STREET 1: 2345 CRYSTAL DRIVE STREET 2: CRYSTAL CITY CITY: ARLINGTON STATE: VA ZIP: 22202 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL INSURANCE CO OF AMERICA CENTRAL INDEX KEY: 0000729057 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 221211670 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: PRUDENTIAL PLZ STREET 2: 751 BROAD STREET CITY: NEWARK STATE: NJ ZIP: 07102-3777 SC 13D 1 SCHEDULE 13D 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D (Rule 13d-101) Under the Securities Exchange Act of 1934 (Amendment No. )* CHARLES E. SMITH RESIDENTIAL REALTY, INC. - -------------------------------------------------------------------------------- (Name of Issuer) Common Stock, $.01 par value ---------------------------------------- (Title of Class of Securities) 832197107 --------- (CUSIP Number) Ellen Kendall, Esq. Gregory P. Patti, Esq. c/o Prudential Real Estate Investors O'Melveny & Myers LLP 8 Campus Drive The Citicorp Center Parsippany, New Jersey 07054 153 East 53rd Street, 54th Floor (973) 683-1696 New York, New York 10022-4611 (212) 326-2000 John Westney, Esq. The Prudential Realty Group One Ravinia Drive, Suite 1400 Atlanta, Georgia 30346 (770) 395-8466 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) October 3, 1997 ------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box |_| Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. - ---------- * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). 2 CUSIP No. 832197107 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON THE PRUDENTIAL INSURANCE COMPANY OF AMERICA S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (Intentionally Omitted) - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_| - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) |_| - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION NEW JERSEY - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES BENEFICIALLY 1,450,000 SHARES OWNED BY EACH REPORTING PERSON 8 SHARED VOTING POWER 0 SHARES 9 SOLE DISPOSITIVE POWER 1,450,000 SHARES 10 SHARED DISPOSITIVE POWER 0 SHARES - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,450,000 SHARES - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |X| - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 9.7% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON IC, CO, IA - -------------------------------------------------------------------------------- Page 2 of 18 Pages 3 CUSIP No. 832197107 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON STRATEGIC VALUE INVESTORS, LLC S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (Intentionally Omitted) - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_| - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) |_| - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES BENEFICIALLY 0 SHARES OWNED BY EACH REPORTING PERSON 8 SHARED VOTING POWER 0 SHARES 9 SOLE DISPOSITIVE POWER 0 SHARES 10 SHARED DISPOSITIVE POWER 0 SHARES - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0 SHARES - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |X| - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON 00 - -------------------------------------------------------------------------------- Page 3 of 18 Pages 4 CUSIP No. 832197107 - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (Intentionally Omitted) - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) |X| (b) |_| - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) |_| - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES BENEFICIALLY 0 SHARES OWNED BY EACH REPORTING PERSON 8 SHARED VOTING POWER 0 SHARES 9 SOLE DISPOSITIVE POWER 0 SHARES 10 SHARED DISPOSITIVE POWER 0 SHARES - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0 SHARES - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES |X| - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 0% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON 00 - -------------------------------------------------------------------------------- Page 4 of 18 Pages 5 ITEM 1. SECURITY AND THE ISSUER This Statement on Schedule 13D (this "Statement") relates to the common stock, par value $.01 per share (the "Shares"), of Charles E. Smith Residential Realty, Inc. (the "Company"). The name and address of the principal executive offices of the Company is 2345 Crystal Drive, Crystal City, Virginia 22202. ITEM 2. IDENTITY AND BACKGROUND This Statement is filed by The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), Strategic Value Investors LLC, a Delaware limited liability company ("SVI"), and Strategic Value Investors International LLC, a Delaware limited liability company ("SVI International"; and collectively with Prudential and SVI, the "Reporting Parties"), in each case, with respect to the acquisition by the Reporting Parties of Shares from the Company on October 3, 1997 (the "Closing Date"). Prudential is an insurance company and the address of its principal business and principal office is Prudential Plaza, 751 Broad Street, Newark, New Jersey 07102. Each of SVI and SVI International is a limited liability company formed to invest in shares or their equivalents of public and private real estate companies and real estate investment trusts (collectively, "REITs") or interests in partnerships in which REITs own general partnership interests or other significant partnership interests. Prudential owns 49% of the membership interests in SVI and New York State Teachers' Retirement System, a New York pension fund created and existing by virtue of the New York State Education Law and endowed with the powers and privileges of a corporation pursuant to Section 502 thereof, Houston Municipal Employees Pension System, a Texas municipal pension system, Chesterfield Investment Company, Inc., a Delaware corporation, 1199 Health Care Employees' Pension Fund, a New York trust, Dallas Police and Fire Pension System, a Texas trust, and Illinois Municipal Retirement Fund, an Illinois qualified pension plan under Section 401(a) of the Internal Revenue Code of 1986, as amended, collectively own 51% of the membership interests in SVI. The address of the principal business and principal office of SVI is 8 Campus Drive, 4th Floor, Parsippany, New Jersey 07054. SCPG Holdings Pte. Ltd., a corporation organized under the laws of Singapore, owns 66 2/3% of the membership Page 5 of 18 Pages 6 interests in SVI International and Crescent Holding GmbH, a corporation organized under the laws of Austria, owns 331/3% of the membership interests in SVI International. Prudential has committed to make parallel investments with investments made by SVI International (in such role, the "Prudential Co-Investor") such that the Prudential Co-Investor's investment is equal to 49% of the sum of (i) the Prudential Co-Investor's investment and (ii) SVI International's investment. In addition, The Prudential Investment Company, a wholly-owned subsidiary of Prudential and the investment advisor of each of SVI and SVI International ("PIC"), has agreed that it is PIC's intention that the investments of SVI, on the one hand, and SVI International and the Prudential Co-Investor, on the other, will be made in parallel. The address of the principal business and principal office of SVI International is c/o Coutts (Cayman) Limited, Coutts House, P.O. Box 707, Grand Cayman, British West Indies. As described in Item 5 below, Prudential (in its capacity as the Prudential Co-Investor), SVI and SVI International own of record 152,250 Shares, 1,139,286 Shares and 158,464 Shares, respectively. Prudential may be deemed solely to beneficially own (i) the Shares owned of record by it in its capacity as the Prudential Co-Investor and (ii) the Shares owned of record by each of SVI and SVI International by virtue of the ability of PIC to vote and dispose of such Shares pursuant to certain investment management agreements described in Item 6 hereto. During the past five years, none of the Reporting Parties has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). During the past five years, none of the Reporting Parties has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. Certain information required by Item 2 concerning the persons identified in General Instruction C to Schedule 13D with respect to the Reporting Parties is set forth on Schedule A hereto, which Schedule A is incorporated herein by reference. To the knowledge of each Reporting Party, during the past five years none of such persons has been (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) a party to a Page 6 of 18 Pages 7 civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION Pursuant to a Purchase Agreement (the "Purchase Agreement") dated as of September 17, 1997 between the Company and Prudential, Prudential agreed to acquire from the Company 1,450,000 Shares and 1,216,666 shares of the Company's Series B Cumulative Redeemable Preferred Stock, $.01 par value (the "Preferred Shares"), for an aggregate purchase price of $75,999,981. Pursuant to an Assignment and Assumption of Acquisition Rights dated as of October 2, 1997 (the "Assignment Agreement"), Prudential (i) assigned the right to purchase 1,139,286 Shares and 955,952 Preferred Shares to SVI and 158,464 Shares and 132,964 Preferred Shares to SVI International and (ii) retained, as the Prudential Co-Investor, the right to purchase 152,250 Shares and 127,750 Preferred Shares. The Purchase Agreement and the Assignment Agreement are described in Item 6 hereto and are attached hereto at Exhibits I and II, respectively. As described in Item 5, the Shares issuable upon the conversion of the Preferred Shares are not deemed to be beneficially owned by any of the Reporting Parties for the purposes of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The 152,250 Shares owned of record by Prudential were purchased from the Company on October 3, 1997 for an aggregate purchase price of $4,339,125. The source of the funds to pay the purchase price was the capital of Prudential. The 1,139,286 Shares owned of record by SVI were purchased from the Company on October 3, 1997 for an aggregate purchase price of $32,469,651. The source of the funds to pay the purchase price was the capital of SVI available for investment. The 158,464 Shares owned of record by SVI International were purchased from the Company on October 3, 1997 for an aggregate purchase price of $4,516,224. The source of the funds to pay the purchase price was the capital of SVI International available for investment. ITEM 4. PURPOSE OF TRANSACTION Prudential, SVI and SVI International acquired and are holding the Shares and Preferred Shares for investment purposes and without the intention of effecting a change in control of the Company. Notwithstanding the foregoing, depending on market conditions, any of the Reporting Parties may choose to acquire additional Shares and Preferred Shares Page 7 of 18 Pages 8 (subject to the restrictions set forth in the next paragraph) or dispose of some or all of its Shares and Preferred Shares. In connection with the transactions contemplated by the Purchase Agreement and the authorization and the issuance of the Preferred Shares, the Company adopted the Series B Preferred Articles Supplementary substantially in the form set forth as Exhibit A to the Purchase Agreement. In addition, the Company's Amended and Restated Articles of Incorporation (the "Articles") provide for certain ownership limitations that would have prohibited the Reporting Parties from acquiring Shares and Preferred Shares (which Preferred Shares are convertible, in certain circumstances, into Shares on a one-for-one basis as set forth in the Series B Preferred Articles Supplementary) that would have (but for the waiver described in the immediately following sentence) exceeded 9.8% of the outstanding Shares (assuming for the purposes of such calculation, that the Preferred Shares are immediately convertible into Shares). In connection with the transactions contemplated by the Purchase Agreement, the board of directors of the Company issued a Waiver of Ownership Limitations (which Waiver of Ownership Limitations is set forth as Exhibit C to the Purchase Agreement) permitting the purchase of the Shares and Preferred Shares pursuant to the Purchase Agreement; provided, among other things, that the Reporting Parties do not convert the Preferred Shares such that the Reporting Parties beneficially own in excess of 9.8% of the Shares. Except as set forth above, no Reporting Party, nor to any Reporting Party's knowledge, any of the persons identified on Schedule A, has any plans or proposals that would result in or relate to any of the transactions described in paragraphs (a) through (j) of Item 4 of Schedule 13D. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER (a) Prudential may be deemed to beneficially own 1,450,000 Shares, or approximately 9.7% of the 14,895,693 Shares issued and outstanding as of the Closing Date (after giving effect to the issuance to Prudential, SVI and SVI International of 1,450,000 Shares on the Closing Date). Of such 1,450,000 Shares, Prudential (i) owns 152,250 of such Shares beneficially and of record in its capacity as the Prudential Co-Investor, (ii) may be deemed to beneficially own 1,139,286 of such Shares (which Shares are owned of record by SVI) by virtue of the ability of PIC to vote and dispose of such Shares pursuant to an Investment Advisory Agreement dated as of October 2, 1997 between SVI and PIC (the "SVI Investment Advisory Agreement") and (iii) may be deemed to beneficially own 158,464 of such Shares (which Shares are owned of record by SVI International) by virtue of the ability of PIC to vote and dispose of such Shares Page 8 of 18 Pages 9 pursuant to an Investment Advisory Agreement dated as of October 2, 1997 among SVI International, PIC, Prudential and Strategic Value Investors International Ltd. ("SVI Ltd."), a Cayman islands company and a wholly-owned subsidiary of Prudential (the "SVI International Investment Advisory Agreement"). Each of the SVI Investment Advisory Agreement and the SVI International Investment Advisory Agreement is described in Item 6 hereto and is attached hereto at Exhibit V and Exhibit VII, respectively. SVI and SVI International do not beneficially own the Shares owned of record by them because they do not have the power to vote or dispose such Shares. Prudential Securities Incorporated, an indirect wholly-owned subsidiary of Prudential ("PSI"), beneficially owns on the date hereof 500 Shares in certain discretionary accounts on behalf of clients of PSI. Prudential disclaims beneficial ownership of such Shares because the management of PSI, and not Prudential, directs the disposition and/or voting, if any, of such Shares. If all of the Preferred Shares owned of record were permitted to be converted into Shares pursuant to the Articles, Prudential would be deemed to beneficially own 2,666,666 Shares or 16.6% of the 16,112,359 Shares that would be outstanding upon the conversion of such Preferred Shares (based on the 14,895,693 Shares outstanding on the Closing Date). Because the Articles prohibit the conversion of the Preferred Shares to the extent described in Item 4, the Shares that would otherwise be issuable upon the conversion of the Preferred Shares are not deemed to be beneficially owned by the Reporting Parties pursuant to Section 13 of the Exchange Act. (b) Prudential has the sole power to vote or direct the vote and the sole power to dispose or direct the disposition of the 1,450,000 Shares owned of record by Prudential, SVI and SVI International. Page 9 of 18 Pages 10 (c) Except as specified above in Item 3, none of the Reporting Parties has effected any transactions in the Shares during the past 60 days. (d) Not applicable. (e) Not applicable. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF ISSUER As described in Item 3 above, Prudential and the Company entered into the Purchase Agreement as of September 17, 1997, pursuant to which the Company agreed to sell 1,450,000 Shares and 1,216,666 Preferred Shares to Prudential and certain assignees of Prudential, including SVI and SVI International. The Purchase Agreement contains customary representations and warranties, covenants and conditions of or with respect to Prudential and the Company. The Purchase Agreement also contains, among other things, (i) the covenant of the Company to provide to Prudential, SVI and SVI International, during the period ending on the earlier of January 1, 2003 and the first date upon which the Shares sold pursuant to the Purchase Agreement, together with the Shares into which the Preferred Shares sold pursuant to the Purchase Agreement are convertible, have an aggregate market value of less than $30 million, non-confidential operating information of the same general nature as the Company provides to financial analysts, substantially concurrently with the provision of such information to financial analysts, (ii) the covenant of the Company to permit the Reporting Parties to consult with management of the Company regarding operating and financial matters of the Company and (iii) certain standstill provisions prohibiting the Reporting Parties from, among other things, (a) soliciting or negotiating any merger, consolidation or liquidation of the Company, (b) soliciting, initiating or participating in a proxy solicitation, (c) seeking representation on the Company's board of directors and (d) acquiring any Shares and Preferred Shares if such Shares and the Shares issuable upon the conversion of such Preferred Shares would exceed 19.988% of the Shares outstanding immediately after such conversion. The foregoing description of the Purchase Agreement and the Assignment Agreement is qualified in its entirety by reference to such Purchase Agreement and Assignment Agreement, which are filed as Exhibit I and Exhibit II hereto, respectively, and are incorporated herein by reference. Prudential and the Company entered into a Registration Rights Agreement (the "Registration Rights Agreement") dated as of October 3, 1997, pursuant to which the Company has agreed, prior to the date that is 45 days after the initial issuance of Shares pursuant to the Purchase Agreement, to file a registration statement under Rule 415 of the Securities Act of 1933, as amended (the "Shelf Registration"), registering the Shares to be issued to Prudential, SVI and SVI International (together with the Shares into which the Preferred Shares may be converted, the "Registrable Shares"). The Company agrees in the Page 10 of 18 Pages 11 Registration Rights Agreement to use its reasonable best efforts to keep such Shelf Registration continuously effective for so long as the aggregate market value of the Registrable Shares is at least $10 million or such shorter period that will terminate upon the earlier of the following: (A) the date when all the Registrable Shares have been sold pursuant to such Shelf Registration or Rule 144 promulgated pursuant to the Exchange Act and (B) the date on which, in the reasonable, written opinion of counsel to the holders of the Registrable Shares and/or to the Company, all outstanding Registrable Shares held by persons that are not affiliates of the Company may be resold without registration under the Securities Act of 1933, as amended, in accordance with Rule 144(k) promulgated pursuant to the Exchange Act or any successor provision thereto. The foregoing description of the Registration Rights Agreement is qualified in its entirety by reference to the Registration Rights Agreement which is filed as Exhibit III hereto and is incorporated herein by reference. In connection with the formation of SVI, Prudential and the other owners of membership interests in SVI identified in Item 2 hereto entered into an Operating Agreement dated as of October 2, 1997, which is filed as Exhibit IV hereto and which is incorporated herein by reference. In addition, SVI and PIC entered into the SVI Investment Advisory Agreement dated as of October 2, 1997, pursuant to which PIC has the power to vote and dispose the Shares owned of record by SVI. The SVI Investment Advisory Agreement is terminable without cause by SVI under certain circumstances. The foregoing description of the SVI Investment Advisory Agreement is qualified in its entirety by reference to such agreement, which is filed as Exhibit V hereto and is incorporated herein by reference. In connection with the formation of SVI International, SVI Ltd. and the owners of membership interests in SVI International identified in Item 2 hereto entered into an Operating Agreement dated as of October 2, 1997, which is filed as Exhibit VI hereto and which is incorporated herein by reference. SVI Ltd., which is the manager of SVI International pursuant to the terms of such Operating Agreement, has certain approval rights with respect to new investments by SVI International. In addition, SVI Ltd., SVI, Prudential and PIC entered into the SVI International Investment Advisory Agreement dated as of October 2, 1997, pursuant to which PIC has the power to vote and dispose the Shares owned of record by SVI International. The SVI International Investment Advisory Agreement is terminable without cause by SVI International under certain circumstances. The foregoing description of the SVI International Investment Advisory Agreement is qualified in its entirety by reference to such agreement, which is filed as Exhibit VII hereto and is incorporated herein by reference. The filing of this Statement should not be construed as an admission that any of the Reporting Parties is or was for the purposes of Section 13 or Section 16 of the Exchange Act the Page 11 of 18 Pages 12 beneficial owner of the Shares or the Preferred Shares described herein. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS Exhibit No. Description ----------- ----------- I Purchase Agreement dated as of September 17, 1997 II Assignment Agreement dated as of October 2, 1997 III Registration Rights Agreement dated as of October 3, 1997 IV Operating Agreement (SVI) dated as of October 2, 1997 V Investment Advisory Agreement (SVI) dated as of October 2, 1997 VI Operating Agreement (SVI International) dated as of October 2, 1997 VII Investment Advisory Agreement (SVI International) dated as of October 2, 1997 Page 12 of 18 Pages 13 Signature After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. October 14, 1997 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ JOHN B. RYAN ------------------------------ Name: John B. Ryan Title: 2nd Vice President STRATEGIC VALUE INVESTORS, LLC By: The Prudential Investment Corporation Its: Attorney-in-Fact By: /s/ KEVIN R. SMITH ------------------------------ Name: Kevin R. Smith Title: Vice President STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC By: Strategic Value Investors International Ltd. Its: Manager By: /s/ TERENCE McHUGH ------------------------------ Name: Terence McHugh Title: Vice President Page 13 of 18 Pages 14 SCHEDULE A Additional information required by Item 2 of Schedule 13D. 1. The Prudential Insurance Company of America. Set forth below is the name, principal occupation/title and business address of each director and executive officer of Prudential. Each of such persons is a citizen of the United States of America, except that Richard M. Thomson is a citizen of Canada. DIRECTORS Principal Occupation/ Name Title Address - ---- --------------------- ------- Franklin E. Agnew Business Consultant USX Tower Suite 660 600 Grant Street Pittsburgh, PA 15219 Frederic K. Becker President Wilentz Goldman & Spitzer 90 Woodbridge Center Drive Suite 900 Woodbridge, NJ 07095 James G. Cullen Vice Chairman Bell Atlantic Corp. 1310 North Court House Road 11th Floor Arlington, VA 22201 Carolyne K. Davis Health Care Advisor Ernst & Young 1225 Connecticut Avenue, NW Washington, DC 20036 Roger A. Enrico Chief Executive Officer PepsiCo 700 Anderson Hill Road Purchase, NY 10577 Allan D. Gilmour Former Vice Chairman, The Prudential Insurance Ford Motor Company Company of America 751 Broad Street Newark, NJ 07102 William H. Gray III President and CEO United Negro College Fund, Inc. 8260 Willow Oaks Corp. Drive P.O. Box 10444 Fairfax, VA 22031-4511 Jon F. Hanson Chairman Hampshire Management Company 235 Moore Street, Suite 200 Hackensack, NJ 07601 Page 14 of 18 Pages 15 Glen H. Hiner Chairman and CEO Owens Corning Owens Corning Parkwall Toledo, OH 43659 Constance Horner Guest Scholar The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036-2188 Gaynor N. Kelley Retired Chairman and CEO The Prudential Insurance Company of America 751 Broad Street 23rd Floor Newark, NJ 07102 Burton G. Malkiel Professor Princeton University Dept. of Economics 110 Fisher Hall Prospect Avenue Princeton, NJ 08544-1021 Arthur F. Ryan Chairman, CEO and The Prudential Insurance President Company of America 751 Broad Street Newark, NJ 07102 Ida F.S. Schmertz Principal Investment Strategies International c/o The Prudential Insurance Company of America 751 Broad Street 23rd Floor Newark, NJ 07102 Charles R. Sitter Former President Exxon Corporation 5959 Las Colinas Boulevard Irving, TX 75039-2298 Donald L. Staheli Chairman and CEO Continental Grain Company 277 Park Avenue New York, NY 10172 Richard M. Thomson Chairman and CEO The Toronto-Dominion Bank P.O. Box 1 Toronto-Dominion Centre Toronto, Ontario Canada M5K 1A2 James A. Unruh Chairman and CEO Unisys Corporation Township Line and Union Meetings Roads P.O. Box 500 Blue Bell, PA 19424-0001 Page 15 of 18 Pages 16 P. Roy Vagelos, M.D. Former Chairman and CEO Merck & Co., Inc. One Crossroads Drive Building A, 3rd Floor Bedminster, NJ 07921 Stanley C. Van Ness, Esq. Counselor at Law Picco Herbert Kennedy One State Street Square Suite 1000 Trenton, NJ 08607-1388 Paul A. Volcker Chairman and CEO 610 Fifth Avenue Suite 420 New York, NY 10020 Joseph H. Williams Director The Williams Companies, Inc. One Williams Center Tulsa, OK 74172 EXECUTIVE OFFICERS Principal Occupation/ Name Title Address - ---- --------------------- ------- Arthur F. Ryan Chairman of the Board, The Prudential Insurance Chief Executive Company of America Officer and President Prudential Plaza 751 Broad Street Newark, NJ 07102-3777 E. Michael Caulfield Chief Executive Officer, The Prudential Insurance Money Management Group Company of America Prudential Plaza 751 Broad Street Newark, NJ 07102-3777 Michele Darling Executive Vice President, The Prudential Insurance Human Resources Company of America Prudential Plaza 751 Broad Street Newark, NJ 07102-3777 Mark B. Grier Chief Financial Officer The Prudential Insurance Company of America Prudential Plaza 751 Broad Street Newark, NJ 07102-3777 Roger A. Lawson Executive Vice President, The Prudential Insurance Marketing and Planning Company of America Prudential Plaza 751 Broad Street Newark, NJ 07102-3777 Page 16 of 18 Pages 17 John V. Scicutella Operations and Systems The Prudential Insurance Executive Officer Company of America Prudential Plaza 751 Broad Street Newark, NJ 07102-3777 2. Strategic Value Investors, LLC. SVI is controlled (for purposes of General Instruction C to Schedule 13D) by Prudential. The directors and executive officers of Prudential are set forth above. 3. Strategic Value Investors International, LLC. SVI International is controlled (for purposes of General Instruction C to Schedule 13D) by SCPG Holdings Pte. Ltd., a corporation organized under the laws of Singapore ("SCPG"), which is a wholly owned subsidiary of Government of Singapore Corporation (Realty) Pte. Ltd., an agency of the Government of Singapore ("GSIC"). Set forth below is the name, principal occupation/title and business address of each executive officer or director of SCPG. Each of such persons is a citizen of Singapore, except S. Bradford Child is a citizen of the United States of America and Mok Yee Yin is a citizen of Malaysia. Principal Occupation/ Name Title Address - ---- --------------------- ------- Kwok Wai Keong Regional Manager, Government of Singapore (Director) Government of Singapore Investment Corporation Pte. Ltd. Investment Corporation 250 North Bridge Tower #38-00 Pte. Ltd. Raffles City Tower Singapore 179101 Seek Ngee Huat Director of Real Estate, Government of Singapore (Director) Government of Singapore Investment Corporation Pte. Ltd. Investment Corporation 250 North Bridge Tower #38-00 Pte. Ltd. Raffles City Tower Singapore 179101 S. Bradford Child Senior Investment Manager, c/o GSIC Realty Corporation (Director) GSIC 255 Shoreline Drive, Suite 600 Redwood City, CA 94065 Guy Tcheau Regional Manager, GSIC c/o GSIC Realty Corporation (Director) 255 Shoreline Drive, Suite 600 Redwood City, CA 94065 Page 17 of 18 Pages 18 Name Principal Occupation/ Address - ---- Title ------- --------------------- Mok Yee Yin Manager, Government of Singapore (Secretary) Government of Singapore Investment Corporation Pte. Ltd. Investment Corporation 250 North Bridge Tower #38-00 Pte. Ltd. Raffles City Tower Singapore 179101 Deanna Ong Senior Accountant, Government of Singapore (Secretary) Government of Singapore Investment Corporation Pte. Ltd. Investment Corporation 250 North Bridge Tower #38-00 Pte. Ltd. Raffles City Tower Singapore 179101 Page 18 of 18 Pages 19 EXHIBIT INDEX Exhibit No. Description Page No. ----------- ----------- -------- I Purchase Agreement dated as of September 17, 1997 II Assigned Agreement dated as of October 2, 1997 III Registration Rights Agreement dated as of October 3, 1997 IV Operating Agreement (SVI) dated as of October 2, 1997 V Investment Advisory Agreement (SVI) dated as of October 2, 1997 VI Operating Agreement (SVI International) dated as of October 2, 1997 VII Investment Advisory Agreement (SVI International) dated as of October 2, 1997 EX-99.I 2 PURCHASE AGREEMENT 1 EXHIBIT I Execution Copy PURCHASE AGREEMENT DATED AS OF SEPTEMBER 17, 1997 BETWEEN THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND CHARLES E. SMITH RESIDENTIAL REALTY, INC. 2 PURCHASE AGREEMENT This PURCHASE AGREEMENT (this "Agreement") is made as of the 17th day of September, 1997 by and between Charles E. Smith Residential Realty, Inc., a Maryland corporation (the "Company"), and The Prudential Insurance Company of America (the "Investor" or "Prudential"). W I T N E S S E T H WHEREAS, the Company wishes to issue and sell to the Investor or one or more other Prudential Investors (as defined in Section 7.2 hereof) an aggregate of 1,450,000 shares of common stock of the Company, $0.01 par value per share (the "Common Stock") and 1,216,666 shares of Series B Cumulative Convertible Redeemable Preferred Stock, $0.01 par value per share, of the Company (the "Series B Preferred Shares"), the terms of which shall be as set forth in the Series B Preferred Articles Supplementary in the form of Exhibit A (the "Series B Preferred Articles Supplementary"), in accordance with and subject to the terms and conditions set forth herein (the Common Stock and the Series B Preferred Shares, collectively, the "Shares"); and WHEREAS, Investor wishes to purchase, either for its own account or with one or more other Prudential Investors, the Shares on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants, agreements and warranties herein contained, the parties hereby agree as follows: 1. PURCHASE AND SALE OF SHARES. 1.1 Sale and Issuance of the Shares. (a) The Company shall adopt and file with the State Department of Assessments and Taxation of Maryland (the "SDAT") on or before the Closing Date (as defined below) the Series B Preferred Articles Supplementary. (b) Subject to the terms and conditions of this Agreement, at the Closing (as defined below), the Company agrees to issue and sell to Investor or one or more other Prudential Investors, and Investor agrees to purchase, or cause one or more other Prudential Investors to purchase, from the Company an aggregate of 1,450,000 shares of Common Stock and 1,216,666 Series B Preferred Shares, at an aggregate purchase price of $75,999,981.00 (the "Purchase Price"). 1.2 Closing. (a) Upon the terms and subject to the satisfaction or waiver of all the conditions to closing set forth in this Agreement, the closing (the "Closing") of the purchase and sale of the Shares shall take place at the offices of Hogan & Hartson L.L.P., Columbia Square, 555 Thirteenth Street, N.W., Washington, D.C. 20004-1109 or at such other location as may be agreed upon by the Company and the Investor. Such Closing shall take place at 10:00 a.m., Eastern time on or before September 26, 3 1997 or such other date or time as may be agreed upon by the Company and the Prudential Investors (the "Closing Date"). At the Closing, the Company agrees to issue and sell to the Investor (or one or more other Prudential Investors) and the Investor agrees to purchase (or cause one or more other Prudential Investors to purchase) from the Company the Shares. (b) At the Closing, the Company shall issue and deliver to each Prudential Investor stock certificates in definitive form, registered in the name of the Prudential Investor, representing the Shares being purchased by the Prudential Investor and the Prudential Investors shall deliver to the Company, against delivery of the stock certificates representing the Shares, an amount equal to the Purchase Price by wire transfer of immediately available funds payable to the Company's order. (c) The certificates evidencing the Shares shall bear a legend substantially in the following form, in addition to any other legend required by the Company's Articles of Incorporation, unless the Company determines otherwise in accordance with applicable law: THIS SECURITY AND ANY COMMON STOCK ISSUED ON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, REPRESENTS, ACKNOWLEDGES, AND AGREES FOR THE BENEFIT OF CHARLES E. SMITH RESIDENTIAL REALTY, INC. (THE "COMPANY") THAT: (I) IT HAS ACQUIRED A "RESTRICTED SECURITY" THAT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT; (II) IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY EXCEPT PURSUANT (A) TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (B) TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY APPLICABLE JURISDICTION; AND (III) IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THIS SECURITY OF THE RESALE RESTRICTIONS SET FORTH IN (II) ABOVE. ANY OFFER, SALE OR OTHER DISPOSITION PURSUANT TO THE FOREGOING CLAUSE (B) IS SUBJECT TO THE RIGHT OF THE ISSUER OF THIS SECURITY (i) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION OR OTHER INFORMATION REASONABLY SATISFACTORY TO IT IN FORM AND SUBSTANCE, AND (ii) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRANSFER AGENT. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER OCTOBER 1, 1999. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants, as of the date of this Agreement and as of the Closing Date, that: 2 4 2.1 Organization, Good Standing and Qualification. (a) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland with full power and authority to own, lease and operate its properties and conduct its business as now being conducted, and has been duly qualified to transact business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not be reasonably expected to result in a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on the operations, assets, business, affairs, properties, or financial or other condition of the Company and its subsidiaries taken as a whole. (b) Charles E. Smith Residential Realty, L.P. (the "Operating Partnership") has been duly formed and is validly existing as a limited partnership in good standing under the Delaware Revised Uniform Limited Partnership Act with partnership power and authority to own, lease and operate its properties and conduct its business as now being conducted and has been duly qualified to transact business and is in good standing under the laws of each jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not be reasonably expected to result in a Material Adverse Effect. (c) The subsidiaries of the Company set forth on Schedule 2.1 (individually, a "Subsidiary", collectively the "Subsidiaries") have each been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of incorporation or formation and have full power and authority to own, lease and operate their properties and to conduct their businesses as now being conducted, and each Subsidiary has been duly qualified to transact business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to be in good standing or to so qualify would not be reasonably expected to result in a Material Adverse Effect. The Company has no subsidiaries except as set forth on Schedule 2.1. The Company or the Operating Partnership owns, directly or indirectly, all of the equity securities of each Subsidiary. 2.2 Power, Authority and Enforceability (a) The Company has all requisite corporate power and authority, and has taken all required corporate action necessary, to execute, deliver and perform this Agreement and to issue and sell the Shares as herein provided. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) equitable principles of general applicability relating to the availability of specific performance, injunctive relief, or other equitable remedies. 2.3 Capitalization. Upon the Company's adoption of the Series B Preferred Articles Supplementary, the authorized capital stock of the Company will consist of 95,000,000 shares of Common Stock, par value $0.01 per share, 45,000,000 shares of excess stock, par value $0.01 per share, 2,640,325 shares of Series A Preferred Stock, par value $0.01 per share, 1,220,000 shares of Series B Preferred Stock, par 3 5 value $0.01 share, and 1,139,675 shares which are not classified. All of the issued and outstanding shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable. Except as set forth in the Company's most recent annual report filed on Form 10-K or on Schedule 2.3, (i) there are no outstanding securities or indebtedness convertible into, exchangeable for or carrying the right to acquire, Common Stock or other equity securities of the Company or subscriptions, warrants, options, rights or other arrangements or commitments obligating the Company to issue or dispose of any Common Stock or other equity securities or any ownership therein, (ii) there are no outstanding contractual obligations, commitments, understandings or arrangements of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire, require or make any payment in respect of any shares of equity securities of the Company or any such Subsidiary, (iii) there are no contractual restrictions on the payment of dividends or other distributions or amounts on or in respect of the Company's Common Stock, (iv) there are no agreements or arrangements to which any of the Company or its Subsidiaries is a party pursuant to which the Company is or could be required to register shares of Common Stock or other securities under the Securities Act on terms materially more favorable to the holder of such Common Stock or other securities than the terms of the Registration Rights Agreement attached hereto as Exhibit C, and (v) there are no agreements or arrangements restricting the voting or transfer of any equity securities of the Company. 2.4 Valid Issuance of Shares. The Shares which are being purchased by the Investor hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly authorized and issued, fully paid and nonassessable. The shares of Common Stock issuable upon the conversion of the Series B Preferred Shares (the "Converted Shares") will be duly and validly reserved for such issuance (based upon the initial conversion price thereof) and, when issued upon such conversion in accordance with the Series B Preferred Articles Supplementary, will be duly and validly authorized and issued, fully paid and nonassessable. 2.5 Compliance with Other Instruments And Applicable Law. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby do not (i) result in a violation of the Company's Amended and Restated Articles of Incorporation (the "Articles of Incorporation") or the Company's Amended and Restated Bylaws (the "Bylaws") or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect or materially impair the Company's ability to perform its obligations under this Agreement). 2.6 No Registration Under the Securities Act. Assuming the continuing accuracy of the Investor's representations set forth in Article III and compliance by the Investor with the transfer restrictions set forth in the legends on the certificates 4 6 evidencing the Shares and the Converted Shares, it is not necessary in connection with the offer, sale and delivery of the Shares in the manner contemplated by this Agreement to register the Shares or the issuance to the Investor of the Converted Shares under the Securities Act of 1933, as amended (the "Securities Act"). 2.7 No General Solicitation. Neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act, an "Affiliate") of the Company has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Shares in a manner that would require registration under the Securities Act of the Shares or (ii) engaged in any form of general solicitation or general advertising in connection with the offering of the Shares (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4.2 of the Securities Act. 2.8 Financial Statements. The audited financial statements and supporting schedules included in the Company's periodic filings filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are complete and correct in all material respects and present fairly the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates specified and the consolidated results of their operations for the periods specified, in each case, in conformity with generally accepted accounting principles applied on a consistent basis ("GAAP") during the periods involved, except as indicated therein or in the notes thereto. The unaudited financial statements, supporting schedules and pro forma financial information included in the Company's periodic filings filed pursuant to the Exchange Act, comply as to form in all material respects with the applicable accounting requirements under the Securities Act and the Exchange Act and the related published rules and regulations. 2.9 Exchange Act Compliance. The Company has timely filed all documents required to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and all documents filed by the Company with the Commission pursuant to the Securities Act and the Exchange Act, when so filed, complied in form in all material respects with such acts and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 2.10 No Material Adverse Changes. Since the date that the Company filed its most recent annual report on Form 10-K pursuant to the Exchange Act, except as otherwise stated in such annual report or in a subsequent 10-Q filed by the Company with the Commission or as contemplated by such annual report or by this Agreement: (i) there has been no change in the business, operations or financial condition, of the Company and its Subsidiaries considered as one enterprise, or in the earnings or the ability to continue 5 7 to conduct business in the usual and ordinary course of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, which has had a Material Adverse Effect; and (ii) except for the transactions contemplated by this Agreement, there has been no transaction entered into by the Company or any of its Subsidiaries other than (a) transactions in the ordinary course of business or (b) transactions which would not, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect; and (iii) there have not been any changes in the capital stock (except as set forth in Section 2.3 of this Agreement) or any increases in the debt of the Company and its Subsidiaries considered as one enterprise, which would, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect. 2.11 Litigation. Except as set forth in the Company's most recent annual report on Form 10-K filed pursuant to the Exchange Act or in any subsequent 10-Q filed by the Company with the Commission, there is no action, suit or proceeding (whether or not purportedly on behalf of the Company or any of its Subsidiaries) before or by any court or governmental agency or body, domestic or foreign, now pending, or to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries which, either alone or in the aggregate, would reasonably be expected to have a Material Adverse Effect or materially impair the Company's ability to perform its obligations under this Agreement. 2.12 Title to Properties; Leasehold Interests. (a) Except as disclosed in the Company's most recent annual report on Form 10-K filed pursuant to the Exchange Act or in any subsequent filing by the Company with the Commission, or except to the extent that the inaccuracy of any of the following, either individually or in the aggregate, would not be reasonably expected to result in a Material Adverse Effect: (i) the Company, through one or more Subsidiaries, has good and marketable title to all real properties and all other assets identified as being owned by the Company in its most recent annual report filed on Form 10-K, in each case, subject only to Permitted Exceptions (as herein defined); (ii) all leases under which the Company, or any of its Subsidiaries, leases any property are in full force and effect, and neither the Company nor any such Subsidiary is in default of any of the terms or provisions of any of such leases and no claim has been asserted by anyone adverse to any such entity's rights as lessee under any of such leases, or affecting or questioning any such entity's right to the continued possession or use of the properties under any such leases or asserting a default under any such leases; and (iii) all liens, charges or encumbrances on or affecting any of the property and assets of the Company and its Subsidiaries which are required to be disclosed in the Company's periodic reports filed pursuant to the Exchange Act are disclosed therein; (b) As used in this Agreement, "Permitted Exceptions" means: (i) real estate taxes and assessments not yet delinquent; (ii) covenants, restrictions, easements and other similar agreements, provided that the same are not violated by existing improvements or the current use and operation of the Company's or any Subsidiary's property; (iii) zoning laws, ordinances and regulations, building codes, rules and other governmental laws, regulations, rules and orders affecting any of the Company's or any Subsidiary's property, provided that the same are not violated by existing improvements or the current use and operation of such property; (iv) any imperfection of title which does not affect in any material adverse respect the current use, operation or enjoyment of any of the Company's or any Subsidiary's real property and does not render title to such real property unmarketable or uninsurable and does not impair the value of such property; and (v) mortgage financing disclosed in the Company's most recent annual report on Form 10-K filed pursuant to the Exchange Act. 6 8 2.13 Environmental Compliance. (a) Except as disclosed in the Company's most recent annual report on Form 10-K filed pursuant to the Exchange Act or in any subsequent filing by the Company with the Commission, the Company and each of its Subsidiaries has complied and is in compliance in all material respects with all Environmental Statutes (as hereinafter defined), except for such noncompliance as would not be reasonably expected to result in a Material Adverse Effect. (b) Neither the Company nor any of its Subsidiaries intends to use any real property owned or occupied by any such party for the purpose of handling, burying, storing, retaining, refining, transporting, processing, manufacturing, generating, producing, spilling, seeping, leaking, escaping, leaching, pumping, pouring, emitting, emptying, discharging, injecting, dumping, transferring or otherwise disposing of or dealing with Hazardous Materials. (c) Except as would not, individually or in the aggregate, have a Material Adverse Effect, neither the Company nor any of its Subsidiaries is aware of any seepage, leak, escape, leach, discharge, injection, release, emission, spill, pumping, pouring, emptying or dumping of Hazardous Materials (i) on to any real property owned or occupied by any such party, (ii) into waters on or adjacent to any real property owned or occupied by any such party or (iii) onto lands from which Hazardous Materials might seep, flow or drain into such waters. (d) The Company is not aware of any occurrence or circumstance that, with notice or passage of time or both, would give rise to a claim under or pursuant to any Environmental Statute (as hereinafter defined) pertaining to Hazardous Materials on or originating from any real property owned or occupied by the Company or any of its Subsidiaries, which claim would be reasonably expected to result in a Material Adverse Effect. (e) No land owned by the Company or any of its Subsidiaries is included or proposed for inclusion on the National Priorities List issued pursuant to CERCLA (as hereinafter defined) by the United States Environmental Protection Agency (the "EPA") or on the inventory of other potential "Problem" sites issued by the EPA and has not otherwise been publicly identified by the EPA as a potential CERCLA site or included or proposed for inclusion on any list or inventory issued pursuant to any other Environmental Statute or issued by any other Governmental Authority (as hereinafter defined). (f) As used herein, "Hazardous Material" shall include without limitation any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, toxic substances or related materials, asbestos or any hazardous material as defined by any federal, state or local environmental law, ordinance, rule or regulation, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss.ss. 9601 et seq.: ("CERCLA"), the Hazardous Materials Transportation Act, as amended, 49 U.S.C. ss.ss. 1801 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. ss.ss. 9601 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. ss.ss. 11001 et seq., the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq., the Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq., the Clean Water Act (Federal Water Pollution Control Act), 33 U.S.C. ss.ss. 1251 et seq., the Safe Drinking Water Act, 42 U.S.C. ss.ss. 300F to 300j-11, and the Occupational Safety and Health Act, 29 U.S.C. ss.ss. 651 et seq., as any of the above statutes may be amended from time to time, and in the regulations adopted and publications promulgated pursuant to each of the foregoing (individually, an "Environmental Statute" collectively, the "Environmental Statutes") or by any federal, state or local governmental authority having or claiming jurisdiction over the properties and assets described in the Company's periodic reports filed pursuant to the Exchange Act (a "Governmental Authority"). 7 9 2.14 Taxes. (a) The Company and its Subsidiaries have filed all federal, state, local, foreign and other tax returns, reports, information returns and statements required to be filed by them (except for returns, reports, information returns and statements relating to which the failure to file would not be reasonably expected to result in any Material Adverse Effect). The Company and its Subsidiaries have paid or caused to be paid all taxes (including interest and penalties) that are shown as due and payable on such returns or claimed by any taxing authority to be due and payable with respect to such returns, except those which are being contested by it in good faith by appropriate proceedings and in respect of which adequate reserves are being maintained on its books in accordance with generally accepted accounting principles consistently applied. The Company and its Subsidiaries do not have any material liabilities for taxes other than those incurred in the ordinary course of business and in respect of which adequate reserves are being maintained by it in accordance with generally accepted accounting principles consistently applied. Except as set forth on Schedule 2.14 hereto, federal and state income tax returns for the Company and its Subsidiaries have not been audited by the Internal Revenue Service or state authorities. No deficiency, assessment with respect to or proposed adjustment of the Company's or any of its Subsidiaries' federal, state, local, foreign or other tax returns is pending or, to the best of the Company's or any of its Subsidiaries' knowledge, threatened. There is no tax lien, whether imposed by any federal, state, local or other tax authority, outstanding against the assets, properties or business of the Company. There are no applicable taxes, fees or other governmental charges payable by the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement or the issuance by the Company of the Shares or the Converted Shares. (b) The Company has qualified to be taxed as a real estate investment trust pursuant to Sections 856 through 860 of the Internal Revenue Code, as amended (the "Code"), for its taxable years ended December 31, 1994 through December 31, 1996, and the Company's present method of operation and its assets and contemplated income are such that the Company expects under present law to so qualify for the fiscal year ending December 31, 1997 and in the future. 2.15 Insurance. The Company and its Subsidiaries each carry or is entitled to the benefits of insurance in such amounts and covering such risks as is reasonably sufficient under the circumstances or is customary in the industry and all such insurance is in full force and effect. 2.16 Employees; ERISA. (a) The Company has good relationships with its employees and has not had any substantial labor problems. The Company does not have any knowledge as to any intentions of any key employee or any group of employees to leave the employ of the Company. Other than as disclosed in the Company's most recent annual report on Form 10-K filed pursuant to the Exchange Act or in any subsequent filing by the Company with the Commission or with respect to plans that do not discriminate in scope, terms or operation in favor of executive officers or directors, are available generally to all salaried employees and are not required to be disclosed pursuant to the rules and regulations of the Commission, the Company has not established, sponsored, maintained, made any contributions to or been 8 10 obligated by law to establish, maintain, sponsor or make any contributions to any "employee pension benefit plan" or "employee welfare benefit plan" (as such terms are defined in ERISA), including, without limitation, any "multi-employer plan." The Company is in compliance with all applicable laws relating to the employment of labor, including provisions relating to wages, hours, equal opportunity, collective bargaining and the payment of Social Security and other taxes, and with ERISA, except where the failure to so comply would not be reasonably expected to result in a Material Adverse Effect. (b) In its capacity as general partner of the Operating Partnership, the Company exercises management rights and responsibilities, directly or indirectly, through one or more Subsidiaries of the Company or the Operating Partnership, with respect to the real property owned by the Operating Partnership and the Subsidiaries, including decisionmaking authority with respect to future acquisitions and sales of such real property. (c) The terms of this transaction have been negotiated and determined at arms'-length and are not less favorable to Investor than the terms that generally would be available in an arms'-length transaction between unrelated parties. 2.17 Legal Compliance. (a) The Company is in compliance with all applicable laws, rules, regulations, orders, licenses, judgments, writs, injunctions, decrees or demands, except to the extent that failure to comply would not be reasonably expected to result in a Material Adverse Effect. The Company has all necessary permits, licenses and other authorizations required to conduct its business as currently conducted, and as proposed to be conducted, except where a failure to have such permit, license or other authorization would not be reasonably expected to result in a Material Adverse Effect. (b) Except as disclosed in the Company's most recent annual report on Form 10-K filed pursuant to the Exchange Act or in any subsequent filing by the Company with the Commission, there are no adverse orders, judgments, writs, injunctions, decrees or demands of any court or administrative body, domestic or foreign, or of any other governmental agency or instrumentality, domestic or foreign, outstanding against the Company which would reasonably be expected to result in a Material Adverse Effect. (c) Neither the Company nor any Subsidiary of the Company is (i) in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, except such defaults or violations as could not reasonably be expected to have a Material Adverse Effect or (ii) in violation of any order of any Governmental Authority, except for such violations as could not reasonably be expected to have a Material Adverse Effect. 2.18 Governmental Consent. Other than such consents, approvals, authorizations, declarations or filings as have already been obtained or made or which will be made at or prior to the Closing Date and as are set forth on Schedule 2.18, no consent, approval or authorization of, or declaration or filing with, any Governmental Authority on the part of the Company is required for the valid execution and delivery of this Agreement or performance hereunder or the valid offer, issue, sale and delivery of the Shares pursuant to this Agreement and the Series B Preferred Articles Supplementary. 9 11 2.19 Investment Company. The Company is not an investment company, as defined in the Investment Company Act of 1940, as amended, nor controlled by an investment company. 2.20 No Other Liabilities. Except as set forth on Schedule 2.20, neither the Company nor any Subsidiary of the Company has any material liability, whether absolute, accrued, contingent or otherwise of a kind required to be reflected on a balance sheet prepared in accordance with generally accepted accounting principles or in the notes thereto, except liabilities (i) reflected on the consolidated balance sheet of the Company and its Subsidiaries as at June 30, 1997, or (ii) liabilities that (a) have been incurred by the Company or any of its Subsidiaries after June 30, 1997 in the ordinary course of business and (2) could not reasonably be expected to have a Material Adverse Effect. 2.21 Material Contracts. The Forms 10-Q filed in 1997, the 1996 Form 10-K, and Schedule 2.21, collectively, contain a correct and complete list of the following with respect to the Company and its Subsidiaries: (i) agreements with any person having beneficial ownership of 5% or more of the outstanding shares of Common Stock of the Company or any director or officer of the Company or any of its Subsidiaries and all shareholders' agreements and voting trusts to which the Company is a party or of which it has knowledge, in each case that are required to be filed as exhibits to a Form 10-K of the Company pursuant to Regulation S-K, and (ii) agreements not made in the ordinary course of business that could reasonably be expected to result in a Material Adverse Effect. Except for material contracts of the type required to be disclosed in the Company's most recent annual report on Form 10-K, neither the Company nor any Subsidiary of the Company has entered into an agreement not made in the ordinary course of business and which could reasonably be expected to result in a Material Adverse Effect. 2.22 No Merger Agreements. As of the date hereof, neither the Company nor any Subsidiary of the Company has entered into any agreement with any person or entity which has not been terminated as of the date of this Agreement and under which there remains any liability or obligation thereof with respect to a merger or consolidation with the Company or any Subsidiary of the Company or any other acquisition of a substantial amount of the assets of the Company or any such Subsidiary. 2.23 Certain Actions By The Company. The Company has not: (i) made a general assignment for the benefit of creditors; (ii) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by the Company's creditors; (iii) suffered the appointment of receiver to take possession of all or substantially all of the Company's assets; (iv) suffered the attachment or other judicial seizure of all or substantially all of the Company's assets; (v) admitted in writing the Company's inability to pay its debts as they become due; or (vi) made an offer of settlement, extension or composition to its creditors generally. 10 12 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor represents and warrants, as of the date of this Agreement and as of the Closing Date, that: 3.1 Organization, Good Standing and Qualification. The Investor has been duly organized and is validly existing as a corporation in good standing under the laws of the State of New Jersey with full power and authority to own, lease and operate its properties and conduct its business as now being conducted, and has been duly qualified to transact business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a material adverse effect on the Investor. 3.2 Power, Authority and Enforceability. (a) The Investor has the requisite corporate power and authority, and has taken all required corporate action necessary, to execute, deliver and perform this Agreement and to purchase the Shares hereunder. (b) This Agreement has been duly executed and delivered by the Investor and constitutes the legal, valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) equitable principles of general applicability relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.3 Compliance with Other Instruments. The execution, delivery and performance of this Agreement by the Investor and the consummation by the Investor of the transactions contemplated hereby do not (i) result in a violation of the Investor's Articles of Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Investor is a party, or result in a violation of any law, rule, regulation, order, judgment or decree applicable to the Investor or by which any property or asset of the Investor is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, materially impair the Investor's ability to perform its obligations under this Agreement). 3.4 Ownership Limitations. The Investor has received a copy of the Company's Articles of Incorporation and understands the restrictions on transfer and ownership of the Company included in Article VIII thereof and shall comply with such restrictions (after giving effect to the waiver referred to in Section 4.9 hereof). 11 13 3.5 Investment Intent; Sophisticated Investor. The Investor is an "accredited investor" within the meaning of Rule 501(a) of the Securities Act. The Investor is purchasing the Shares solely for investment purposes and not with a view toward making a public distribution of such shares or the Converted Shares except in accordance with the restrictions on transfer set forth in the legends thereon and in accordance with the Registration Rights Agreement. In the normal course of its business or its investing activities, the Investor invests in or purchases securities similar to the Shares and it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of purchasing the Shares. The Investor is aware that it may be required to bear the economic risk of an investment in the Shares for an indefinite period of time and it is able to bear such risk for an indefinite period. 3.6 Unregistered Securities. The Investor understands and acknowledges and agrees that the Shares and the Common Stock issuable upon conversion of the Series B Preferred Shares have not been, and that the Series B Preferred Shares will not be, registered under the Securities Act or any other applicable securities law and, unless so registered, may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act or any other applicable securities law, pursuant to an exemption therefrom or in a transaction not subject thereto. The Investor agrees to comply with the legends set forth in the certificates representing such shares. 3.7 Access to Information. The Investor has had access to such financial and other information concerning the Company or any of its affiliates and the Shares as it deemed necessary in connection with its decision to purchase any of the Shares, including an opportunity to ask questions and request information from the Company, subject to any limitations specified in Section 6.4 of this Agreement. 3.8 REIT Qualification Matters. To the knowledge of the Investor, no person which would be treated as an "individual" for purposes of Section 542(a)(2) of the Code (as modified by Section 856(h) of the Code) owns or would be considered to own (taking into account the ownership attribution rules under Section 544 of the Code, as modified by Section 856(h) of the Code) in excess of 20% of the value of the outstanding equity interest in the Investor. 3.9 Investment Company Matters The Investor is not, and after giving effect to the purchase of the Series B Preferred Shares contemplated hereby, will not be (a) required to register as an "investment company" or (b) an entity controlled by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. 3.10 Governmental Consent. Other than such consents, approvals, authorizations, declarations or filings as have already been obtained or made or which will be made at or prior to the Closing Date, no consent, approval or authorization of, or declaration or filing with, any Governmental Authority on the part of the Investor is required for the valid execution and delivery of this Agreement or performance of its obligations hereunder. 12 14 4. CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT THE CLOSING. The Investor's obligations at the Closing under Section 1.2 of this Agreement are subject to the satisfaction or waiver by the Investor on or before such Closing of each of the following conditions: 4.1 Series B Preferred Articles Supplementary. At or prior to the Closing, the Series B Preferred Articles Supplementary shall have been filed with and accepted for recording by the SDAT. 4.2 Representations and Warranties. The representations and warranties of the Company contained in Article 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 4.3 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the date of such Closing. 4.4 No Material Adverse Change. After the date of this Agreement and through the Closing Date, there shall not have occurred any change or event that has had or may reasonably be expected to have a Material Adverse Effect. 4.5 Opinion of Company Counsel. The Investor shall have received from Hogan & Hartson L.L.P., counsel for the Company, and from the general counsel of the Company opinions in form and scope customary for transactions such as the Purchase of Shares and other transactions contemplated hereunder and reasonably satisfactory to the Investor. 4.6 Registration Rights Agreement. Simultaneous with the Closing, the Company and the Investor shall have entered into a Registration Rights Agreement in the form attached hereto as Exhibit B. 4.7 Officer's Certificate. The Company shall have delivered to the Investor on the Closing Date a certificate or certificates signed by an authorized officer of the Company to the effect that the facts required to exist by Sections 4.1, 4.2, 4.3, 4.4, 4.9, 4.10 and 4.11 exist on such Closing Date. 13 15 4.8 Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incidental thereto, shall be reasonably satisfactory in form and substance to the Investor; and the Investor shall have received copies of all documents which the Investor may reasonably request in connection with said transactions and copies of the records of all proceedings of the Company in connection therewith in form and substance satisfactory to the Investor. 4.9 Limited Waiver of Ownership Limitations. The Board of Directors of the Company shall have adopted a limited waiver of the ownership limitations in its Articles of Incorporation substantially in the form attached hereto as Exhibit C. 4.10 No Injunction There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby and there shall be no actual or threatened action, suit, arbitration, inquiry, proceedings or investigation by or before any Governmental Authority, court or agency of competent jurisdiction, which would reasonably be expected to materially impair the ability of the Company or the Investor to consummate the transactions contemplated hereby or of the Company to issue the Shares. 4.11 Amendment to Operating Partnership Agreement The First Amended and Restated Partnership Agreement of the Operating Partnership, as amended, shall have been amended further to create preferred partnership interests with economic attributes substantially identical to those of the Series B Preferred Shares. 4.12 Listing Approval. On or before the date that the registration statement filed pursuant to the Registration Rights Agreement becomes effective, the Common Stock (including shares issuable upon conversion of the Series B Preferred Shares) shall have been approved for listing on the New York Stock Exchange. 4.13 Consultation Agreement. The Operating Partnership and certain Subsidiaries specified by the Investor shall have entered into an agreement with the Investor and the Company providing information and consultation rights to each of them substantially similar in scope and duration as those set forth in Section 6.1. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The obligations of the Company under Section 1.2 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 14 16 5.1 Representations and Warranties. The representations and warranties of the Investor contained in Article 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 5.2 Performance. The Investor shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the date of such Closing. 5.3 Officer's Certificate. The Investor shall have delivered to the Company on the Closing Date a certificate or certificates signed by an authorized officer of the Investor to the effect that the facts required to exist by Sections 5.1 and 5.2 and exist on such Closing Date. 5.4 No Injunction. There shall not be in effect any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby and there shall be no actual or threatened action, suit, arbitration, inquiry, proceedings or investigation by or before any Governmental Authority, court or agency of competent jurisdiction, which would reasonably be expected to materially impair the ability of the Company or the Investor to consummate the transactions contemplated hereby. 6. COVENANTS. 6.1 Information Rights. (a) For the period ending on the earlier of (i) January 1, 2003, and (ii) the first date on which the number of shares of Common Stock plus the number of shares of Common Stock issuable upon conversion of Series B Preferred Stock then held by the Prudential Investor have an aggregate Market Value (as defined below) of less than $30 million (the "Qualification Period"), the Company and/or the Operating Partnership shall provide to the Investor copies of all documents filed by either of them with the Commission pursuant to Sections 13 or 15 of the Exchange Act and any amendments thereto filed with the Commission promptly after the filing thereof with the Commission. As used herein, the "Market Value" of the Common Stock as of any date shall equal the average of the closing prices of the Common Stock reported for the preceding 10 trading days on the New York Stock Exchange. (b) The Company and the Operating Partnership shall keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and the Operating Partnership in accordance with generally accepted accounting principles, and the Company shall cause the Operating Partnership and its other Subsidiaries to do the same. Subject to the limitations set forth in Section 8.5(C) of the Partnership Agreement, during the Qualification Period, the Company shall, and shall cause the Operating Partnership to, upon reasonable notice by Purchaser, provide Purchaser with reasonable access to, all books and records of the Company and the Operating Partnership during regular business hours and allow Purchaser to make copies and abstracts thereof and the Company shall cause its Subsidiaries to do the same. Purchaser shall 15 17 have the right to consult from time to time (but in any event not more frequently than five times in any calendar year) with management of the Company at the Company's place of business regarding operating and financial matters of the Company and its Subsidiaries. (c) During the Qualification Period, the Company shall provide to such Prudential Investor non-confidential operating information of the same general nature as the Company provides to financial analysts, substantially concurrently with provision of such information to financial analysts. Investor hereby acknowledges that the Company will not be required to furnish any information that the Company believes would constitute material nonpublic information, unless the Investor agrees in writing with the Company not to trade in the securities of the Company until such time as such material information becomes public. 6.2 Maintenance of REIT Status. (a) Until the earlier of (i) the end of the Qualification Period or (ii) December 31, 2002, the Company will use its reasonable best efforts to continue to be taxed as a real estate investment trust pursuant to Sections 856 through 860 of the Code, subject to the right of the Company to voluntarily terminate its status as a real estate investment trust pursuant to Subsection 6.2(b). The Company agrees that it will not voluntarily terminate its status as a real estate investment trust for a period of 24 months after the date of this Agreement. (b) If the Company's Board of Directors shall adopt a resolution or take other corporate action recommending that the Company terminate its status as a real estate investment trust, the Company shall, within 10 calendar days of such resolution, provide each Prudential Investor with notice of the record date for the annual or special meeting of stockholders called for the approval of such action. The Company agrees that the record date for determining stockholders eligible to vote at meeting at which such a vote or resolution shall occur shall not be earlier than the twentieth calendar day after the date of the notice provided pursuant to this Subsection 6.2(b). 6.3 Waiver of Ownership Limitations. So long as the sum of (i) the aggregate number of shares of Common Stock held by all Prudential Investors and (ii) the aggregate number of shares of Common Stock into which the Series B Preferred Shares held by all Prudential Investors are convertible (assuming that all such Series B Preferred Shares are immediately convertible) is greater than 9.8% of the outstanding Common Stock and (ii) the Prudential Investors have not breached the covenant set forth in Subsection 6.5(a)(iii) of this Agreement, the Company shall not reverse or rescind the waiver required to be granted pursuant to Section 4.9 of this Agreement. Thereafter, the Company may reverse or rescind such waiver or such waiver may terminate by its own terms. 6.4 No Public Disclosure. Neither party to this Agreement nor any affiliate of either party will make any public disclosure concerning the transactions contemplated by this Agreement unless such disclosure has been provided to the other party at least one business day prior to such disclosure. Unless in the reasonable opinion of counsel to each party such disclosure is required by applicable law, neither party nor any affiliate of either party will make any such public disclosure without the other party's prior written consent. With respect to the initial public disclosure of the transactions contemplated by this Agreement, the Investor shall have the right to review (before filing or public announcement) any filing 16 18 or press release that refers to the Investor or the transactions contemplated hereby. The Investor shall have the right to review (before public announcement) any subsequent press releases that specifically refer to the transactions contemplated hereby or to the Investor. 6.5 Standstill Provisions. (a) During the Standstill Period (as defined below), except as provided in Subsection 6.5(a)(iii), each Prudential Investor will not, and will cause each of its controlled Affiliates not to, and will use its reasonable efforts to cause each of its other Affiliates not to, directly or indirectly: (i) act in concert with any other person or Group by becoming a member of a 13D Group (as defined below), other than any 13D Group comprised exclusively of Investor and one or more of its Affiliates; (ii) sell, transfer, pledge (other than pledges made to commercial lending institutions securing indebtedness for borrowings) or otherwise dispose of (collectively, "Transfer") any Series B Preferred Shares or Common Stock to any person if the acquisition of such capital stock by such person would, to the knowledge of the Prudential Investor at the time of such Transfer, after due inquiry, violate the provisions of Section 8(b)(1) of the Articles of Incorporation of the Company; provided that this Section shall not prohibit Transfers (A) between the Investor and an Affiliate of the Investor or (B) between one or more Affiliates of the Investor; (iii) so long as the sum of (i) the aggregate number of shares of Common Stock held by all Prudential Investors and (ii) the aggregate number of shares of Common Stock into which the Series B Preferred Shares held by all Prudential Investors are convertible (assuming that all such Series B Preferred Shares are immediately convertible) is greater than 9.8% of the outstanding Common Stock, purchase or otherwise acquire any Common Stock or other securities of the Company if, after giving effect to such purchase or acquisition, the Prudential Investors and their Affiliates (and any persons that are members of a 13D Group of which any Prudential Investor or any of their Affiliates may be a member, notwithstanding the provisions of clause (i) above) collectively would Beneficially Own (as defined below) more than 19.998% of the outstanding shares of Common Stock of the Company; provided that the Prudential Investors shall not be deemed to have breached this covenant as a result of a decrease in the aggregate number of shares of Common Stock outstanding; (iv) solicit or propose to effect or negotiate any merger, consolidation, other business combination, liquidation, sale of the Company or all or substantially all of the assets of the Company and its Subsidiaries or any other change of control of the Company or similar extraordinary transaction; (v) solicit, initiate or participate in any "solicitation," of "proxies" or become a "participant" in an "election contest" (as such terms are defined or used in Regulation 14A under the 1934 Act, disregarding clause (iv) of Rule 14a-1(1)(2) and including an exempt solicitation pursuant to Rule 14a-2(b)(i); call, or in any way participate in a call for, any special meeting of stockholders of the Company (or take any action with respect to acting by written consent of the stockholders of the Company); request, or take any action to obtain or retain any list of holders of any securities of the Company; or initiate or propose any stockholder proposal or participate in the making of, or solicit stockholders of the Company for the approval of, one or more stockholder proposals; provided that Investor shall not be prohibited from communicating with a security holder who is engaged in any "solicitation" of "proxies" or who is a "a participant" in any "election contest"; 17 19 (vi) seek representation on the Board of Directors of the Company or a change in the size of the Board of Directors; or (vii) Transfer any capital stock of such Prudential Investor or of any Affiliate of such Prudential Investor that owns any capital stock of the Company, or Transfer of any options, warrants, convertible securities, or other similar rights to acquire any capital stock of such Prudential Investor or any such Affiliate, such that, after giving effect thereto, the Beneficial Owner (as defined below) of such shares of capital stock of the Company would, to the knowledge of the Prudential Investor at the time of such Transfer, after due inquiry, (A) Beneficially Own more than 19.998% of the outstanding shares of Common Stock of the Company or (B) violate the provisions of Section 8(b)(l) of the Articles of Incorporation, or (viii) act in concert with any person with respect to any of the foregoing. The foregoing provisions shall not be construed to prevent the Prudential Investor from voting, or granting any proxy to vote, any Shares or attending or participating in any meeting called by the Company or a person other than Prudential Investor. (b) As used in this Section, the following terms have the respective meanings set forth below: "Affiliate" shall have the meaning ascribed thereto in Rule 12b-2 promulgated under the 1934 Act, as such rule is in effect on the date hereof, but shall not include any investment company registered under the Investment Company Act of 1940, as amended, with respect to which Prudential or any of its Affiliates provides management services. "Beneficially Own" shall mean, with respect to any security, having direct or indirect (including through any Affiliate) "beneficial ownership" of such security, as determined pursuant to Rule 13d-3 under the 1934 Act, including pursuant to any agreement, arrangement or understanding, whether or not in writing. "Beneficial Ownership" and "Beneficial Owner" shall have correlative meanings. As used with respect to the Common Stock of the Company, the term shall include any shares of Common Stock issuable, without regard to any requirement of notice or the passage of time or the occurrence of any event, pursuant to any options, warrants, or other convertible or exchangeable securities held by the applicable person, its Affiliates, or any member of a 13D Group of which such person is a member. For purposes of this Agreement, the Prudential Investor shall not be deemed to Beneficially Own Common Stock held in customer accounts of any broker-dealer subsidiary of Prudential. "Covered Transaction" shall mean any merger, consolidation, other business combination, liquidation, sale of the Company or all or substantially all of the assets of the Company and its subsidiaries or any other change of control of the Company or similar extraordinary transaction, other than any transaction in which the Company is the surviving and acquiring corporation and in which the business or assets so acquired do not, or would not reasonably be expected to, have a value greater than 50% of the assets of the Company (on a consolidated basis) prior to such transaction. "Group" shall mean a "group" as such term is used in Section 13(d)(3) of the 1934 Act. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "person" shall mean any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, or other form of business or legal entity. "Prudential Investor" shall have the meaning given such term in Section 7.2 of this Agreement. 18 20 "Standstill Period" shall mean the period beginning on the date hereof and ending on the earlier of (i) January 1, 2003, and (ii) the first date following the date on which the aggregate Beneficial Ownership by the Prudential Investors and their Affiliates (and any persons that are members of a 13D Group of such Prudential Investors or any of their Affiliates are members, notwithstanding the provisions of clause (i) of Section 6.5(a)) of shares of Common Stock of the Company shall have been less than 9.8% of the number of outstanding shares of Common Stock of the Company (treating any shares of Common Stock issuable under options, warrants, or other convertible or exchangeable securities Beneficially Owned by such Prudential Investors, their Affiliates, and any member of such a 13D Group as being outstanding for this purpose). Notwithstanding the foregoing, the Standstill Period also shall be terminated on the earliest of: (i) the acquisition by any person or Group other than a Prudential Investor or any Affiliate thereof of Beneficial Ownership of 25% or more of the outstanding shares of Common Stock of the Company, on a fully diluted basis; or (ii) any breach by the Company of this Agreement that is neither cured nor desisted from within 30 days of receipt of written notice of such breach and which would reasonably be expected to materially adversely affect a Prudential Investor. "13D Group" shall mean any group of persons acquiring, holding, voting, or disposing of capital stock of the Company that would be required under Section 13(d) of the 1934 Act and the rules and regulations thereunder (as in effect, and based on legal interpretations thereof existing, on the date hereof) to file a statement on Schedule 13D with the Securities and Exchange Commission as a "person" within the meaning of Section 13(d)(3) for the 1934 Act if such group Beneficially Owned capital stock representing more than 5% of any class of capital stock of the Company then outstanding. 6.6 Specific Performance. Each of the Company and each Prudential Investor acknowledges and agrees that, in view of the uniqueness of the arrangements contemplated by Sections 6.1 and 6.5 and of this Agreement and the irreparable damage that the Prudential Investor (with respect to Section 6.1) and the Company (with respect to Section 6.5) would suffer in the event that any of the provisions of such Sections are not performed by each Prudential Investor and the Company (or their respective directors, officers, employees, financial advisors, legal advisors, accountants, agents or representatives, as the case may be) in accordance with their specific terms or are otherwise breached, that the parties hereto would not have an adequate remedy at law for money damages in the event that such Sections are not performed in accordance with their terms. Accordingly, each party shall be entitled, without the requirement of posting a bond or other security, to equitable relief, including injunctive relief and specific performance, in the event of any breach of the provisions of such Sections by the other, in addition to all other remedies available at law or in equity. 7. MISCELLANEOUS 7.1 Survival of Warranties and Covenants. The warranties and representations of the Company and the Investor contained in or made pursuant to Articles II and III of this Agreement shall survive the Closing hereunder through and until 19 21 the expiration of the statute of limitations applicable to each such warranty or representation. The covenants contained in or made pursuant to Article VI hereof shall survive the Closing hereunder indefinitely, except for any provisions which expire by their terms. The representations and warranties contained in this Agreement shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investor or the Company unless, as a result of such investigation, the Investor or the Company, as the case may be, acquires actual knowledge that a representation or warranty is untrue. 7.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. Except as specifically provided hereby, the Investor shall not be permitted to assign any of its rights hereunder to any third party; provided, however, that the Investor's rights hereunder may be assigned to another Prudential Investor (either by the Investor or another Prudential Investor). "Prudential Investor" shall mean (i) the Investor, (ii) any Person controlled (as such term is defined in Rule 12b-2 under the 1934 Act), directly or indirectly, by The Prudential Insurance Company of America and (iii) any one or more of Strategic Value Investors, LLC ("SVI"), Strategic Value Investors International LLC ("SVI International") and the Prudential Co-Investor and any Redemption Vehicle (as each such term is described in the offering documentation of SVI and SVI International), to which any Series B Preferred Shares or shares of Common Stock are transferred or to which the rights under this Agreement are assigned (either before or after the Closing), by the Investor or another Prudential Investor, and which agrees to be bound by the terms of this Agreement. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement. 7.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland, without giving effect to the conflict of law provisions thereof. 7.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.5 Titles and Subtitles. The title and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified, (b) on the fifth business day after deposit with the United States Post Office, by registered or certified mail, postage prepaid, (c) on the next business day after dispatch via nationally recognized overnight courier or (d) upon confirmation of transmission by facsimile, all addressed to the party to be notified at the address indicated for such party below, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. Notices should be provided in accordance with this Section at the following addresses: 20 22 If to the Investor, to: Strategic Value Investors c/o The Prudential Insurance Company of America c/o Prudential Real Estate Investors Inc. 8 Campus Drive Arbor Circle South Parsippany, New Jersey 07054-4493 Attn.: SVI Portfolio Manager Facsimile: (201) 734-1472 with a copy to: Goodwin, Proctor & Hoar LLP 300 Park Avenue, 17th Floor New York, New York 10022 Attn.: Robert S. Insolia Facsimile: (212) 572-6476 If to the Company, to: Charles E. Smith Residential Realty, Inc. 2345 Crystal Drive Crystal City Arlington, Virginia 22202 Attn.: Robert D. Zimet Facsimile: (703) 769-1305 with a copy to: Hogan & Hartson L.L.P. 555 13th Street, N.W. Washington, D.C. 20004-1109 Attn.: J. Warren Gorrell, Jr. Facsimile: (202) 637-5910 7.7 Finder's Fees or Broker's Fees. Each party represents that it neither is nor will be obligated for any finder's fee or broker's fee or commission in connection with this transaction. The Investor agrees to indemnify and hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee or broker's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, employees or representatives is responsible. The Company agrees to indemnify and hold harmless the Investor from any liability for any commission or compensation in the nature of a finder's fee or broker's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 21 23 7.8 Expenses. Each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the Series B Preferred Articles Supplementary, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 Amendments and Waivers. Any term of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.11 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein. 22 24 IN WITNESS WHEREOF, the parties have executed this Purchase Agreement as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Jeffrey L. Danker ---------------------------------------- Name: Jeffrey L. Danker Its: Managing Director CHARLES E. SMITH RESIDENTIAL REALTY, INC. By: /s/ Ernest Gerardi, Jr. ---------------------------------------- Name: Ernest Gerardi, Jr. Its: President 23 25 Schedule 2.1 SUBSIDIARIES 1. Charles E. Smith Residential Realty L.P. 2. First Herndon Associates Limited Partnership 3. Metropolitan Acquisition Finance LAP. 4. Smith Employment Services L.P. 5. Smith Property Holdings Columbia Road L.P. 6. Smith Property Holdings One L.P. 7. Smith Property Holdings One (D.C.) L.P. 8. Smith Property Holdings Two, L.P. 9. Smith Property Holdings Two (D.C.) L.P. 10. Smith Property Holdings Three L.P. 11. Smith Property Homage Three (D.C.) L.P. 12. Smith Property Holdings Four L.P. 13. Smith Properly Holdings Five L.P. 14. Smith Property Holdings Five (D.C.) L.P. 15. Smith Property Holdings Six LP. 16. Smith Property Holdings Six (D.C.) L.P. 17. Smith Property Holdings Seven L.P. 18. Smith Properly Holding Crystal Towers L.P. 19. Smith Property Holdings Kenmore L.P. 20. Smith Property Holdings Van Ness L.P. 21. Smith Property Holdings Crystal Plaza L.L.C. 22. Smith One, Inc. 23. Smith Two, Inc. 24. Smith Three, Inc. 25. Smith Four, Inc. 26. Smith Five, Inc. 27. Smith Six, Inc. 28. Smith Seven, Inc. 24 26 EXHIBIT A Series B Cumulative Convertible Redeemable Preferred Stock ARTICLES SUPPLEMENTARY CHARLES E. SMITH RESIDENTIAL REALTY, INC. ===================================== Articles Supplementary of Board of Directors Classifying and Designating a Series of Preferred Stock as Series B Cumulative Convertible Redeemable Preferred Stock and Fixing Distribution and Other Preferences and Rights of Such Series ===================================== Dated as of September 23, 1997 27 CHARLES E. SMITH RESIDENTIAL REALTY, INC. ===================================== Articles Supplementary of Board of Directors Classifying and Designating a Series of Preferred Stock as Series B Cumulative Convertible Redeemable Preferred Stock and Fixing Distribution and Other Preferences and Rights of Such Series ===================================== Charles E. Smith Residential Realty, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland pursuant to section 8-203(b) of the Annotated Code of Maryland that: FIRST: Pursuant to authority granted by the Amended and Restated Articles of Incorporation of the Corporation, the Board of Directors on September 10, 1997 adopted a resolution designating and classifying 1,216,666 unissued and unclassified shares of capital stock as Series B Cumulative Convertible Redeemable Preferred Stock. SECOND: The following is a description of the Series B Cumulative Convertible Redeemable Preferred Stock, including the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption thereof: Section 1. Number of Shares and Designation. This class of preferred stock shall be designated as Series B Cumulative Convertible Redeemable Preferred Stock and the number of shares which shall constitute such series shall not be more than 1,216,666 shares, par value $0.01 per share, which number may be decreased (but not below the number thereof then outstanding) from time to time by the Board of Directors. Section 2. Definitions. For purposes of the Series B Preferred Shares, the following terms shall have the meanings indicated: "Board of Directors" shall mean the Board of Directors of the Corporation or any committee authorized by such Board of Directors to perform any of its responsibilities with respect to the Series B Preferred Shares. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York City, New York are not required to be open. "Call Date" shall mean the date specified in the notice to holders required under Section 5(d) as the Call Date. "Common Shares" shall mean the shares of Common Stock, par value $0.01 per share, of the Corporation. 28 "Constituent Person" shall have the meaning set forth in Section 6(e). "Conversion Price" shall mean the conversion price per Common Share for which the Series B Preferred Shares are convertible, as such Conversion Price may be adjusted pursuant to Section 6. The initial conversion price shall be $28.50 (equivalent to a conversion rate of one Common Share for each Series B Preferred Share). "Current Market Price" of publicly traded shares of Common Stock or any other class of shares of capital stock or other security of the Corporation or any other issuer for any day shall mean the last reported sales price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the New York Stock Exchange ("NYSE") or, if such security is not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such security is listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the Nasdaq Stock Market ("NASDAQ") or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such security selected for such purpose by the Board of Directors. "Dividend Payment Date" shall mean (i) for any Dividend Period with respect to which the Corporation pays a dividend on the Common Shares, the date on which such dividend is paid, or (ii) for any Dividend Period with respect to which the Corporation does not pay a dividend on the Common Shares, a date to be set by the Board of Directors, which date shall not be later than the forty-fifth calendar day after the end of the applicable Dividend Period. "Dividend Periods" shall mean quarterly dividend periods commencing on January 1, April 1, July 1 and October 1 of each year and ending on and including the day preceding the first day of the next succeeding Dividend Period, except that: (i) the initial Dividend Period shall commence on July 1, 1997 and end on and include September 30, 1997, and (ii) the Dividend Period during which any Series B Preferred Shares shall be redeemed pursuant to Section 5 shall end on and include the Call Date with respect to the Series B Preferred Shares being redeemed. "Expiration Time" shall have the meaning set forth in Section 6(d)(iv). "Fair Market Value" shall mean the average of the daily Current Market Prices of a Common Share on the five (5) consecutive Trading Days selected by the Corporation commencing not more than 20 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. The term "ex date," when used with respect to any issuance or distribution, means the first day on which the Common Shares trade regular way, without the right to receive such issuance or distribution, on the exchange or in the market, as the case may be, used to determine that day's Current Market Price. Exh. A-2 29 "Fully Junior Shares" shall mean the Common Shares and any other class or series of shares of capital stock of the Corporation now or hereafter issued and outstanding over which the Series B Preferred Shares have preference or priority in both (i) the payment of dividends and (ii) the distribution of assets on any liquidation, dissolution or winding up of the Corporation. "Funds from Operations" shall mean net income (loss) (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring, and distributions in excess of earnings allocated to other Operating Partnership interests or minority interests (as reflected in the financial statements of the Corporation) plus depreciation/amortization of assets unique to the real estate industry, all computed in a manner consistent with the revised definition of Funds From Operations adopted by the National Association of Real Estate Investment Trusts (NAREIT), in its White Paper dated March 1995, as such definitions may be modified from time to time, as determined by the Corporation in good faith. "Issue Date" shall mean the date on which the first Series B Preferred Shares are issued. "Junior Shares" shall mean the Common Shares and any other class or series of capital stock of the Corporation now or hereafter issued and outstanding over which the Series B Preferred Shares have preference or priority in either (i) the payment of dividends or (ii) the distribution of assets on any liquidation, dissolution or winding up of the Corporation. "Liquidation Preference" shall have the meaning set forth in Section 4(a). "Non-Electing Share" shall have the meaning set forth in Section 6(e). "Operating Partnership" shall mean the Charles E. Smith Residential Realty, L.P., a Delaware limited partnership. "Parity Shares" shall have the meaning set forth in Section 8(b). "Person" shall mean any individual, firm, partnership, corporation, limited liability company or other entity, and shall include any successor (by merger or otherwise) of such entity. "Purchased Shares" shall have the meaning set forth in Section 6(d)(iv). "Securities" and "Security" shall have the meanings set forth in Section 6(d)(iii). "Securities Act" shall mean the Securities Act of 1933, as amended. "Series B Preferred Shares" shall mean the shares of Series B Cumulative Convertible Redeemable Preferred Stock. "Set apart for payment" shall be deemed to include, without any action other than the following, the recording by the Corporation in its accounting ledgers of any Exh. A-3 30 accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Directors, the allocation of funds to be so paid on any series or class of shares of capital stock of the Corporation; provided, however, that if any funds for any class or series of Junior Shares or any class or series of shares of capital stock ranking on a parity with the Series B Preferred Shares as to the payment of dividends are placed in a separate account of the Corporation or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Series B Preferred Shares shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. "Trading Day" shall mean any day on which the securities in question are traded on the NYSE, or if such securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading on any national securities exchange, on the National Market System of NASDAQ, or if such securities are not quoted on such National Market System, in the securities market in which the securities are traded. "Transaction" shall have the meaning set forth in Section 6(e). "Transfer Agent" shall mean First Union National Bank, or such other agent or agents of the Corporation as may be designated by the Board of Directors or their designee as the transfer agent, registrar and dividend disbursing agent for the Series B Preferred Shares. "Units" shall mean Partnership Units as that term is defined in the Amended and Restated Agreement of Limited Partnership of the Operating Partnership. "Voting Preferred Shares" shall have the meaning set forth in Section 9. "Weighted Average Trading Price" shall mean, for any Trading Day, the number obtained by dividing (i) the sum of the products, for each sale of Common Shares on such Trading Day, of (a) the sale price per Common Share and (b) the number of Common Shares sold by (ii) the total number of Common Shares sold on such Trading Day. Section 3. Dividends. (a) The holders of Series B Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative preferential dividends payable in cash in an amount per share equal to the greater of (i) 7.0877% of the Liquidation Preference per annum (equivalent to $2.02 per share) or (ii) the ordinary cash dividends (determined on each Dividend Payment Date) on the Common Shares, or portion thereof, into which a Series B Preferred Share is convertible. The dividends referred to in clause (ii) of the preceding sentence shall equal the number of Common Shares, or portion thereof, into which a Series B Preferred Share is convertible, multiplied by the most current quarterly dividend on a Common Share on or before the applicable Dividend Payment Date. If the Corporation pays an ordinary cash dividend on the Common Shares with respect to a Dividend Period after the date on which the Dividend Payment Date is declared pursuant Exh. A-4 31 to clause (ii) of the definition of Dividend Payment Date and the dividend calculated pursuant to clause (ii) of this paragraph (a) with respect to such Dividend Period is greater than the dividend previously declared on the Series B Preferred Shares with respect to such Dividend Period, the Corporation shall pay an additional dividend to the holders of the Series B Preferred Shares on the date on which the dividend on the Common Shares is paid, in an amount equal to the difference between (y) the dividend calculated pursuant to clause (ii) of this paragraph (a) and (z) the amount of dividends previously declared on the Series B Preferred Shares with respect to such Dividend Period. The dividends shall begin to accrue and shall be fully cumulative from the first day of the applicable Dividend Period, whether or not in any Dividend Period or Periods there shall be funds of the Corporation legally available for the payment of such dividends, and shall be payable quarterly, when, as and if declared by the Board of Directors, in arrears on Dividend Payment Dates. Each such dividend shall be payable in arrears to the holders of record of Series B Preferred Shares as they appear in the records of the Corporation at the close of business on such record dates, not less than 10 nor more than 50 days preceding such Dividend Payment Dates thereof, as shall be fixed by the Board of Directors. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time and for such interim periods, without reference to any regular Dividend Payment Date, to holders of record on such date, not less than 10 nor more than 50 days preceding the payment date thereof, as may be fixed by the Board of Directors. Any dividend payment made on Series B Preferred Shares shall first be credited against the earliest accrued but unpaid dividend due with respect to Series B Preferred Shares which remains payable. (b) The amount of dividends referred to in clause (i) of Section 3(a) payable for each full Dividend Period on the Series B Preferred Shares shall be computed by dividing the annual dividend rate by four. The distribution payable with respect to the initial Dividend Period will include a full dividend with respect to such Dividend Period, notwithstanding the fact that the Series B Preferred Shares were issued after September 30, 1997 (i.e., the greater of $0.505 per Series B Share or the ordinary cash dividend paid on the Common Shares with respect to the quarterly period ending on or about September 30, 1997). The amount of dividends payable for any period shorter than a full Dividend Period, on the Series B Preferred Shares shall be computed on the basis of a 360-day year of twelve 30-day months. Holders of Series B Preferred Shares shall not be entitled to any dividends, whether payable in cash, property or shares, in excess of cumulative dividends, as herein provided, on the Series B Preferred Shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series B Preferred Shares which may be in arrears. (c) So long as any Series B Preferred Shares are outstanding, no dividends, except as described in the immediately following sentence, shall be declared or paid or set apart for payment on any class or series of Parity Shares for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series B Preferred Shares for all Dividend Periods terminating on or prior to the dividend payment date on such class or series of Parity Shares. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon Series B Preferred Shares and all dividends declared upon any other class or series of Parity Shares shall be declared ratably in proportion to the respective amounts of Exh. A-5 32 dividends accumulated and unpaid on the Series B Preferred Shares and accumulated and unpaid on such Parity Shares. (d) So long as any Series B Preferred Shares are outstanding, no dividends (other than dividends or distributions paid solely in shares of, or options, warrants or rights to subscribe for or purchase shares of, Fully Junior Shares) shall be declared or paid or set apart for payment or other distribution shall be declared or made or set apart for payment upon Junior Shares, nor shall any Junior Shares be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Shares made for purposes of an employee incentive or benefit plan of the Corporation or any subsidiary) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any Junior Shares) by the Corporation, directly or indirectly (except by conversion into or exchange for Fully Junior Shares), unless in each case (i) the full cumulative dividends on all outstanding Series B Preferred Shares and any other Parity Shares of the Corporation shall have been or contemporaneously are declared and paid or declared and set apart for payment for all past Dividend Periods with respect to the Series B Preferred Shares and all past dividend periods with respect to such Parity Shares and (ii) sufficient funds shall have been or contemporaneously are declared and paid or declared and set apart for the payment of the dividend for the current Dividend Period with respect to the Series B Preferred Shares and the current dividend period with respect to such Parity Shares. (e) No distributions on Series B Preferred Shares shall be declared by the Board of Directors or paid or set apart for payment by the Corporation at such time as the terms and provisions of any agreement of the Corporation, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law. Exh. A-6 33 Section 4. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of Junior Shares, the holders of the Series B Preferred Shares shall be entitled to receive Twenty Eight Dollars and Fifty Cents ($28.50) (the "Liquidation Preference") per Series B Preferred Share plus an amount equal to all dividends (whether or not earned or declared) accumulated, accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment; provided, that the dividend payable with respect to the Dividend Period containing the date of final distribution shall be equal to the greater of (i) the dividend provided in Section 3(a)(i) or (ii) the dividend determined pursuant to Section 3(a)(ii) for the preceding Dividend Period. Until the holders of the Series B Preferred Shares have been paid the Liquidation Preference in full, no payment will be made to any holder of Junior Stock upon the liquidation, dissolution, or winding up of the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the Series B Preferred Shares shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares of any class or series of Parity Shares, then such assets, or the proceeds thereof, shall be distributed among the holders of Series B Preferred Shares and any such other Parity Shares ratably in accordance with the respective amounts that would be payable on such Series B Preferred Shares and any such other Parity Shares if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Corporation with one or more corporations, real estate investment trusts or other entities, (ii) a sale, lease or conveyance of all or substantially all of the Corporation's property or business or (iii) a statutory share exchange shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation. (b) Subject to the rights of the holders of shares of any Parity Shares upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the holders of the Series B Preferred Shares, as provided in this Section 4, any other series or class or classes of Junior Shares shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series B Preferred Shares shall not be entitled to share therein. Section 5. Redemption at the Option of the Corporation. (a) The Series B Preferred Shares shall be redeemable by the Corporation, at its option, in whole at any time or from time to time in part as set forth herein, subject to the following provisions. Series B Preferred Shares may be redeemed, in whole or in part, at the option of the Corporation, at any time by issuing and delivering to each holder for each Series B Preferred Share to be redeemed such number of authorized but previously unissued Common Shares as equals the Liquidation Preference (excluding any accumulated, accrued and unpaid dividends, if any, to the Call Date, which are to be paid in cash as provided below, whether or not earned or declared) per Series B Preferred Exh. A-7 34 Share divided by the Conversion Price as in effect as of the opening of business on the Call Date; provided that the Corporation may not issue to any holder a number of Common Shares that would result in such holder exceeding the Common Stock Ownership Limit then applicable to such holder; provided further that the Corporation shall deliver to each holder, as a condition to the redemption of Series B Shares pursuant to this paragraph, a certificate of an officer of the Corporation stating that the Corporation has not then commenced liquidation or bankruptcy proceedings and does not then have any intention of commencing any such proceedings. (b) Series B Preferred Shares shall be redeemed by the Corporation on the date specified in the notice to holders required under paragraph (d) of this Section 5 (the "Call Date"). The Call Date shall be selected by the Corporation, shall be specified in the notice of redemption, and shall be not less than 30 day nor more than 60 days after the date notice of redemption is sent by the Corporation. Upon any redemption of Series B Preferred Shares pursuant to paragraph (a) of this Section 5, the Corporation shall pay in cash to the holder of such shares an amount equal to all accumulated, accrued, and unpaid dividends, if any, to the Call Date, whether or not earned or declare as provided in this paragraph. Immediately prior to authorizing any redemption of the Series B Preferred Shares, and as a condition precedent for such redemption, the Corporation, by resolution of its Board of Directors, shall declare a mandatory dividend on the Series B Preferred Shares, payable in cash on the Call Date in an amount equal to all accumulated, accrued, and unpaid dividends as of the Call Date on the Series B Preferred Shares to be redeemed, which amount shall be added to the redemption price, except to the extent such dividends are to be paid pursuant to the immediately following sentence. If the Call Date falls after a dividend payment record date and prior to the corresponding Dividend Payment Date, then each holder of Series B Preferred Shares at the close of business on such dividend payment record date shall be entitled to the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the redemption of such shares prior to such Dividend Payment Date. Except as provided above, the Corporation shall make no payment or allowance for accumulated or accrued dividends on Series B Preferred Shares called for redemption or on the Common Shares issued upon such redemption. (c) If full cumulative dividends on the Series B Preferred Shares and any other class or series of Parity Shares of the Corporation have not been declared and paid or declared and set apart for payment, the Series B Preferred Shares may not be redeemed under this Section 5 in part and neither the Corporation nor any of its subsidiaries may purchase or acquire Series B Preferred Shares, otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of Series B Preferred Shares. (d) Notice of the redemption of any Series B Preferred Shares under this Section 5 shall be mailed by first-class mail to each holder of record of Series B Preferred Shares to be redeemed at the address of each such holder as shown on the Corporation's records, not less than 30 nor more than 90 days prior to the Call Date. Neither the failure to mail any notice required by this paragraph (d), nor any defect therein or in the mailing thereof, to any particular holder, shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Any notice which was mailed in the manner herein provided shall be conclu- Exh. A-8 35 sively presumed to have been duly given on the date mailed whether or not the holder receives the notice. Each such mailed notice shall state, as appropriate: (1) the Call Date; (2) the number of Series B Preferred Shares to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the number of Common Shares to be issued in redemption of the Series B Preferred Shares to be redeemed; (4) the place or places at which certificates for such shares are to be surrendered; (5) the then-current Conversion Price; and (6) that dividends on the shares to be redeemed shall cease to accrue on such Call Date except as otherwise provided herein. Notice having been mailed as aforesaid, from and after the Call Date (unless the Corporation shall fail to make available an amount of Common Shares and cash necessary to effect such redemption, including all accumulated, accrued, and unpaid dividends to the Call Date, whether or not earned or declared), (i) except as otherwise provided herein, dividends on the Series B Preferred Shares so called for redemption shall cease to accumulate or accrue on the Series B Preferred Shares called for redemption (except that, in the case of a Call Date after a dividend payment record date and prior to the corresponding Dividend Payment Date, holders of Series B Preferred Shares on the dividend payment record date will be entitled on such Dividend Payment Date to receive the dividend paid on such shares), (ii) such shares shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Series B Preferred Shares of the Corporation shall cease (except the rights to convert and to receive the Common Shares and/or cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required and to receive any dividends payable thereon). The Corporation's obligation to provide Common Shares and/or cash in accordance with the preceding sentence shall be deemed fulfilled if, on or before the Call Date, the Corporation shall deposit with a bank or trust company (which may be an affiliate of the Corporation) that has an office in the Borough of Manhattan, City of New York, and that has, or is an affiliate of a bank or trust company that has, capital and surplus of at least $500,000,000, such number of Common Shares and such amount of cash as is necessary for such redemption, in trust, with irrevocable instructions that such Common Shares and/or cash be applied to the redemption of the Series B Preferred Shares so called for redemption. In the case of any redemption pursuant to paragraph (a)(i) of this Section 5, at the close of business on the Call Date, each holder of Series B Preferred Shares to be redeemed (unless the Corporation defaults in the delivery of the Common Shares or cash payable on such Call Date) shall be deemed to be the record holder of the Common Shares into which such Series B Preferred Shares are to be converted at redemption, regardless of whether such holder has surrendered the certificates representing the Series B Preferred Shares to be so redeemed. No interest shall accrue for the benefit of the holders of Series B Preferred Shares to be redeemed on any cash so set aside by the Corporation. Subject to applicable escheat laws, any such cash unclaimed at the end of two years from the Call Date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of such cash. As promptly as practicable after the surrender in accordance with such notice of the certificates for any such shares so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and if the notice shall so state), such certificates shall be exchanged in accordance with such notice for certificates representing Common Shares and/or any cash (without interest thereon) for which such shares have Exh. A-9 36 been redeemed. If fewer than all the outstanding Series B Preferred Shares are to be redeemed, shares to be redeemed shall be selected by the Corporation from outstanding Series B Preferred Shares not previously called for redemption pro rata (as nearly as may be), by lot or by any other method determined by the Corporation in its sole discretion to be equitable. If fewer than all the Series B Preferred Shares represented by any certificate are redeemed, then new certificates representing the unredeemed shares shall be promptly issued without cost to the holder thereof. (e) In the case of any redemption pursuant to paragraph (a)(i) of this Section 5, (i) no fractional Common Shares or scrip representing fractions of Common Shares shall be issued upon redemption of the Series B Preferred Common Shares. Instead of any fractional interest in Common Shares that would otherwise be deliverable upon redemption of Series B Preferred Shares, the Corporation shall pay to the holder of such share an amount in cash (rounded to the nearest cent) based upon the Current Market Price of the Common Shares on the Trading Day immediately preceding the Call Date. If more than one share shall be surrendered for redemption at one time by the same holder, the number of full Common Shares issuable upon redemption thereof shall be computed on the basis of the aggregate number of Series B Preferred Shares so surrendered. (ii) the Corporation covenants that any Common Shares issued upon redemption of Series B Preferred Shares shall be validly issued, fully paid and non-assessable. The Corporation shall use its reasonable best efforts to list the Common Shares required to be delivered upon any such redemption of Series B Preferred Shares, prior to such redemption, upon each national securities exchange, if any, upon which the outstanding Common Shares are listed at the time of such delivery. Section 6. Conversion. Holders of Series B Preferred Shares shall have the right to convert all or a portion of such shares into Common Shares, as follows: (a) Subject to and upon compliance with the provisions of this Section 6 and the provisions of Article VIII of the Corporation's Articles of Incorporation, a holder of Series B Preferred Shares shall have the right, at his or her option, on or after the date 90 days after the Issue Date, to convert such shares into the number of authorized but previously unissued fully paid and non-assessable Common Shares obtained by dividing the aggregate Liquidation Preference of such shares (exclusive of accumulated, accrued, and unpaid dividends, which are to be paid in cash as provided below) by the Conversion Price (as in effect at the time and on the date provided for in the last paragraph of paragraph (b) of this Section 6) by surrendering such shares to be converted, such surrender to be made in the manner provided in paragraph (b) of this Section 6. Notwithstanding any provision of Article VIII of the Corporation's Articles of Incorporation, a holder shall be entitled to convert shares of Series B Preferred Stock immediately prior to the record date for payments of distributions to holders of Common Shares upon any liquidation or winding up of the Company. (b) In order to exercise the conversion right, the holder of each Series B Preferred Share to be converted shall surrender the certificate representing such share, Exh. A-10 37 duly endorsed or assigned to the Corporation or in blank, at the office of the Transfer Agent, accompanied by written notice to the Corporation that the holder thereof elects to convert such Series B Preferred Shares. Unless the shares issuable on conversion are to be issued in the same name as the name in which such Series B Preferred Share is registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Corporation demonstrating that such taxes have been paid). Holders of Series B Preferred Shares at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion thereof following such dividend payment record date and prior to such Dividend Payment Date. However, Series B Preferred Shares surrendered for conversion during the period between the close of business on any dividend payment record date with respect to the Series B Preferred Shares and the opening of business on the dividend payment record date with respect to the Common Shares for the corresponding Dividend Period (except shares converted after the issuance of notice of redemption with respect to a Call Date during such period, such Series B Preferred Shares being entitled to such dividend on the Dividend Payment Date) must be accompanied by payment of an amount equal to the dividend payable on such Common Shares on such Dividend Payment Date. A holder of Series B Preferred Shares on a dividend payment record date who (or whose transferee) tenders any such shares for conversion into Common Shares on the corresponding Dividend Payment Date will receive the dividend payable by the Corporation on such Series B Preferred Shares on such date, and the converting holder need not include payment of the amount of such dividend upon surrender of Series B Preferred Shares for conversion. Except as provided above, the Corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the Common Shares issued upon such conversion. As promptly as practicable after the surrender of certificates for Series B Preferred Shares as aforesaid, the Corporation shall issue and shall deliver at such office to such holder, or on his or her written order, a certificate or certificates for the number of full Common Shares issuable upon the conversion of such shares in accordance with provisions of this Section 6, and any fractional interest in respect of a Common Share arising upon such conversion shall be settled as provided in paragraph (c) of this Section 6. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for Series B Preferred Shares shall have been surrendered and such notice shall have been received by the Corporation as aforesaid (and if applicable, payment of an amount equal to the dividend payable on such shares shall have been received by the Corporation as described above), and the person or persons in whose name or names any certificate or certificates for Common Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date unless the share transfer books of the Corporation shall be closed on that date, in which event such Exh. A-11 38 person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such share transfer books are open, but such conversion shall be at the Conversion Price in effect on the date on which such shares shall have been surrendered and such notice received by the Corporation. (c) No fractional shares or scrip representing fractions of Common Shares shall be issued upon conversion of the Series B Preferred Shares. Instead of any fractional interest in a Common Share that would otherwise be deliverable upon the conversion of a Series B Preferred Share, the Corporation shall pay to the holder of such share an amount in cash based upon the Current Market Price of the Common Shares on the Trading Day immediately preceding the date of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of Series B Preferred Shares so surrendered. (d) The Conversion Price shall be adjusted from time to time as follows: (i) If the Corporation shall after the Issue Date (A) pay a dividend or make a distribution on its capital shares in Common Shares, (B) subdivide its outstanding Common Shares into a greater number of shares, (C) combine its outstanding Common Shares into a smaller number of shares or (D) issue any shares of capital stock by reclassification of its Common Shares, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or distribution or at the opening of business on the Business Day next following the day on which such subdivision, combination or reclassification becomes effective, as the case may be, shall be adjusted so that the holder of any Series B Preferred Share thereafter surrendered for conversion shall be entitled to receive the number of Common Shares that such holder would have owned or have been entitled to receive after the happening of any of the events described above as if such Series B Preferred Shares had been converted immediately prior to the record date in the case of a dividend or distribution or the effective date in the case of a subdivision, combination or reclassification. An adjustment made pursuant to this subparagraph (i) shall become effective immediately after the opening of business on the Business Day next following the record date (except as provided in paragraph (h) below) in the case of a dividend or distribution and shall become effective immediately after the opening of business on the Business Day next following the effective date in the case of a subdivision, combination or reclassification. (ii) If the Corporation shall issue after the Issue Date rights, options or warrants to all holders of Common Shares entitling them (for a period expiring within 45 days after the record date described below) to subscribe for or purchase Common Shares at a price per share less than 94% (100% if a stand-by underwriter is used and charges the Corporation a commission) of the Fair Market Value per Common Share on the record date for the determination of stockholders entitled to receive such rights, options or warrants, then the Conversion Price in effect at the opening of business on the Business Day next following such record date shall be adjusted to equal the price determined by Exh. A-12 39 multiplying (A) the Conversion Price in effect immediately prior to the opening of business on the Business Day next following the date fixed for such determination by (B) a fraction, the numerator of which shall be the sum of (x) the number of Common Shares outstanding on the close of business on the date fixed for such determination and (y) the number of shares that the aggregate proceeds to the Corporation from the exercise of such rights, options or warrants for Common Shares would purchase at 94% of such Fair Market Value (or 100% in the case of a stand-by underwriting), and the denominator of which shall be the sum of (x) the number of Common Shares outstanding on the close of business on the date fixed for such determination and (y) the number of additional Common Shares offered for subscription or purchase pursuant to such rights, options or warrants. Such adjustment shall become effective immediately after the opening of business on the day next following such record date (except as provided in paragraph (h) below). In determining whether any rights, options or warrants entitle the holders of Common Shares to subscribe for or purchase Common Shares at less than 94% of such Fair Market Value (or 100% in the case of a stand-by underwriting), there shall be taken into account any consideration received by the Corporation upon issuance and upon exercise of such rights, options or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (iii) If the Corporation shall distribute to all holders of its Common Shares any securities of the Corporation (other than Common Shares) or evidence of its indebtedness or assets (including cash other than cumulative cash dividends or cash distributions paid with respect to the Common Shares after December 31, 1996 which are not in excess of the following: the sum of (A) the Corporation's cumulative undistributed Funds from Operations at December 31, 1996, plus (B) the cumulative amount of Funds from Operations, as determined by the Board of Directors, after December 31, 1996, minus (C) the cumulative amount of dividends accrued or paid in respect of the Series B Preferred Shares or any other class or series of preferred stock of the Corporation after the Issue Date) or rights, options or warrants to subscribe for or purchase any of its securities (excluding those rights, options and warrants issued to all holders of Common Shares entitling them for a period expiring within 45 days after the record date referred to in subparagraph (ii) above to subscribe for or purchase Common Shares, which rights and warrants are referred to in and treated under subparagraph (ii) above) (any of the foregoing being hereinafter in this subparagraph (iii) collectively called the "Distribution"), then in each such case the Conversion Price shall be adjusted so that it shall equal the price determined by multiplying (x) the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such Distribution by (y) a fraction, the numerator of which shall be the Fair Market Value per Common Share on the record date described below less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and shall be described in a resolution of the Board of Directors), of the portion of the Distribution so distributed and applicable to one Common Share, and the denominator of which shall be the Fair Market Value per Common Share on the record date mentioned below. Such adjustment shall become effective immediately at the opening of business on the Exh. A-13 40 Business Day next following (except as provided in paragraph (h) below) the record date for the determination of stockholders entitled to receive such Distribution. For the purposes of this subparagraph (iii), a Distribution, which is distributed not only to the holders of the Common Shares on the date fixed for the determination of stockholders entitled to such Distribution, but also is distributed with each Common Share delivered to a Person converting a Series B Preferred Share after such determination date, shall not require an adjustment of the Conversion Price pursuant to this subparagraph (iii); provided that on the date, if any, on which a person converting a Series B Preferred Share would no longer be entitled to receive such Distribution with a Common Share (other than as a result of the termination of all such Distribution), such Distribution shall be deemed to have occurred and the Conversion Price shall be adjusted as provided in this subparagraph (iii) (and such day shall be deemed to be "the date fixed for the determination of the stockholders entitled to receive such Distribution" and "the record date" within the meaning of the two preceding sentences). (iv) In case a tender or exchange offer (which term shall not include open market repurchases by the Corporation) made by the Corporation or any subsidiary of the Corporation for all or any portion of the Common Shares shall expire and such tender or exchange offer shall involve the payment by the Corporation or such subsidiary of consideration per Common Share having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors), at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer, that exceeds the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this subparagraph, by a fraction of which the numerator shall be the number of Common Shares outstanding (including any tendered or exchanged shares) at the Expiration Time, multiplied by the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, and the denominator shall be the sum of (A) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based upon the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any maximum, being referred to as the "Purchased Shares") and (B) the product of the number of Common Shares outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (v) No adjustment in the Conversion Price shall be required unless such adjustment would require a cumulative increase or decrease of at least 1% in such price; provided, however, that any adjustments that by reason of this subparagraph (v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment until made; and provided, further, that Exh. A-14 41 any adjustment shall be required and made in accordance with the provisions of this Section 6 (other than this subparagraph (v)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of Common Shares. Notwithstanding any other provisions of this Section 6, the Corporation shall not be required to make any adjustment of the Conversion Price for the issuance of any Common Shares pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of additional optional amounts in Common Shares under such plan. All calculations under this Section 6 shall be made to the nearest cent (with $.005 being rounded upward) or to the nearest one-tenth of a share (with .05 of a share being rounded upward), as the case may be. Anything in this paragraph (d) to the contrary notwithstanding, the Corporation shall be entitled, to the extent permitted by law, to make such reductions in the Conversion Price, in addition to those required by this paragraph (d), as it in its discretion shall determine to be advisable in order that any share dividends, subdivision of shares, reclassification or combination of shares, distribution of rights or warrants to purchase shares or securities, or distribution of other assets (other than cash dividends) hereafter made by the Corporation to its stockholders shall not be taxable, or it that is not possible, to reduce any income taxes otherwise payable as a result of such event to the maximum extent possible. (e) If the Corporation shall be a party to any transaction (including without limitation a merger, consolidation, statutory share exchange, self tender offer for all or a substantial portion of its Common Shares, sale of all or substantially all of the Corporation's assets or recapitalization of the Common Shares and excluding any transaction as to which subparagraph (d)(i) of this Section 6 applies) (each of the foregoing being referred to herein as a "Transaction"), in each case as a result of which Common Shares are converted into the right to receive shares, securities or other property (including cash or any combination thereof), each Series B Preferred Share which is not redeemed or converted into the right to receive shares, securities or other property in connection with such Transaction shall thereafter be convertible into the kind and amount of shares, securities and other property (including cash or any combination thereof) receivable upon the consummation of such Transaction by a holder of that number of Common Shares into which one Series B Preferred Share was convertible immediately prior to such Transaction, assuming such holder of Common Shares (i) is not a Person with which the Corporation consolidated or into which the Corporation merged or which merged into the Corporation or to which such sale or transfer was made, as the case may be ("Constituent Person"), or an affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of shares, securities and other property (including cash) receivable upon such Transaction (provided that if the kind or amount of shares, securities and other property (including cash) receivable upon such Transaction is not the same for each Common Share held immediately prior to such Transaction by other than a Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-Electing Share"), then for the purpose of this paragraph (e) the kind and amount of shares, securities and other property (including cash) receivable upon such Transaction by each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the Non-Electing Shares). The Corporation shall not be a party to any Transaction unless the terms of such Transaction are consistent with the provisions Exh. A-15 42 of this paragraph (e), and it shall not consent or agree to the occurrence of any Transaction until the Corporation has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Series B Preferred Shares that will contain provisions enabling the holders of the Series B Preferred Shares that remain outstanding after such Transaction to convert into the consideration received by holders of Common Shares at the Conversion Price in effect immediately prior to such Transaction. The provisions of this paragraph (e) shall similarly apply to successive Transactions. (f) If: (i) the Corporation shall declare a dividend (or any other distribution) on its Common Shares (other than cash dividends or distributions paid with respect to the Common Shares after December 31, 1996 not in excess of the sum of the Corporation's cumulative undistributed Funds from Operations at December 31, 1996, plus the cumulative amount of Funds from Operations, as determined by the Board of Directors, after December 31, 1996, minus the cumulative amount of dividends accrued or paid in respect of the Series B Preferred Shares or any other class or series of preferred shares of capital stock of the Corporation after the Issue Date); or (ii) the Corporation shall authorize the granting to all holders of Common Shares of rights, options or warrants to subscribe for or purchase any shares of any class or any other rights, options or warrants; or (iii) there shall be any reclassification of the Common Shares (other than an event to which subparagraph (d)(i) of this Section 6 applies) or any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or a statutory share exchange, or a self tender offer by the Corporation for all or a substantial portion of its outstanding Common Shares (or an amendment thereto changing the maximum number of shares sought or the amount of type of consideration being offered therefor) or the sale or transfer of all or substantially all of the assets of the Corporation as an entirety; or (iv) there shall occur the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; then the Corporation shall cause to be filed with the Transfer Agent and shall cause to be mailed to the holders of Series B Preferred Shares at their addresses as shown on the records of the Corporation, as promptly as possible, but at least 10 days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution or rights, options or warrants are to be determined or (B) the date on which such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Exh. A-16 43 Shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up. Failure to give or receive such notice or any defect therein shall not affect the legality or validity of the proceedings described in this Section 6. (g) Whenever the Conversion Price is adjusted as herein provided, the Corporation shall promptly file with the Transfer Agent an officer's certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Corporation shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date of such adjustment and shall mail such notice of such adjustment of the Conversion Price to the holder of each Series B Preferred Share at such holder's last address as shown on the records of the Corporation. (h) In any case in which paragraph (d) of this Section 6 provides that an adjustment shall become effective on the day next following the record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any Series B Preferred Share converted after such record date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of any fraction pursuant to paragraph (c) of this Section 6. (i) There shall be no adjustment of the Conversion Price in case of the issuance of any shares of capital stock of the Corporation in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 6. If any action or transaction would require adjustment of the Conversion Price pursuant to more than one paragraph of this Section 6, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value. (j) If the Corporation shall take any action affecting the Common Shares, other than action described in this Section 6, that in the opinion of the Board of Directors would materially and adversely affect the conversion rights of the holders of the Series B Preferred Shares, the Conversion Price for the Series B Preferred Shares may be adjusted, to the extent permitted by law, in such manner, if any, and at such time, as the Board of Directors, in its sole discretion, may determine to be equitable in the circumstances. (k) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Shares, solely for the purpose of effecting conversion of the Series B Preferred Shares, the full number of Common Shares deliverable upon the conversion of all outstanding Series B Preferred Shares not theretofore converted. For purposes of this paragraph (k), the number of Common Shares that shall be deliverable upon the conversion of all outstanding Series B Preferred Shares shall be computed as if at the time of computation all such outstanding shares were held by a single holder. Exh. A-17 44 The Corporation covenants that any Common Shares issued upon conversion of the Series B Preferred Shares shall be validly issued, fully paid and non-assessable. Before taking any action that would cause an adjustment reducing the Conversion Price below the then-par value of the Common Shares deliverable upon conversion of the Series B Preferred Shares, the Corporation will take any action that, in the opinion of its counsel, may be necessary in order that the Corporation may validly and legally issue fully paid and (subject to any customary qualification based upon the nature of a real estate investment trust) non-assessable Common Shares at such adjusted Conversion Price. The Corporation shall use reasonable best efforts to list the Common Shares required to be delivered upon conversion of the Series B Preferred Shares, prior to such delivery, upon each national securities exchange, if any, upon which the outstanding Common Shares are listed at the time of such delivery. The Corporation shall endeavor to comply with all federal and state securities laws and regulations thereunder in connection with the issuance of any securities that the Corporation shall be obligated to deliver upon conversion of the Series B Preferred Shares. In addition to any legend required by Article VIII of the Articles of Incorporation, the certificates evidencing such securities shall bear such legends restricting transfer thereof in the absence of registration under applicable securities laws or an exemption therefrom as the Corporation may in good faith deem appropriate. (l) The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Common Shares or other securities or property on conversion of the Series B Preferred Shares pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Shares or other securities or property in a name other than that of the holder of the Series B Preferred Shares to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or established, to the reasonable satisfaction of the Corporation, that such tax has been paid. Section 7. Shares To Be Retired. All Series B Preferred Shares which shall have been issued and reacquired in any manner by the Corporation shall be restored to the status of authorized but unissued shares of capital stock of the Corporation, without designation as to class or series. Section 8. Ranking. Any class or series of shares of capital stock of the Corporation shall be deemed to rank: (a) prior to the Series B Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series B Preferred Shares; (b) on a parity with the Series B Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, Exh. A-18 45 whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof shall be different from those of the Series B Preferred Shares, if the holders of such class or series and the Series B Preferred Shares shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other ("Parity Shares"); the Series A Cumulative Convertible Redeemable Preferred Stock of the Corporation are Parity Shares; (c) junior to the Series B Preferred Shares, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series shall be Junior Shares; and (d) junior to the Series B Preferred Shares, as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series shall be Fully Junior Shares. Section 9. Voting. So long as any Series B Preferred Shares are outstanding, in addition to any other vote or consent of stockholders required by law or by the Corporation's Articles of Incorporation, the affirmative vote of at least 66-2/3% of the votes entitled to be cast by the holders of the Series B Preferred Shares given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (a) Any amendment, alteration or repeal of any of the provisions of the Corporation's Articles of Incorporation, the Corporation's By-Laws or these Articles Supplementary that materially and adversely affects the voting powers, rights or preferences of the holders of the Series B Preferred Shares; provided, however, that the amendment of the provisions of the Corporation's Articles of Incorporation so as to authorize or create or to increase the authorized amount of, any Fully Junior Shares, Junior Shares that are not senior in any respect to the Series B Preferred Shares or any Parity Shares shall not be deemed to materially adversely affect the voting powers, rights or preferences of the holders of Series B Preferred Shares; or (b) A share exchange that affects the Series B Preferred Shares, a consolidation with or merger of the Corporation into another entity, or a consolidation with or merger of another entity into the Corporation, unless in each such case each Series B Preferred Share (i) shall remain outstanding without a material and adverse change to its terms and rights or (ii) shall be converted into or exchanged for convertible preferred shares of the surviving entity having preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption thereof identical to that of a Series B Preferred Share (except for changes that do not materially and adversely affect the holders of the Series B Preferred Shares); or (c) The authorization, reclassification or creation of, or the increase in the authorized amount of, any shares of any class or any security convertible into shares of any class ranking prior to the Series B Preferred Shares in the distribution of assets on any liquidation, dissolution or winding up of the Corporation or in the payment of dividends; Exh. A-19 46 provided, however, that no such vote of the holders of Series B Preferred Shares shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect, or when the issuance of any such prior shares or convertible security is to be made, as the case may be, provision is made for the redemption of all Series B Preferred Shares at the time outstanding for Common Stock. For purposes of the foregoing provisions of this Section 9, each Series B Preferred Share shall have one (1) vote per share, except that when any other series of Preferred Shares shall have the right to vote with the Series B Preferred Shares as a single class on any matter, then the Series B Preferred Shares and such other series shall have with respect to such matters one (1) vote per $28.50 of stated liquidation preference. Except as otherwise required by applicable law or as set forth herein, the Series B Preferred Shares shall not have any relative, participating, optional or other special voting rights and powers other than as set forth herein, and the consent of the holders thereof shall not be required for the taking of any Corporation action. Section 10. Record Holders. The Corporation and the Transfer Agent may deem and treat the record holder of any Series B Preferred Shares as the true and lawful owner thereof for all purposes, and neither the Corporation nor the Transfer Agent shall be affected by any notice to the contrary. Exh. A-20 47 IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary to be duly executed by its President and attested by its Secretary this ___ day of September, 1997. CHARLES E. SMITH RESIDENTIAL REALTY, INC. By: - ---------------------------------- Its: President I, Robert Zimet, Secretary, hereby acknowledge on behalf of Charles E. Smith Residential Realty, Inc. that the foregoing Articles Supplementary are the corporate act of said corporation under the penalties of perjury. Attest: - --------------------------------- Exh. A-21 48 Exhibit B REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of October 3, 1997 (this "Agreement"), by and between Charles E. Smith Residential Realty, Inc., a Maryland corporation (the "Company"), The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), Strategic Value Investors, LLC, a Delaware limited liability company ("SVI-US") and Strategic Value Investors International, LLC, a Delaware limited liability company ("SVI-International")(Prudential, SVI-US and SVI-International collectively, the "Investors"). WHEREAS, pursuant to that certain Series B Cumulative Convertible Redeemable Preferred Share Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"), by and between the Company and Prudential, Prudential has agreed to acquire 1,450,000 shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), and 1,216,666 shares of Series B Cumulative Convertible Redeemable Preferred Stock, par value $.01 per share, of the Company (the "Preferred Stock" and, together with the Common Stock, the "Shares"), all of which Preferred Stock may be converted into shares of Common Stock, pursuant to the terms of and subject to certain limitations set forth in the Articles Supplementary relating to the Preferred Stock; and WHEREAS, in connection with the Purchase Agreement, the Company has agreed to register for sale by Prudential and certain transferees, the shares of Common Stock purchased by Prudential pursuant to the Purchase Agreement (the "Initial Common Shares") and the shares of Common Stock received by Prudential upon conversion of shares of Preferred Stock (the "Underlying Common Shares"); WHEREAS, pursuant to that certain Assignment and Assumption of Acquisition Rights dated as of October 2, 1997, Prudential assigned and SVI-US and SVI-International assumed certain of Prudential's rights and obligations under the Purchase Agreement and the Company acknowledged and consented to such assignment and assumption; and WHEREAS, the parties hereto desire to enter into this Agreement to evidence the foregoing agreement of the Company and the mutual covenants of the parties relating thereto. NOW, THEREFORE, in consideration of the foregoing and the covenants of the parties set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, subject to the terms and conditions set forth herein, the parties hereby agree as follows: Section 1. Certain Definitions. In this Agreement the following terms shall have the following respective meanings: "Accredited Investor" shall have the meaning set forth in Rule 501 of the General Rules and Regulations promulgated under the Securities Act. "Affiliates" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. 49 "Articles Supplementary" shall mean the Articles Supplementary Classifying and Designating the Series B Cumulative Convertible Redeemable Preferred Stock, as filed with the Department of Assessments and Taxation of the State of Maryland. "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the relevant time. "Holder" or "Holders" shall mean (i) the Investors and (ii) each Person holding Registrable Shares as a result of a transfer or assignment to that Person of Registrable Shares other than pursuant to an effective registration statement or Rule 144 (or any successor provision) under the Securities Act. "Indemnified Party" shall have the meaning ascribed to it in Section 4(c) of this Agreement. "Indemnifying Party" shall have the meaning ascribed to it in Section 4(c) of this Agreement. "Managing Underwriter" shall mean the investment banker or investment bankers and manager or managers that shall administer an underwritten offering, if any, as set forth in Section 3 hereof. "Market Value" shall mean, with respect to the Common Stock on any date of determination, the average of the closing prices of the Common Stock on each of the preceding 10 trading days on the New York Stock Exchange. "Person" shall mean an individual, corporation, partnership, estate, trust, association, private foundation, joint stock company or other entity. "Preferred Stock" shall have the meaning ascribed to it in the recitals to this Agreement. "Prospectus" shall mean the prospectus included in any Shelf Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Shares. The terms "Register," "Registered" and "Registration" refer to a registration effected by preparing and filing a Shelf Registration Statement (and Prospectus) in compliance with the Securities Act providing for the sale by the Holders in accordance with the method or methods of distribution designated by the Holders, and the declaration or ordering of the effectiveness of such registration statement by the Commission. "Registrable Shares" shall mean (i) the Initial Common Shares, (ii) the Underlying Common Shares, and (iii) the shares of Common Stock issued upon redemption of shares of Preferred Stock in accordance with Section 5(a) of the Articles Supplementary classifying and designating the Preferred Stock; provided, however, that any such shares of Common Stock shall cease to be Registrable Exh. B-2 50 Shares when (A) a shelf registration statement with respect to the sale of such shares shall have become effective under the Securities Act and all such shares shall have been disposed of in accordance with such shelf registration statement; (B) such shares shall have been resold by the Holder thereof in accordance with Rule 144; (C) such shares shall have been otherwise transferred and new certificates not subject to transfer restrictions under the Securities Act and not bearing any legend restricting further transfer shall have been delivered by the Company, and no other applicable and legally binding restriction on transfer under the federal securities laws shall exist; or (D) such shares may be sold in accordance with Rule 144(k) under the Securities Act. "Registration Expenses" shall mean all out-of-pocket expenses (excluding Selling Expenses) incurred by the Company in complying with Section 2 hereof, including, without limitation, the following: (a) all registration and filing fees; (b) fees and expenses of compliance with federal and state securities or real estate syndication laws (including, without limitation, reasonable fees and disbursements of counsel in connection with state securities and real estate syndication qualifications of the Registrable Shares under the laws of such jurisdictions as the Holders may reasonably designate); (c) printing (including, without limitation, expenses of printing or engraving certificates representing the Registrable Shares in a form eligible for deposit with The Depository Trust Company and otherwise meeting the requirements of any securities exchange on which they are listed and of printing registration statements and prospectuses), messenger, telephone, shipping and delivery expenses; (d) fees and disbursements of counsel for the Company; (e) fees and disbursements of all independent public accountants of the Company; (f) Securities Act liability insurance if the Company so desires; (g) fees and expenses of other Persons reasonably necessary in connection with the registration, including any experts, retained by the Company; and (h) fees and expenses incurred in connection with the listing of the Registrable Shares on each securities exchange on which securities of the same class are then listed. "Rule 144" shall mean Rule 144 promulgated by the Commission under the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the relevant time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to any sale of Registrable Shares. "Shelf Registration" shall mean a registration effected pursuant to Section 2 hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 2 hereof filed with the Commission which covers some or all of the Registrable Shares, as applicable, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. Exh. B-3 51 Section 2. Shelf Registration. (a) The Company shall, within 45 days following the date of initial issuance (the "Issue Date") of the Shares, file with the Commission a Shelf Registration Statement relating to the offer and sale of the Registrable Shares by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement and, thereafter, shall use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective under the Securities Act as soon as practicable and in no event later than 90 days after the Issue Date (including, without limitation, the execution of an undertaking to file post-effective amendments and appropriate qualification under applicable state securities and real estate syndication laws); provided, however that no Holder shall be entitled to have the Registrable Shares held by it covered by such Shelf Registration unless such Holder is in compliance with Section 3(k) hereof. (b) The Company shall (i) use its reasonable best efforts to keep such Shelf Registration continuously effective in order to permit the Prospectus forming part thereof to be usable by the Holders for so long as the aggregate Market Value of the Registrable Shares is at least $10 million or such shorter period that will terminate upon the earlier of the following: (A) the date when all the Registrable Shares have been sold pursuant to such shelf registration statement or Rule 144 and (B) the date on which, in the reasonable, written opinion of counsel to the Holders and/or to the Company, all outstanding Registrable Shares held by persons that are not affiliates of the Company may be resold without registration under the Securities Act in accordance with Rule 144(k) or any successor provision thereto (in any such case, such period being called the "Effectiveness Period") and (ii) after the effectiveness of the Shelf Registration Statement, promptly upon the request of any Holder to take any action reasonably necessary to register the sale of any Registrable Shares of such Holder and to identify such Holder as a selling securityholder. The Company shall be deemed not to have used their reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if the Company voluntarily takes any action that would result in Holders covered thereby not being able to offer and sell any such Registrable Shares during that period, unless (x) such action is required by applicable law or the rules of any national securities exchange or other market on which any of the Registrable Shares are then listed or quoted, or (y) any event contemplated by paragraph 3(c)(2)(iii) below occurs and the Company acts promptly in good faith and for valid business reasons in suspending use of the Prospectus until the requisite changes have been made and the Company thereafter promptly (and in no event longer than 30 days) complies with the requirements of paragraph 3(i) below. Notwithstanding the foregoing, the Company shall have the right (the "Suspension Right") to defer such filing (or suspend sales under any filed registration thereunder) for a period of not more than 90 days during any 12-month period, if the Company shall furnish to the Holders a certificate signed by the President or any other executive officer of the Company stating that, either (i) in the good faith judgment of the Company, the continued effectiveness of the Shelf Registration Statement would require the Company to disclose a material financing, acquisition or other corporate transaction, and the Board of Directors shall have determined in good faith that it would be detrimental to the Company and its shareholders to file such registration statement or amendment thereto at such time (or continue sales under a filed registration statement) or (ii) the Company plans to conduct an underwritten offering of its equity securities during such 90-day period. and, in each case, therefore, the Company has elected to defer the filing of such registration statement (or suspend sales under a filed registration statement); provided that, in the case of clause (ii), the Company shall terminate such deferral or suspension, prior to the end of such 90-day period and following the thirtieth day following the initial closing of any such underwritten offering, in the event that during such period the average of the closing prices of the class of equity Exh. B-4 52 securities sold by the Company in such offering during a period of 20 consecutive trading days is at least 110% of the initial public offering price of such security in such offering. Section 3. Registration Procedures. (a) The Company shall furnish to the Holders , prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement, and each amendment thereof or supplement, if any, to the Prospectus included therein and shall use its reasonable efforts to reflect in each such document, when so filed with the Commission, such comments at the Holders reasonably may propose. (b) The Company shall take such action as may be necessary so that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto (and each report or other document incorporated therein by reference in each case) complies in all material respects with the applicable provisions of the Securities Act and the Exchange Act and the respective rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise the Holders: (i) when a Shelf Registration Statement and any amendment thereto has been filed with the Commission and when the Shelf Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Shelf Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise the Holders of: (i) the issuance by the Commission of any stop order suspending effectiveness of the Shelf Registration Statement or the initiation of any proceedings for that purpose; (ii) the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) the happening of any event that requires the making of any changes in the Shelf Registration Statement or the Prospectus so that, as of such date, the Shelf Registration Statement and the Prospectus do not contain an untrue statement of a material fact and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall use its reasonable best efforts to prevent the issuance, and if issued to obtain the withdrawal, of any order suspending the effectiveness of any Shelf Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all reports, other documents and exhibits (including those incorporated by reference). Exh. B-5 53 (f) The Company shall, during the Effectiveness Period, deliver to each Holder, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents (except upon and during the continuance of any event described in paragraph 3(c)(2)(iii) above) to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Shares covered by the Prospectus or any amendment or supplement thereto during the Shelf Registration Period. (g) Prior to any offering of Registrable Shares pursuant to any Shelf Registration Statement, the Company shall register or qualify or cooperate with the Holders included therein and their respective counsel in connection with the registration or qualification of such Registrable Shares for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such United States jurisdictions of the Registrable Shares covered by such Shelf Registration Statement; provided, however, that in no event shall the Company be obligated to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to so qualify but for this Section 3(g), (ii) file any general consent to service of process in any jurisdiction where it is not as of the date hereof then so subject or (iii) subject itself to taxation in any such jurisdiction if it is not so subject. (h) Unless any Registrable Shares shall be in book-entry only form, the Company shall cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Shares to be sold pursuant to any Shelf Registration Statement free of any restrictive legends and in such permitted denominations and registered in such names as Holders may request in connection with the sale of Registrable Shares pursuant to such Shelf Registration Statement. (i) Upon the occurrence of any event contemplated by paragraph 3(c)(2)(iii) above, the Company shall promptly, and in any event within 30 days, prepare a post-effective amendment to any Shelf Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the Registrable Shares included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. If the Company notifies the Holders of the occurrence of any event contemplated by paragraph 3(c)(2)(iii) above, the Holders shall suspend the use of the Prospectus until the requisite changes to the Prospectus have been made. (j) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to their security holders or otherwise provide in accordance with Section 11(a) of the Securities Act as soon as practicable after the effective date of the applicable Shelf Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Securities Act. (k) The Company may require each Holder to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such Registrable Shares as the Company may from time to time reasonably request for inclusion in such Shelf Registration Statement and the Company may exclude from such registration the Registrable Shares of any Holder that fails to furnish such information within a reasonable time after receiving such request. Exh. B-6 54 (l) The Company agrees to use its reasonable best efforts (including the payment of any listing fees) to obtain the listing of all Registrable Shares covered by the registration statement on each securities exchange on which securities of the same class are then listed. (m) If the Holders of at least 800,000 Registrable Shares (or such fewer number as remain outstanding) shall propose to sell such Registrable Shares in an underwritten public offering, such Holders shall be entitled to select the underwriters for such offering, subject to the approval of the Company, not to be unreasonably withheld (provided that the Holders shall not require consent of the Company in order for Prudential Securities Incorporated to be an underwriter) and the Company shall make available members of the management of the Company and its Affiliates for reasonable assistance in selling efforts relating to such offering for a public offering of such size (including, without limitation, senior management attendance at due diligence meetings with underwriters and their counsel and road shows) and shall enter into underwriting agreements containing usual and customary terms and conditions for such types of offerings [(including "blackout" periods following consummation of any such offering, to the extent reasonably requested by the Managing Underwriter in the circumstances and not inconsistent with the needs of the Company to raise additional equity capital at such time)]; provided that (i) the Company shall not be required to assist in an underwritten offering more than once in any 12-month period or more than three times during the term of this Agreement; (ii) the Company shall pay the Registration Expenses for one underwritten offering; and (iii) upon request by an underwriter, the Company shall waive the common stock ownership limitation contained in its Articles of Incorporation to the extent necessary to permit such underwriter to purchase the securities for the purpose of the distribution. Section 4. Expenses of Registration. The Company shall pay all Registration Expenses incurred in connection with the registration of the Registrable Shares in accordance with Sections 2 and 3 hereof. All Selling Expenses incurred in connection with the offer and sale of Registrable Shares by any of the Holders shall be borne by the Holder offering or selling such Registrable Shares pursuant to Section 7 of this Agreement. Each Holder shall pay the expenses of its own counsel. Section 5. Indemnification. (a) In connection with any Shelf Registration Statement, the Company shall indemnify and hold harmless each Holder and each of their respective directors and officers and each person controlling such Holder within the meaning of Section 15 of the Securities Act as follows: (i) from and against any loss, liability, claim, damage and expense whatsoever, including any amounts paid in settlement of any investigation, litigation, proceeding or claim, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Shelf Registration Statement (or any amendment thereto) covering Registrable Shares, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, that the Company shall not be liable under this clause (i) for any settlement of any action effected without its written consent, which consent shall not be unreasonably Exh. B-7 55 withheld; and (ii) against any and all expenses (including reasonable fees and disbursements of counsel chosen by any such Holder (except to the extent otherwise expressly provided in Section 5(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, as such expenses are incurred to the extent that any such expense is not paid under subparagraph (i) of this Section 5(a); provided further, that the indemnity provided for in this Section 5(a) shall not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission (i) made in reliance upon and in conformity with written information furnished to the Company by such Holder in writing expressly stating that such information is being provided by such Holder for use in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) or (ii) contained in any preliminary prospectus or the Prospectus if such Holder failed to send or deliver a copy of the Prospectus (or any amendment or supplement thereto) to the Person asserting such losses, claims, damages or liabilities on or prior to the delivery of written confirmation of any sale of securities covered thereby to such Person in any case where such Prospectus (or any amendment or supplement thereto) corrected such untrue statement or omission. Any amounts advanced by the Company to an indemnified party pursuant to this Section 5 as a result of such losses shall be returned to the Company if it shall be finally determined by such a court in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company. (b) Each Holder, severally and not jointly, shall indemnify and hold harmless the Company and the other selling Holders and each of their respective directors and officers (including each officer of the Company who signed the Shelf Registration Statement) and each Person, if any, who controls the Company or other selling Holder within the meaning of Section 15 of the Securities Act, from and against any loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 5(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such selling Holder in writing expressly stating that such information is being provided by such Holder for use in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Shares pursuant to the Shelf Registration Statement. (c) Each party entitled to indemnification under this Section 5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, but the omission to so notify the Indemnifying Party shall not relieve it from any liability which it may have to the Indemnified Party pursuant to the provisions of this Section 5 except to the extent of the actual damages suffered by such delay in notification. The Indemnifying Party shall assume the defense of such action, including the employment of counsel to be chosen by the Indemnifying Party to be reasonably satisfactory to the Indemnified Party, and payment of expenses. The Indemnified Party shall have the right to employ its own counsel in any such case, but the legal fees and expenses of such counsel shall be at the expense of the Indemnified Party, unless the employment of such counsel shall have been authorized in writing by the Indemnifying Party in connection with the defense of such action, or the Indemnifying Party shall not have employed counsel to take charge of the defense of such action or the Indemnified Party shall have reasonably concluded that there may be defenses available to it or Exh. B-8 56 them which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party), in any of which events such fees and expenses shall be borne by the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 5 is unavailable to a party that would have been an Indemnified Party under this Section 5 in respect of any expenses, claims, losses, damages and liabilities referred to herein, then each party that would have been an Indemnifying Party hereunder shall, in lieu of indemnifying such Indemnified Party, contribute to the amount paid or payable by such Indemnified Party as a result of such expenses, claims, losses, damages and liabilities in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and such Indemnified Party on the other in connection with the statement or omission which resulted in such expenses, claims, losses, damages and liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or such Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and each Holder agrees that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5(d). (e) No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 6. Information to be Furnished by Holders. Each Holder shall furnish to the Company such information as the Company may reasonably request and as shall be required in connection with the Registration and related proceedings referred to in Sections 2 and 3 hereof. If any Holder fails to provide the Company with such information within 15 business days of the Company's request, the Company's obligations under Sections 2 and 3 hereof with respect to such Holder or the Registrable Shares owned by such Holder shall be suspended until such Holder provides such information. Section 7. Rule 144 Sales. (a) The Company covenants that it will file the reports required to be filed by the Company under the Exchange Act, so as to enable any Holder to sell Registrable Shares pursuant to Rule 144 under the Securities Act. (b) In connection with any sale, transfer or other disposition by any Holder of any Registrable Shares pursuant to Rule 144 under the Securities Act, the Company shall cooperate with such Holder to facilitate the timely preparation and delivery of certificates representing Registrable Shares to be sold and not bearing any Securities Act legend, if deemed appropriate, and enable certificates for such Registrable Shares to be for such number of shares and registered in such names as the selling Holder Exh. B-9 57 may reasonably request, provided that such request is made at least two business days prior to any sale of Registrable Shares. Section 8. Miscellaneous. (a) Governing Law. This Agreement shall he governed in all respects by the laws of the State of Maryland (other than the choice of law rules thereof). (b) Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof. (c) Amendment. No supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the party to be bound thereby. (d) Notices, etc. Each notice, demand, request, request for approval, consent, approval, disapproval, designation or other communication (each of the foregoing being referred to herein as a notice) required or desired to be given or made under this Agreement shall be in writing (except as otherwise provided in this Agreement), and shall be effective and deemed to have been received (i) when delivered in person, (ii) when sent by facsimile with receipt acknowledged, (iii) five (5) days after having been mailed by certified or registered United States mail, postage prepaid, return receipt requested, or (iv) the next business day after having been sent by a nationally recognized overnight mail or courier service, receipt requested. Notices shall be addressed as follows: (a) if to the Investors, at the Investor's address or fax number set forth below its signature hereon, or at such other address or fax number as the Investors shall have furnished to the Company in writing, or (b) if to any assignee or transferee of the Investors, at such address or fax number as such assignee or transferee shall have furnished the Company in writing, or (c) if to the Company, at the address or fax number of its principal executive offices set forth below its signature hereon or at such other address or fax number as the Company shall have furnished to the Investors or any assignee or transferee. Any notice or other communication required to be given hereunder to a Holder in connection with a registration may instead be given to the designated representative of such Holder. (e) Counterparts. This Agreement may be executed in any number of counterparts, each of which may be executed by fewer than all of the parties hereto (provided that each party executes one or more counterparts), each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. (f) Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. (g) Section Titles. Section titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders. The Company hereby agrees to extend the benefits of this Agreement to any Holder and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. Exh. B-10 58 (i) Remedies. The Company and the Investors acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that the Company and each Holder, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of another party under this Agreement in accordance with the terms and conditions of this Agreement in any court of the United States or any State thereof having jurisdiction. (j) Attorneys' Fees. If the Company or any Holder brings an action to enforce its rights under this Agreement, the prevailing party in the action shall be entitled to recover its costs and expenses, including, without limitation, reasonable attorneys' fees, incurred in connection with such action, including any appeal of such action. [Page Break Intentionally Inserted] Exh. B-11 59 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first above written. CHARLES E. SMITH RESIDENTIAL REALTY, INC. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 2345 Crystal Drive Crystal City Arlington, Virginia 22202 Attention: Robert D. Zimet Facsimile: (703) 769-1312 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 8 Campus Drive Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: Jeffrey L. Danker Facsimile: (201) 734-1472 Exh. B-12 60 STRATEGIC VALUE INVESTORS, LLC By: The Prudential Investment Corporation, Its Attorney-In-Fact By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 8 Campus Drive Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Facsimile: (201) 734-1472 STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC By: Strategic Value Investors International Ltd., Its Manager By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 8 Campus Drive Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Facsimile: (201) 734-1472 Exh. B-13 61 Exhibit C WAIVER OF OWNERSHIP LIMITATIONS RESOLVED, that, pursuant to Section 8(j) of the Company's Articles of Incorporation, as amended, the Common Stock Ownership Limit and the Aggregate Stock Ownership Limit (as such terms are defined in the Articles of Incorporation) set forth in Section 8(b)(1)(i) of the Articles of Incorporation are hereby waived with respect to the Acquisition and Beneficial Ownership (as such terms are defined in the Articles of Incorporation) of Series B Preferred Shares and shares of Common Stock of the Company by each Prudential Investor (as that term is defined in the Purchase Agreement to be entered into between the Company and The Prudential Insurance Company of America) and any other Person (as such term is defined in the Articles of Incorporation) that Beneficially Owns (as such term is defined in the Articles of Incorporation) Series B Preferred Shares and Common Stock solely by reason of a Prudential Investor's (as defined in the Purchase Agreement) Beneficial Ownership of Series B Preferred Shares or Common Stock ("a Prudential Related Person"); provided that (i) this waiver shall not be effective to exempt any Person that would be treated as an "individual" for purposes of Section 542(a)(2) of the Internal Revenue Code of 1986, as amended (the "Code") (as modified by Section 856(h) of the Code) from either the Common Stock Ownership Limit or the Aggregate Stock Ownership Limit; and (ii) this waiver shall not be effective to exempt any Person from either the Common Stock Ownership Limit or the Aggregate Stock Ownership Limit (whether or not such Person would be treated as an "individual" under the provisions of the Code cited above) if (and to the extent that), by reason of such Person's Beneficial Ownership of Capital Stock (as such term is defined in the Articles of Incorporation), any Person that would be treated as an "individual" under the provisions of the Code cited above would be considered to own Capital Stock in excess of either the Common Stock Ownership Limit or the Aggregate Stock Ownership Limit; and (iii) this waiver shall not be effective to exempt any Prudential Investor or Prudential Related Person from either the Common Stock Ownership Limit or the Aggregate Stock Ownership Limit if (and to the extent that) the Prudential Investors, their respective affiliates (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended), and any member of a group (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) relating to the capital stock of the Company, of which any Prudential Investor or any of its affiliates is a member, collectively Beneficially Own shares of Common Stock of the Company (including for such purpose any shares of Common Stock issuable upon exercise of any Acquisition Rights (as such term is defined in the Articles of Incorporation) held by any of them) in excess of the Special Ownership Limit (as defined below); provided further that this waiver shall terminate in the event that (x) the Prudential Investors, their respective affiliates (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended), and any member of a group (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) relating to the capital stock of the Company, of which any Prudential Investor or any of its affiliates is a member, collectively Beneficially Own shares of Common Stock of the Company (including for such purpose any shares of Common Stock issuable upon exercise of any Acquisition Rights (as such term is defined in the Articles of Incorporation) held by any of them) in excess of the Special Ownership Limit; or 62 (y) the Prudential Investors, their respective affiliates, and any member of a group relating to the capital stock of the Company, of which any Prudential Investor or any of its affiliates is a member, collectively Beneficially Own in excess of 9.8% of the outstanding shares of Common Stock of the Company (excluding for such purpose any shares of Common Stock issuable upon conversion of any Series B Preferred Stock Beneficially Owned by any of them); provided that the waiver shall not terminate under this paragraph solely by reason of the issuance of Common Stock by the Company in redemption of Series B Preferred Stock or by reason of a conversion of Series B Preferred Stock into Common Stock immediately prior to liquidation of the Company; provided that this waiver shall not terminate solely as a result of a decrease in the aggregate number of outstanding shares of Common Stock. As used herein, the term "Special Ownership Limit" shall mean a number of shares of Common Stock equal to the lesser of (A) 19.998% of the outstanding Common Stock of the Company (the shares of Common Stock issuable upon conversion of Series B Preferred Shares being deemed to be outstanding for this purpose) or (B) the sum of (i) 1,450,000 shares of Common Stock (the "Initial Shares"), plus (ii) the number of shares of Common Stock held by any Prudential Investor that was acquired by any Prudential Investor upon conversion of any Series B Preferred Stock ("Conversion Shares"), plus (iii) the number of shares of Common Stock Beneficially Owned by a Prudential Investor by reason of the ownership by a Prudential Investor of any shares of Series B Preferred Stock (excluding any shares of Series B Preferred Stock acquired after the original issuance thereof from any Person other than a Prudential Investor) ("Underlying Shares"), plus (iv) the number of shares of Common Stock issuable upon conversion of any shares of Series B Preferred Stock that have not yet been purchased under the Stock Purchase Agreement, less (v) the number of Initial Shares transferred after October 3, 1997 to any Person other than a Prudential Investor or an affiliate thereof, less (vi) the number of Conversion Shares or Underlying Shares transferred after October 3, 1997 to any Person other than a Prudential Investor, in each case as such number of shares of Common Stock may be adjusted to reflect stock splits, stock combinations, stock dividends, or similar transactions. In the event that the number of outstanding shares of Common Stock decreases, other than by reason of a stock combination affecting all shares of Common Stock, the percentage referred to in clause (A) above shall be increased by multiplying the percentage in effect immediately preceding such decrease by a fraction, the numerator of which equals the number of shares of Common Stock outstanding immediately prior to such decrease and the denominator of which equals the number of shares of Common Stock outstanding immediately after such decrease (the shares of Common Stock issuable upon conversion of Series B Preferred Shares being deemed to be outstanding for purpose of this calculation). Exh. C-2 EX-99.II 3 ASSIGNMENT AGREEMENT 1 EXHIBIT II ASSIGNMENT AND ASSUMPTION OF ACQUISITION RIGHTS THIS ASSIGNMENT AND ASSUMPTION OF ACQUISITION RIGHTS (this "ASSIGNMENT"), is made by and among THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("ASSIGNOR"), STRATEGIC VALUE INVESTORS, LLC, a Delaware limited liability company ("SVI-US"), STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC, a Delaware limited liability company ("SVI-INTERNATIONAL"; each of SVI-US and SVI-International, an "ASSIGNEE," and collectively, the "ASSIGNEES") and CHARLES E. SMITH RESIDENTIAL REALTY, INC., a Maryland corporation ("SMITH"). W I T N E S S E T H: WHEREAS, pursuant to that certain Purchase Agreement (the "PURCHASE AGREEMENT") dated as of September 17, 1997, by and between Assignor and Smith, Smith has agreed to sell to Assignor (a) 1,450,000 shares of common stock of Smith and (b) 1,216,666 shares of Series B Cumulative Convertible Redeemable Preferred Stock of Smith (collectively, the "SECURITIES"); WHEREAS, pursuant to the terms of this Assignment and in accordance with Section 7.2 of the Purchase Agreement, Assignor desires to assign all of its rights and obligations with respect to certain of the Securities to the Assignees; WHEREAS, the Assignees desire to accept such assignment and assume all of Assignor's rights and obligations with respect to such assigned Securities; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Assignment of Purchase Rights. Assignor hereby assigns, sets over and transfers to each Assignee and each Assignee hereby assumes from Assignor, all of Assignor's rights and obligations under the Purchase Agreement with respect to those Securities identified as being assigned to such Assignee on Schedule I attached hereto (the "ASSIGNED ACQUISITION RIGHTS"). 2. Agreement of Smith. Smith, by its signature below, acknowledges and consents to the transfer from Assignor to the Assignees of Assignor's rights and obligations under the Purchase Agreement with respect to the Assigned Acquisition Rights. 3. Dividend Adjustment. Assignor, SVI-US and SVI-International shall pay to Smith, promptly after the receipt of dividends for the quarter ended September 30, 1997, an amount equal to $118,776.00. Such amount shall be paid by Assignor and 2 each Assignee in proportion to their percentage interests in the Securities. 4. Counterparts. This Assignment may be executed in counterparts, each of which shall be an original and all of which counterparts taken together shall constitute one and the same agreement. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.] 2 3 DATED, DELIVERED AND EFFECTIVE as of this 2nd day of October, 1997. ASSIGNOR: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation By: /s/ ROBERT W. GADSDEN -------------------------------------------- Name: Robert W. Gadsden Title: Vice President ASSIGNEES: STRATEGIC VALUE INVESTORS, LLC, a Delaware limited liability company By: The Prudential Investment Corporation, a New Jersey corporation, its attorney-in-fact By: /s/ GARY H. PICONE -------------------------------------------- Name: Gary H. Picone Title: Vice President STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC, a Delaware limited liability company By: Strategic Value Investors International Ltd., a Cayman Islands company, it manager By: /s/ GARY H. PICONE --------------------------------------- Name: Gary H. Picone Title: Vice President ACKNOWLEDGED AND AGREED: CHARLES E. SMITH RESIDENTIAL REALTY, INC., a Maryland corporation By: /s/ ERNEST A. GERARDI, JR. -------------------------------------------- Name: Ernest A. Gerardi, Jr. Title: President 3 4 SCHEDULE I ASSIGNED ACQUISITION RIGHTS
% Common Preferred Assignee Assigned Shares Shares - --------------------------- -------------- --------------- ---------------- SVI-US 78.57% 1,139,286 955,952 SVI-International 10.93% 158,464 132,964 -------------- --------------- ---------------- Total 89.50% Assigned: Total Retained By Assignor: 10.50% 152,250 127,750 ============== =============== ================ Total Securities: 100% 1,450,000 1,216,666
4 EX-99.III 4 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT III REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of October 3, 1997 (this "Agreement"), by and between Charles E. Smith Residential Realty, Inc., a Maryland corporation (the "Company"), The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), Strategic Value Investors, LLC, a Delaware limited liability company ("SVI-US") and Strategic Value Investors International, LLC, a Delaware limited liability company ("SVI-International")(Prudential, SVI-US and SVI-International collectively, the "Investors"). WHEREAS, pursuant to that certain Series B Cumulative Convertible Redeemable Preferred Share Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"), by and between the Company and Prudential, Prudential has agreed to acquire 1,450,000 shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), and 1,216,666 shares of Series B Cumulative Convertible Redeemable Preferred Stock, par value $.01 per share, of the Company (the "Preferred Stock" and, together with the Common Stock, the "Shares"), all of which Preferred Stock may be converted into shares of Common Stock, pursuant to the terms of and subject to certain limitations set forth in the Articles Supplementary relating to the Preferred Stock; and WHEREAS, in connection with the Purchase Agreement, the Company has agreed to register for sale by Prudential and certain transferees, the shares of Common Stock purchased by Prudential pursuant to the Purchase Agreement (the "Initial Common Shares") and the shares of Common Stock received by Prudential upon conversion of shares of Preferred Stock (the "Underlying Common Shares"); WHEREAS, pursuant to that certain Assignment and Assumption of Acquisition Rights dated as of October 2, 1997, Prudential assigned and SVI-US and SVI-International assumed certain of Prudential's rights and obligations under the Purchase Agreement and the Company acknowledged and consented to such assignment and assumption; and WHEREAS, the parties hereto desire to enter into this Agreement to evidence the foregoing agreement of the Company and the mutual covenants of the parties relating thereto. NOW, THEREFORE, in consideration of the foregoing and the covenants of the parties set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, subject to the terms and conditions set forth herein, the parties hereby agree as follows: Section 1. Certain Definitions. In this Agreement the following terms shall have the following respective meanings: "Accredited Investor" shall have the meaning set forth in Rule 501 of the General Rules and Regulations promulgated under the Securities Act. "Affiliates" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. 2 "Articles Supplementary" shall mean the Articles Supplementary Classifying and Designating the Series B Cumulative Convertible Redeemable Preferred Stock, as filed with the Department of Assessments and Taxation of the State of Maryland. "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the relevant time. "Holder" or "Holders" shall mean (i) the Investors and (ii) each Person holding Registrable Shares as a result of a transfer or assignment to that Person of Registrable Shares other than pursuant to an effective registration statement or Rule 144 (or any successor provision) under the Securities Act. "Indemnified Party" shall have the meaning ascribed to it in Section 4(c) of this Agreement. "Indemnifying Party" shall have the meaning ascribed to it in Section 4(c) of this Agreement. "Managing Underwriter" shall mean the investment banker or investment bankers and manager or managers that shall administer an underwritten offering, if any, as set forth in Section 3 hereof. "Market Value" shall mean, with respect to the Common Stock on any date of determination, the average of the closing prices of the Common Stock on each of the preceding 10 trading days on the New York Stock Exchange. "Person" shall mean an individual, corporation, partnership, estate, trust, association, private foundation, joint stock company or other entity. "Preferred Stock" shall have the meaning ascribed to it in the recitals to this Agreement. "Prospectus" shall mean the prospectus included in any Shelf Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Shares. The terms "Register," "Registered" and "Registration" refer to a registration effected by preparing and filing a Shelf Registration Statement (and Prospectus) in compliance with the Securities Act providing for the sale by the Holders in accordance with the method or methods of distribution designated by the Holders, and the declaration or ordering of the effectiveness of such registration statement by the Commission. 2 3 "Registrable Shares" shall mean (i) the Initial Common Shares, (ii) the Underlying Common Shares, and (iii) the shares of Common Stock issued upon redemption of shares of Preferred Stock in accordance with Section 5(a) of the Articles Supplementary classifying and designating the Preferred Stock; provided, however, that any such shares of Common Stock shall cease to be Registrable Shares when (A) a shelf registration statement with respect to the sale of such shares shall have become effective under the Securities Act and all such shares shall have been disposed of in accordance with such shelf registration statement; (B) such shares shall have been resold by the Holder thereof in accordance with Rule 144; (C) such shares shall have been otherwise transferred and new certificates not subject to transfer restrictions under the Securities Act and not bearing any legend restricting further transfer shall have been delivered by the Company, and no other applicable and legally binding restriction on transfer under the federal securities laws shall exist; or (D) such shares may be sold in accordance with Rule 144(k) under the Securities Act. "Registration Expenses" shall mean all out-of-pocket expenses (excluding Selling Expenses) incurred by the Company in complying with Section 2 hereof, including, without limitation, the following: (a) all registration and filing fees; (b) fees and expenses of compliance with federal and state securities or real estate syndication laws (including, without limitation, reasonable fees and disbursements of counsel in connection with state securities and real estate syndication qualifications of the Registrable Shares under the laws of such jurisdictions as the Holders may reasonably designate); (c) printing (including, without limitation, expenses of printing or engraving certificates representing the Registrable Shares in a form eligible for deposit with The Depository Trust Company and otherwise meeting the requirements of any securities exchange on which they are listed and of printing registration statements and prospectuses), messenger, telephone, shipping and delivery expenses; (d) fees and disbursements of counsel for the Company; (e) fees and disbursements of all independent public accountants of the Company; (f) Securities Act liability insurance if the Company so desires; (g) fees and expenses of other Persons reasonably necessary in connection with the registration, including any experts, retained by the Company; and (h) fees and expenses incurred in connection with the listing of the Registrable Shares on each securities exchange on which securities of the same class are then listed. "Rule 144" shall mean Rule 144 promulgated by the Commission under the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the relevant time. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to any sale of Registrable Shares. "Shelf Registration" shall mean a registration effected pursuant to Section 2 hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 2 hereof filed with the Commission which covers some or all of the Registrable Shares, as applicable, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. 3 4 Section 2. Shelf Registration. (a) The Company shall, within 45 days following the date of initial issuance (the "Issue Date") of the Shares, file with the Commission a Shelf Registration Statement relating to the offer and sale of the Registrable Shares by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement and, thereafter, shall use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective under the Securities Act as soon as practicable and in no event later than 90 days after the Issue Date (including, without limitation, the execution of an undertaking to file post-effective amendments and appropriate qualification under applicable state securities and real estate syndication laws); provided, however that no Holder shall be entitled to have the Registrable Shares held by it covered by such Shelf Registration unless such Holder is in compliance with Section 3(k) hereof. (b) The Company shall (i) use its reasonable best efforts to keep such Shelf Registration continuously effective in order to permit the Prospectus forming part thereof to be usable by the Holders for so long as the aggregate Market Value of the Registrable Shares is at least $10 million or such shorter period that will terminate upon the earlier of the following: (A) the date when all the Registrable Shares have been sold pursuant to such shelf registration statement or Rule 144 and (B) the date on which, in the reasonable, written opinion of counsel to the Holders and/or to the Company, all outstanding Registrable Shares held by persons that are not affiliates of the Company may be resold without registration under the Securities Act in accordance with Rule 144(k) or any successor provision thereto (in any such case, such period being called the "Effectiveness Period") and (ii) after the effectiveness of the Shelf Registration Statement, promptly upon the request of any Holder to take any action reasonably necessary to register the sale of any Registrable Shares of such Holder and to identify such Holder as a selling securityholder. The Company shall be deemed not to have used their reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if the Company voluntarily takes any action that would result in Holders covered thereby not being able to offer and sell any such Registrable Shares during that period, unless (x) such action is required by applicable law or the rules of any national securities exchange or other market on which any of the Registrable Shares are then listed or quoted, or (y) any event contemplated by paragraph 3(c)(2)(iii) below occurs and the Company acts promptly in good faith and for valid business reasons in suspending use of the Prospectus until the requisite changes have been made and the Company thereafter promptly (and in no event longer than 30 days) complies with the requirements of paragraph 3(i) below. Notwithstanding the foregoing, the Company shall have the right (the "Suspension Right") to defer such filing (or suspend sales under any filed registration thereunder) for a period of not more than 90 days during any 12-month period, if the Company shall furnish to the Holders a certificate signed by the President or any other executive officer of the Company stating that, either (i) in the good faith judgment of the Company, the continued effectiveness of the Shelf Registration Statement would require the Company to disclose a material financing, acquisition or other corporate transaction, and the Board of Directors shall have determined in good faith that it would be detrimental to the Company and its shareholders to file such registration statement or amendment thereto at such time (or continue sales under a filed registration statement) or (ii) the Company plans to conduct an underwritten offering of its equity securities during such 90-day period. and, in each case, therefore, the Company has elected to defer the filing of such registration statement (or suspend sales under a filed registration statement); provided that, in the case of clause (ii), the Company shall terminate such deferral or suspension, prior to the end of such 90-day period and following the thirtieth day following the initial closing of any such underwritten offering, in the event that during such period the average of the closing prices of the class of equity 4 5 securities sold by the Company in such offering during a period of 20 consecutive trading days is at least 110% of the initial public offering price of such security in such offering. Section 3. Registration Procedures. (a) The Company shall furnish to the Holders , prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement, and each amendment thereof or supplement, if any, to the Prospectus included therein and shall use its reasonable efforts to reflect in each such document, when so filed with the Commission, such comments at the Holders reasonably may propose. (b) The Company shall take such action as may be necessary so that (i) any Shelf Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto (and each report or other document incorporated therein by reference in each case) complies in all material respects with the applicable provisions of the Securities Act and the Exchange Act and the respective rules and regulations thereunder, (ii) any Shelf Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Shelf Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise the Holders: (i) when a Shelf Registration Statement and any amendment thereto has been filed with the Commission and when the Shelf Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Shelf Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise the Holders of: (i) the issuance by the Commission of any stop order suspending effectiveness of the Shelf Registration Statement or the initiation of any proceedings for that purpose; (ii) the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) the happening of any event that requires the making of any changes in the Shelf Registration Statement or the Prospectus so that, as of such date, the Shelf Registration Statement and the Prospectus do not contain an untrue statement of a material fact and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall use its reasonable best efforts to prevent the issuance, and if issued to obtain the withdrawal, of any order suspending the effectiveness of any Shelf Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all reports, other documents and exhibits (including those incorporated by reference). 5 6 (f) The Company shall, during the Effectiveness Period, deliver to each Holder, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents (except upon and during the continuance of any event described in paragraph 3(c)(2)(iii) above) to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Shares covered by the Prospectus or any amendment or supplement thereto during the Shelf Registration Period. (g) Prior to any offering of Registrable Shares pursuant to any Shelf Registration Statement, the Company shall register or qualify or cooperate with the Holders included therein and their respective counsel in connection with the registration or qualification of such Registrable Shares for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such United States jurisdictions of the Registrable Shares covered by such Shelf Registration Statement; provided, however, that in no event shall the Company be obligated to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to so qualify but for this Section 3(g), (ii) file any general consent to service of process in any jurisdiction where it is not as of the date hereof then so subject or (iii) subject itself to taxation in any such jurisdiction if it is not so subject. (h) Unless any Registrable Shares shall be in book-entry only form, the Company shall cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Shares to be sold pursuant to any Shelf Registration Statement free of any restrictive legends and in such permitted denominations and registered in such names as Holders may request in connection with the sale of Registrable Shares pursuant to such Shelf Registration Statement. (i) Upon the occurrence of any event contemplated by paragraph 3(c)(2)(iii) above, the Company shall promptly, and in any event within 30 days, prepare a post-effective amendment to any Shelf Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the Registrable Shares included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. If the Company notifies the Holders of the occurrence of any event contemplated by paragraph 3(c)(2)(iii) above, the Holders shall suspend the use of the Prospectus until the requisite changes to the Prospectus have been made. (j) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to their security holders or otherwise provide in accordance with Section 11(a) of the Securities Act as soon as practicable after the effective date of the applicable Shelf Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Securities Act. (k) The Company may require each Holder to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such Registrable Shares as the Company may from time to time reasonably request for inclusion in such Shelf Registration Statement and the Company may exclude from such registration the Registrable Shares of any Holder that fails to furnish such information within a reasonable time after receiving such request. 6 7 (l) The Company agrees to use its reasonable best efforts (including the payment of any listing fees) to obtain the listing of all Registrable Shares covered by the registration statement on each securities exchange on which securities of the same class are then listed. (m) If the Holders of at least 800,000 Registrable Shares (or such fewer number as remain outstanding) shall propose to sell such Registrable Shares in an underwritten public offering, such Holders shall be entitled to select the underwriters for such offering, subject to the approval of the Company, not to be unreasonably withheld (provided that the Holders shall not require consent of the Company in order for Prudential Securities Incorporated to be an underwriter) and the Company shall make available members of the management of the Company and its Affiliates for reasonable assistance in selling efforts relating to such offering for a public offering of such size (including, without limitation, senior management attendance at due diligence meetings with underwriters and their counsel and road shows) and shall enter into underwriting agreements containing usual and customary terms and conditions for such types of offerings [(including "blackout" periods following consummation of any such offering, to the extent reasonably requested by the Managing Underwriter in the circumstances and not inconsistent with the needs of the Company to raise additional equity capital at such time)]; provided that (i) the Company shall not be required to assist in an underwritten offering more than once in any 12-month period or more than three times during the term of this Agreement; (ii) the Company shall pay the Registration Expenses for one underwritten offering; and (iii) upon request by an underwriter, the Company shall waive the common stock ownership limitation contained in its Articles of Incorporation to the extent necessary to permit such underwriter to purchase the securities for the purpose of the distribution. Section 4. Expenses of Registration. The Company shall pay all Registration Expenses incurred in connection with the registration of the Registrable Shares in accordance with Sections 2 and 3 hereof. All Selling Expenses incurred in connection with the offer and sale of Registrable Shares by any of the Holders shall be borne by the Holder offering or selling such Registrable Shares pursuant to Section 7 of this Agreement. Each Holder shall pay the expenses of its own counsel. Section 5. Indemnification. (a) In connection with any Shelf Registration Statement, the Company shall indemnify and hold harmless each Holder and each of their respective directors and officers and each person controlling such Holder within the meaning of Section 15 of the Securities Act as follows: (i) from and against any loss, liability, claim, damage and expense whatsoever, including any amounts paid in settlement of any investigation, litigation, proceeding or claim, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Shelf Registration Statement (or any amendment thereto) covering Registrable Shares, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, that the Company shall not be liable under this clause (i) for any settlement 7 8 of any action effected without its written consent, which consent shall not be unreasonably withheld; and (ii) against any and all expenses (including reasonable fees and disbursements of counsel chosen by any such Holder (except to the extent otherwise expressly provided in Section 5(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, as such expenses are incurred to the extent that any such expense is not paid under subparagraph (i) of this Section 5(a); provided further, that the indemnity provided for in this Section 5(a) shall not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission (i) made in reliance upon and in conformity with written information furnished to the Company by such Holder in writing expressly stating that such information is being provided by such Holder for use in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) or (ii) contained in any preliminary prospectus or the Prospectus if such Holder failed to send or deliver a copy of the Prospectus (or any amendment or supplement thereto) to the Person asserting such losses, claims, damages or liabilities on or prior to the delivery of written confirmation of any sale of securities covered thereby to such Person in any case where such Prospectus (or any amendment or supplement thereto) corrected such untrue statement or omission. Any amounts advanced by the Company to an indemnified party pursuant to this Section 5 as a result of such losses shall be returned to the Company if it shall be finally determined by such a court in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company. (b) Each Holder, severally and not jointly, shall indemnify and hold harmless the Company and the other selling Holders and each of their respective directors and officers (including each officer of the Company who signed the Shelf Registration Statement) and each Person, if any, who controls the Company or other selling Holder within the meaning of Section 15 of the Securities Act, from and against any loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 5(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such selling Holder in writing expressly stating that such information is being provided by such Holder for use in the Shelf Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Shares pursuant to the Shelf Registration Statement. (c) Each party entitled to indemnification under this Section 5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, but the omission to so notify the Indemnifying Party shall not relieve it from any liability which it may have to the Indemnified Party pursuant to the provisions of this Section 5 except to the extent of the actual damages suffered by such delay in notification. The Indemnifying Party shall assume the defense of such action, including the employment of counsel to be chosen by the Indemnifying Party to be reasonably satisfactory to the Indemnified Party, and payment of expenses. The Indemnified Party shall have the right to employ its own counsel in any such case, but the legal fees and expenses of such counsel shall be at the expense of the Indemnified Party, unless the employment of such counsel shall have been authorized in writing by the Indemnifying Party in connection with the defense of such action, or the Indemnifying Party shall not have employed counsel to take charge of the defense of such action 8 9 or the Indemnified Party shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party), in any of which events such fees and expenses shall be borne by the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 5 is unavailable to a party that would have been an Indemnified Party under this Section 5 in respect of any expenses, claims, losses, damages and liabilities referred to herein, then each party that would have been an Indemnifying Party hereunder shall, in lieu of indemnifying such Indemnified Party, contribute to the amount paid or payable by such Indemnified Party as a result of such expenses, claims, losses, damages and liabilities in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and such Indemnified Party on the other in connection with the statement or omission which resulted in such expenses, claims, losses, damages and liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or such Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and each Holder agrees that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5(d). (e) No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 6. Information to be Furnished by Holders. Each Holder shall furnish to the Company such information as the Company may reasonably request and as shall be required in connection with the Registration and related proceedings referred to in Sections 2 and 3 hereof. If any Holder fails to provide the Company with such information within 15 business days of the Company's request, the Company's obligations under Sections 2 and 3 hereof with respect to such Holder or the Registrable Shares owned by such Holder shall be suspended until such Holder provides such information. Section 7. Rule 144 Sales. (a) The Company covenants that it will file the reports required to be filed by the Company under the Exchange Act, so as to enable any Holder to sell Registrable Shares pursuant to Rule 144 under the Securities Act. (b) In connection with any sale, transfer or other disposition by any Holder of any Registrable Shares pursuant to Rule 144 under the Securities Act, the Company shall cooperate with such Holder to facilitate the timely preparation and delivery of certificates representing Registrable Shares to be sold and not bearing any Securities Act legend, if deemed appropriate, and enable certificates for such Registrable Shares to be for such number of shares and registered in such names as the selling Holder 9 10 may reasonably request, provided that such request is made at least two business days prior to any sale of Registrable Shares. Section 8. Miscellaneous. (a) Governing Law. This Agreement shall he governed in all respects by the laws of the State of Maryland (other than the choice of law rules thereof). (b) Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof. (c) Amendment. No supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the party to be bound thereby. (d) Notices, etc. Each notice, demand, request, request for approval, consent, approval, disapproval, designation or other communication (each of the foregoing being referred to herein as a notice) required or desired to be given or made under this Agreement shall be in writing (except as otherwise provided in this Agreement), and shall be effective and deemed to have been received (i) when delivered in person, (ii) when sent by facsimile with receipt acknowledged, (iii) five (5) days after having been mailed by certified or registered United States mail, postage prepaid, return receipt requested, or (iv) the next business day after having been sent by a nationally recognized overnight mail or courier service, receipt requested. Notices shall be addressed as follows: (a) if to the Investors, at the Investor's address or fax number set forth below its signature hereon, or at such other address or fax number as the Investors shall have furnished to the Company in writing, or (b) if to any assignee or transferee of the Investors, at such address or fax number as such assignee or transferee shall have furnished the Company in writing, or (c) if to the Company, at the address or fax number of its principal executive offices set forth below its signature hereon or at such other address or fax number as the Company shall have furnished to the Investors or any assignee or transferee. Any notice or other communication required to be given hereunder to a Holder in connection with a registration may instead be given to the designated representative of such Holder. (e) Counterparts. This Agreement may be executed in any number of counterparts, each of which may be executed by fewer than all of the parties hereto (provided that each party executes one or more counterparts), each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. (f) Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. (g) Section Titles. Section titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders. The Company hereby agrees to extend the benefits of this Agreement to any Holder and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. 10 11 (i) Remedies. The Company and the Investors acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that the Company and each Holder, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of another party under this Agreement in accordance with the terms and conditions of this Agreement in any court of the United States or any State thereof having jurisdiction. (j) Attorneys' Fees. If the Company or any Holder brings an action to enforce its rights under this Agreement, the prevailing party in the action shall be entitled to recover its costs and expenses, including, without limitation, reasonable attorneys' fees, incurred in connection with such action, including any appeal of such action. [Page Break Intentionally Inserted] 11 12 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first above written. CHARLES E. SMITH RESIDENTIAL REALTY, INC. By: /s/ ERNEST A. GERARDI, JR. ------------------------------------- Name: Ernest A. Gerardi, Jr. ----------------------------------- Title: President ---------------------------------- 2345 Crystal Drive Crystal City Arlington, Virginia 22202 Attention: Robert D. Zimet Facsimile: (703) 769-1312 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ ROBERT W. GADSDEN ------------------------------------- Name: Robert W. Gadsden ----------------------------------- Title: Vice President ---------------------------------- 8 Campus Drive Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: Jeffrey L. Danker Facsimile: (201) 734-1472 12 13 STRATEGIC VALUE INVESTORS, LLC By: The Prudential Investment Corporation, Its Attorney-In-Fact By: /s/ GARY H. PICONE ------------------------------------- Name: Gary H. Picone ----------------------------------- Title: Vice President ---------------------------------- 8 Campus Drive Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Facsimile: (201) 734-1472 STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC By: Strategic Value Investors International Ltd., Its Manager By: /s/ GARY H. PICONE ------------------------------------- Name: Gary H. Picone ----------------------------------- Title: Vice President ---------------------------------- 8 Campus Drive Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Facsimile: (201) 734-1472 13 EX-99.IV 5 OPERATING AGREEMENT 1 EXHIBIT IV OPERATING AGREEMENT 0F STRATEGIC VALUE INVESTORS, LLC Dated as of October 2, 1997 2 OPERATING AGREEMENT OF STRATEGIC VALUE INVESTORS, LLC A DELAWARE LIMITED LIABILITY COMPANY TABLE OF CONTENTS Page ---- ARTICLE 1. DEFINITIONS ............................. 1 1.1 Defined Terms .................................................... 1 1.2 Construction ..................................................... 9 ARTICLE 2. THE COMPANY .............................. 10 2.1 Formation Under Act .............................................. 10 2.2 Statutory Compliance ............................................. 10 2.3 Name of Company .................................................. 10 2.4 Purpose of Company ............................................... 10 2.5 Principal and Registered Office; Service of Process .............. 11 2.6 Expenses of Consideration of Investment by Member ................ 11 2.7 No Individual Authority .......................................... 11 2.8 No Member Responsible for Other's Commitments .................... 11 ARTICLE 3. TERM ................................. 11 3.1 Term ............................................................. 11 ARTICLE 4. MANAGEMENT OF THE COMPANY ....................... 12 4.1 The Investment Advisory Agreement ................................ 12 4.2 Management ....................................................... 12 ARTICLE 5. FISCAL YEAR .............................. 12 5.1 Calendar Year .................................................... 12 ARTICLE 6. MEMBERS ................................ 12 6.1 Liability ........................................................ 12 i 3 Page ---- 6.2 Indemnification .................................................. 13 6.3 Appointment of Investment Advisor as Attorney-In-Fact ............ 13 6.4 Survival of Appointment .......................................... 14 ARTICLE 7. MEETINGS ............................... 14 7.1 Meetings ......................................................... 14 7.2 Quorum ........................................................... 14 7.3 Manner of Acting ................................................. 15 7.4 Proxies .......................................................... 15 7.5 Action by Members Without a Meeting .............................. 15 7.6 Waiver of Notice ................................................. 15 ARTICLE 8. CAPITAL COMMITMENTS AND CONTRIBUTIONS OF THE MEMBERS ..................... 15 8.1 Calls on Capital Commitments ..................................... 15 8.2 Allocation of Investment Securities Acquired ..................... 16 8.3 Defaults ......................................................... 16 8.4 Subsequent Fund Closings ......................................... 16 ARTICLE 9. REDEMPTIONS .............................. 17 ARTICLE 10. ALLOCATIONS AND DISTRIBUTIONS ..................... 17 10.1 Distributions .................................................... 17 10.2 Allocations ...................................................... 18 10.3 Allocation of Tax Items for Federal and State and Local Tax Purposes ......................................................... 19 ARTICLE 11. ASSIGNMENT; RESTRICTIONS ON TRANSFER OF INTERESTS ..................... 20 11.1 Transfers ........................................................ 20 11.2 Assumption by Assignee ........................................... 20 11.3 Other Assignments Void ........................................... 21 ii 4 Page ---- ARTICLE 12. INDEPENDENT REVIEWER ......................... 21 12.1 Independent Reviewer ............................................. 21 12.2 Initial Independent Reviewer ..................................... 21 ARTICLE 13. BOOKS AND RECORDS, REPORTS, TAXES, ETC ............................. 22 13.1 Books; Reports ................................................... 22 13.2 Where Maintained ................................................. 22 13.3 Tax Returns ...................................................... 22 13.4 Section 754 Election ............................................. 22 ARTICLE 14. DISSOLUTION .............................. 22 14.1 Dissolution ...................................................... 22 14.2 Procedures ....................................................... 23 14.3 Certificate of Cancellation ...................................... 23 14.4 No Action for Dissolution ........................................ 24 ARTICLE 15. NOTICES ................................ 24 15.1 In Writing; Address .............................................. 24 ARTICLE 16. MISCELLANEOUS ............................. 25 16.1 Governing Law .................................................... 25 16.2 Entire Agreement ................................................. 25 16.3 Headings ......................................................... 25 16.4 Parties in Interest .............................................. 25 16.5 Confidentiality .................................................. 25 16.6 Amendments; Waivers .............................................. 25 16.7 Severability ..................................................... 26 16.8 Qualification in Other States .................................... 26 16.9 Consent to Jurisdiction and Litigation ........................... 26 16.10 Partnership Tax Treatment; Tax Matters Partner ................... 27 16.11 Conflicts; Waiver ................................................ 27 16.12 Counterparts ..................................................... 27 iii 5 Page ---- 16.13 Waiver of Jury Trial ............................................. 27 iv 6 OPERATING AGREEMENT OF STRATEGIC VALUE INVESTORS, LLC This Operating Agreement (this "Agreement") of STRATEGIC VALUE INVESTORS, LLC (the "Company") is entered into and shall be effective as of the 2nd day of October, 1997, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ("Prudential"), and the other parties identified on the signature pages hereof (Prudential and such other parties, collectively the "Members"). R E C I T A L S WHEREAS, the Members desire to form a limited liability company under the Delaware Limited Liability Company Act (the "Act") to invest in REIT Shares or Partnership Units of REIT Partnerships (as such capitalized terms are defined below); WHEREAS, the Members desire to execute this Agreement to establish the rules and procedures that are to govern the conduct of the business and affairs of the Company as set forth below, NOW, THEREFORE, in consideration the foregoing recitals, which are incorporated into the operative provisions of this Agreement by this reference, and for good and valuable consideration, the receipt and adequacy of which are hereby conclusively acknowledged and intending to be legally bound thereby, the Members hereby covenant and agree as follows: ARTICLE 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accountants" means Price Waterhouse, LLP or any other accountancy firm that has been retained by the Investment Advisor to serve as accountants to the Company. "Act" has the meaning set forth in the Recitals. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the taxable year, after giving effect to the following adjustments: (i) credit to such Capital Account any amount that such Member is obligated to restore under Section 1.704-1(b)(2)(ii)(c) of the Treasury Regulations, as well as any addition thereto pursuant to the next to last sentence of Sections 1.704-2(g)(l) and (i)(5) of the Treasury Regulations, after taking into account thereunder any changes 1 7 during such year in minimum gain, as determined in accordance with Sections 1.704-2(d) and 1.704-(i)(3) of the Treasury Regulations; and (ii) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations. This definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and 1.704-2, and will be interpreted consistently with those provisions. "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. "Agreement" means this Operating Agreement as the same shall be amended or supplemented from time to time in accordance with the terms set forth herein. "Allocated Percentage" has the meaning set forth in the Investment Advisory Agreement. "Bankruptcy" means, with respect to any Person, the inability of such Person generally to pay its debts as such debts become due, or an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; the filing of any petition or answer by such Person seeking to adjudicate it a bankrupt or insolvent, or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of such Person or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking, consenting to, or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for such Person or for any substantial part of its property; or corporate action taken by such Person to authorize any of the actions set forth above. "Base Rate" means, at any date, the prime rate then in effect for The Chase Manhattan Bank (or, if unavailable, another major money center bank selected by the Investment Advisor), plus 2% per annum per annum. "Business Day" means a day other than a Saturday, Sunday or legal holiday for commercial lenders under the laws of the States of Delaware, New Jersey or New York. "Capital Account" means, with respect to each Member, a single capital account that shall be established for such Member and that shall be maintained for such Member in accordance with the following provisions: (i) To each Member's Capital Account there shall be credited such Member's Capital Contributions, such Member's allocable share of Profits, and any 2 8 items in the nature of income or gain that are specially allocated pursuant to Article 10 of this Agreement, and the amount of any Company liabilities that are assumed by such Member or that are secured by any Company property distributed to such Member. (ii) To each Member's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Company property actually or deemed distributed to such Member pursuant to any provision of this Agreement, such Member's allocable share of Losses, and any items in the nature of expenses or Losses that are specially allocated pursuant to Article 10 of this Agreement, and the amount of any liabilities of such Member that are assumed by the Company or that are secured by any property contributed by such Member to the Company. (iii) In the event the Gross Asset Values of Company assets are adjusted, the Capital Accounts of all Members shall be adjusted simultaneously to reflect aggregate net adjustment as if the Company recognized gain or loss equal to the amount of such aggregate net adjustment. (iv) The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Treasury Regulations. (v) In the event any Interest in the Company is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Interest. "Capital Commitment" means, when referring to a dollar amount, (i) with respect to any Member other than Prudential, an amount committed by such Member pursuant to a Subscription Agreement and (ii) with respect to Prudential, that amount which, when aggregated with all amounts referred to in clause (i) above, equals 49% of the aggregate amount committed by the Members to the Company. "Capital Contribution" means, for each Member, the aggregate amount contributed to the Company by such Member pursuant to Section 8.1 hereof; provided that, in the case of Prudential, the value of any Investment Securities contributed to the Company by Prudential (valued on the basis of the price established in the investment transaction) shall be included in such amount. "Certificate of Formation" means the Certificate of Formation of the Company filed with the Delaware Secretary of State on September 10, 1997, as amended or restated from time to time. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time, or corresponding provisions of subsequent superseding Federal revenue laws. 3 9 "Commitment Period" means the period commencing on the closing of the first purchase of Investment Securities by the Company and expiring on the second anniversary of such date (or the third anniversary of such date if the Commitment Period is extended) or, if earlier, on the date on which the Company is terminated. "Company Minimum Gain" has the meaning assigned to the term partnership minimum gain in Treasury Regulations Section 1.704-2(b)(2) and 1.704-2(d)(1). In general, Company Minimum Gain equals the excess of the amount by which a Nonrecourse Liability exceeds the adjusted tax basis of the Company property it encumbers. "Company Property" means all assets owned by the Company and forming a part of, or in any way related to or used in connection with, the ownership, and operation of the business of the Company, including all Investment Securities held by the Company and any cash held in bank accounts or investments held in the name of the Company. "Defaulting Member" has the meaning set forth in Section 8.3. "Depreciation" means, for each taxable year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for the year or other period for federal income tax purposes, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of the year or other period, Depreciation will be an amount that bears the same ratio to the beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for the year or other period bears to the beginning adjusted tax basis, provided that if the federal income tax depreciation, amortization, or other cost recovery deduction for the year or other period is zero, Depreciation will be determined with reference to the beginning Gross Asset Value using any reasonable method selected by the Tax Matters Partner. "Disposition Proceeds" means all cash and non-cash proceeds received by the Company for any sale or other disposition of any Investment Security or portion thereof. "Dissolution Events" has the meaning set forth in Section 14.1. "Distributions" means all distributions made, or deemed to be made, to the Members pursuant to Section 10.1. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, together with the rules and regulations promulgated thereunder. "Fiscal Year" has the meaning set forth in Article 5. "Governmental Plan" has the meaning set forth in Section 3(32) of ERISA. 4 10 "Gross Asset Value" means, with respect to any asset, the adjusted basis of such asset for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member to the Company will be the fair market value of the asset (valued on the basis of the price established in the investment transaction) on the date of the contribution, as determined by the Investment Advisor. (ii) The Investment Advisor shall adjust the Gross Asset Values of all Company assets to equal the respective fair market values of the assets, as reasonably determined by the Investment Advisor, as of (a) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company if the Investment Advisor reasonably determines an adjustment is necessary or appropriate to reflect the relative economic interests of the Members in the Company and (c) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g). (iii) The Gross Asset Values of Company assets will be increased or decreased to reflect any adjustment to the adjusted basis of the assets under Code Sections 734(b) or 743(b), but only to the extent that the adjustment is taken into account in determining Capital Accounts under Treasury Regulations Section 1.704-1(b)(2)(iv)(m). (iv) The Gross Asset Value of any Company asset distributed to any Members will be the gross fair market value of the asset as determined by the Investment Advisor on the date of distribution. After the Gross Asset Value of any asset has been determined or adjusted under subparagraphs (i), (ii), or (iii) above, the Gross Asset Value will be adjusted by the Depreciation taken into account with respect to the asset for purposes of computing Profits or Losses. "Initial Closing Date" means the date on which the Company first issues Interests to the Members. "in-Interest" means, with respect to any percentage or fraction, the Members voting for or against the related proposal or issue, as the case may be, expressed in terms of a percentage or fraction of aggregate Capital Commitments. "Interest" means with respect to any Member, the interest of such Member in the Company, measured in terms of such Member's Capital Commitment. 5 11 "Investment Advisor" means the Prudential Investment Corporation in its capacity as investment advisor under the Investment Advisory Agreement, which will fulfill its responsibilities through PREI. "investment Advisor Fees" has the meaning set forth in the Investment Advisory Agreement. "Investment Advisory Agreement" has the meaning set forth in Section 4.1. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time. "Investment Securities" means REIT Shares and Partnership Units, collectively. "Liquidator" has the meaning set forth in Section 14.2(a). "Member" means each party that shall execute this Agreement or a counterpart of this Agreement. "Member" means any of the Members. "Member Nonrecourse Debt" means any nonrecourse debt of the Company for which any Member bears the economic risk of loss, as described in Treasury Regulations Section 1.704-2(b)(4). "Member Nonrecourse Debt Minimum Gain" means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(3). "Member Nonrecourse Deductions" has the meaning assigned to the term partner nonrecourse deductions in Treasury Regulations Section 1.704-2(i)(2). In general, the amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for any tax year is the excess, if any, of the net increase during such year in the amount of Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, over the aggregate amount of any actual or deemed distributions during such year to the Member that bears the economic risk of loss for such Member Nonrecourse Debt to the extent such distributions are from the proceeds of such Member Nonrecourse Debt, and are allocable to an increase in the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt. "Member's Share of Company Minimum Gain" generally means, as described in Treasury Regulations Section 1.704-2(g)(1), the sum of Nonrecourse Deductions allocated to such Member and the aggregate amount of distributions made to such Member of proceeds of a Nonrecourse Liability that are allocable to an increase in Company Minimum Gain, minus the aggregate of such Member's Share of the Net Decrease in Company Minimum Gain. 6 12 "Member's Share of Member Nonrecourse Debt Minimum Gains" generally means, as described in Treasury Regulations Section 1.704-2(i)(5), an amount determined in a manner consistent with Treasury Regulations Section 1.704-2(g)(1) with respect to each Member Nonrecourse Debt for which such Member bears the economic risk of loss. "Member's Share of the Net Decrease in Company Minimum Gain" generally means, as described in Treasury Regulations Section 1.704-2(g)(2), an amount equal to the total net decrease in Company Minimum Gain multiplied by a ratio equal to such Member's Share of Company Minimum Gain at the end of the immediately preceding taxable year over the total Company Minimum Gain at such time. "Member's Share of the Net Decrease of Member Nonrecourse Debt Minimum Gain" generally means, as described in Treasury Regulations 1.704-2(i)(4), an amount determined in a manner consistent with Treasury Regulations Section 1.704-2(g)(2). "Memorandum" means the Private Placement Memorandum dated July 1, 1997, relating to the Company, as amended, restated, supplemented or otherwise modified, pertaining to the offering of the Interests. "Nonrecourse Deductions" has the meaning assigned to such term in Treasury Regulations Section 1.704-2(c). In general, the amount of Nonrecourse Deductions for a Company taxable year equals the excess of the net increase, if any, in the amount of Company Minimum Gain during such year over the aggregate amount of distributions during such year of proceeds of a Nonrecourse Liability that are allocable to an increase in Company Minimum Gain. "Nonrecourse Liability" means any debt of the Company to the extent that no Member (or a Person related to a Member) bears the economic risk of loss for that liability, as described in Treasury Regulations Sections 1.704-2(b)(3) and 1.752-1s(a)(2). "Notice of Default" has the meaning set forth in Section 8.3. "Other Operating Agreements" has the meaning set forth in the Investment Advisory Agreement. "Partnership Units" means partnership interests in REIT Partnerships. "Performance Fees" has the meaning set forth in the Investment Advisory Agreement. "Person" means an association, a corporation, an individual, a limited liability company, a partnership, a trust or any other entity or organization, including a government or an agency, board, court, department, official, political subdivision or representative thereof or any other governmental entity. 7 13 "PIMS" means Prudential Investment Management Services LLC, a Delaware limited liability company. "Portfolio Income" means all cash and non-cash dividends or other actual or deemed distributions in respect of any Investment Securities or portion thereof that do not constitute Disposition Proceeds. "PREI" means Prudential Real Estate Investors, a division of Prudential. "Profits" and "Losses" mean, for each taxable year or other period, an amount equal to the Company's federal taxable income or loss (as is appropriate) for such year or other period, determined in accordance with Code Section 703(a) (including all items of income, gain, loss or deduction required to be stated separately under Section 703(a)(1) of the Code), with the following adjustments: (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses will be added to taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures under Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, will be subtracted from taxable income or loss; (iii) Gain or loss resulting from any disposition of Company property (with respect to which gain or loss is recognized for federal income tax purposes) will be computed by reference to the Gross Asset Value of the property, notwithstanding that the adjusted tax basis of the property differs from its Gross Asset Value; (iv) Any items that are specially allocated pursuant to Section 5.2 shall be excluded from the determination of Profits and Losses; and (v) In lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing taxable income or loss, there will be taken into account Depreciation for the taxable year or other period. "Public Investment Security" has the meaning set forth in the Investment Advisory Agreement. "Redemption Vehicles" has the meaning set forth in the Investment Advisory Agreement. "REIT" means any public or private real estate company or real estate investment trust, whether or not such company qualifies as a real estate investment trust under applicable provisions of the Code. 8 14 "REIT Partnership" means any partnership in which a REIT owns general partnership interests or other significant partnership interests. "REIT Shares" means shares or equivalents thereof of REITs. "Section 704(c) Property" means (i) each item of property that is contributed to the Company and to which Section 704(c) of the Code or Section 1.704-3(a)(3) of the Treasury Regulations applies, and (ii) each item of Company property that, as contemplated by Section 1.704-1(b)(4)(i) and other analogous provisions of the Treasury Regulations, is governed by the principles of Section 704(c) of the Code (or principles contained in Section 704(c) of the Code). "Securities Act" means the Securities Act of 1933, as the same may be amended. "Standard of Care" has the meaning set forth in the Investment Advisory Agreement. "Subscription Agreement" means one of the several Subscription Agreements between the Company and a Member. "Tax Matters Partner" means the person designated as "Tax Matters Partner" pursuant to Section 16.10. "Transfer" means (a) as a noun, any voluntary or involuntary, direct or indirect, sale, conveyance, assignment, transfer, divestment, alienation, pledge, hypothecation, creation of a security interest in, or other disposition, or encumbrance, and (b) as a verb, voluntarily or involuntarily, directly or indirectly, to sell, convey, assign, transfer, divest, alienate, pledge, hypothecate, create a security interest in, or otherwise dispose of or encumber; whether for consideration or gratuitously. "Treasury Regulations" means the regulations implementing the Code, as the same may be hereafter amended. "Unaffiliated Member" means a Member other than Prudential. "Unfunded Commitments" means any Member's Capital Commitments that have not been called by the Investment Advisor and delivered by such Member plus any capital contribution returned to such Member pursuant to Section 8.4. "Venture Capital Operating Company" has the meaning set forth in Department of Labor regulation 29 C.F.R. ss. 2510.3 - 101(d). 1.2 Construction. Any of the terms used herein may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All words or terms used in this Agreement, regardless of the number or gender in which they are used, 9 15 shall include any other number or gender, as the context may require. The words "herein", "hereof" and "hereunder" shall refer to this Agreement unless the context otherwise requires. The word "including" shall mean "including, without limitation," except where the context otherwise requires. References to contracts, agreements, and other contractual instruments shall be deemed to include all subsequent amendments, supplements and other modifications permitted by the terms of this Agreement. References to specific statutes include (a) successor statutes of similar purpose and import, and (b) all rules, regulations and orders promulgated thereunder. The term "provisions," when used with respect hereto or to any other document or instrument, shall be construed as if preceded by the phrase "terms, covenants, agreements, requirements, conditions and/or". This Agreement shall not be construed against any party hereto as the drafters hereof. All references to "Articles," "Sections," "clauses," and "Exhibits" are to Articles, Sections, clauses and Exhibits to this Agreement unless the context otherwise requires. All Exhibits attached hereto are made a part hereof and are incorporated herein by this reference. ARTICLE 2. THE COMPANY 2.1 Formation Under Act. The Members hereby associate themselves as members in a limited liability company under the Act, upon the terms and conditions contained in this Agreement. The Members hereby ratify and confirm the Certificate of Formation, and resolve that the same was duly authorized, executed, delivered and filed. The Investment Advisor shall, when required, file such amendments to, or restatements of, the Certificate of Formation, in such public offices in the State of Delaware or elsewhere as the Investment Advisor deems advisable to give effect to the provisions of this Agreement and the Certificate of Formation, and to preserve the character of the Company as a limited liability company. 2.2 Statutory Compliance. The Company shall exist under and be governed by, and this Agreement shall be construed in accordance with, the applicable laws of the State of Delaware. In the event of any conflict between any provision of this Agreement and any provision of the Act, such provision of this Agreement shall control unless the contravention of such provision of the Act is expressly prohibited by the Act. Members shall execute and file such documents and instruments as may be necessary or appropriate in the sole discretion of the Investment Advisor with respect to the formation of, and the conduct of business by, the Company. 2.3 Name of Company. The Company will be conducted under the name "Strategic Value Investors, LLC." 2.4 Purpose of Company. The purpose of the Company is to acquire, sell, dispose of, and invest in Investment Securities and to engage in such other activities as are permitted hereby. The Company shall not engage in any other business. In connection with the 10 16 foregoing, the Company may engage in all activities necessary, customary, convenient or incident to such purpose, upon the terms and subject to the conditions of this Agreement. 2.5 Principal and Registered Office; Service of Process. The principal office of the Company shall be: 8 Campus Drive, 4th Floor, Arbor Circle South, Parsippany, New Jersey 07054-4493 or such other place as the Investment Advisor may from time to time determine. The registered address of the Company shall be: 1023 Centre Road, Wilmington, Delaware 19805. The registered agent of the Company at such address shall be Corporation Service Company. The registered agent shall mail a copy of any process against the Company served upon it to the Company at the address set forth above, and the Investment Advisor shall deliver a copy of any such process received by the Company to each of the Members. The Investment Advisor may elect to change the Company's registered agent and the Company's registered and principal offices by complying with the relevant requirements of the Act. 2.6 Expenses of Consideration of Investment by Member. Each Member shall bear its own expenses in connection with its consideration of an investment in the Company and its acquisition of Interests therein, including the fees of any attorney, financial advisor, or other consultant utilized by such Member. 2.7 No Individual Authority. No Member acting alone shall have any authority to act for, or undertake, or assume any obligations or responsibility on behalf of the other Members or the Company. 2.8 No Member Responsible for Other's Commitments. No Member shall be responsible or liable for any obligation of any other Member hereunder, including the obligation of any Member to the Company to make any Capital Commitment hereunder. ARTICLE 3. TERM 3.1 Term. The term of the Company commenced upon the filing of the Certificate of Formation in the office of the Delaware Secretary of State and shall continue until the fifth anniversary of the first call on any Capital Commitment unless earlier dissolved and terminated pursuant to Article 14. 11 17 ARTICLE 4. MANAGEMENT OF THE COMPANY 4.1 The Investment Advisory Agreement. The Company has, contemporaneously herewith, entered into an Investment Advisory Agreement (the "Investment Advisory Agreement") with the Investment Advisor. The Investment Advisory Agreement may be terminated by a vote of one-half in Interest of the Unaffiliated Members (referred to therein as "Unaffiliated Investors") as provided in the Investment Advisory Agreement. 4.2 Management. Pursuant to the Investment Advisory Agreement, PIC will serve as investment advisor to, and manager of the Company, and will fulfill its responsibilities through PREI. PREI will have the rights and responsibilities as set forth in the Investment Advisory Agreement. ARTICLE 5. FISCAL YEAR 5.1 Calendar Year. The fiscal year (the "Fiscal Year") of the Company shall be the calendar year, unless (subject to obtaining consent of the Internal Revenue Service) the Investment Advisor shall otherwise decide. ARTICLE 6. MEMBERS 6.1 Liability. A Member shall not be personally liable for the debts, liabilities or obligations of the Company and shall have no obligation to make Capital Contributions in excess of its Capital Commitment (together with Disposition Proceeds that may be recalled during the Reinvestment Period), except to the extent required by the Act and Section 6.2. 12 18 6.2 Indemnification. (a) Except as otherwise required by law, the Investment Advisor and its Affiliates, directors, officers, employees, shareholders, assigns, representatives or agents shall not be liable, responsible or accountable in damages or otherwise to the Company or any Member for any loss, liability, damage, settlement cost, or other expense (including attorneys' fees) incurred by reason of any act or omission or any such alleged act or omission performed or omitted by such Person (including those in connection with serving on boards of directors for companies in the Company's portfolio) if such Person acted in a manner consistent with the Standard of Care. (b) To the fullest extent permitted by applicable law, the Investment Advisor, PIMS, PREI, the Independent Reviewer and any of their respective officers, directors, agents, stockholders, partners, members, employees, other Affiliates, and any other Person who serves at the request of the Investment Advisor on behalf of the Company (each such Person being an "Indemnitee") shall be held harmless and be indemnified by the Company for any liability, loss (including amounts paid in settlement), damages or expenses (including reasonable attorneys' fees and disbursements) incurred by such Indemnitee on behalf of the Company or in furtherance of the interests of the Company or otherwise arising out of, or in connection with, the Company; provided that such Indemnitee acted in a manner consistent with the Standard of Care. (c) To the fullest extent permitted by law, expenses (including legal fees) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 6.2. (d) The individual indemnity obligation of each Member will be limited to the lesser of (i) the aggregate of: (x) such Member's Unfunded Commitments; (y) Distributions (including Distributions in redemption) previously made to such Member; and (z) the Member's Interest in the Company or (ii) such Member's Capital Commitment. 6.3 Appointment of Investment Advisor as Attorney-In-Fact. Each Member irrevocably constitutes and appoints the Investment Advisor, and any replacement or substitute Investment Advisor, as such Member's true and lawful attorney-in-fact and agent, with full power and authority in such Member's name, place and stead, (a) to execute, acknowledge, deliver, file and record in the appropriate public offices all certificates or other instruments (including counterparts of this Agreement) that the Investment Advisor deems appropriate to continue the Company as a limited liability company in the jurisdiction in which the Company conducts business, including amendments to this Agreement necessary to correct scriveners' errors, from and after the date on which such Member becomes a Defaulting Member, all documents and instruments (including transfer and sale documents) that the Investment Advisor deems necessary to implement the rights and remedies set forth in Section 8.3, (b) to take all 13 19 actions necessary and to execute and deliver all documents, certificates and other instruments (including Other Operating Agreements) in connection with the formation of Redemption Vehicles in accordance with Section 6(c) of the Investment Advisory Agreement and the subsequent operation of such Redemption Vehicles and (c) to take all actions as are necessary and appropriate to fulfill the duties of Investment Advisor as set forth herein, as referenced in the Investment Advisory Agreement and/or as described in the Memorandum. 6.4 Survival of Appointment. The appointment by all Members of the Investment Advisor as attorney-in-fact set forth in Section 6.3 shall be deemed to be a power coupled with an interest and with full power of substitution, in recognition of the fact that each of the Members will be relying upon the Investment Advisor to act as contemplated by this Agreement in any filing and other action by the Investment Advisor on behalf of the Company, and such power shall, to the extent permitted by law, survive the death, disability, incompetency, withdrawal, removal, bankruptcy or insolvency of any Person hereby giving such power and the transfer by a Member of all or part of its Interest. The foregoing power of attorney of a transferor Member shall survive such transfer only until such time as the transferee shall have been admitted to the Company as a Member and all required documents and instruments shall have been duly executed, filed and recorded to effect such substitution. Any Person dealing with the Company may conclusively presume and rely upon the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. ARTICLE 7. MEETINGS 7.1 Meetings. Meetings of Members shall be called from time to time by the Investment Advisor or one-third in-Interest of the Unaffiliated Members. Any such meetings shall be held at the principal place of business of the Company. Members may participate in meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person at the meeting. 7.2 Quorum. Attendance by a majority in-Interest of the Members, represented in person or by proxy, shall constitute a quorum at any meeting of Members. In the absence of a quorum at any such meeting, a majority of the Interests so represented may adjourn the meeting from time to time for a period not to exceed sixty (60) days without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of Members whose absence would cause less than a quorum to be present. 14 20 7.3 Manner of Acting. If a quorum is present, the affirmative vote of a majority in-Interest of the Members shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Act or by this Agreement. Unless otherwise expressly provided in this Agreement or required under applicable law, Members who have an interest (economic or otherwise) in the outcome of any particular matter upon which Members vote or consent may vote or consent upon any such matter and their vote shall be counted in the determination of whether the requisite matter was approved by the Members. 7.4 Proxies. At all meetings of Members, a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Investment Advisor before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. 7.5 Action by Members Without a Meeting. Action required or permitted to be taken at a meeting of Members may be taken without a meeting, without prior notice and without a vote if the action is evidenced by one or more written consents describing the action taken, signed by all Members and delivered to the Investment Advisor for inclusion in the minutes or for filing with the Company records. Action taken under this Section 7.5 is effective when all Members have signed the consent, unless the consent specifies a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent. 7.6 Waiver of Notice. When any notice is required to be given to any Member, a written waiver of notice signed by the Person entitled to such notice, whether before, at, or after the time stated in the notice, shall be equivalent to the giving of such notice. ARTICLE 8. CAPITAL COMMITMENTS AND CONTRIBUTIONS OF THE MEMBERS 8.1 Calls on Capital Commitments. (a) Each Member shall make contributions to the capital of the Company by contributing amounts, in installments when and as called by the Investment Advisor, from time to time in accordance with Sections 3(e) and 4(d) of the Investment Advisory Agreement, upon at least ten Business Days' prior written notice; provided that, at initial closing, the Investment Advisor shall not be required to provide ten Business Days notice but will provide notice in as far advance of the initial closing as possible. (b) At or prior to the first closing of a transaction to acquire Investment Securities, and at or prior to each subsequent closing of a transaction to acquire Investment Securities, the Capital Commitments will be called in an aggregate amount sufficient to acquire 15 21 the Investment Securities (and related closing costs) and, in the case of the first transaction, the costs of organization of the Company. 8.2 Allocation of Investment Securities Acquired. Each of the Investment Securities acquired by the Company shall be allocated on the books of the Company (a) in the case of Investment Securities contributed by a Member to the Company, to the Member contributing such Investment Securities, and (b) otherwise, to the Members in proportion to their relative Capital Contributions with respect to such Investment Securities; provided, however, that under no circumstances shall Partnership Units be allocated to any Member other than Prudential. In the case of any investment made by the Company both in the form of REIT Shares and Partnership Units, Prudential shall be allocated all such Partnership Units and that number of REIT Shares sufficient for Prudential to have been allocated its proportionate amount of such investment, and the remainder of such REIT Shares shall be allocated among the Members other than Prudential in proportion to their relative capital contributions with respect to such Investment Securities. 8.3 Defaults. If a Member (a "Defaulting Member") fails to pay when due (a) any installment of its Capital Commitment and such failure continues for ten days after written notice thereof from the Company (the "Notice of Default") or (b) any fees it is required to pay pursuant to the Investment Advisory Agreement and such failure continues for 30 days after an invoice therefor, the Company may, in its sole discretion and in addition to any other legal and equitable remedies the Company may have: (i) reduce the Capital Commitment of the Defaulting Member by all or a portion of the sums so unpaid; (ii) commence legal proceedings against the Defaulting Member to collect any sums due and unpaid plus any collection expenses, including court costs and reasonable attorneys' fees and disbursements; (iii) cancel without consideration, 20% of any Interests held by the Defaulting Member and its Affiliates; and/or (iv) determine that the Defaulting Member shall forfeit to the nondefaulting Members all distributions except to the extent a distribution represents a return of a capital call made by the Defaulting Member. 8.4 Subsequent Fund Closings. On each Subsequent Closing held pursuant to Section 3(d) of the Investment Advisory Agreement, the Company may admit additional Members to the Company or may permit Members to increase their Capital Commitments to the Company. At each Subsequent Closing, each additional Members will purchase Interests by contributing to the Company an amount determined by the Investment Advisor based on the value of the Investment Securities then held by the Company and as determined in accordance with Section 3(f) of the Investment Advisory Agreement. Each additional Member shall also contribute to the Company an amount equal to its portion of costs and expenses paid by the Company prior to the date of such Subsequent Closing, together with interest on such costs and expenses at a rate equal to Base Rate. The amount contributed to the Company at any Subsequent Closing will be distributed to Unaffiliated Members admitted to the Company prior to such Subsequent Closing Date, by the Investment Advisor within ten Business Days of receipt of same, and distributed to each Unaffiliated Member ratably in proportion to their Capital Commitments; provided that the Investment Advisor may direct a portion of such amounts to instead be paid to SVI-International in order to equitably allocate costs and expenses of SVI- 16 22 International and the Company. All amounts so distributed may be recalled by the Investment Advisor during the Commitment Period pursuant to Section 8.1(a) and Sections 3(e) and 4(d) of the Investment Advisory Agreement. Each Member purchasing Interests on a Subsequent Closing Date will agree to be bound by the terms of this Agreement and to execute a counterpart to this Agreement in the form of Exhibit A attached hereto. ARTICLE 9. REDEMPTIONS Members shall have the rights to cause redemptions with respect to their Allocated Percentages of Public Investment Securities (and, in the case of Prudential, Partnership Units) set forth in Section 6 of the Investment Advisory Agreement. ARTICLE 10. ALLOCATIONS AND DISTRIBUTIONS 10.1 Distributions. (a) The Investment Advisor may, in its sole discretion, make distributions ("Distributions") of cash, property or securities of the Company to the Members at any time and from time to time. (b) Distributions of Disposition Proceeds and Portfolio Income in respect of Investment Securities acquired by the Company, net of any expenses attributable thereto, shall be made to the Members to whom such Investment Securities have been allocated by the Company pursuant to Section 8.2. (c) Amounts distributed to a Member may be withheld until any federal or state withholding obligations of the Company with respect to such Member are satisfied. Any amount withheld under this Section 10.1(c) shall be treated as having been distributed to the Member to whom such withholding applies. (d) Amounts distributed to a Member may be withheld to pay Investment Advisor Fees or Performance Fees then due by such Investor. Any amount withheld under this Section 10.1(d) shall be treated as having been distributed to the Member from whom such Investment Advisor Fees or Performance Fees were due. (e) Notwithstanding anything to the contrary in this Agreement or the Investment Advisory Agreement, no Distribution of Disposition Proceeds or Portfolio Income in respect of Partnership Units shall be made to any Member other than Prudential. 17 23 10.2 Allocations. (a) In General. Subject to paragraph (b) below, all Profits and Losses of the Company shall be allocated to the Capital Accounts of the Members as follows: (i) Each item of income, gain, deduction or loss of the Company attributable to an Investment Security of the Company (including, without limitation, all Portfolio Income received with respect to such Investment Security and all expenses attributable to the acquisition or disposition of such Investment Security) shall be allocated to the Capital Account of the Member to whom such Investment Security is allocated on the books of the Company under Section 8.2. For this purpose, expenses of the Independent Reviewer with respect to any Investment Securities shall be allocated pro rata to the Members other than Prudential to whom such Investment Securities are allocated pursuant to Section 8.2. (ii) All other income, gain, deduction or loss of the Company shall be allocated to the Capital Accounts of the Members in proportion to their respective Capital Commitments. (b) Regulatory Allocations. (i) If there is a Net Decrease in Company Minimum Gain during any fiscal year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member's Share of the Net Decrease in Company Minimum Gain. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This clause (i) is intended to comply with the "minimum gain chargeback" requirements of Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (ii) If there is a Net Decrease in Member Nonrecourse Debt Minimum Gain during any fiscal year attributable to a Member Nonrecourse Debt, each Member with a share of Member Nonrecourse Debt Minimum Gain attributable to such debt at the beginning of such year shall be specially allocated items of income and gain for such year (and, if necessary, for subsequent years) in an amount equal to such Member's Share of the Net Decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2)(i). This clause (ii) is intended to comply with the "partner minimum gain chargeback" requirements of Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. 18 24 (iii) If any Member unexpectedly receives any adjustment, allocation or distribution described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) which results in an Adjusted Capital Account Deficit for the Member, such Member shall be allocated items of income and book gain in an amount and manner sufficient to eliminate such Adjusted Capital Account Deficit as quickly as possible; provided, that an allocation pursuant to this clause (iii) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided in this Section 5.4 have been tentatively made as if this clause (iii) were not in this Agreement. This clause (iii) is intended to constitute a "qualified income offset" as provided by Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. (iv) Member Nonrecourse Deductions shall be allocated among the Members who bear the "economic risk of loss" with respect to the Member Nonrecourse Debt resulting in such Member Nonrecourse Deductions. This clause (iv) is to be interpreted in a manner consistent with the requirements of Treasury Regulations Section 1.704-2(b)(4) and (i)(1). (v) The allocations set forth in this paragraph (b) (the "Regulatory Allocations") are intended to comply with certain requirements of the applicable Treasury Regulations promulgated under Code Section 704(b). Notwithstanding any other provision of this Section 10.2, the Regulatory Allocations shall be taken into account in allocating other operating Profits, Losses and other items of income, gain, loss and deduction to the Members for Capital Account purposes so that, to the extent possible, the net amount of such allocations of Profits, Losses and other items shall be equal to the amount that would have been allocated to each Member if the Regulatory Allocations had not occurred. 10.3 Allocation of Tax Items for Federal and State and Local Tax Purposes. (i) Subject to Sections 1.704-1(b)(4)(i) and 1.704-1(b)(2)(iv)(m) of the Treasury Regulations and the remaining paragraphs of this Section 10.3, allocations of income, gain, loss, deduction and credit for federal, state and local tax purposes shall be allocated to the Members in the same manner and amounts as the book items corresponding to such tax items are allocated for Capital Account purposes. (ii) Notwithstanding paragraph (a) hereof, any increase or decrease in the amount of any items of income, gain, loss, deduction or credit for tax purposes attributable to an adjustment to the basis of Company assets made pursuant to a valid election or deemed election under Sections 732(d), 734, 743, and 754 of the Code, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment, shall be allocated to those Members entitled thereto under such law. Such items shall be excluded in determining the Capital Accounts of the Members, except as otherwise provided by Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations. 19 25 (iii) For purposes of determination of the Members' share of the excess Nonrecourse Liabilities of the Company for purposes of Section 1.752-3(a)(3) of the Treasury Regulations, each such liability attributable to an Investment Security of the Company (as determined by the Tax Matters Partner) shall be allocated to the Member to whom such Investment Security has been allocated under Section 8.2 hereof, and any other such liability shall be allocated to the Members' in proportion to their respective Unrecovered Capital. (iv) If the Company owns or acquires Section 704(c) Property, or if the value of the assets of the Company are adjusted as described in the definition of "Gross Asset Value" herein, then, solely for tax purposes and not for Capital Account purposes, tax depreciation, and any gain or loss, attributable to such Section 704(c) Property shall be allocated between or among the Members in a manner that takes into account the variation between such value and such adjusted tax basis, in accordance with the principles of Code Section 704(c) and the "traditional method with curative allocations" as set forth in Treasury Regulations Section 1.704-3(b). To the extent permitted by law, such curative allocations will be effected by allocating all income attributable to Partnership Units to Prudential. ARTICLE 11. ASSIGNMENT; RESTRICTIONS ON TRANSFER OF INTERESTS 11.1 Transfers. The Members, or any assignee or successor in interest of the Members, may only transfer their applicable Interests in the Company, or in any part thereof, as provided in this Article 11. Interests may not be Transferred without the prior written consent of the Investment Advisor. Further, such consent will be withheld if such Transfer: (a) is not as permitted under the Securities Act, and applicable state securities laws, pursuant to registration or an exemption therefrom; (b) would cause the number of security holders in the Company to exceed 100 persons, as determined pursuant to the Investment Company Act; (c) would, if taken together with all Interests previously Transferred, result in a Transfer of more than 79% of the Interests in the Company; (d) calls into question the qualification of the Company or any related vehicle as a Venture Capital Operating Company under ERISA; and (e) would result in the Company being a publicly traded partnership within the meaning of Section 7704 of the Code and the related Treasury Regulations. The Investment Advisor's consent to any transfer, sale or assignment of any Interests prior to the date all Capital Commitments have been drawn may also be conditioned on the Investment Advisor's satisfaction with the creditworthiness of the proposed transferee or upon the posting of security for any unpaid installments of the transferor's Capital Commitment and any other sums owing. Any such transferee shall be required to execute a certificate or questionnaire in form and substance satisfactory to the Investment Advisor. 11.2 Assumption by Assignee. Any assignment of an Interest in the Company permitted under this Article 11 shall be in writing, and shall be an assignment and Transfer of 20 26 all of the assignor's rights and obligations hereunder, and the assignee shall expressly agree in writing to be bound by all of the terms of this Agreement and assume and agree to perform all of the assignor's agreements and obligations existing or arising at the time of and subsequent to such assignment. Upon any such permitted assignment of the assignor's Interest, and after such assumption, the assignor shall be relieved of its agreements and obligations hereunder arising after such assignment and the assignee shall become a Member in place of the assignor. It shall be a condition precedent to any transfer of any Interest permitted under this Article 11 that all sums due and owing by the transferor that remain unpaid are paid and that the transferee shall have executed and delivered to the Investment Advisor an agreement in form and substance satisfactory to it to the effect that the transferee agrees to be bound by all of the terms and conditions of this Agreement, and that the transferee is acquiring an interest in the Company subject hereto. The assignee shall pay all expenses incurred by the Company in admitting the assignee as a Member. 11.3 Other Assignments Void. (a) Except as otherwise provided in this Article 11, no other Transfer by a Member of its Interest in the Company shall be permitted. Any purported Transfer of an interest in the Company not otherwise permitted by this Article 11 shall be null and void and of no effect whatsoever. ARTICLE 12. INDEPENDENT REVIEWER 12.1 Independent Reviewer. The Company will not undertake any transaction to acquire Investment Securities unless the Independent Reviewer has issued a fairness opinion with respect to the terms and conditions of the proposed investment. It is not contemplated that the Independent Reviewer will have a role with respect to any Investment Securities after the same have been acquired. The Independent Reviewer will be independent of, and unaffiliated with, the Investment Advisor, PREI and Prudential and will have significant experience in the valuation, acquisition and trading of equity securities, including securities similar to the Investment Securities. 12.2 Initial Independent Reviewer. The initial Independent Reviewer will be Houlihan, Lokey, Howard & Zukin Financial Advisors Inc. If the initial Independent Reviewer ceases to be the Independent Reviewer or is unable (as a result of a conflicts of interest or otherwise) to act with respect to any proposed investment, the Investment Advisor will select a replacement or substitute Independent Reviewer, as the case may be. Any replacement or substitute Independent Reviewer must be approved by Members, but will be deemed approved unless one-third in-Interest of the Unaffiliated Members object in writing to the proposed replacement or substitute within 15 days after notice with respect thereto is sent to Members. 21 27 ARTICLE 13. BOOKS AND RECORDS, REPORTS, TAXES, ETC. 13.1 Books; Reports. The books and records of the Company shall be maintained, and reports shall be provided to the Members, in accordance with Section 8 of the Investment Advisory Agreement. 13.2 Where Maintained. The books, accounts and records of the Company shall be at all times maintained at its principal office. 13.3 Tax Returns. The Company shall be treated and shall file its tax returns as a partnership for Federal, state, municipal and other governmental income tax and other tax purposes. The Investment Advisor shall prepare or cause to be prepared, on an accrual basis, all Federal, state and municipal partnership tax returns required to be filed. Such tax returns shall be prepared by the Accountants, who shall sign such returns as preparers. 13.4 Section 754 Election. Subject to Section 16.10, at the request of a Member, the Company shall make and file a timely election under Section 754 of the Code (and a corresponding election under applicable state or local law) in the event of a transfer of an interest in the Company permitted hereunder. Any adjustment resulting from such an election shall be reflected on the books of the Company and in the Allocated Percentage of the Members in accordance with Treasury Regulation Section 1.,704-1(b)(2)(iv)(m). Any Member or transferee first requesting an election hereunder shall reimburse to the Company the reasonable out-of-pocket expenses incurred by the Company in connection with such election including, without limitation, any legal or accountants' fees; thereafter, each transferee shall reimburse such expenses with respect to adjustments under Section 743 of the Code in the proportion which the interest of each transferee bears to the sum of the interests of all transferees; the Company shall bear the expenses of any adjustments under Section 734 of the Code. ARTICLE 14. DISSOLUTION 14.1 Dissolution. The Company shall dissolve and commence winding up and liquidating upon the first to occur of the following ("Dissolution Events"): (a) The fifth (5th) anniversary of the date of the first call on any Capital Commitment) (b) The sale or distribution of all or substantially all of the Company's assets; 22 28 (c) The unanimous written agreement of all Members to dissolve, wind up, and liquidate the Company; (d) The Bankruptcy of a Member, unless Members (other than the Member subject to such Dissolution Event) both holding a majority in Interest of the Members and whose Capital Account balances exceed fifty percent (50%) of the aggregate Capital Account balances of all such Members (the "Remaining Members") consent within one hundred twenty (120) days of the Dissolution Event to the continuation of the business of the Company. If the Remaining Members consent to the continuation of the business of the Company, the Member whose actions or conduct resulted in such Dissolution Event ("Former Member") shall remain a Member of the Company and any successor-in-interest or assignee, voluntary or involuntary, of such Member shall have only rights to allocations and distributions pursuant to Article 10; and (e) The happening of any other event that makes it unlawful or impossible to carry on the business of the Company. The Members hereby agree that the Company shall not dissolve prior to the occurrence of a Dissolution Event. 14.2 Procedures. (a) Liquidation. If the Company is dissolved, the Members shall appoint a liquidator, who shall be the Investment Advisor if the Investment Advisory Agreement has not been terminated (the "Liquidator") and the Liquidator shall cause the winding up of the affairs of the Company and the liquidation of its assets as promptly as is consistent with obtaining the fair value thereof. (b) Liquidating Distributions. Following the payment of, or provision for, all debts and liabilities of the Company and all expenses of liquidation, and subject to the right of the person winding up the Company's affairs to set up such cash reserves as reasonably necessary for any contingent or unforeseen liabilities or obligations of the Company, the proceeds of the liquidation will be distributed in cash (or, in the case of Investment Securities that have not been sold or transferred, distributed in kind) to the Members in accordance with their respective positive Capital Account balances, after crediting or changing all amounts required to be credited or changed thereto under this terms of this Agreement. (c) No Recourse. Each Member will look solely to the assets of the Company for all Distributions with respect to the Company, such Member's Capital Contributions thereto and its share of profits or losses, and will have no recourse therefor (upon dissolution of the Company or otherwise) against the Liquidator or any other Member. 14.3 Certificate of Cancellation. Upon the completion of the winding up of the affairs of the Company, the Liquidator shall cause to be filed in the office of the Delaware Secretary of State a certificate of cancellation. 23 29 14.4 No Action for Dissolution. Except as expressly permitted in this Agreement, a Member shall not take any voluntary action that directly causes a dissolution of the Company. ARTICLE 15. NOTICES 15.1 In Writing; Address. Unless otherwise expressly provided herein, all notices, requests, demands and other communications required or permitted under this Agreement shall (a) be in writing (including by telecopy), (b) shall be given to the Company at the address set forth below or, in the case of the Members, at the address set forth on the signature page, and (c) shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, or, in the case of telecopy notice, when received in legible form. All notices to the Company shall be addressed as follows: c/o Prudential Real Estate Investors 8 Campus Drive, 4th Floor Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Fax No.: (973) 683-1794 with a copy to: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attention: Jacqueline A. Weiss, Esq. Fax No.: (212) 326-2061 Any party may alter the address or telecopy number to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 15.1 for the giving of notice. 24 30 ARTICLE 16. MISCELLANEOUS 16.1 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to its conflict of law principles. 16.2 Entire Agreement. This instrument contains all of the understandings and agreements of whatsoever kind and nature existing between the parties hereto with respect to this Agreement and the rights, interests, understandings, agreements and obligations of the respective parties pertaining to the Company. 16.3 Headings. The descriptive headings of the Articles, Sections and subsections of this Agreement are for convenience only and do not constitute a part of this Agreement. 16.4 Parties in Interest. This Agreement shall be binding upon and inure to the benefit of each party and their respective permitted successors and assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement, except that the Investors shall be third party beneficiaries hereof. 16.5 Confidentiality. The terms and provisions of this Agreement shall be kept confidential and shall not, without the Investment Advisor's prior written consent (which shall not be unreasonably withheld), be disclosed by a Member or by a Member's agents, managers, members, representatives and employees to any person or entity that this Agreement has been signed and exists. No publicity, media communications, press releases or other public announcements concerning this Agreement or the transactions contemplated hereby shall be issued or made by any Member without the prior written consent of the Investment Advisor, which consent shall not be unreasonably withheld. Each Member will maintain the confidentiality of information that is, to the knowledge of such Member, non-public information furnished by the Investment Advisor or any Member regarding the Company and the Investment Advisor (including information regarding any REIT or REIT Partnership) in which the Company holds, or contemplates acquiring or disposing of, any Investment Securities received by such Member pursuant to this Agreement in accordance with such procedures as it applies generally to information of this kind (including procedures relating to information sharing with Affiliates), except (a) as otherwise required by governmental regulatory agencies, self-regulating bodies, law, legal process, or litigation in which such Member is a defendant, plaintiff or other named party or (b) to directors, employees, representatives and advisors of such Member and its Affiliates who need to know the information and who are informed of the confidential nature of the information. 16.6 Amendments; Waivers. This Agreement may be amended only by agreement in writing of a majority in-Interest of the Unaffiliated Members; provided that any 25 31 amendment that materially adversely affects the Members shall require the approval of at least two-thirds in-Interest of Unaffiliated Members and provided, further, that no such amendment shall be effective if the Investment Advisor reasonably determines that such amendment could reasonably be expected to materially and adversely affect the Fund taken as a whole. Except as otherwise provided herein, no waiver of any provision nor consent to any exception to the terms of this Agreement shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof, nor shall any single or partial exercise preclude any further or other exercise of such or any other right. 16.7 Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any court of competent jurisdiction or other governmental entity, the remaining provisions of this Agreement to the extent permitted by law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for all parties remain valid, binding and enforceable; provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by law, the parties hereby to the same extent waive any provision of law that renders any provision hereof prohibited or unenforceable in any respect. 16.8 Qualification in Other States. If the business of the Company is carried on or conducted in any states in addition to Delaware, then the Members agree that the Company shall exist under the laws of each state in which business is actually conducted by the Company, and they severally agree to execute such other and further documents as may be required or requested in order that the Members legally may qualify the Company in such states to the extent possible. 16.9 Consent to Jurisdiction and Litigation. All litigation relating to or arising under or in connection with this Agreement shall be brought only in the federal or state courts of competent jurisdiction located in the State and County of New York, which shall have exclusive jurisdiction to resolve any disputes with respect to this Agreement. By execution and delivery of this Agreement, each party hereto irrevocably and unconditionally consents to the jurisdiction of such courts of any actions, suits or proceedings arising out of or relating to this Agreement. The parties hereto irrevocably waive any obligation of the laying of venue or based on the grounds of forum non conveniens that it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction. No party hereto shall be entitled to immunity whatsoever, whether characterized as sovereign immunity or otherwise, from any legal proceedings to enforce the obligations hereunder. Subject to Section 6.2, in the event of any breach of the provisions of this Agreement, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. 26 32 16.10 Partnership Tax Treatment: Tax Matters Partner. The Partners intend for the Company to be treated as a partnership for U.S. federal income tax purposes and no election to the contrary shall be made. Prudential shall function as the "Tax Matters Partner" pursuant to Section 6231(a)(7) of the Code, and shall have the exclusive authority and discretion to make any elections required or permitted to be made by the Company under the Code or any other tax laws. Contemporaneously herewith, Prudential shall execute a power of attorney authorizing the Investment Advisor to act on its behalf as Tax Matters Partner. 16.11 Conflicts; Waiver. The Investment Advisor and its Affiliates or associates or any of their legal, financial or other advisors shall in no way be prohibited from, and intend to, spend substantial time in connection with other businesses or activities, including, managing investments, advising or managing entities whose investment objectives are the same as or overlap with those of the Company, participating in actual or potential investments of the Company, providing consulting, merger and acquisition, structuring or financial advisory services, including with respect to actual, contemplated or potential investments of the Company, or acting as a director, officer or creditors' committee member of, adviser to, or participant in, any corporation, partnership, trust or other business entity. The Investment Advisor and its Affiliates or associates or any of their legal, financial or other advisors may, and expect to, receive fees or other compensation from third parties for such activities, which fees will be for the benefit of their own account and not the Company. Such fees may relate to actual, contemplated or potential investments of the Company and may be payable by entities in which the Company directly or indirectly, has invested or contemplates investing. Each Member waives any and all rights of any nature whatsoever that any such Person may have to object to or participate in any such activity. 16.12 Counterparts. This Agreement may be executed in any number of counterparts by facsimile or other written form of communication, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 16.13 Waiver of Jury Trial. EACH PARTY HERETO, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. [Remainder of This Page Intentionally Left Blank] 27 33 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the day and year first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ KEVIN R. SMITH ----------------------------------- Name: Kevin R. Smith ------------------------------ Title: Vice President ----------------------------- S-1 34 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the day and year first above written. ________________ By:___________________________________ Name:______________________________ Title:_____________________________ Notice Address: ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ S-1 35 EXHIBIT A FORM OF COUNTERPART TO OPERATING AGREEMENT This counterpart, dated as of ____________, _____ is delivered pursuant to Section 8.4 of the Operating Agreement dated as of October 2, 1997, by and among THE PRUDENTIAL INSURANCE COMPANY OF AMERICA and the Members identified on the signature pages thereof. By execution of this counterpart, the entity named below agrees to be bound by the terms and conditions of such Operating Agreement, and to assume the rights and obligations of a Member thereunder, as if such entity were an original signatory thereto, and agrees that this Counterpart may be attached to the Operating Agreement and made a part thereof. MEMBER ______________________________________ By: _________________________________ Its: _________________________________ Notice Address: ___________________________________ ___________________________________ ___________________________________ ___________________________________ ___________________________________ B-1 EX-99.V 6 INVESTMENT ADVISORY AGREEMENT 1 Exhibit V INVESTMENT ADVISORY AGREEMENT Dated as of October 2, 1997 by and between STRATEGIC VALUE INVESTORS, LLC and THE PRUDENTIAL INVESTMENT CORPORATION 2 INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT dated as of October 2, 1997 (this "Agreement"), is made by and between STRATEGIC VALUE INVESTORS, LLC, a Delaware limited liability company ("SVI-U.S." and, together with any entities that become parties hereto after the date hereof as described in Section 6, the "U.S. Fund Entities"), and THE PRUDENTIAL INVESTMENT CORPORATION, a New Jersey corporation (the "Investment Advisor"), and a wholly owned subsidiary of The Prudential Insurance Company of America ("Prudential"). Each Person committing capital to any U.S. Fund Entity (each, an "Investor") will sign an annex to this Agreement ("Annex Number 1") confirming such Investor's understanding and obligations with regard to the matters set forth herein and therein. SECTION 1. Definitions. As used in this Agreement, the following definitions shall apply, unless the context requires otherwise: "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. "Affiliated Securities" is defined in Section 6(c). "Agreement" is defined in the preamble. "Allocated Percentage" means, with respect to any Investor, the percentage of any Investment Security allocated to such Investor on the books of any U.S. Fund Entity. "Base Rate" means at any date, the prime rate then in effect for The Chase Manhattan Bank (or, if unavailable, another major money center bank selected by the Investment Advisor), plus 2% per annum. "Capital Commitment" means, with respect to any Investor, such Investor's capital commitment to SVI-U.S. "Closing" means a closing of SVI-U.S. "Code" means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated thereunder. 3 "Collection Accounts" is defined in Section 5(b). "Contributed Capital" means, with respect to any Investor at any date, (1) the aggregate amount of such Investor's Capital Commitment that has been called by the Investment Advisor and delivered by the Investor on or prior to such date, less (2) the sum of (A) the amount of such Investor's Capital Commitments returned to the Investor on or prior to such date and (B) such Investor's Allocated Percentage of any realized losses of the U.S. Fund Entities. "Disposition Proceeds" shall have the meaning set forth in the Operating Agreement. "Distributions" shall have the meaning set forth in the Operating Agreement. "Drawdown Date" is defined in Section 3(e). "Drawdown Notice" is defined in Section 3(e). "ERISA" means the Employee Retirement and Income Security Act of 1974, as amended, together with the rules and regulations promulgated thereunder. "Expenses" is defined in Section 11(a). "Final Action Notice" is defined in Section 6(b). "Final Redemption Date" is defined in Section 6(b). "Final Redemption Request" is defined in Section 6(b). "Final Redemption Request Date" is defined in Section 6(b). "Fiscal Year" shall have the meaning set forth in the Operating Agreement. "Fund" means SVI-U.S., SVI-International, the co-investment arrangement with Prudential Co-Investor, any Redemption Vehicle, any redemption vehicle established in connection with SVI-International, and any similar separate or "side" vehicle formed pursuant to the terms of any of the Other Operating Agreements or the terms of the operating agreement of SVI-International or of any redemption vehicle established by SVI- International, collectively. "Fund Entity" means any of SVI-U.S., SVI-International, Prudential Co-Investor, any Redemption Vehicle, any redemption vehicle established in connection with SVI-International, and any similar separate or "side" vehicle formed pursuant to the terms 2 4 of any of the Operating Agreements or the terms of the operating agreement of SVI-International or of any redemption vehicle established by SVI-International. "Fund Investors" means any investor in the Fund. "Fund Rate" is defined in Section 10(b). "Identified Investment Security" is defined in Section 6(b). "Indemnitee" is defined in Section 15(a). "Independent Reviewer" means the Person selected by the Investment Advisor to act as the independent reviewer for the Fund, including any replacement or substitute therefor. "Index Rate" means the NAREIT Equity Index (excluding healthcare REITs) or, if such rate is unavailable for any partial monthly period, the S&P REIT Index (excluding healthcare REITs). "Initial Closing" is defined in Section 3(d). "Initial Redemption Request Date" is defined in Section 6(b). "in Interest" means, with respect to any percentage or fraction, the Investors voting for or against the related proposal or issue, as the case may be, expressed in terms of a percentage or fraction of the aggregate Capital Commitments. "Interest" means, with respect to any Investor, the interest of such Investor in the U.S. Fund Entities, measured in terms of such Investor's Capital Commitment. "Investment Advisor" is defined in the preamble. "Investment Advisor Fee" is defined in Section 10(a). "Investment Period" means the 24 month period commencing at the closing of the first acquisition on Investment Securities by SVI-U.S., which period may be extended for another 12 months with the consent of two-thirds in Interest of Unaffiliated Investors. "Investment Proceeds" is defined in Section 5(b). "Investment Securities" means REIT Shares and Partnership Units, collectively. 3 5 "Investor" is defined in the preamble. "Line of Credit" is defined in Section 6(e). "Memorandum" means the Private Placement Memorandum dated July 1, 1997, relating to SVI-U.S., as amended, restated, supplemented or otherwise modified, pertaining to the offering of the Interests. "Operating Agreement" means the Operating Agreement of SVI-U.S. dated October 2, 1997. "Operating Agreements" means the Operating Agreement and the Other Operating Agreements, collectively. "Other Operating Agreement" is defined in Section 6(c). "Partnership Units" means partnership interests in REIT Partnerships. "Performance Fee" is defined in Section 10(b). "Performance Fee Determination Date" is defined in Section 10(b). "Person" means an association, a corporation, an individual, a limited liability company, a partnership, a trust or any other entity or organization, including a government or an agency, board, court, department, official, political subdivision or representative thereof or any other governmental entity. "PIMS" means Prudential Investment Management Services LLC, a Delaware limited liability company. "PREI" means Prudential Real Estate Investors, a division of Prudential. "Preliminary Action Notice" is defined in Section 6(b). "Private Investment Securities" means Investment Securities other than Public Investment Securities. "Prudential" is defined in the preamble. "Prudential Co-Investor" means Prudential or an entity established by Prudential through which Prudential will make certain investments alongside SVI-International as described in the Memorandum. 4 6 "Public Investment Securities" means publicly traded Investment Securities that are freely transferrable by SVI-U.S. without further registration under the Securities Act and shall not include Investment Securities that are "restricted securities," Investment Securities acquired from a REIT in circumstances that may cause SVI-U.S. to be treated as a statutory underwriter in connection with any resale of such securities, or Investment Securities subject to "lock-up agreements" or other holding periods (for so long as such restrictions remain effective). "Quarterly Contributed Capital" means, for any Investor with respect to any Quarterly Payment Date, the average of such Investor's Contributed Capital as at the last day of each month ending within the period to which such Quarterly Payment Date relates. "Quarterly Payment Date" is defined in Section 10(a). "Redemption Vehicle" is defined in Section 6(c). "Reinvestment Period" means, if the Capital Commitments are called substantially in full prior to the second anniversary of the first purchase of Investment Securities by SVI-U.S., the period commencing on the date on which all Capital Commitments are called substantially in full and ending on such second anniversary; provided that, if the Investment Period is extended, references to "second anniversary" shall be deemed to be references to "third anniversary." "REIT" means any public or private real estate company or real estate investment trust, whether or not such company qualifies as a real estate investment trust under applicable provisions of the Code. "REIT Partnership" means any partnership in which a REIT owns general partnership interests or other significant partnership interests. "REIT Shares" means shares or equivalents thereof of REITs. "Sales Election" is defined in Section 7(a). "Sales Election Deadline" is defined in Section 7(b). "Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Shortfall Amount" is defined in Section 10(b). "Standard of Care" is defined in Section 2(b). 5 7 "Subsequent Closing" is defined in Section 3(d). "SVI-International" means Strategic Value Investors International, LLC, a Delaware limited liability company. "SVI-U.S." is defined in the preamble. "Unaffiliated Investor" means an Investor other than Prudential and Prudential Co-Investor. "Unfunded Commitments" means any Investor Capital Commitments that have not been called by the Investment Advisor and delivered by such Investor plus any capital contribution returned to such Investor pursuant to Section 8.4 of the Operating Agreement. "U.S. Fund Entities" is defined in the preamble. "Venture Capital Operating Company" has the meaning set forth in Department of Labor regulation 29 C.F.R. ss. 2510.3 - 101(d). SECTION 2. Appointment and Authorization; Standard of Care; Reliance on Others. a. Appointment and Authorization. Subject to and in accordance with the terms of this Agreement, SVI-U.S. and any Redemption Vehicle that becomes party hereto and the Investment Advisor hereby agree that the Investment Advisor shall and is authorized to provide, on the terms set forth herein, the services to SVI-U.S. and any such Redemption Vehicle as set forth herein, for the compensation hereinafter described. b. Standard of Care. The Prudential Investment Corporation, acting solely in its capacity as investment advisor hereunder, is acting as a fiduciary for SVI-U.S. The Investment Advisor shall discharge its duties hereunder solely in the interests of the Investors and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (the "Standard of Care"). c. Reliance on Others. In performing its duties, the Investment Advisor shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, of the following persons or groups unless they have knowledge concerning the matter in question that would cause such reliance to be unwarranted and provided that the Investment Advisor acts in good faith: 6 8 i. one or more employees or other agents of Investment Advisor whom the Investment Advisor reasonably believes to be reliable and competent in the matters presented; or ii. any attorney, independent accountant, valuation consultant, or other person as to matters that the Investment Advisor reasonably believes to be within such person's professional or expert competence. SECTION 3. Duties of the Investment Advisor. a. Services to be Provided. The Investment Advisor shall direct, manage and administer the operations of SVI-U.S. and any Redemption Vehicle. In connection therewith the Investment Advisor shall evaluate, structure and consummate investments for SVI-U.S., make calls on the Capital Commitments in connection with the acquisition of Investment Securities or otherwise as permitted herein; engage the Independent Reviewer; select any substitute or replacement Independent Reviewer (subject to Section 3(c)); coordinate reviews by the Independent Reviewer; manage the U.S. Fund Entities' portfolio of Investment Securities; determine the timing and amount of dividends and distributions to be made to Investors; cause the formation and maintenance, as necessary and appropriate of Redemption Vehicles and the transfers of Investment Securities thereto; effectuate borrowings and repayment of borrowings by Redemption Vehicles in accordance with the terms hereof and of the Operating Agreement; cause the dissolution of any vehicle constituting one of the U.S. Fund Entities as permitted under this Agreement and the applicable operating agreement of such vehicle or to cause the amendment of such operating agreements pursuant to their respective terms; value the Investment Securities held by the U.S. Fund Entities; determine whether to honor redemption requests in kind or in cash or in some combination thereof and coordinate the execution of the same; administer requests for redemptions; and prepare and distribute to Investors reports, all in the manner generally contemplated and described in the Memorandum; and take such actions as are necessary and appropriate to execute the investment objectives of the U.S. Fund Entities and to fulfill the obligations of the Investment Advisor as set forth herein, as referenced in the Operating Agreement and/or as described in the Memorandum, including, without limitation, actions in connection with the borrowing of funds and the acquisition and disposition of Investment Securities. b. Authority to Bind U.S. Fund Entities. Subject to Section 16, the Investment Advisor shall have full power and authority to act on behalf of the U.S. Fund Entities and to bind or obligate the U.S. Fund Entities. Nothing in this Agreement shall be deemed to create a joint venture or partnership between the parties with respect to the arrangements set forth in this Agreement. For all purposes herein, the Investment Advisor shall be deemed to be an independent contractor. 7 9 c. Independent Reviewer. i. The initial Independent Reviewer will be Houlihan, Lokey, Howard and Zukin Financial Advisors Inc. ii. If the Person serving as the Independent Reviewer ceases to so serve or is unable (as a result of a conflicts of interest or otherwise) to act with respect to any proposed investment, the Investment Advisor shall select a replacement or substitute Independent Reviewer, as the case may be, which replacement or substitute shall be a Person with significant experience in the valuation, acquisition and trading of equity securities, including securities similar to the Investment Securities intended to be acquired by SVI-U.S., and shall be independent of, and unaffiliated with, Prudential. The Investment Advisor shall give written notice of such replacement or substitute to the Investors. Such replacement or substitute Independent Reviewer will be deemed approved by the Investors unless one-third or more in Interest of the Unaffiliated Investors object in writing to such proposed replacement or substitute within 15 days after notice with respect thereto is sent to the Investors. Any replacement or substitute Independent Reviewer will be engaged on terms and conditions substantially similar to those on which the initial Independent Reviewer was engaged. d. Closings. i. The Investment Advisor may, in its sole direction, cause SVI-U.S. to hold a closing (the "Initial Closing") subject to receipt of Capital Commitments from Fund Investors other than Prudential totaling $76.5 million or more. ii. If at the Initial Closing, the Fund shall not have received $510 million in Capital Commitments from Fund Investors other than Prudential, the Investment Advisor may cause SVI-U.S. to hold subsequent Closings (each, a "Subsequent Closing") during the next 12 months at which additional Interests may be purchased and Capital Commitments delivered, until $510 million in Capital Commitments have been obtained from Fund Investors other than Prudential. iii. At the Initial Closing, Prudential's Capital Commitment will equal 49% of all Capital Commitments to SVI-U.S. At each Subsequent Closing, Prudential's Capital Commitment will be increased so that Prudential's Capital Commitment will at all times equal 49% of all Capital Commitments to SVI-U.S. iv. Investors acquiring Interests at a Subsequent Closing shall be required to purchase Interests at a price determined in accordance with Section 8.4 8 10 of the Operating Agreement and to pay the expenses therein set forth and the fees herein set forth. v. Subsequent Closings may involve the purchase by SVI-U.S. of Investment Securities from SVI-International or the sale by SVI-U.S. of Investment Securities to SVI-International in order to generally maintain the proportional relationship between SVI-U.S. and SVI-International. vi. The amount contributed to SVI-U.S. at any Subsequent Closing will be distributed to the Investors admitted to SVI-U.S. prior to such Subsequent Closing ratably in proportion to their Capital Commitments; provided that the Investment Advisor may direct a portion of such amounts to instead be paid to SVI-International in order to equitably allocate costs and expenses of SVI-U.S. and SVI-International. e. Capital Calls. i. Subject to subparagraph (iv) below, the Investment Advisor may call for capital contributions from the Investors by giving Investors written notice (each a "Drawdown Notice"), setting forth (i) the aggregate amount drawn, (ii) each Investor's share thereof, (iii) the date on which such amounts are due (the "Drawdown Date"), which shall be at least 10 business days after the date of such Drawdown Notice, (iv) the account into which the funds drawn should be deposited and (v) with respect to each Investor, such Investor's total Capital Commitment, the amount drawn from such Investor to date, and the amount remaining to be drawn from such Investor immediately following such Drawdown Date. Notwithstanding the foregoing, at initial closing, the Investment Advisor shall not be required to provide 10 business days' notice but will provide notice as far in advance of the initial closing as possible. ii. Each Investor shall be obligated to deliver to the account so designated in immediately available funds such Investor's share of the amount drawn prior to 10:00 a.m. (New York time) on the Drawdown Date. iii. Any Investor who fails to fund such Investor's share of a draw in conformity herewith shall be a "Defaulting Member" within the meaning of Section 8.3 of the Operating Agreement. iv. The Investment Advisor may call for capital only (y) in connection with the proposed acquisition of Investment Securities, and the payment of related Expenses, which draw must be made either (I) against Unfunded Commitments or, (II) during a Reinvestment Period, in an aggregate amount not in excess of Disposition Proceeds (net of deductions for expenses) previously distributed 9 11 by the U.S. Fund Entities to the Investors, or (z) pursuant to and in conformity with Section 6.2 of the Operating Agreement and Section 15. Notwithstanding the foregoing, all amounts contributed to the U.S. Fund Entities at a Subsequent Closing and distributed to the existing Investors admitted to a U.S. Fund Entity prior to such Subsequent Closing may be drawn down from such Investors at any time during the Commitment Period. f. Valuations. The Investment Advisor shall value Investment Securities quarterly for reporting purposes, and as and when necessary for other purposes. i. The Investment Advisor shall value Public Investment Securities and any short-term marketable securities without discounts for liquidity, block size or otherwise, at the average closing sales price for such security for the five trading days prior to the valuation date, as published in The Wall Street Journal. ii. The Investment Advisor shall value Private Investment Securities based on the value given to such Private Investment Securities by Prudential's Comptroller's Department, Institutional Valuation Unit. Absent known material circumstances, the Investment Advisor may base valuation of such Private Investment Securities on valuations made by third party appraisers or market participants, recent trades of securities determined by the Investment Advisor to be substantially similar for such purposes and other customary methods of valuing private or illiquid securities; provided that Partnership Units which are, or are expected to become, exchangeable for Public Investment Securities will be valued at the value of such Public Investment Securities. Valuations of private companies and their real estate are subject to numerous and various assumptions and limitations. Many different individual assumptions may be supportable and reasonable, but the interplay between different assumptions, or the use of different accepted methodologies, may produce different estimates of value for the same company or property. Valuations should be considered only estimates of value, and not a measure of realizable value, and are subject to change with the passage of time. g. PREI to Fulfill Duties. i. The Investment Advisor will fulfill its responsibilities hereunder through PREI. In addition, the Investment Advisor and PREI may arrange to have certain services the Investment Advisor is obligated to provide performed by Prudential or any of its Affiliates. The Investment Advisor may also assign its rights and obligations under this Agreement to another entity that is wholly owned, directly or indirectly, by Prudential, or to Prudential, so long as the personnel responsible for providing such services are not substantially changed and such assignee is a registered investment advisor. 10 12 ii. If at any time Bernard Winograd ceases to be a portfolio manager for the Fund, the Investors shall have no further obligations to contribute capital to SVI-U.S. for the purpose of purchasing Investment Securities and SVI-U.S. shall have no further right to purchase Investment Securities, except, in each case, for the purchase of Investment Securities that are subject to commitment letters or other documentation at such time. h. Other Service Providers. The Investment Advisor may from time to time engage other service providers, including securities advisors, consultants, architects, engineers, appraisers, legal and accounting firms, custodians, and transfer agents. Each service provider shall be compensated by the U.S. Fund Entities in such proportions, on such terms and at such rates as the Investment Advisor deems appropriate in light of the services provided. The Investment Advisor may engage Affiliates or utilize in-house staff of Prudential or any of its Affiliates as service providers provided that (i) the Investment Advisor reasonably believes that engaging an Affiliate or utilizing in-house staff of Prudential or its Affiliate is in the best interests of the U.S. Fund Entities; (ii) the compensation of such Affiliate or in-house staff of Prudential or its Affiliate is comparable to that charged by unaffiliated third parties for similar services; and (iii) the Investment Advisor notifies the Investors of the retention of such an Affiliate or the use of in-house staff. SECTION 4. Investments of the U.S. Fund Entities. a. Permitted Investments. The Investment Advisor shall invest the Capital Commitments in REIT Shares and Partnership Units in connection with, or incidentally to, the sale of real estate by Prudential to the relevant REITs or the contribution of real estate by Prudential to related REIT Partnerships, and, in each case, in a manner consistent with the Memorandum. b. Fairness Opinion. Before the acquisition by SVI-U.S. of Investment Securities of a REIT or REIT Partnership, the Investment Advisor shall require the Independent Reviewer to issue a fairness opinion with respect to the terms and conditions of such proposed acquisition. c. Investment Restrictions. The Investment Advisor shall cause a substantial majority of the U.S. Fund Entities' investments to be in entities that qualify for taxation as real estate investment trusts (as defined in Section 856 of the Code). The Investment Advisor shall cause the Fund to acquire no more than 40% in the aggregate of the Investment Securities of any one REIT and its related REIT Partnerships. No more than 49% of the total Investment Securities acquired by SVI-U.S. in respect of any one REIT and its related REIT Partnerships will be in the form of Partnership Units of the related REIT Partnerships. 11 13 d. Investment Mechanics. i. At or shortly prior to the closing of the first acquisition of Investment Securities by SVI-U.S., the Investment Advisor will draw the Capital Commitments ratably in proportion to Capital Commitments in an amount sufficient to pay organizational costs of SVI-U.S. ii. SVI-U.S. may acquire Investment Securities directly for cash or, in circumstances in which Prudential has received Investment Securities from the REIT or REIT Partnership whose Investment Securities are to be acquired by SVI-U.S., SVI-U.S. may acquire such Investment Securities in part for cash and in part as a contribution from Prudential. iii. In the case of the acquisition of Investment Securities solely for cash, the Investment Advisor shall call Capital Commitments ratably in proportion to Capital Commitments in an aggregate amount sufficient to acquire the Investment Securities (and to pay related costs and expenses). iv. In the case of the acquisition of Prudential's share of the Investment Securities as a contribution from Prudential, the Investment Advisor shall call Capital Commitments of the Unaffiliated Investors ratably in proportion to Capital Commitments of such Unaffiliated Investors, in an aggregate amount sufficient to purchase the Investment Securities allocable to such Unaffiliated Investors, and Prudential will contribute to SVI-U.S. Investment Securities (valued on the basis of the price established in the investment transaction) such that 49% of the full amount of the Investment Securities so contributed and so purchased will be allocable to Prudential. In such case, the Investment Advisor may call for additional amounts to pay related costs and expenses. v. In the case of the acquisition of Prudential's share of the Investment Securities in part as a contribution from Prudential and in part for cash, the Investment Advisor shall cause SVI-U.S. to take the actions described in subparagraphs (iii) and (iv) above in such combination as the Investment Advisor deems appropriate. e. Allocation of Expenses. The Investment Advisor shall cause investments and expenses to be allocated between the U.S. Fund Entities (subject to Section 11), on the one hand, and SVI-International and Prudential Co-Investor, on the other, pro rata in accordance with the aggregate amounts of capital commitments of each. f. Sale of Investment Securities Prior to Termination. The Investment Advisor shall endeavor, prior to the termination of this Agreement, to cause all Private Investment Securities to be sold or otherwise disposed of for cash; provided, however, that 12 14 such Investment Securities not theretofore sold or disposed of will be distributed in kind to the applicable Investors on a pro rata basis as is appropriate. SECTION 5. Distributions. a. Operating Agreement. The Investment Advisor shall cause the U.S. Fund Entities to make Distributions to the Investors in accordance with the provisions of the Operating Agreements. The Investment Advisor may withhold from any such Distribution to an Investor (i) any Investment Advisor Fees or Performance Fees then due by such Investor, (ii), subject to Section 11(a), such Investor's share of any amounts then owing for Expenses of the U.S. Fund Entities, (iii) such Investor's share of any capital call made in conformity with Section 3(e) that is then pending, (iv) any taxes required to be withheld by the pertinent U.S. Fund Entity in respect of such Investor, and (v) any amount that the Investment Advisor deems is advisable to hold as a reserve for expenses and liabilities of the U.S. Fund Entities, subject to Section 11(a). Any amounts withheld under clauses (i), (iii) and (iv) above shall be deemed to have been distributed for all purposes under this Agreement and the Operating Agreements. Any amount withheld and deemed distributed under clause (iii) and the preceding sentence shall be deemed to have been recontributed by the pertinent Investor in response to the pertinent capital call. Such distributions shall be made as and when determined by the Investment Advisor, in its sole discretion, but in any event no later than the termination of the U.S. Fund Entities. b. Collection Account. The Investment Advisor shall cause the U.S. Fund Entities to deposit dividends received on Investment Securities and proceeds received by the U.S. Fund Entities from the sale of Investment Securities (other than proceeds from sales in connection with repayments of indebtedness of Redemption Vehicles) (such proceeds, "Investment Proceeds") into one or more accounts for the U.S. Fund Entities ("Collection Accounts") or invest such amounts in short-term, investment grade securities. The Investment Advisor shall, in its sole discretion, withdraw and apply such amounts in payment of the Expenses of the U.S. Fund Entities or hold such amounts in the Collection Account in order to create reserves for anticipated costs and expenses of the U.S. Fund Entities. SECTION 6. Redemptions. a. Generally. Investors may request redemptions with respect to all, but not less than all, of their Allocated Percentages of any Public Investment Securities, and, in addition, Prudential may request a redemption with respect to all, but not less than all, of its Allocated Percentage of any Investment Security that consists of Partnership Units that relate to Investment Securities that are Public Investment Securities, by, in any such case, complying with the notice requirements of Section 6(b). In addition, whenever any Unaffiliated Investors request redemptions with respect to any Public Investment Securities, Prudential shall be deemed to have requested a redemption with respect to the same Public 13 15 Investment Securities (or, in the event Prudential has an interest through SVI-U.S. in any Partnership Units obtained in connection with the transactions in which SVI-U.S. acquired such Public Investment Securities, a redemption with respect to a combination of such Partnership Units and such Public Investment Securities (in such proportions as Prudential shall designate)) in the minimum amount required so that, following all such redemptions, both Prudential's aggregate percentage interest in the profits and contributed capital of SVI- U.S. and Prudential's percentage interest in the profits and capital of the Redemption Vehicle formed to effectuate such redemption shall be not more than 49%. Subject to Section 6(f), the Investment Advisor may in its sole discretion respond to any actual (or, in the case of Prudential, a deemed) redemption request with respect to Public Investment Securities by distributing to the pertinent Investor (i) such Investor's Allocated Percentage thereof in kind, (ii) the value in cash, determined as set forth in Section 3(f), of such Investor's Allocated Percentage of such Public Investment Securities or (iii) some combination of (i) and (ii) above. The Investment Advisor shall respond to any redemption request by Prudential in respect of Partnership Units by distributing the Partnership Units subject thereto to Prudential. Subject to the preceding sentence, the Investment Advisor shall honor all redemption requests with respect to a particular Investment Securities ratably and with the same consideration. b. Notices -- Preliminary and Final. Redemptions may be requested, on March 15 and September 15 of each year (each an "Initial Redemption Request Date"), in accordance with the following procedures: i. An Investor who wishes to request a redemption should send a notice to such effect to the Investment Advisor within 30 days prior to the applicable Initial Redemption Request Date. The notice must be received on or before the relevant Initial Redemption Request Date and must specify (a) one or more securities with respect to which redemption is sought (any such security, an "Identified Investment Security") and (b) if the Investment Advisor determines to make a cash payment, whether the Investor wishes to receive its redemption proceeds by wire transfer to an identified account of the Investor at any domestic commercial bank that is a member of the Federal Reserve System, or by check. ii. Within 10 business days after the applicable Initial Redemption Request Date, the Investment Advisor shall forward to each Investor a notice (the "Preliminary Action Notice") setting forth (i) each redemption request received or deemed received (including the identity of the Fund Investors requesting a redemption), (ii) a description of any changes in the rights associated with the pertinent Investment Securities as a result of the redemption, (iii) whether the Investment Advisor has preliminarily elected to effect redemptions pursuant thereto in cash or in kind and (iv) if the redemption may be effected in cash, to the extent available, a description of any Line of Credit to be utilized and an explanation of the rationale for leveraging the Investment Securities. Each Investor shall have an 14 16 opportunity to re-evaluate its redemption request or its failure to request a redemption in light of the initial proposed action specified in the Preliminary Action Notice. Not later than five (5) business days after the date of the Preliminary Action Notice (such date the "Final Redemption Request Date"), each Investor that wishes to cancel or modify its redemption request and each Investor that failed to submit a redemption request must notify the Investment Advisor by sending a new or modified redemption request (a "Final Redemption Request") specifying the Investment Securities with respect to which such Investor has finally decided to request redemption, and containing the other information required to be contained in the redemption request made on or before the Initial Redemption Request Date. If a Final Redemption Request in proper form is not received from an Investor on or before the Final Redemption Request Date, such Investor shall be deemed to have made its request as set forth in the request made on or before the Initial Redemption Request Date or, if no such request had been made, to waive its right to redeem during the period in question. iii. Within five (5) business days after the Final Redemption Request Date, the Investment Advisor shall determine, in its sole discretion, how to best satisfy the redemption requests, and will forward a notice to each Investor (the "Final Action Notice") advising as to such action and as to the approximate date on which distributions or payments are intended to be made (the "Final Redemption Date"). Such action may be different than as stated in the Preliminary Action Notice. c. Redemption Vehicles. Whenever a redemption is to be effectuated with respect to Partnership Units or with respect to Public Investment Securities held by SVI-U.S., the Investment Advisor shall cause to be formed a new entity (a "Redemption Vehicle") for the purpose of holding, for the account of the nonredeeming Investors and, in cases in which it has an interest in Public Investment Securities with respect to which it has not requested redemption, Prudential, (i) in the case of a redemption with respect to Partnership Units, the Investment Securities of issuers affiliated with the issuer of such Partnership Units ("Affiliated Securities") that are not to be distributed to Investors in connection with such redemption and (ii) in the case of a redemption with respect to Public Investment Securities, the Identified Investment Securities that are not to be distributed to Investors in connection with such redemption. Each Redemption Vehicle shall be a limited liability company governed by an operating agreement (each, an "Other Operating Agreement") with terms substantially the same as those of the Operating Agreement (except as relates to Closings, Partnership Units and other matters not relevant to such Redemption Vehicle or not required to be reiterated in such Other Operating Agreement). The Investment Advisor shall cause each Redemption Vehicle to become a party to this Agreement. No Redemption Vehicle shall hold securities of more than one issuer or affiliate group of issuers. Redemption Vehicles shall be formed in connection with redemptions as follows: 15 17 i. In the case of a Final Action Notice that specifies that a redemption will be made solely with respect to an Identified Investment Security that is a Public Investment Security, the Investment Advisor will cause SVI-U.S. to form the relevant Redemption Vehicle, contribute the pertinent Identified Investment Securities to such Redemption Vehicle, distribute interests in the Redemption Vehicle to Investors in proportion to their Allocated Percentages in such Identified Investment Securities, and cause such Redemption Vehicle to make the redemptions specified in the Final Action Notice in cash, in kind, or in combination, as so specified. If any redemption is to be made in cash, the pertinent Redemption Vehicle shall borrow the cash as described in Section 6(e) at any time after the Investors have been distributed their respective interests in the Redemption Vehicle. ii. In the case of a Final Action Notice that specifies that a redemption will be made solely with respect to an Identified Investment Security that consists of Partnership Units, the Investment Advisor will cause SVI-U.S. to distribute to Prudential all of the Partnership Units constituting the Identified Investment Securities and will thereafter cause SVI-U.S. to form the relevant Redemption Vehicle, contribute the Affiliated Securities to such Redemption Vehicle, and distribute interests in such Redemption Vehicle to the Unaffiliated Investors in proportion to their Allocated Percentages in the Affiliated Securities. iii. In the case of a Final Action Notice that specifies that a redemption will be made both with respect to an Identified Investment Security that consists of Partnership Units and with respect to an Identified Investment Security that consists of the related Affiliated Securities, the Investment Advisor shall cause SVI-U.S. to form the relevant Redemption Vehicle, contribute the Affiliated Securities to such Redemption Vehicle, distribute to Prudential all of the Partnership Units in question, distribute interests in the Redemption Vehicle to Unaffiliated Investors in proportion to their Allocated Percentages in the Affiliated Securities, and cause such Redemption Vehicle to make the redemptions specified in the Final Action Notice in cash, in kind, or in combination as so specified. Notwithstanding the foregoing, the Investment Advisor may cause a Redemption Vehicle to hold Partnership Units so long as (i) no indebtedness is incurred by such Redemption Vehicle in connection with such redemption or (ii) any indebtedness incurred by such Redemption Vehicle is equally and ratably secured by Partnership Units and REIT Shares. d. Subsequent Redemptions by Redemption Vehicles. In the case of a Final Action Notice that specifies that a redemption will be made with respect to an Identified Investment Security held by a Redemption Vehicle, the Investment Advisor will cause the Redemption Vehicle in question to make the redemptions specified in such Final Action Notice, in cash, in kind, or in combination, as so specified. 16 18 e. Line of Credit. i. The Investment Advisor shall cause any Redemption Vehicles that is to make a redemption in cash to obtain a line of credit (the "Line of Credit") to provide funds for such redemption. Such Line of Credit shall be from a lender unaffiliated with Prudential, and shall be on such terms as the Investment Advisor deems appropriate under the circumstances. If necessary, the Investment Advisor may cause the U.S. Fund Entities to pledge their interests in REIT Shares to a lender under a Line of Credit to secure loan commitment related to such Line of Credit. No Redemption Vehicle shall borrow in excess of 50% of the value of its assets as of the date of the borrowing. The Investment Advisor shall take steps it deems necessary (including selling a portion of the pertinent Investment Securities and repaying all or a portion of such indebtedness) so that the indebtedness incurred pursuant to the Line of Credit obtained by a Redemption Vehicle is maintained at a level that does not exceed 50% of the value of the assets of such Redemption Vehicle; provided that the Investment Advisor shall not be required to take such steps if such ratio is not met due to temporary market fluctuations. ii. The Investment Advisor may secure the Line of Credit in whole or part with the Investment Securities and cash held by the Redemption Vehicle borrowing thereunder. iii. Expenses related to the Line of Credit and debt service on amounts borrowed thereunder shall be expenses of the pertinent Redemption Vehicle, and shall be payable out of the proceeds from the sale Investment Securities held by the Redemption Vehicle or dividends or other Distributions payable in respect of such Investment Securities. f. Limitations on Redemptions. The Investment Advisor may deny any redemption request if the Investment Advisor determines in its reasonable discretion that making a redemption pursuant thereto may (i) adversely affect the ability of any U.S. Entity (including the Redemption Vehicle that would be formed in connection with such redemption) to qualify as a "Venture Capital Operating Company" within the meaning of ERISA; or (ii) have material adverse tax or regulatory consequences for Investors. SECTION 7. Sales Election. a. Generally. If the Investment Advisor determines to sell or transfer any Investment Security other than a sale or transfer (i) to a Redemption Vehicle, (ii) of Partnership Units in connection with any redemption, or (iii) to pay debt service in respect of a borrowing by a Redemption Vehicle, each Investor may elect instead to receive a distribution in kind of its Allocated Percentage of such Investment Security (a "Sales Election"). 17 19 b. Notice to Investor; Election. The Investment Advisor shall notify each Investor in writing of the Investment Advisor's decision to sell or transfer a specified Investment Security, and shall include in such notification the Investment Advisor's best estimate of the approximate price to be received and the anticipated timing of the proposed sale or series of sales. No later than 5 business days from the date of each such notice (such fifth day, the "Sales Election Deadline"), each Investor shall have the right to elect in writing to receive its Allocated Percentage of the Investment Securities in question. The actual price and timing of sales may vary from the Investment Advisor's estimates as set forth in its notice to Investors. No such variance shall require the Investment Advisor to make an additional notice or give rise to any further election by Investors with respect to the Investment Securities in question. c. Distribution. Simultaneous with the consummation of the sale of the specified Investment Securities, the Investment Advisor shall cause the pertinent U.S. Fund Entity to distribute to each Investor making a Sales Election, such Investor's Allocated Percentage of the amount sold of such Investment Securities. For all purposes of this Agreement and the Operating Agreements, such distribution shall be deemed to be a distribution of the value, determined by reference to the sale of the specified Investment Securities, of the Investment Securities distributed. d. Holdback. No Investor shall sell, transfer or otherwise dispose of any portion of its interest in any Investment Security received pursuant to a Sales Election or any other security of the issuer of such Investment Security held by such Investor, until the earlier of (i) 6 months after the Sales Election Deadline or (ii) the date on which the pertinent U.S. Fund Entity has sold, transferred or otherwise disposed of all of its interest in such Investment Securities. SECTION 8. Reports. a. The books and records of the U.S. Fund Entities shall be kept according to the accrual method of accounting, and shall be audited as of the end of each Fiscal Year by a firm of independent certified public accountants of national recognition and standing selected by the Investment Advisor. Within 60 days after the end of each Fiscal Year, the Investment Advisor shall cause to be prepared and mailed to the Investors a report of such accountants, setting forth as at the end of such Fiscal Year: i. a balance sheet of the U.S. Fund Entities; ii. a statement of the net income or net loss for such year and such Investor's share thereof; iii. a statement of cash flow; 18 20 iv. a statement of such Investor's Capital Account; and v. the amount of such Investor's share in each U.S. Fund Entity's taxable income or loss for each year, in the form required by the Code and applicable regulations and in sufficient detail to enable it to timely prepare its federal, state and other tax returns; In addition, concurrently with the report of such accountants, the Investment Advisor shall cause to be mailed to the Investors, if not already contained in such report to be provided to the Investors by such accountants, a report containing a statement of any fees received by the Investment Advisor or any of its Affiliates in connection with Fund's activity. The Investment Advisor shall also cause to be delivered to any Investor upon request such other information as shall be needed by such Investor in order to enable it to timely file any of its tax returns and will also from time to time furnish such other information as any Investor may reasonably request for the purpose of enabling it to timely comply with any reporting or filing requirements imposed or permitted by any statute, rule, regulation or otherwise by any governmental agency or authority, or to furnish to, or otherwise be used in connection with its relationship with, any regulatory authority. b. Within 45 days after the end of each of the first three fiscal quarters in each Fiscal Year, the Investment Advisor shall cause to be prepared and mailed to each Investor a report of the Investment Advisor setting forth the (unaudited) information described in Section 8(a)(i)-(v) and a report containing a statement of fees received by the Investment Advisor or any of its Affiliates in connection with the Fund's activities. SECTION 9. Tax and ERISA Matters. a. Pursuant to the delegation of authority more particularly described in the Operating Agreement, the Investment Advisor shall function as the "Tax Matters Partner" for purposes of Section 6231 of the Code of each U.S. Fund Entity and will have the exclusive authority and discretion to make any elections required or permitted to be made by any U.S. Fund Entity under the Code or any other tax laws; provided that the Investment Advisor shall not cause any U.S. Fund Entity to be excluded from the partnership taxation provisions of Subchapter K of the Code. b. The Investment Advisor shall use its reasonable best efforts to cause each U.S. Fund Entity to qualify as a Venture Capital Operating Company. Concurrently with the closing of the first acquisition of Investment Securities by SVI-U.S., the Investment Advisor shall obtain an opinion of counsel which opinion shall state whether SVI-U.S. should qualify as a Venture Capital Operating Company on the date of such closing. 19 21 Annually, the Investment Advisor shall provide a certificate to each Investor stating that the Investment Advisor believes that SVI-U.S. and each Redemption Vehicle should have qualified as a Venture Capital Operating Company on the applicable day of such "annual valuation period" or otherwise is not deemed to have "Plan Assets" under ERISA. c. If the Investment Advisor determines that the same is required to prevent legal restrictions or requirements applicable to any Investor or any U.S. Fund Entity from having a material adverse effect on any such Investor or entity, the Investment Advisor may, in its sole discretion: (i) cause the U.S. Fund Entity in question to dissolve and distribute its assets in accordance with the Operating Agreement or the pertinent Other Operating Agreement; (ii) cause all or a portion of the Interests of any Investor to be redeemed in a manner generally consistent with Section 6; or (iii) cause the Operating Agreement, any Other Operating Agreement or this Agreement to be amended (provided that no such amendment may be made unilaterally if such amendment would have a material adverse effect on any Investor). SECTION 10. Compensation. a. Investment Advisor Fee. Each Investor shall pay to the Investment Advisor a fee (the "Investment Advisor Fee") based on such Investor's Contributed Capital from time to time. The Investment Advisor Fee shall be payable quarterly in arrears on the last day of each calendar quarter (each a "Quarterly Payment Date") or, if such day is not a business day, the next succeeding business day. The amount due on each Quarterly Payment Date will be equal to one-fourth of the sum of (i) 60 basis points times the amount of such Investor's Quarterly Contributed Capital not in excess of $50 million as at such date; (ii) 50 basis points times the amount of such Investor's Quarterly Contributed Capital in excess of $50 million but not in excess of $100 million as at such date; and (iii) 40 basis points times the amount of such Investor's Quarterly Contributed Capital in excess of $100 million as at such date. If the Investment Advisor Fee has not been paid within 30 days of the applicable Quarterly Payment Date the pertinent Investor shall be deemed to be a "Defaulting Member" within the meaning of Section 8.3 of the Operating Agreement. b. Performance Fee. i. Each Investor shall pay to the Investment Advisor a fee (the "Performance Fee") based upon such Investor's return on its investment. The Performance Fee shall be payable by an Investor on the date of (a) any actual or deemed Distribution (other than a Distribution made in connection with a Subsequent Closing) to such Investor of cash proceeds from the sale of Investment Securities by any U.S. Fund Entity and (b) any Distribution of Investment Securities to such Investor by any U.S. Fund Entity (any such date, a "Performance Fee Determination Date"). 20 22 ii. The Performance Fee with respect to any Investor will be equal to the sum of (a) 20% of the relevant Investor's return (after costs, expenses and the Investment Advisor Fee but before the Performance Fee) in excess of the return such Investor would have realized had such Investor's Capital Contributions been invested at the Index Rate and (b) an additional 10% of the relevant Investor's return (after costs, expenses and the Investment Advisor Fee but before the Performance Fee) in excess of the return such Investor would have realized had such Investor's Capital Contributions been invested at a rate equal to the Index Rate plus 500 basis points. iii. On each Performance Fee Determination Date with respect to any Investor, the Performance Fee will be determined with respect to any Investment Securities distributed on such date and any Investment Securities proceeds with respect to which are distributed or deemed distributed on such date. The Performance Fee will be determined by (a) future valuing to the Performance Fee Determination Date, at the Index Rate, each Capital Contribution made by the relevant Investor with respect to the pertinent Investment Securities; (b) future valuing to the Performance Fee Determination Date, at the Index Rate plus 500 basis points, each capital contribution made by the relevant Investor with respect to the pertinent Investment Securities; (c) future valuing to the Performance Fee Determination Date, at the Index Rate, the amount of any Shortfall Amount in respect of the prior Performance Fee Determination Date, and (d) future valuing to the Performance Fee Determination Date, at the Fund Rate, each distribution or deemed distribution (other than any distribution that itself triggered a Performance Fee Determination Date) made to the relevant Investor with respect to the pertinent Investment Securities. The Performance Fee will equal the sum of (i) 20% of the amount, if any, by which (I) the sum of the distribution being made in respect of the pertinent Investment Securities on the Performance Fee Determination Date plus the amount described in clause (d) above exceeds (II) the sum of the amounts described in clauses (a) and (c) above; plus (ii) 10% of the amount, if any, by which (III) the sum of the distribution being made in respect of the pertinent Investment Securities on the Performance Fee Determination Date plus the amount described in clause (d) above exceeds (IV) the sum of the amounts described in clauses (b) and (c) above. If on any Performance Fee Determination Date the amount described in clause (II) above exceeds the amount described in clause (I) above, no Performance Fee will be due and such excess will be carried forward to the next Performance Fee Determination Date as a "Shortfall Amount." If on the last Performance Fee Determination Date with respect to any Investor, there exists a Shortfall Amount the Investment Advisor will rebate to such Investor, without interest, an amount of Performance Fees previously paid to the Investment Advisor with respect to such Investor equal to the lesser of the amount of such Shortfall Amount and the amount of such Performance Fees previously paid. For the purposes of calculating the Performance Fee, (x) the "Fund Rate" shall mean the aggregate internal rate of return earned by the U.S. Fund Entities' investments through the applicable 21 23 Performance Fee Determination Date assuming a sale of all investments for their respective fair market values as of such date and monthly compounding and (y) any distribution that was in fact reduced by the withholding of a payment of the Investment Advisor Fee will be treated as having been so reduced, and any payment of the Investment Advisor Fee made directly by the pertinent Investor and not previously treated as a reduction of a distribution pursuant to this clause will be subtracted from the amount of the distribution being made on the Performance Fee Determination Date. iv. All future value computations shall be made using monthly compounding and the actual number of days elapsed in each month. v. If the Performance Fee has not been paid within 30 days the pertinent Investor shall be deemed to be a "Defaulting Member" within the meaning of Section 8.3 of the Operating Agreement. vi. Notwithstanding the foregoing, if, on the last Performance Fee Determination Date with respect to any Investor, the aggregate amount of capital contributed, and fees paid, by such Investor exceeds the sum of the aggregate amount of cash and the value of all property actually distributed to such Investor, the Investment Advisor will rebate to such Investor Performance Fees previously paid by such Investor in an amount equal to the lesser of (y) such excess and (z) Performance Fees received by the Investment Advisor from such Investor. c. Invoices. The Investment Advisor will provide each Investor with an invoice for each of the Investment Advisor Fee and the Performance Fee due from such Investor reflecting any amounts not deducted from Distributions. Each invoice shall reflect the amount of the Investment Advisor Fee or Performance Fee, as the case may be, that has been paid up to the date of such invoice. Any amount that has not been deducted as reflected in any such invoice and that is not paid within 10 days of the date of such invoice shall bear interest at the Base Rate. SECTION 11. Expenses. a. Expenses of the U.S. Fund Entities. Each of the U.S. Fund Entities shall bear its share of organizational costs and expenses and the U.S. Fund Entities, collectively, shall bear their share of all costs and expenses of operating the Fund. The costs and expenses associated with operating the Fund (collectively, "Expenses") will include, without limitation, (i) costs and expenses of meetings of Investors, and of preparing, printing and mailing reports to Investors and of amending organizational documents when necessary; (ii) brokers' commissions and fees of transfer agents chargeable in connection with any securities transactions; (iii) fees and expenses of service providers, whether affiliated with Prudential 22 24 or not, including, without limitation, securities advisors, attorneys (including, without limitation, SVI-U.S.'s share of a one time fee of $15,000.00 to reimburse PREI for the cost of its in-house counsel for services in connection with creation of Fund), accountants, appraisers, contractors, architects, engineers, consultants, insurance consultants, custodians and other agents; and (iv) to the extent not included in the foregoing or paid out of other sources, the costs and expenses connected with the acquisition, disposition and ownership of the Investment Securities, and the termination of the U.S. Fund Entities. All such Expenses shall be allocated among U.S. Fund Entities and among Investors in accordance with the following principles: (1) Expenses that relate to a particular U.S. Fund Entity or to the Investment Securities held thereby shall be allocated to such U.S. Fund Entity and to the Investors therein in proportion to their Allocated Percentages therein at the time the Expense is incurred; (2) Expenses that relate to Partnership Units shall be allocated to Prudential; (3) Expenses that relate to Affiliated Securities shall be allocated to the Investors with Allocated Percentages with respect thereto in proportion to such percentages; (4) Expenses that relate to unconsummated investment transactions shall be allocated to SVI-U.S. and to the Investors therein in proportion to their Allocated Percentages; and (5) Expenses that relate to the Independent Reviewer shall be allocated to the Unaffiliated Investors in proportion to their Allocated Percentages. b. Expenses of the Investment Advisor and Administrative Services. At its expense, the Investment Advisor, Prudential and/or PREI, shall pay the compensation of their respective employees who provide services to the Fund, including, without limitation, administration and portfolio management services, provide adequate office space and any necessary office furnishings and equipment, together with telephone service, heat, utilities, supplies and similar miscellaneous office expenses and shall provide other necessary items of an overhead and administrative nature. SECTION 12. Conflicts; Waiver. The Investment Advisor and its Affiliates or associates or any of their legal, financial or other advisors shall in no way be prohibited from, and intend to, spend substantial time in connection with other businesses or activities, including, but not limited to, managing investments, advising or managing entities whose investment objectives are the same as or overlap with those of the Fund, participating in actual or potential investments of the Fund, providing consulting, merger and acquisition, structuring or financial advisory services, including with respect to actual, contemplated or potential investments of the Fund, or acting as a director, officer or creditors' committee member of, adviser to, or participant in, any corporation, partnership, trust or other business entity. The Investment Advisor and its Affiliates or associates or any of their legal, financial or other advisors may, and expect to, receive fees or other compensation from third parties for such activities, which fees will be for the benefit of their own account and not the Fund. Such fees may relate to actual, contemplated or potential investments of the Fund and may be payable by entities in which the Fund directly or indirectly, has invested or contemplates investing. Each U.S. Fund 23 25 Entity and each Investor waives any and all rights of any nature whatsoever that any such Person may have to object to or participate or any such activity. SECTION 13. Representations and Warranties of the Investment Advisor. The Investment Advisor hereby represents and warrants to SVI-U.S. as of the date hereof as follows: a. The Investment Advisor is a corporation, duly incorporated and validly existing under the laws of the State of New Jersey, has the full power and authority to transact the business in which it is presently engaged and is duly qualified under the laws of each jurisdiction where the conduct of its business requires, or the performance of its obligations under this Agreement would require, such qualification. b. The Investment Advisor has full corporate power and authority and has obtained all necessary authorization to execute, deliver and perform this Agreement on the terms and conditions hereof. No consent of any other Person and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, fling or declaration with, any governmental authority is required by the Investment Advisor in connection with this Agreement or the execution, delivery, performance, validity or enforceability hereof. This Agreement constitutes the legal, valid and binding obligation of the Investment Advisor enforceable against the Investment Advisor in accordance with its terms, subject to bankruptcy, insolvency moratorium or similar laws affecting generally the enforcement of creditors' rights and general equitable principles. c. The Investment Advisor's execution, delivery and performance of this Agreement and any documents and instruments required hereunder shall not violate any provision of any existing law or regulation binding on the Investment Advisor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Investment Advisor, or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Investment Advisor is a party or by which the Investment Advisor or any of its assets may be bound, and shall not result in or require the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. 24 26 d. SVI-U.S. is a limited liability company, duly formed and validly existing under the laws of the State of Delaware, has the full power and authority to transact the business in which it is presently engaged and is duly qualified under the laws of each jurisdiction where the conduct of its business requires, or the performance of its obligations would require, such qualification. SECTION 14. Liability of the Investment Advisor. Except as otherwise required by law, the Investment Advisor and any of its Affiliates, directors, officers, employees, shareholders, assigns, representatives or agents shall not be liable, responsible or accountable in damages or otherwise to the Fund or any Investor for any loss, liability, damage, settlement cost, or other expense (including attorneys' fees) incurred by reason of any act or omission or any such alleged act or omission performed or omitted by such Person (including those in connection with serving on boards of directors for companies in the Fund's portfolio) if such Person acted in a manner consistent with the Standard of Care. SECTION 15. Indemnification. a. Indemnity. To the fullest extent permitted by applicable law, the Investment Advisor, PIMS, PREI, the Independent Reviewer and any of their respective officers, directors, agents, stockholders, partners, members, employees, other Affiliates, and any other Person who serves at the request of the Investment Advisor on behalf of any of the U.S. Fund Entities (each such Person being an "Indemnitee") shall be held harmless and be indemnified by the U.S. Fund Entities for any liability, loss (including amounts paid in settlement), damages or expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by such Indemnitee on behalf of the U.S. Fund Entities or in furtherance of the interests of the U.S. Fund Entities or otherwise arising out of, or in connection, with the U.S. Fund Entities; provided that such Indemnitee acted in a manner consistent with the Standard of Care. b. Advances. To the fullest extent permitted by law, expenses (including, without limitation, legal fees) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the U.S. Fund Entities prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the U.S. Fund Entities of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 15. c. Limitation on Liability. The individual indemnity obligation of each Investor will be limited to the lesser of (i) the aggregate of: (x) such Investor's Unfunded 25 27 Commitments; (y) Distributions (including Distributions in redemption) previously made to such Investor; and (z) the Investor's Interest in the U.S. Fund Entities or (ii) such Investor's Capital Commitment. The Investment Advisor shall not call capital for the purpose of satisfying the foregoing obligations in an amount in excess of the sum of such Investor's Unfunded Commitment and Distributions to such Investor that represent returns of capital. SECTION 16. Term of Agreement; Survival of Certain Terms. a. Initial Term. Unless terminated in accordance with its terms this Agreement shall remain in effect with respect to each U.S. Fund Entity until the termination of such U.S. Fund Entity. b. Termination. This Agreement may be terminated at any time with or without cause upon 90 days' prior written notice by (i) SVI-U.S. (upon the vote of a majority in Interest of the Unaffiliated Investors therein) or (ii) the Investment Advisor (but in the latter case, subject to Section 9(c), only if this Agreement is so terminated with respect to all U.S. Fund Entities). Upon such termination, the Investment Advisor shall be entitled to receive all compensation it has earned through the effective date of such termination, including any accrued but unpaid Investment Advisor Fee and Performance Fee. c. Survival. Notwithstanding anything herein to the contrary, Sections 10, 11, 15 and 16 of this Agreement shall survive any termination hereof. SECTION 17. Notices. Unless expressly provided otherwise herein, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing (including by telecopy) and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, or, in the case of telecopy notice, when received in legible form, addressed as set forth below: If to SVI-U.S.: c/o Prudential Real Estate Investors 8 Campus Drive, 4th Floor Arbor Circle South Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Fax: (973) 683-1794 26 28 with a copy to: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attention: Jacqueline A. Weiss, Esq. Fax: (212) 326-2061 If to the Investment Advisor: Prudential Real Estate Investors 8 Campus Drive, 4th Floor Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Fax: (973) 683-1794 with a copy to: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attention: Jacqueline A. Weiss, Esq. Fax: (212) 326-2061 Any party may alter the address or telecopy number to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 17 for the giving of notice. SECTION 18. Amendments; Waivers. Subject to Section 9, this Agreement may be amended only by agreement in writing of the Investment Advisor and a majority in Interest of the Unaffiliated Investors, provided that any amendment that materially adversely affects the Investors shall require the approval of at least two-thirds in Interest of the Unaffiliated Investor, and provided further that no such amendment shall be effective if the Investment Advisor reasonably determines that such amendment could reasonably be expected to materially adversely affect the Fund taken as a whole. The Investment Advisor shall cause the effectuation of any such amendment duly approved by the appropriate Investors. Except as otherwise provided herein, no waiver of any provision nor consent to any exception to the terms of this Agreement shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver 27 29 thereof, nor shall any single or partial exercise preclude any further or other exercise of such or any other right. SECTION 19. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflict of law principles. SECTION 20. Assignment. Neither this Agreement nor any rights or obligations under it are assignable, except that the Investment Advisor may assign its obligations hereunder as set forth in Section 3(g). SECTION 21. Headings. The descriptive headings of the Articles, Sections and subsections of this Agreement are for convenience only and do not constitute a part of this Agreement. SECTION 22. Parties in Interest. This Agreement shall be binding upon and inure to the benefit of each party and their respective permitted successors and assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement, except that the Investors shall be third party beneficiaries hereof. SECTION 23. Consent to Jurisdiction and Litigation. All litigation relating to or arising under or in connection with this Agreement shall be brought only in the federal or state courts of competent jurisdiction located in the State and County of New York, which shall have exclusive jurisdiction to resolve any disputes with respect to this Agreement. By execution and delivery of this Agreement, each party hereto irrevocably and unconditionally consents to the jurisdiction of such courts for any actions, suits or proceedings arising out of or relating to this Agreement. The parties hereto irrevocably waive any obligation of the laying of venue or based on the grounds of forum non conveniens that it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction. No party hereto shall be entitled to immunity whatsoever, whether characterized as sovereign immunity or otherwise, from any legal proceedings to enforce the obligations hereunder. Subject to Section 15, in the event of any breach of the provisions of this Agreement, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the 28 30 applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. SECTION 24. Attorney's Fees. In the event of any action for the breach of this Agreement or misrepresentation by any party, the prevailing party shall be entitled to reasonable attorney's fees, costs and expenses incurred in such action. SECTION 25. Representation By Counsel. Each party hereto acknowledges that such party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. SECTION 26. Interpretation. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties hereto. Any of the terms used herein may, unless the context otherwise requires be used in the singular or the plural depending on the reference. All words or terms used in this Agreement, regardless of the number or gender in which they are used, shall include any other number or gender, as the context may require. Further, "hereof," "herein," "hereunder," "hereto," "this Agreement" and comparable terms refer to the entire instrument, including any exhibits or schedules to the instrument, and not to any particular article, section or other subdivision of the instrument. All references to SVI-U.S. shall include all parallel or subsidiary vehicles including Redemption Vehicles, if any, that may be utilized. In such circumstances, references to the Operating Agreement shall be deemed to include references to the applicable Other Operating Agreements. References to actions to be taken by any U.S. Fund Entity shall mean such actions to be taken by the Investment Manager on behalf of such U.S. Fund Entity or, if applicable, to the Investment Manager causing such U.S. Fund Entity to take such action, unless the context clearly requires otherwise. SECTION 27. Further Assurances. Each party agrees to execute and deliver (or to cause the execution and delivery of) such further instruments and to do such further acts as the Investment Advisor deems necessary or advisable to better effectuate this Agreement. 29 31 SECTION 28. Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any court of competent jurisdiction or other governmental entity, the remaining provisions of this Agreement to the extent permitted by law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for all parties remain valid, binding and enforceable; provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by law, the parties hereby to the same extent waive any provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 29. Counterparts. This Agreement may be executed in any number of counterparts by facsimile or other written form of communication, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. SECTION 30. WAIVER OF JURY TRIAL. EACH PARTY HERETO, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. [Remainder of Page Intentionally Left Blank] 30 32 IN WITNESS WHEREOF, each of the parties hereto has caused this Investment Advisory Agreement to be executed by its duly authorized officers as of the day and year first above written. STRATEGIC VALUE INVESTORS, LLC By: The Prudential Investment Corporation Its: Attorney-in-Fact By: /s/ JOSEPH D. MARGOLIS -------------------------------------- Name: Joseph D. Margolis Title: Vice President THE PRUDENTIAL INVESTMENT CORPORATION By: /s/ JOSEPH D. MARGOLIS -------------------------------------- Name: Joseph D. Margolis Title: Vice President S-1 33 ANNEX NUMBER 1 TO INVESTMENT ADVISORY AGREEMENT Date: ___________, 199__ The undersigned acknowledges and agrees as follows: 1. This Annex Number 1 is part of the Investment Advisory Agreement dated October 2, 1997, to which it is attached. 2. The undersigned is a party to and a "Member" under the Operating Agreement and or one or more Other Operating Agreements, and its notice address for purposes hereof it as set forth thereunder. 3. The undersigned has reviewed this Annex Number 1 and the Investment Advisory Agreement and is represented by counsel in connection therewith. 4. The undersigned will pay the Investment Advisor Fee and the Performance Fee in accordance with the Investment Advisory Agreement. 5. The Investment Advisor may deduct or withhold from Distributions to the undersigned any amounts payable by the undersigned in respect of any fees or expenses relating to the Investment Advisory Agreement. 6. No Indemnitee shall be liable to the undersigned and the undersigned shall indemnify each Indemnitee, all as set forth in Section 15 of the Investment Advisory Agreement, and the Investment Advisor may deduct, withhold or make capital calls for any amounts payable by the undersigned in respect thereof. 7. The undersigned shall fulfill any other obligations it may have under Sections 7, 10, 11 or 15 of the Investment Advisory Agreement. 8. Appointment of Investment Advisor as Attorney-in-Fact: The undersigned irrevocably constitutes and appoints the Investment Advisor, and any replacement or substitute Investment Advisor, as the undersigned's true and lawful attorney-in-fact and agent, with full power and authority in the undersigned's name, place and stead (a) the execute, acknowledge, deliver, file and record in the appropriate public offices all certificates or other instruments (including counterparts A-1 34 of the Operating Agreement) that the Investment Advisor deems appropriate to continue SVI-U.S. as a limited liability company in the jurisdiction in which SVI-U.S. conducts business, including amendments to the Operating Agreement necessary to correct scriveners' errors, and from and after the date on which the undersigned becomes a Defaulting Member, all documents and instruments (including transfer and sale documents) that the Investment Advisor deemed necessary to implement the rights and remedies set forth in Section 8.3 of the Operating Agreement, (b) to take all actions necessary and to execute and deliver all documents, certificates and other instruments (including Other Operating Agreements) in connection with the formation of Redemption Vehicles in accordance with Section 6(c) of the Investment Advisory Agreement and the subsequent operation of such Redemption Vehicles and (c) to take all actions as are necessary and appropriate to fulfill the duties of Investment Advisor as referenced in the Investment Advisory Agreement and the Operating Agreement and/or as described in the Memorandum, including, without limitation, actions in connection with the borrowing of funds and the acquisition and disposition of Investment Securities. The appointment by the undersigned of the Investment Advisor as attorney-in-fact set forth shall be deemed to be a power coupled with an interest and with full power of substitution, in recognition of the fact that the undersigned will be relying upon the Investment Advisor to act as contemplated by the Investment Advisory Agreement and the Operating Agreement in any filing and other action by the Investment Advisor on behalf of SVI-U.S., and such power shall, to the extent permitted by law, survive the death, disability, incompetency, withdrawal, removal, bankruptcy or insolvency of any Person hereby giving such power and the transfer by the undersigned of all or part of its Interest. The foregoing power of attorney of a transferor undersigned shall survive such transfer only until such time as the transferee shall have been admitted to SVI-U.S. as a member and all required documents and instruments shall have been duly executed, filed and recorded to effect such substitution. Any Person dealing with SVI-U.S. may conclusively presume and rely upon the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. A-2 35 9. This Annex Number 1 shall survive the termination of the Investment Advisory Agreement. ------------------------- By: ------------------------------------- Name: Title: Notice Address: --------------------------------------------- --------------------------------------------- --------------------------------------------- Attention: ---------------------------------- Fax: ---------------------------------------- A-3 EX-99.VI 7 OPERATING AGREEMENT (SVI INTERNATIONAL) 1 EXHIBIT VI OPERATING AGREEMENT OF STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC Dated as of October 2, 1997 2 OPERATING AGREEMENT OF STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC A DELAWARE LIMITED LIABILITY COMPANY TABLE OF CONTENTS Page ---- ARTICLE 1. DEFINITIONS............................... 1 1.1 Defined Terms........................................................ 1 1.2 Construction......................................................... 10 ARTICLE 2. THE COMPANY............................... 10 2.1 Formation Under Act.................................................. 10 2.2 Statutory Compliance................................................. 11 2.3 Name of Company...................................................... 11 2.4 Purpose of Company................................................... 11 2.5 Principal and Registered Office; Service of Process.................. 11 2.6 Expenses of Consideration of Investment by Member.................... 11 2.7 No Individual Authority.............................................. 11 2.8 No Member Responsible for Other's Commitments........................ 11 ARTICLE 3. TERM................................... 12 3.1 Term................................................................. 12 ARTICLE 4. MANAGEMENT OF THE COMPANY........................ 12 4.1 The Investment Advisory Agreement.................................... 12 4.2 Management........................................................... 12 4.3 Performance of Duties................................................ 13 4.4 Activities in the United States...................................... 13 4.5 Limited Liability.................................................... 13 ARTICLE 5. FISCAL YEAR............................... 13 5.1 Calendar Year........................................................ 13 i 3 Page ---- ARTICLE 6. MEMBERS................................. 14 6.1 Liability............................................................ 14 6.2 Indemnification...................................................... 14 6.3 Appointment of Manager as Attorney-In-Fact........................... 15 6.4 Survival of Appointment of Manager as Attorney-In-Fact............... 15 ARTICLE 7. MEETINGS................................. 15 7.1 Meetings............................................................. 15 7.2 Quorum............................................................... 16 7.3 Manner of Acting..................................................... 16 7.4 Proxies.............................................................. 16 7.5 Action by Members Without a Meeting.................................. 16 7.6 Waiver of Notice..................................................... 16 ARTICLE 8. CAPITAL COMMITMENTS AND CONTRIBUTIONS OF THE MEMBERS........... 17 8.1 Calls on Capital Commitments......................................... 17 8.2 Allocation of Investment Securities Acquired......................... 18 8.3 Defaults............................................................. 18 8.4 Subsequent Fund Closings............................................. 18 8.5 Portfolio Manager.................................................... 18 ARTICLE 9. REDEMPTIONS............................... 19 9.1 Generally............................................................ 19 9.2 Notices -- Preliminary and Final..................................... 19 9.3 Redemption Vehicles.................................................. 20 9.4 Subsequent Redemptions by Redemption Vehicles........................ 20 9.5 Line of Credit....................................................... 21 9.6 Limitations on Redemptions........................................... 21 ARTICLE 10. SALES ELECTION.............................. 21 10.1 Generally............................................................ 21 10.2 Notice to Member; Election........................................... 21 ii 4 Page ---- 10.3 Distribution......................................................... 22 10.4 Holdback............................................................. 22 ARTICLE 11. ALLOCATIONS AND DISTRIBUTIONS...................... 22 11.1 Distributions........................................................ 22 11.2 Allocations.......................................................... 23 11.3 Allocation of Tax Items for Federal and State and Local Tax Purposes............................................................. 25 ARTICLE 12. ASSIGNMENT; RESTRICTIONS ON TRANSFER OF INTERESTS............ 25 12.1 Transfers............................................................ 25 12.2 Assumption by Assignee............................................... 26 12.3 Other Assignments Void............................................... 26 ARTICLE 13. INDEPENDENT REVIEWER........................... 26 13.1 Independent Reviewer................................................. 26 13.2 Initial Independent Reviewer......................................... 27 ARTICLE 14. BOOKS AND RECORDS, REPORTS, TAXES, ETC.................. 27 14.1 Books; Reports....................................................... 27 14.2 Where Maintained..................................................... 28 14.3 Tax Returns.......................................................... 28 14.4 Section 754 Election................................................. 28 ARTICLE 15. DISSOLUTION............................... 29 15.1 Dissolution.......................................................... 29 15.2 Procedures........................................................... 29 15.3 Certificate of Cancellation.......................................... 30 15.4 No Action for Dissolution............................................ 30 iii 5 Page ---- ARTICLE 16. REMOVAL OF MANAGER............................ 30 ARTICLE 17. NOTICES................................. 30 17.1 In Writing; Address.................................................. 30 ARTICLE 18. MISCELLANEOUS.............................. 31 18.1 Governing Law........................................................ 31 18.2 Entire Agreement..................................................... 31 18.3 Headings............................................................. 32 18.4 Parties in Interest.................................................. 32 18.5 Confidentiality...................................................... 32 18.6 Amendments; Waivers.................................................. 32 18.7 Severability......................................................... 32 18.8 Consent to Jurisdiction and Litigation............................... 33 18.9 Partnership Tax Treatment; Tax Matters Partner....................... 33 18.10 Conflicts; Waiver.................................................... 33 18.11 Counterparts......................................................... 34 18.12 Waiver of Jury Trial................................................. 34 iv 6 OPERATING AGREEMENT OF STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC This Operating Agreement (this "Agreement") of STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC (the "Company") is entered into and shall be effective as of the 2nd day of October, 1997, by and among STRATEGIC VALUE INVESTORS INTERNATIONAL LTD., a Cayman Islands company (the "Manager"), and the other parties identified on the signature pages hereof (collectively, the "Members"). R E C I T A L S WHEREAS, the Members desire to form a limited liability company under the Delaware Limited Liability Company Act (the "Act") to make investments from outside the United States in REIT Shares (as such capitalized term is defined below); WHEREAS, the Members desire to execute this Agreement to establish the rules and procedures that are to govern the conduct of the investment activities and related affairs of the Company as set forth below; NOW, THEREFORE, in consideration of the foregoing recitals, which are incorporated into the operative provisions of this Agreement by this reference, and for good and valuable consideration, the receipt and adequacy of which are hereby conclusively acknowledged and intending to be legally bound thereby, the Members hereby covenant and agree as follows: ARTICLE 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accountants" means Price Waterhouse, LLP or any other accountancy firm that has been retained by the Manager to serve as accountants to the Company. "Act" has the meaning set forth in the Recitals. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the taxable year, after giving effect to the following adjustments: (i) credit to such Capital Account any amount that such Member is obligated to restore under Section 1.704-1(b)(2)(ii)(c) of the Treasury Regulations, as well as any addition thereto pursuant to the next to last sentence of Sections 1.704-2(g)(1) and (i)(5) of the Treasury Regulations, after taking into account thereunder any changes 1 7 during such year in minimum gain, as determined in accordance with Sections 1.704-2(d) and 1.704-(i)(3) of the Treasury Regulations; and (ii) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations. This definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulations Section 1.704-l(b)(2)(ii)(d) and 1.704-2, and will be interpreted consistently with those provisions. "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. "Agreement" means this Operating Agreement as the same shall be amended or supplemented from time to time in accordance with the terms set forth herein. "Allocated Percentage" means, with respect to any Member, the percentage of any Investment Security allocated to such Member on the books of the Company. "Bankruptcy" means, with respect to any Person, the inability of such Person generally to pay its debts as such debts become due, or an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; the filing of any petition or answer by such Person seeking to adjudicate it a bankrupt or insolvent, or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of such Person or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking, consenting to, or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for such Person or for any substantial part of its property; or corporate action taken by such Person to authorize any of the actions set forth above. "Base Rate" means, at any date, the prime rate then in effect for The Chase Manhattan Bank (or, if unavailable, another major money center bank selected by the Manager), plus 2% per annum. "Business Day" means a day other than a Saturday, Sunday or legal holiday for commercial lenders under the laws of the States of Delaware, New Jersey or New York. "Capital Account" means, with respect to each Member, a single capital account that shall be established for such Member and that shall be maintained for such Member in accordance with the following provisions: (i) To each Member's Capital Account there shall be credited such Member's Capital Contributions, such Member's allocable share of Profits, and any 2 8 items in the nature of income or gain that are specially allocated pursuant to Article 11 of this Agreement, and the amount of any Company liabilities that are assumed by such Member or that are secured by any Company property distributed to such Member. (ii) To each Member's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Company property actually or deemed distributed to such Member pursuant to any provision of this Agreement, such Member's allocable share of Losses, and any items in the nature of expenses or Losses that are specially allocated pursuant to Article 11 of this Agreement, and the amount of any liabilities of such Member that are assumed by the Company or that are secured by any property contributed by such Member to the Company. (iii) In the event the Gross Asset Values of Company assets are adjusted, the Capital Accounts of all Members shall be adjusted simultaneously to reflect aggregate net adjustment as if the Company recognized gain or loss equal to the amount of such aggregate net adjustment. (iv) The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Treasury Regulations. (v) In the event any Interest in the Company is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Interest. "Capital Commitment" means, when referring to a dollar amount, an amount committed by any Member pursuant to a Subscription Agreement. "Capital Contribution" means, for each Member, the aggregate amount contributed to the Company by such Member pursuant to Section 8.1 hereof. "Certificate of Formation" means the Certificate of Formation of the Company filed with the Delaware Secretary of State on September 10, 1997, as amended or restated from time to time. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time, or corresponding provisions of subsequent superseding Federal revenue laws. "Collection Account" has the meaning set forth in Section 11.1(f). "Commitment Period" means the period commencing on the closing of the first purchase of Investment Securities by the Company and expiring on the second anniversary of such date (or the third anniversary of such date if the Commitment Period is extended with the consent of two-thirds in Interest), or, if earlier, on the date on which the Company is terminated. 3 9 "Company Minimum Gain" has the meaning assigned to the term partnership minimum gain in Treasury Regulations Section 1.704-2(b)(2) and 1.704-2(d)(1). In general, Company Minimum Gain equals the excess of the amount by which a Nonrecourse Liability exceeds the adjusted tax basis of the Company property it encumbers. "Defaulting Member" has the meaning set forth in Section 8.3. "Depreciation" means, for each taxable year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for the year or other period for federal income tax purposes, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of the year or other period, Depreciation will be an amount that bears the same ratio to the beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for the year or other period bears to the beginning adjusted tax basis, provided that if the federal income tax depreciation, amortization, or other cost recovery deduction for the year or other period is zero, Depreciation will be determined with reference to the beginning Gross Asset Value using any reasonable method selected by the Tax Matters Partner. "Disposition Proceeds" means all cash and non-cash proceeds received by the Company for any sale or other disposition of any Investment Security or portion thereof. "Dissolution Events" has the meaning set forth in Section 15.1. "Distributions" means all distributions made, or deemed to be made, to the Members pursuant to Section 11.1. "Expenses" has the meaning set forth in the Investment Advisory Agreement. "Final Action Notice" has the meaning set forth in Section 9.2. "Final Redemption Date" has the meaning set forth in Section 9.2. "Final Redemption Request" has the meaning set forth in Section 9.2. "Final Redemption Request Date" has the meaning set forth in Section 9.2. "Fiscal Year" has the meaning set forth in Article 5. "Fund" means SVI-U.S., the Company, the co-investment arrangement with Prudential Co-Investor, any Redemption Vehicle, any redemption vehicle established in connection with SVI-U.S., and any similar separate or "side" vehicle formed pursuant to the terms of any of the Other Operating Agreements or the terms of the operating agreement of SVI-U.S. or of any redemption vehicle established in connection with SVI-U.S., collectively. 4 10 "Gross Asset Value" means, with respect to any asset, the adjusted basis of such asset for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member to the Company will be the fair market value of the asset (valued on the basis of the price established in the investment transaction) on the date of the contribution, as determined by the Manager. (ii) The Manager shall adjust the Gross Asset Values of all Company assets to equal the respective fair market values of the assets, as reasonably determined by the Manager, as of (a) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company if the Manager reasonably determines an adjustment is necessary or appropriate to reflect the relative economic interests of the Members in the Company and (c) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g). (iii) The Gross Asset Values of Company assets will be increased or decreased to reflect any adjustment to the adjusted basis of the assets under Code Sections 734(b) or 743(b), but only to the extent that the adjustment is taken into account in determining Capital Accounts under Treasury Regulations Section 1.704-1(b)(2)(iv)(m). (iv) The Gross Asset Value of any Company asset distributed to any Members will be the gross fair market value of the asset as determined by the Manager on the date of distribution. After the Gross Asset Value of any asset has been determined or adjusted under subparagraphs (i), (ii), or (iii) above, the Gross Asset Value will be adjusted by the Depreciation taken into account with respect to the asset for purposes of computing Profits or Losses. "Initial Closing Date" means the date on which the Company first issues Interests to the Members. "Initial Redemption Request Date" has the meaning set forth in Section 9.2. "in-Interest" means, with respect to any percentage or fraction, the Members voting for or against the related proposal or issue, as the case may be, expressed in terms of a percentage or fraction of aggregate Capital Commitments. "Interest" means with respect to any Member, the interest of such Member in the Company, measured in terms of such Member's Capital Commitment. 5 11 "Investment Advisor" means the Prudential Investment Corporation in its capacity as investment advisor under the Investment Advisory Agreement, which will fulfill its responsibilities through PREI. "Investment Advisor Fees" has the meaning set forth in the Investment Advisory Agreement. "Investment Advisory Agreement" has the meaning set forth in Section 4.1. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time. "Investment Proceeds" has the meaning set forth Section 11.1(f). "Investment Securities" means REIT Shares. "Line of Credit" has the meaning set forth in Section 9.5. "Liquidator" has the meaning set forth in Section 15.2(a). "Manager" shall mean Strategic Value Investors International Ltd., a Cayman Islands company, and each replacement Manager appointed or elected by the Members in accordance with this Agreement. "Member" means each party (other than the Manager) that shall execute this Agreement or a counterpart of this Agreement. "Member Nonrecourse Debt" means any nonrecourse debt of the Company for which any Member bears the economic risk of loss, as described in Treasury Regulations Section 1.704-2(b)(4). "Member Nonrecourse Debt Minimum Gain" means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(3). "Member Nonrecourse Deductions" has the meaning assigned to the term partner nonrecourse deductions in Treasury Regulations Section 1.704-2(i)(2). In general, the amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse Debt for any tax year is the excess, if any, of the net increase during such year in the amount of Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, over the aggregate amount of any actual or deemed distributions during such year to the Member that bears the economic risk of loss for such Member Nonrecourse Debt to the extent such distributions are from the proceeds of such Member Nonrecourse Debt, and are allocable to an 6 12 increase in the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt. "Member's Share of Company Minimum Gain" generally means, as described in Treasury Regulations Section 1.704-2(g)(1), the sum of Nonrecourse Deductions allocated to such Member and the aggregate amount of distributions made to such Member of proceeds of a Nonrecourse Liability that are allocable to an increase in Company Minimum Gain, minus the aggregate of such Member's Share of the Net Decrease in Company Minimum Gain. "Member's Share of Member Nonrecourse Debt Minimum Gains" generally means, as described in Treasury Regulations Section 1.704-2(i)(5), an amount determined in a manner consistent with Treasury Regulations Section 1.704-2(g)(1) with respect to each Member Nonrecourse Debt for which such Member bears the economic risk of loss. "Member's Share of the Net Decrease in Company Minimum Gain" generally means, as described in Treasury Regulations Section 1.704-2(g)(2), an amount equal to the total net decrease in Company Minimum Gain multiplied by a ratio equal to such Member's Share of Company Minimum Gain at the end of the immediately preceding taxable year over the total Company Minimum Gain at such time. "Member's Share of the Net Decrease of Member Nonrecourse Debt Minimum Gain" generally means, as described in Treasury Regulations 1.704-2(i)(4), an amount determined in a manner consistent with Treasury Regulations Section 1.704-2(g)(2). "Memorandum" means the Private Placement Memorandum dated July 1, 1997, relating to the Company, as supplemented by General Supplement No. 1 for the Company pertaining to the offering of the Interests. "Nonrecourse Deductions" has the meaning assigned to such term in Treasury Regulations Section 1.704-2(c). In general, the amount of Nonrecourse Deductions for a Company taxable year equals the excess of the net increase, if any, in the amount of Company Minimum Gain during such year over the aggregate amount of distributions during such year of proceeds of a Nonrecourse Liability that are allocable to an increase in Company Minimum Gain. "Nonrecourse Liability" means any debt of the Company to the extent that no Member (or a Person related to a Member) bears the economic risk of loss for that liability, as described in Treasury Regulations Sections 1.704-2(b)(3) and 1.752-l(a)(2). "Notice of Default" has the meaning set forth in Section 8.3. "Other Operating Agreements" has the meaning set forth in Section 9.3. "Performance Fees" has the meaning set forth in the Investment Advisory Agreement. 7 13 "Person" means an association, a corporation, an individual, a limited liability company, a partnership, a trust or any other entity or organization, including a government or an agency, board, court, department, official, political subdivision or representative thereof or any other governmental entity. "PIMS" means Prudential Investment Management Services LLC, a Delaware limited liability company. "Portfolio Income" means all cash and non-cash dividends or other actual or deemed distributions in respect of any Investment Securities or portion thereof that do not constitute Disposition Proceeds. "PREI" means Prudential Real Estate Investors, a division of Prudential. "Preliminary Action Notice" has the meaning set forth in Section 9.2. "Profits" and "Losses" mean, for each taxable year or other period, an amount equal to the Company's federal taxable income or loss (as is appropriate) for such year or other period, determined in accordance with Code Section 703(a) (including all items of income, gain, loss or deduction required to be stated separately under Section 703(a)(1) of the Code), with the following adjustments: (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses will be added to taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures under Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, will be subtracted from taxable income or loss; (iii) Gain or loss resulting from any disposition of Company property (with respect to which gain or loss is recognized for federal income tax purposes) will be computed by reference to the Gross Asset Value of the property, notwithstanding that the adjusted tax basis of the property differs from its Gross Asset Value; (iv) Any items that are specially allocated pursuant to Section 11.2 shall be excluded from the determination of Profits and Losses; and (v) In lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing taxable income or loss, there will be taken into account Depreciation for the taxable year or other period. "Prudential" means The Prudential Insurance Company of America. 8 14 "Prudential Co-Investor" means Prudential or an entity established by Prudential through which Prudential or such entity will directly make certain investments in parallel with the Company. "Public Investment Security" has the meaning set forth in the Investment Advisory Agreement. "Redemption Vehicles" has the meaning set forth in Section 9.3. "Reinvestment Period" means, if the Capital Commitments are called substantially in full prior to the second anniversary of the first purchase of Investment Securities by the Company, the period commencing on the date on which all Capital Commitments are called substantially in full and ending on such second anniversary; provided that, if the Commitment Period is extended, references to "second anniversary" shall be deemed to be references to "third anniversary". "REIT" means any public or private real estate company or real estate investment trust, whether or not such company qualifies as a real estate investment trust under applicable provisions of the Code, provided such entity is classified as a corporation for federal income tax purposes. "REIT Shares" means shares of REITs or securities convertible, exchangeable or exercisable into shares of REITs. "Sales Election" has the meaning set forth in Section 10.1. "Sales Election Deadline" has the meaning set forth in Section 10.2. "Section 704(c) Property" means (i) each item of property that is contributed to the Company and to which Section 704(c) of the Code or Section 1.704-3(a)(3) of the Treasury Regulations applies, and (ii) each item of Company property that, as contemplated by Section 1.704-1(b)(4)(i) and other analogous provisions of the Treasury Regulations, is governed by the principles of Section 704(c) of the Code (or principles contained in Section 704(c) of the Code). "Securities Act" means the Securities Act of 1933, as the same may be amended. "Standard of Care" has the meaning set forth in Section 4.3. "Subscription Agreement" means one of the several Subscription Agreements between the Company and a Member. "SVI-U.S." means Strategic Value Investors, LLC, a Delaware limited liability company. 9 15 "Tax Matters Partner" means the person designated as "Tax Matters Partner" pursuant to Section 18.9. "Transfer" means (a) as a noun, any voluntary or involuntary, direct or indirect, sale, conveyance, assignment, transfer, divestment, alienation, pledge, hypothecation, creation of a security interest in, or other disposition, or encumbrance, and (b) as a verb, voluntarily or involuntarily, directly or indirectly, to sell, convey, assign, transfer, divest, alienate, pledge, hypothecate, create a security interest in, or otherwise dispose of or encumber; whether for consideration or gratuitously. "Treasury Regulations" means the regulations implementing the Code, as the same may be hereafter amended. "Unfunded Commitments" means any Member's Capital Commitments that have not been called by the Manager and delivered by such Member to the Company, plus any capital contribution returned to such Member pursuant to Section 8.4. 1.2 Construction. Any of the terms used herein may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All words or terms used in this Agreement, regardless of the number or gender in which they are used, shall include any other number or gender, as the context may require. The words "herein", "hereof" and "hereunder" shall refer to this Agreement unless the context otherwise requires. The word "including" shall mean "including, without limitation," except where the context otherwise requires. References to contracts, agreements, and other contractual instruments shall be deemed to include all subsequent amendments, supplements and other modifications permitted by the terms of this Agreement. References to specific statutes include (a) successor statutes of similar purpose and import, and (b) all rules, regulations and orders promulgated thereunder. The term "provisions," when used with respect hereto or to any other document or instrument, shall be construed as if preceded by the phrase "terms, covenants, agreements, requirements, conditions and/or". This Agreement shall not be construed against any party hereto as the drafters hereof. All references to "Articles," "Sections," "clauses," and "Exhibits" are to Articles, Sections, clauses and Exhibits to this Agreement unless the context otherwise requires. All Exhibits attached hereto are made a part hereof and are incorporated herein by this reference. ARTICLE 2. THE COMPANY 2.1 Formation Under Act. The Members hereby associate themselves as members in a limited liability company under the Act, upon the terms and conditions contained in this Agreement. The Members hereby ratify and confirm the Certificate of Formation, and resolve that the same was duly authorized, executed, delivered and filed. The Manager shall, when required, file such amendments to, or restatements of, the Certificate of Formation, in 10 16 such public offices in the State of Delaware, the Cayman Islands, or elsewhere as the Manager deems advisable to give effect to the provisions of this Agreement and the Certificate of Formation, and to preserve the character of the Company as a limited liability company. 2.2 Statutory Compliance. The Company shall exist under and be governed by, and this Agreement shall be construed in accordance with, the applicable laws of the State of Delaware. In the event of any conflict between any provision of this Agreement and any provision of the Act, such provision of this Agreement shall control unless the contravention of such provision of the Act is expressly prohibited by the Act. Members shall execute and file such documents and instruments as may be necessary or appropriate in the sole discretion of the Manager with respect to the formation of, and the conduct of business by, the Company. 2.3 Name of Company. The Company will be conducted under the name "Strategic Value Investors International, LLC." 2.4 Purpose of Company. The purpose of the Company is to acquire, sell, dispose of, and invest in Investment Securities from the Cayman Islands and to engage in such other activities as are permitted hereby. The Company shall not engage in any other business or in any business within the United States. In connection with the foregoing, the Company may engage in all activities necessary, customary, convenient or incident to such purpose, upon the terms and subject to the conditions of this Agreement. 2.5 Principal and Registered Office; Service of Process. The principal office and principal place of business of the Company shall be: [insert Cayman Islands address] or such other place as the Manager may from time to time determine. The registered address of the Company in Delaware shall be: 1023 Centre Road, Wilmington, Delaware 19805. The registered agent of the Company at such address shall be Corporation Service Company. The registered agent shall mail a copy of any process against the Company served upon it to the Company at the address set forth above, and Manager shall deliver a copy of any such process received by the Company to each of the Members. The Manager may elect to change the Company's registered agent and the Company's registered and principal offices by complying with the relevant requirements of the Act. 2.6 Expenses of Consideration of Investment by Member. Each Member shall bear its own expenses in connection with its consideration of an investment in the Company and its acquisition of Interests therein, including the fees of any attorney, financial advisor, or other consultant utilized by such Member. 2.7 No Individual Authority. No Member acting alone shall have any authority to act for, or undertake, or assume any obligations or responsibility on behalf of the other Members or the Company. 2.8 No Member Responsible for Other's Commitments. No Member shall be responsible or liable for any obligation of any other Member hereunder, including the obligation of any Member to the Company to make any Capital Commitment hereunder. 11 17 ARTICLE 3. TERM 3.1 Term. The term of the Company commenced upon the filing of the Certificate of Formation in the office of the Delaware Secretary of State and shall continue until the fifth anniversary of the first call on any Capital Commitment unless earlier dissolved and terminated pursuant to Article 15. ARTICLE 4. MANAGEMENT OF THE COMPANY 4.1 The Investment Advisory Agreement. The Company has, contemporaneously herewith, entered into an Investment Advisory Agreement (the "Investment Advisory Agreement") with the Investment Advisor. The Investment Advisory Agreement may be terminated by a vote of a majority in Interest of the Members as provided in the Investment Advisory Agreement. Pursuant to the Investment Advisory Agreement, the Investment Advisor will serve as investment advisor to the Company, and will fulfill its responsibilities through PREI. 4.2 Management. The Manager will have general managerial authority over affairs of the Company including the right to approve investments for the Company, form, maintain, and manage, as necessary and appropriate, Redemption Vehicles, transfer Investment Securities thereto, cause the amendment of this Agreement and the Other Operating Agreements, determine whether to honor redemption requests in kind or in cash or in some combination thereof and coordinate the execution of the same, administer requests for redemptions and engage the services of the Investment Advisor pursuant to the Investment Advisory Agreement. The duties of the Manager shall include (i) communicating with Members (including the furnishing of financial reports), (ii) communicating with the general public, (iii) soliciting sales of interests in the Company, (iv) accepting the subscriptions of new Members, (v) maintaining the Company's principal corporate records and books of account, (vi) auditing the Company's books of account, (vii) disbursing payments of dividends, legal fees, accounting fees, and officers' salaries, if any, (viii) publishing or furnishing the offering and redemption price of the Interests issued by the Company, (ix) conducting meetings of the Company's Members, and (x) making redemptions of the Interests issued by the Company. Each Member agrees to be bound by any determination made by the Manager. No other Member shall have any power or authority to participate in the management of the Company or to bind or act on behalf of the Company, except as expressly authorized by this Agreement or as expressly required under the Act. Each Member will pay the Manager its share of an annual fee of $2,000 and its share of expenses incurred by the Manager in connection with the discharge of its duties hereunder. 12 18 4.3 Performance of Duties. (i) Standards. The Manager shall discharge its duties hereunder solely in the interests of the Members with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (the "Standard of Care"). The Manager shall be entitled to delegate such of its powers, authority and responsibilities under this Agreement as it may deem appropriate from time to time. (ii) Reliance on Others. In performing its duties, the Manager shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, of the following persons or groups unless they have knowledge concerning the matter in question that would cause such reliance to be unwarranted and provided that the Manager acts in good faith: (a) one or more employees or other agents of the Company or the Manager whom the Manager reasonably believes to be reliable and competent in the matters presented; or (b) any attorney, independent accountant, valuation consultant, or other person as to matters that the Manager reasonably believes to be within such person's professional or expert competence. 4.4 Activities in the United States. Activity in the United States of any officer, director or employee of the Manager or the Company acting in such capacities shall be limited to gathering, assessing and communicating information regarding the Company's investments and proposed opportunities for investment, approval or disapproval thereof, monitoring the Investment Advisor's activities on the Company's behalf under the Investment Advisory Agreement, and acts required to be performed under this Agreement. 4.5 Limited Liability. The Manager shall not be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the Company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a Manager of the Company. ARTICLE 5. FISCAL YEAR 5.1 Calendar Year. The fiscal year (the "Fiscal Year") of the Company shall be the calendar year, unless (subject to obtaining consent of the Internal Revenue Service) the Manager shall otherwise decide. 13 19 ARTICLE 6. MEMBERS 6.1 Liability. A Member shall not be personally liable for the debts, liabilities or obligations of the Company and shall have no obligation to make Capital Contributions in excess of its Capital Commitment (together with Disposition Proceeds that may be recalled during a Reinvestment Period), except to the extent required by the Act, Section 6.2 and Section 8.1(a)(iv). 6.2 Indemnification. (a) Except as otherwise required by law, the Manager and its Affiliates, directors, officers, employees, shareholders, assigns, representatives or agents shall not be liable, responsible or accountable in damages or otherwise to the Company or any Member for any loss, liability, damage, settlement cost, or other expense (including attorneys' fees) incurred by reason of any act or omission or any such alleged act or omission performed or omitted by such Person (including those in connection with serving on boards of directors for companies in the Company's portfolio) if such Person acted in a manner consistent with the Standard of Care. (b) To the fullest extent permitted by applicable law, the Investment Advisor, the Manager, PIMS, PREI, the Independent Reviewer and any of their respective officers, directors, agents, stockholders, partners, members, employees, other Affiliates, and any other Person who serves at the request of the Investment Advisor or the Manager on behalf of the Company (each such Person being an "Indemnitee") shall be held harmless and be indemnified by the Company for any liability, loss (including amounts paid in settlement), damages or expenses (including reasonable attorneys' fees and disbursements) incurred by such Indemnitee on behalf of the Company or in furtherance of the interests of the Company or otherwise arising out of, or in connection with, the Company; provided, that such Indemnitee acted in a manner consistent with the Standard of Care. (c) To the fullest extent permitted by law, expenses (including legal fees) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 6.2. (d) The individual indemnity obligation of each Member will be limited to the lesser of (i) the aggregate of: (x) such Member's Unfunded Commitments; (y) Distributions (including Distributions in redemption) previously made to such Member; and (z) the Member's Interest in the Company or (ii) such Member's Unfunded Commitment. The Manager shall not call capital for purpose of satisfying the foregoing obligations in an amount 14 20 in excess of the sum of such Investor's Unfunded Commitments and Distributions to such Investor that represent returns of capital. 6.3 Appointment of Manager as Attorney-In-Fact. Each Member irrevocably constitutes and appoints the Manager, and any replacement or substitute Manager, as such Member's true and lawful attorney-in-fact and agent, with full power and authority in such Member's name, place and stead, (a) to execute, acknowledge, deliver, file and record in the appropriate public offices all certificates or other instruments (including counterparts of this Agreement) that the Manager deems appropriate to continue the Company as a limited liability company in the jurisdiction in which the Company conducts business, including amendments to this Agreement necessary to correct scriveners' errors, from and after the date on which such Member becomes a Defaulting Member, all documents and instruments (including transfer and sale documents) that the Manager deems necessary to implement the rights and remedies set forth in Section 8.3, (b) to take all actions necessary and to execute and deliver all documents, certificates and other instruments (including Other Operating Agreements) in connection with the formation of Redemption Vehicles as described in Section 9.3 of this Agreement and the subsequent operation of such Redemption Vehicles and (c) to execute and deliver amendments to this Agreement and the Other Operating Agreements in accordance with their terms. 6.4 Survival of Appointment of Manager as Attorney-In-Fact. The appointment by all Members of the Manager as attorney-in-fact set forth in Section 6.3 shall be deemed to be a power coupled with an interest and with full power of substitution, in recognition of the fact that each of the Members will be relying upon the Manager to act as contemplated by this Agreement in any action by the Manager on behalf of the Company, and such power shall, to the extent permitted by law, survive the death, disability, incompetency, withdrawal, removal, bankruptcy or insolvency of any Person hereby giving such power and the transfer by a Member of all or part of its Interest. The foregoing power of attorney of a transferor Member shall survive such transfer only until such time as the transferee shall have been admitted to the Company as a Member and all required documents and instruments shall have been duly executed, filed and recorded to effect such substitution. Any Person dealing with the Company may conclusively presume and rely upon the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. ARTICLE 7. MEETINGS 7.1 Meetings. Meetings of Members shall be called from time to time by the Manager or one-third in-Interest of the Members. Any such meetings shall be held at the principal place of business of the Company. Members may participate in meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person at the meeting. 15 21 7.2 Quorum. Attendance by a majority in-Interest of the Members, represented in person or by proxy, shall constitute a quorum at any meeting of Members. In the absence of a quorum at any such meeting, a majority of the Interests so represented may adjourn the meeting from time to time for a period not to exceed sixty (60) days without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of Members whose absence would cause less than a quorum to be present. 7.3 Manner of Acting. If a quorum is present, the affirmative vote of a majority in-Interest of the Members shall be the act of the Members, unless the vote of a greater or lesser proportion or number is otherwise required by the Act or by this Agreement. Unless otherwise expressly provided in this Agreement or required under applicable law, Members who have an interest (economic or otherwise) in the outcome of any particular matter upon which Members vote or consent may vote or consent upon any such matter and their vote shall be counted in the determination of whether the requisite matter was approved by the Members. 7.4 Proxies. At all meetings of Members, a Member may vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Manager or before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. 7.5 Action by Members Without a Meeting. Action required or permitted to be taken at a meeting of Members may be taken without a meeting, without prior notice and without a vote if the action is evidenced by one or more written consents describing the action taken, signed by Members holding the requisite amount of Interests necessary to take such action and delivered to the Manager for inclusion in the minutes or for filing with the Company records. Action taken under this Section 7.5 is effective when all Members have signed the consent, unless the consent specifies a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent. 7.6 Waiver of Notice. When any notice is required to be given to any Member, a written waiver of notice signed by the Person entitled to such notice, whether before, at, or after the time stated in the notice, shall be equivalent to the giving of such notice. 16 22 ARTICLE 8. CAPITAL COMMITMENTS AND CONTRIBUTIONS OF THE MEMBERS 8.1 Calls on Capital Commitments. (a) Each Member shall make contributions to the capital of the Company by contributing amounts in installments, when and as called by the Manager, in accordance with this Agreement. (i) Subject to subparagraph (iv) below and the balance of this Section 8.1, the Manager may call for capital contributions from the Members by giving Members written notice (each a "Drawdown Notice"), setting forth (i) the aggregate amount drawn, (ii) each Member's share of such amount, (iii) the date on which such amounts are due (the "Drawdown Date"), which shall be at least 10 business days after the date of such Drawdown Notice, (iv) the account into which the funds drawn should be deposited and (v) with respect to each Member, such Member's total Capital Commitment, the amount drawn from such Member to date, and the amount remaining to be drawn from such Member immediately following such Drawdown Date. Notwithstanding the foregoing, at initial closing, the Manager shall not be required to provide 10 Business Days' notice but will provide notice as far in advance of the initial closing as possible. (ii) Each Member shall be obligated to deliver to the account so designated in immediately available funds such Member's share of the amount drawn prior to 10:00 a.m. (New York time) on the Drawdown Date. (iii) Any Member who fails to fund such Member's share of a draw in conformity herewith shall be a "Defaulting Member" within the meaning of Section 8.3 of this Agreement. (iv) The Manager may call for capital only (y) in connection with the proposed acquisition of Investment Securities, and the payment of related Expenses, which draw must be made either (I) against Unfunded Commitments or, (II) during a Reinvestment Period, in an aggregate amount not in excess of Disposition Proceeds (net of deductions for expenses) previously distributed by the Company to the Members, or (z) pursuant to and in conformity with Section 6.2 of this Agreement or Section 10 of the Investment Advisory Agreement. Notwithstanding the foregoing, all amounts contributed to the Company at a Subsequent Closing and distributed to the existing Members admitted to the Company prior to such Subsequent Closing may be drawn down from such Members at any time during the Commitment Period. (b) The Manager shall call against Capital Commitments ratably in proportion to Commitments in an aggregate amount sufficient to acquire the Investment 17 23 Securities and to pay related costs and expenses including costs and expenses of the Independent Reviewer. 8.2 Allocation of Investment Securities Acquired. Each of the Investment Securities acquired by the Company shall be allocated on the books of the Company to the Members in proportion to their relative Capital Contributions with respect to such Investment Securities. 8.3 Defaults. If a Member (a "Defaulting Member") fails to pay when due (a) any installment of its Capital Commitment and such failure continues for ten days after written notice thereof from the Company (the "Notice of Default") or (b) any fees it is required to pay pursuant to the Investment Advisory Agreement and such failure continues for 30 days after an invoice therefor, the Company may, in its sole discretion and in addition to any other legal and equitable remedies the Company may have: (i) reduce the Capital Commitment of the Defaulting Member by all or a portion of the sums so unpaid; (ii) commence legal proceedings against the Defaulting Member to collect any sums due and unpaid plus any collection expenses, including court costs and reasonable attorneys' fees and disbursements; (iii) cancel without consideration, 20% of any Interests held by the Defaulting Member and its Affiliates; and/or (iv) determine that the Defaulting Member shall forfeit to the nondefaulting Members all distributions except to the extent a distribution represents a return of a capital call made by the Defaulting Member. 8.4 Subsequent Fund Closings. On each Subsequent Closing held pursuant to Section 3(e) of the Investment Advisory Agreement, the Company may admit additional Members to the Company or may permit Members to increase their Capital Commitments to the Company. At each Subsequent Closing, each additional Member will purchase Interests by contributing to the Company an amount determined by the Investment Advisor based on the value of the Investment Securities then held by the Company and as determined in accordance with Section 3(f) of the Investment Advisory Agreement. Each additional Member shall also contribute to the Company an amount equal to its portion of costs and expenses paid by the Company prior to the date of such Subsequent Closing, together with interest on such costs and expenses at a rate equal to Base Rate. The amount contributed to the Company at any Subsequent Closing will be distributed to the Members admitted to the Company prior to such Subsequent Closing ratably in proportion to their Capital Commitments; provided that the Investment Advisor may direct a portion of such amounts to instead be paid to SVI-U.S. in order to equitably allocate costs and expenses of SVI-U.S. and the Company. All amounts so distributed may be recalled by the Manager during the Commitment Period pursuant to Section 8.1(a) of this Agreement. Each Member purchasing Interests on a Subsequent Closing Date will agree to be bound by the terms of this Agreement and to execute a counterpart to this Agreement in the form of Exhibit A attached hereto. 8.5 Portfolio Manager. If at any time Bernard Winograd ceases to be a portfolio manager for the Fund, the Members shall have no further obligations to contribute capital to the Company for the purpose of purchasing Investment Securities and the Company shall have no further right to purchase Investment Securities, except, in each case, for the 18 24 purchase of Investment Securities that are subject to commitment letters or other documentation at such time. ARTICLE 9. REDEMPTIONS 9.1 Generally. Members may request redemptions with respect to all, but not less than all, of their Allocated Percentages of any Public Investment Security by complying with the notice requirements of Section 9.2. Subject to Section 9.6, the Manager will respond to any redemption request with respect to Public Investment Securities by causing a Redemption Vehicle to distribute to such Member (i) the pertinent Member's Allocated Percentage thereof in kind, (ii) the value, in cash, determined as set forth in Section 3(f) of the Investment Advisory Agreement, of such Member's Allocated Percentage of such Public Investment Securities, or (iii) some combination of (i) and (ii) above. The pertinent Redemption Vehicle shall honor all redemption requests with respect to a particular Investment Security ratably and with the same consideration. 9.2 Notices -- Preliminary and Final. Redemptions may be requested, on March 15 and September 15 of each year (each an "Initial Redemption Request Date"), in accordance with the following procedures: (a) A Member who wishes to request a redemption should send a notice to such effect to the Manager within 30 days prior to the applicable Initial Redemption Request Date. The notice must be received on or before the relevant Initial Redemption Request Date and must specify (a) one or more securities with respect to which redemption is sought (any such security, an "Identified Investment Security") and (b) if the Manager determines to form a Redemption Vehicle which will make a cash payment, whether the Member wishes to receive its redemption proceeds by wire transfer to an identified account of the Member at any domestic commercial bank that is a member of the Federal Reserve System, or by check. (b) Within 10 business days after the applicable Initial Redemption Request Date, the Manager shall forward to each Member a notice (the "Preliminary Action Notice") setting forth (i) each redemption request received (including the identity of investors in the Fund requesting a redemption), (ii) a description of any changes in the rights associated with the pertinent Investment Securities as a result of the redemption, (iii) whether the Investment Advisor has preliminarily elected to effect redemptions pursuant thereto in cash or in kind and (iv) if the redemption may be effected in cash, to the extent available, a description of any Line of Credit to be utilized and an explanation of the rationale for leveraging the Investment Securities. Each Member shall have an opportunity to re-evaluate its redemption request or its failure to request a redemption in light of the initial proposed action specified in the Preliminary Action Notice. Not later than five (5) Business Days after the date of the Preliminary Action Notice (such date the "Final Redemption Request Date"), each Member that wishes to 19 25 cancel or modify its redemption request and each Member that failed to submit a redemption request must notify the Manager by sending a new or modified redemption request (a "Final Redemption Request") specifying the Investment Securities with respect to which such Member has finally decided to request redemption, and containing the other information required to be contained in the redemption request made on or before the Initial Redemption Request Date. If a Final Redemption Request in proper form is not received from an Member on or before the Final Redemption Request Date, such Member shall be deemed to have made its request as set forth in the request made on or before the Initial Redemption Request Date or, if no such request had been made, to waive its right to redeem during the period in question. (c) Within five (5) Business Days after the Final Redemption Request Date, the Manager shall determine, in its sole discretion, how to best satisfy the redemption requests, and will forward a notice to each Member (the "Final Action Notice") advising as to such action and as to the approximate date on which distributions or payments are intended to be made (the "Final Redemption Date"). Such action may be different than as stated in the Preliminary Action Notice. 9.3 Redemption Vehicles. Whenever a redemption is to be effectuated with respect to Public Investment Securities held by the Company, the Manager shall form a new entity (a "Redemption Vehicle") for the purpose of holding, for the account of the nonredeeming Members, the Identified Investment Securities that are not to be distributed to Members in connection with such redemption. Each Redemption Vehicle shall be a limited liability company governed by an operating agreement (each, an "Other Operating Agreement") with terms substantially the same as those of the Operating Agreement (except as otherwise specified herein or as relates to closings and other matters not relevant to such Redemption Vehicle or not required to be reiterated in such Other Operating Agreement). Each Redemption Vehicle shall become a party to the Investment Advisory Agreement. No Redemption Vehicle shall hold securities of more than one issuer or affiliate group of issuers. The Manager shall form the relevant Redemption Vehicle and contribute the pertinent Identified Investment Securities to such Redemption Vehicle. The Company shall distribute interests in the Redemption Vehicle to Members in proportion to their Allocated Percentages in such Identified Investment Securities; and the Redemption Vehicle will make the redemptions specified in the Final Action Notice in cash, in kind, or in combination, as so specified. If any redemption is to be made in cash, the pertinent Redemption Vehicle shall borrow the cash as described in Section 9.5 at any time after the Members have been distributed their respective interests in the Redemption Vehicle. 9.4 Subsequent Redemptions by Redemption Vehicles. In the case of a Final Action Notice that specifies that a redemption will be made with respect to an Identified Investment Security held by a Redemption Vehicle, the operating agreement of the Redemption Vehicle in question will provide for the redemptions specified in such Final Action Notice, in cash, in kind, or in combination, as so specified. 20 26 9.5 Line of Credit. (a) Any Redemption Vehicle that is to make a redemption in cash shall obtain a line of credit (the "Line of Credit") to provide funds for such redemption. Such Line of Credit shall be from a lender unaffiliated with Prudential, and shall be on such terms as the Manager deems appropriate under the circumstances. If necessary, the Manager may cause the Company to pledge its interests in REIT Shares to a lender under a Line of Credit to secure a loan commitment related to such Line of Credit. No Redemption Vehicle shall borrow in excess of 50% of the value of its assets as of the date of the borrowing. The Manager shall take appropriate steps it deems necessary (including selling a portion of the pertinent Investment Securities and repaying all or a portion of such indebtedness) so that the indebtedness incurred pursuant to the Line of Credit obtained by a Redemption Vehicle is maintained at a level that does not exceed 50% of the value of the assets of such Redemption Vehicle; provided that the Manager shall not be required to take such steps if such ratio is not met due to temporary market fluctuations. (b) The Redemption Vehicle may secure the Line of Credit in whole or part with the Investment Securities and cash held by the Redemption Vehicle borrowing thereunder. (c) Expenses related to the Line of Credit and debt service on amounts borrowed thereunder shall be expenses of the pertinent Redemption Vehicle, and shall be payable out of the proceeds from the sale of Investment Securities held by the Redemption Vehicle or dividends or other Distributions payable in respect of such Investment Securities. 9.6 Limitations on Redemptions. The Manager may deny any redemption request if the Manager determines in its reasonable discretion that making a redemption pursuant thereto may have material adverse tax or regulatory consequences for Members. ARTICLE 10. SALES ELECTION 10.1 Generally. If the Company or any Redemption Vehicle determines to sell or transfer any Investment Security other than a sale or transfer (i) to a Redemption Vehicle or (ii) to pay debt service in respect of a borrowing by a Redemption Vehicle, each Member may elect instead to receive a distribution in kind of its Allocated Percentage of such Investment Security (a "Sales Election"). 10.2 Notice to Member; Election. The Manager shall notify each Member in writing of the decision to sell or transfer a specified Investment Security, and shall include in such notification the Investment Advisor's best estimate of the approximate price to be received 21 27 and the anticipated timing of the proposed sale or series of sales. No later than five Business Days from the date of each such notice (such fifth day, the "Sales Election Deadline"), each Member shall have the right to elect in writing to receive its Allocated Percentage of the Investment Securities in question. The actual price and timing of sales may vary from the estimates as set forth in its notice to Members. No such variance shall require the Manager to make an additional notice or give rise to any further election by Members with respect to the Investment Securities in question. 10.3 Distribution. Simultaneous with the consummation of the sale of the specified Investment Securities, the Company shall distribute to each Member making a Sales Election, such Member's ratable share of the amount sold of such Investment Securities. For all purposes of this Agreement and the Investment Advisory Agreement, such distribution shall be deemed to be a distribution of the value, determined by reference to the sale of the specified Investment Securities, of the Investment Securities distributed. 10.4 Holdback. No Member shall sell, transfer or otherwise dispose of any portion of its interest in any Investment Security received pursuant to a Sales Election or any other security of the issuer of such Investment Security held by such Investor until the earlier of (i) 6 months after the Sales Election Deadline or (ii) the date on which the pertinent Redemption Vehicle has sold, transferred or otherwise disposed of all of its interest in such Investment Securities. ARTICLE 11. ALLOCATIONS AND DISTRIBUTIONS 11.1 Distributions. (a) The Manager may, in its sole discretion, make Distributions of cash, property or securities of the Company to the Members at any time and from time to time. (b) Distributions of Disposition Proceeds and Portfolio Income in respect of Investment Securities acquired by the Company, net of any expenses attributable thereto, shall be made to the Members to whom such Investment Securities have been allocated by the Company pursuant to Section 8.2. (c) Amounts distributed to a Member may be withheld until any federal, state or foreign withholding obligations of the Company with respect to such Member are satisfied. Any amount withheld under this Section 11.1(c) shall be treated as having been distributed to the Member to whom such withholding applies. (d) Amounts distributed to a Member may be withheld to pay Investment Advisor Fees or Performance Fees then due by such Investor. Any amount withheld 22 28 under this Section 11.1(d) shall be treated as having been distributed to the Member from whom such Investment Advisor Fees or Performance Fees were due. (e) Amounts distributed to a Member may be withheld to pay such Member's Allocated Percentage of any capital call made by the Manager in accordance with this Agreement that is then pending. Any amount withheld under this Section 11.1(e) shall be treated as having been distributed to the pertinent Member and recontributed by such Member in response to the pertinent capital call. (f) The Manager shall deposit dividends received on Investment Securities and proceeds received by the Company from the sale of Investment Securities (other than proceeds from sales in connection with repayments of indebtedness of Redemption Vehicles)(such proceeds, "Investment Proceeds") into one or more accounts maintained in the Cayman Islands for the Company ("Collection Accounts") or invest such amounts in short-term, investment grade securities. The Manager shall, in sole discretion, withdraw and apply such amounts in payment of the Expenses of the Company or hold such amounts in the Collection Account in order to create reserves for anticipated costs and expenses of the Company. 11.2 Allocations. (a) In General. Subject to paragraph (b) below, all Profits and Losses of the Company shall be allocated to the Capital Accounts of the Members as follows: (i) Each item of income, gain, deduction or loss of the Company attributable to an Investment Security of the Company (including, without limitation, all Portfolio Income received with respect to such Investment Security and all expenses attributable to the acquisition or disposition of such Investment Security) shall be allocated to the Capital Account of the Member to whom such Investment Security is allocated on the books of the Company under Section 8.2. (ii) All other income, gain, deduction or loss of the Company shall be allocated to the Capital Accounts of the Members in proportion to their respective Capital Commitments. (b) Regulatory Allocations. (i) If there is a Net Decrease in Company Minimum Gain during any fiscal year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member's Share of the Net Decrease in Company Minimum Gain. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This clause (i) is intended to comply with the "minimum gain chargeback" 23 29 requirements of Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (ii) If there is a Net Decrease in Member Nonrecourse Debt Minimum Gain during any fiscal year attributable to a Member Nonrecourse Debt, each Member with a share of Member Nonrecourse Debt Minimum Gain attributable to such debt at the beginning of such year shall be specially allocated items of income and gain for such year (and, if necessary, for subsequent years) in an amount equal to such Member's Share of the Net Decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2)(i). This clause (ii) is intended to comply with the "partner minimum gain chargeback" requirements of Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (iii) If any Member unexpectedly receives any adjustment, allocation or distribution described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) which results in an Adjusted Capital Account Deficit for the Member, such Member shall be allocated items of income and book gain in an amount and manner sufficient to eliminate such Adjusted Capital Account Deficit as quickly as possible; provided, that an allocation pursuant to this clause (iii) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided in this Section 11.2(b) have been tentatively made as if this clause (iii) were not in this Agreement. This clause (iii) is intended to constitute a "qualified income offset" as provided by Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. (iv) Member Nonrecourse Deductions shall be allocated among the Members who bear the "economic risk of loss" with respect to the Member Nonrecourse Debt resulting in such Member Nonrecourse Deductions. This clause (iv) is to be interpreted in a manner consistent with the requirements of Treasury Regulations Section 1.704-2(b)(4) and (i)(1). (v) The allocations set forth in this paragraph (b) (the "Regulatory Allocations") are intended to comply with certain requirements of the applicable Treasury Regulations promulgated under Code Section 704(b). Notwithstanding any other provision of this Section 11.2, the Regulatory Allocations shall be taken into account in allocating other operating Profits, Losses and other items of income, gain, loss and deduction to the Members for Capital Account purposes so that, to the extent possible, the net amount of such allocations of Profits, Losses and other items shall be equal to the amount that would have been allocated to each Member if the Regulatory Allocations had not occurred. 24 30 11.3 Allocation of Tax Items for Federal and State and Local Tax Purposes. (i) Subject to Sections 1.704-1(b)(4)(i) and 1.704-1(b)(2)(iv)(m) of the Treasury Regulations and the remaining paragraphs of this Section 11.3, allocations of income, gain, loss, deduction and credit for federal, state and local tax purposes shall be allocated to the Members in the same manner and amounts as the book items corresponding to such tax items are allocated for Capital Account purposes. (ii) Notwithstanding paragraph (a) hereof, any increase or decrease in the amount of any items of income, gain, loss, deduction or credit for tax purposes attributable to an adjustment to the basis of Company assets made pursuant to a valid election or deemed election under Sections 732(d), 734, 743, and 754 of the Code, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment, shall be allocated to those Members entitled thereto under such law. Such items shall be excluded in determining the Capital Accounts of the Members, except as otherwise provided by Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations. (iii) For purposes of determination of the Members' share of the excess Nonrecourse Liabilities of the Company for purposes of Section 1.752-3(a)(3) of the Treasury Regulations, each such liability attributable to an Investment Security of the Company (as determined by the Tax Matters Partner) shall be allocated to the Member to whom such Investment Security has been allocated under Section 8.2 hereof, and any other such liability shall be allocated to the Members' in proportion to their respective Unrecovered Capital. (iv) If the Company owns or acquires Section 704(c) Property, or if the value of the assets of the Company are adjusted as described in the definition of "Gross Asset Value" herein, then, solely for tax purposes and not for Capital Account purposes, tax depreciation, and any gain or loss, attributable to such Section 704(c) Property shall be allocated between or among the Members in a manner that takes into account the variation between such value and such adjusted tax basis, in accordance with the principles of Code Section 704(c) and the "traditional method with curative allocations" as set forth in Treasury Regulations Section 1.704-3(b). ARTICLE 12. ASSIGNMENT; RESTRICTIONS ON TRANSFER OF INTERESTS 12.1 Transfers. The Members, or any assignee or successor in interest of the Members, may only transfer their applicable Interests in the Company, or in any part thereof, as provided in this Article 12. Interests may not be Transferred without the prior written consent of the Manager. Further, such consent will be withheld if such Transfer: (a) is not as permitted under the Securities Act, and applicable state or foreign securities laws, pursuant to 25 31 registration or an exemption therefrom; (b) would cause the number of security holders in the Company to exceed 100 persons, as determined pursuant to the Investment Company Act; (c) would, if taken together with all Interests previously Transferred, result in a Transfer of more than 79% of the Interests in the Company; or (d) would result in the Company being a publicly traded partnership within the meaning of Section 7704 of the Code and the related Treasury Regulations. The Manager's consent to any transfer, sale or assignment of any Interests prior to the date all Capital Commitments have been drawn may also be conditioned on the Manager's satisfaction with the creditworthiness of the proposed transferee or upon the posting of security for any unpaid installments of the transferor's Capital Commitment and any other sums owing. Any such transferee shall be required to execute a certificate or questionnaire in form and substance satisfactory to the Manager. 12.2 Assumption by Assignee. Any assignment of an Interest in the Company permitted under this Article 12 shall be in writing, and shall be an assignment and Transfer of all of the assignor's rights and obligations hereunder, and the assignee shall expressly agree in writing to be bound by all of the terms of this Agreement and assume and agree to perform all of the assignor's agreements and obligations existing or arising at the time of and subsequent to such assignment. Upon any such permitted assignment of the assignor's Interest, and after such assumption, the assignor shall be relieved of its agreements and obligations hereunder arising after such assignment and the assignee shall become a Member in place of the assignor. It shall be a condition precedent to any transfer of any Interest permitted under this Article 12 that all sums due and owing by the transferor that remain unpaid are paid and that the transferee shall have executed and delivered to the Manager an agreement in form and substance satisfactory to it to the effect that the transferee agrees to be bound by all of the terms and conditions of this Agreement, and that the transferee is acquiring an interest in the Company subject hereto. The assignee shall pay all expenses incurred by the Company in admitting the assignee as a Member. 12.3 Other Assignments Void. (a) Except as otherwise provided in this Article 12, no other Transfer by a Member of its Interest in the Company shall be permitted. Any purported Transfer of an interest in the Company not otherwise permitted by this Article 12 shall be null and void and of no effect whatsoever. ARTICLE 13. INDEPENDENT REVIEWER 13.1 Independent Reviewer. The Company will not undertake any transaction to acquire Investment Securities unless the Independent Reviewer has issued a fairness opinion with respect to the terms and conditions of the proposed investment. It is not contemplated that the Independent Reviewer will have a role with respect to any Investment Securities after the same have been acquired. The Independent Reviewer will be independent of, and unaffiliated with, the Manager, the Investment Advisor, PREI and Prudential and will have significant 26 32 experience in the valuation, acquisition and trading of equity securities, including securities similar to the Investment Securities. 13.2 Initial Independent Reviewer. The initial Independent Reviewer will be Houlihan, Lokey, Howard & Zukin Financial Advisors Inc. If the initial Independent Reviewer ceases to be the Independent Reviewer or is unable (as a result of a conflicts of interest or otherwise) to act with respect to any proposed investment, the Investment Advisor will select a replacement or substitute Independent Reviewer, as the case may be. Any replacement or substitute Independent Reviewer must be approved by Members, but will be deemed approved unless one-third in-Interest of the Members object in writing to the proposed replacement or substitute within 15 days after notice with respect thereto is sent to Members. ARTICLE 14. BOOKS AND RECORDS, REPORTS, TAXES, ETC. 14.1 Books; Reports. (a) The books and records of the Company shall be maintained, and reports shall be provided to the Members by the Manager. The books and records of the Company shall be kept according to the accrual method of accounting, and shall be audited as of the end of each Fiscal Year by a firm of independent certified public accountants of national recognition and standing selected by the Manager. Within 60 days after the end of each Fiscal Year, the Manager shall cause to be prepared and mailed to the Members a report of such accountants, setting forth as at the end of such Fiscal Year: (i) a balance sheet of the Company; (ii) a statement of the net income or net loss for such year and such Member's share thereof; (iii) a statement of cash flow; (iv) a statement of such Member's account; and (v) the amount of such Member's share in the Company's taxable income or loss for each year, in the form required by the Code and applicable regulations and in sufficient detail to enable it to timely prepare its federal, state and other tax returns; In addition, concurrently with the report of such accountants, the Manager shall cause to be mailed to the Members, if not already contained in such report to be provided to the Members by such accountants, a report containing a statement of any fees received by the Investment Advisor or any of its Affiliates in connection with the Company's activity. 27 33 The Manager shall also cause to be delivered to any Member upon request such other information as shall be needed by such Member in order to enable it to timely file any of its tax returns and will also from time to time furnish such other information as any Member may reasonably request for the purpose of enabling it to timely comply with any reporting or filing requirements imposed or permitted by any statute, rule, regulation or otherwise by any governmental agency or authority, or to furnish to, or otherwise be used in connection with its relationship with, any regulatory authority. (b) Within 45 days after the end of each of the first three fiscal quarters in each Fiscal Year, the Manager shall cause to be prepared and mailed to each Member a report of the Manager setting forth the (unaudited) information described in Section 14.1(a)(i)-(v) and a report containing a statement of fees received by the Investment Advisor or any of its Affiliates in connection with the Fund's activities. 14.2 Where Maintained. The books, accounts and records of the Company shall be at all times maintained at its principal office. 14.3 Tax Returns. The Company shall be treated and shall file its tax returns as a partnership for federal, state, municipal and other governmental income tax and other tax purposes. The Manager shall prepare or cause to be prepared, on an accrual basis, all federal, state and municipal partnership tax returns required to be filed. Such tax returns shall be prepared by the Accountants, who shall sign such returns as preparers. 14.4 Section 754 Election. Subject to Section 18.9, at the request of a Member, the Company shall make and file a timely election under Section 754 of the Code (and a corresponding election under applicable state or local law) in the event of a transfer of an interest in the Company permitted hereunder. Any adjustment resulting from such an election shall be reflected on the books of the Company and in the Allocated Percentage of the Members in accordance with Treasury Regulation Section 1.,704-1(b)(2)(iv)(m). Any Member or transferee first requesting an election hereunder shall reimburse to the Company the reasonable out-of-pocket expenses incurred by the Company in connection with such election including, without limitation, any legal or accountants' fees; thereafter, each transferee shall reimburse such expenses with respect to adjustments under Section 743 of the Code in the proportion which the interest of each transferee bears to the sum of the interests of all transferees; the Company shall bear the expenses of any adjustments under Section 734 of the Code. 28 34 ARTICLE 15. DISSOLUTION 15.1 Dissolution. The Company shall dissolve and commence winding up and liquidating upon the first to occur of the following ("Dissolution Events"): (a) The fifth (5th) anniversary of the date of the first call on any Capital Commitment; (b) The sale or distribution of all or substantially all of the Company's assets; (c) The unanimous written agreement of all Members to dissolve, wind up, and liquidate the Company; (d) The Bankruptcy of a Member, unless Members (other than the Member subject to such Dissolution Event) both holding a majority in Interest of the Members and whose Capital Account balances exceed fifty percent (50%) of the aggregate Capital Account balances of all such Members (the "Remaining Members") consent within one hundred twenty (120) days of the Dissolution Event to the continuation of the business of the Company. If the Remaining Members consent to the continuation of the business of the Company, the Member whose actions or conduct resulted in such Dissolution Event ("Former Member") shall remain a Member of the Company and any successor-in-interest or assignee, voluntary or involuntary, of such Member shall have only rights to allocations and distributions pursuant to Article 11; and (e) The happening of any other event that makes it unlawful or impossible to carry on the business of the Company. The Members hereby agree that the Company shall not dissolve prior to the occurrence of a Dissolution Event. 15.2 Procedures. (a) Liquidation. If the Company is dissolved, the Members shall appoint a liquidator, who shall be the Manager, unless the Manager has been removed (the "Liquidator") and the Liquidator shall cause the winding up of the affairs of the Company and the liquidation of its assets as promptly as is consistent with obtaining the fair value thereof. (b) Liquidating Distributions. Following the payment of, or provision for, all debts and liabilities of the Company and all expenses of liquidation, and subject to the right of the person winding up the Company's affairs to set up such cash reserves as reasonably necessary for any contingent or unforeseen liabilities or obligations of the Company, the proceeds of the liquidation will be distributed in cash (or, in the case of Investment Securities 29 35 that have not been sold or transferred, distributed in kind) to the Members in accordance with their respective positive Capital Account balances, after crediting or changing all amounts required to be credited or changed thereto under this terms of this Agreement. (c) No Recourse. Each Member will look solely to the assets of the Company for all Distributions with respect to the Company, such Member's Capital Contributions thereto and its share of profits or losses, and will have no recourse therefor (upon dissolution of the Company or otherwise) against the Liquidator, the Manager or any Member. 15.3 Certificate of Cancellation. Upon the completion of the winding up of the affairs of the Company, the Manager shall cause to be filed in the office of the Delaware Secretary of State a certificate of cancellation. 15.4 No Action for Dissolution. Except as expressly permitted in this Agreement, a Member shall not take any voluntary action that directly causes a dissolution of the Company. ARTICLE 16. REMOVAL OF MANAGER 16.1 Unless otherwise expressly provided herein, the Manager shall not be removed except (a) by the vote of a majority in Interest of the Members or (b) if the Investment Advisory Agreement has been terminated. ARTICLE 17. NOTICES 17.1 In Writing; Address. Unless otherwise expressly provided herein, all notices, requests, demands and other communications required or permitted under this Agreement shall (a) be in writing (including by telecopy), (b) shall be given to the Company at the address set forth below or, in the case of the Members, at the address set forth on the signature pages hereof, and (c) shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, or, in the case of telecopy notice, when received in legible form. 30 36 All notices to the Manager or the Company shall be addressed as follows: Strategic Value Investors International Ltd. c/o Coutts (Cayman) Limited Coutts House P.O. Box 707 Grand Cayman, B.W.I. Attention: Andrew Galloway Fax No.: (345) 945-4799 with a copy to: Prudential Real Estate Investors 8 Campus Drive, 4th Floor Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Fax No.: (973) 683-1794 and to: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attention: Jacqueline A. Weiss, Esq. Fax No.: (212) 326-2061 Any party may alter the address or telecopy number to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 17.1 for the giving of notice. ARTICLE 18. MISCELLANEOUS 18.1 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without regard to its conflict of law principles. 18.2 Entire Agreement. This instrument contains all of the understandings and agreements of whatsoever kind and nature existing between the parties hereto with respect to this Agreement and the rights, interests, understandings, agreements and obligations of the respective parties pertaining to the Company. 31 37 18.3 Headings. The descriptive headings of the Articles, Sections and subsections of this Agreement are for convenience only and do not constitute a part of this Agreement. 18.4 Parties in Interest. This Agreement shall be binding upon and inure to the benefit of each party and their respective permitted successors and assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement, except that the Investors shall be third party beneficiaries hereof. 18.5 Confidentiality. The terms and provisions of this Agreement shall be kept confidential and shall not, without the Investment Advisor's prior written consent (which shall not be unreasonably withheld), be disclosed by a Member or by a Member's agents, managers, members, representatives and employees to any person or entity (other than an Affiliate of such Member) that this Agreement has been signed and exists. No publicity, media communications, press releases or other public announcements concerning this Agreement or the transactions contemplated hereby shall be issued or made by any Member without the prior written consent of the Manager, which consent shall not be unreasonably withheld. Each Member will maintain the confidentiality of information that is, to the knowledge of such Member, non-public information furnished by the Manager or any Member regarding the Company and the Investment Advisor (including information regarding any REIT) in which the Company holds, or contemplates acquiring or disposing of, any Investment Securities received by such Member pursuant to this Agreement in accordance with such procedures as it applies generally to information of this kind (including procedures relating to information sharing with Affiliates), except (a) as otherwise required by governmental regulatory agencies, self-regulating bodies, law, legal process, or litigation in which such Member is a defendant, plaintiff or other named party or (b) to directors, employees, representatives and advisors of such Member and its Affiliates who need to know the information and who are informed of the confidential nature of the information. 18.6 Amendments; Waivers. This Agreement may be amended only by agreement in writing of a majority in-Interest of the Members; provided that any amendment that materially adversely affects the Members shall require the approval of at least two-thirds in-Interest of Members and provided, further, that no such amendment shall be effective if the Investment Advisor reasonably determines that such amendment could reasonably be expected to materially and adversely affect the Fund taken as a whole. Except as otherwise provided herein, no waiver of any provision nor consent to any exception to the terms of this Agreement shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof, nor shall any single or partial exercise preclude any further or other exercise of such or any other right. 18.7 Severability. If any provision of this Agreement is determined to be 32 38 invalid, illegal or unenforceable by any court of competent jurisdiction or other governmental entity, the remaining provisions of this Agreement to the extent permitted by law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for all parties remain valid, binding and enforceable; provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by law, the parties hereby to the same extent waive any provision of law that renders any provision hereof prohibited or unenforceable in any respect. 18.8 Consent to Jurisdiction and Litigation. All litigation relating to or arising under or in connection with this Agreement shall be brought only in the federal or state courts of competent jurisdiction located in the State and County of New York, which shall have exclusive jurisdiction to resolve any disputes with respect to this Agreement. By execution and delivery of this Agreement, each party hereto irrevocably and unconditionally consents to the jurisdiction of such courts of any actions, suits or proceedings arising out of or relating to this Agreement. The parties hereto irrevocably waive any obligation of the laying of venue or based on the grounds of forum non conveniens that it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction. No party hereto shall be entitled to immunity whatsoever, whether characterized as sovereign immunity or otherwise, from any legal proceedings to enforce the obligations hereunder. Subject to Section 6.2, in the event of any breach of the provisions of this Agreement, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. 18.9 Partnership Tax Treatment; Tax Matters Partner. The Members intend for the Company to be treated as a partnership for U.S. federal income tax purposes and no election to the contrary shall be made. The Manager shall function as the "Tax Matters Partner" pursuant to Section 6231(a)(7) of the Code, and shall have the exclusive authority and discretion to make any elections required or permitted to be made by the Company under the Code or any other tax laws. Contemporaneously herewith, the Manager shall execute a power of attorney authorizing the Investment Advisor to act on its behalf as Tax Matters Partner. 18.10 Conflicts; Waiver. The Investment Advisor, the Manager and their Affiliates or associates or any of their legal, financial or other advisors shall in no way be prohibited from, and intend to, spend substantial time in connection with other businesses or activities, including, managing investments, advising or managing entities whose investment objectives are the same as or overlap with those of the Company, participating in actual or potential investments of the Company, providing consulting, merger and acquisition, structuring or financial advisory services, including with respect to actual, contemplated or potential investments of the Company, or acting as a director, officer or creditors' committee member of, adviser to, or participant in, any corporation, partnership, trust or other business entity. The Investment Advisor, the Manager and their Affiliates or associates or any of their legal, financial or other advisors may, and expect to, receive fees or other compensation from third parties for 33 39 such activities, which fees will be for the benefit of their own account and not the Company. Such fees may relate to actual, contemplated or potential investments of the Company and may be payable by entities in which the Company directly or indirectly, has invested or contemplates investing. Each Member waives any and all rights of any nature whatsoever that any such Person may have to object to or participate in any such activity. 18.11 Counterparts. This Agreement may be executed in any number of counterparts by facsimile or other written form of communication, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 18.12 Waiver of Jury Trial. EACH PARTY HERETO, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. [Remainder of This Page Intentionally Left Blank] 34 40 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the day and year first above written. STRATEGIC VALUE INVESTORS INTERNATIONAL LTD., as Manager By: /s/ TERENCE McHUGH ----------------------------------- Name: Terence McHugh ----------------------------- Title: Vice President ---------------------------- S-1 41 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the day and year first above written. __________________________ By: __________________________________ Name: ____________________________ Title: ___________________________ Notice Address: __________________________________ __________________________________ __________________________________ __________________________________ __________________________________ S-2 EX-99.VII 8 INVESTMENT ADVISORY AGREEMENT (SVI INTERNATIONAL) 1 EXHIBIT VII INVESTMENT ADVISORY AGREEMENT Dated as of October 2, 1997 by and among STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC, THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, STRATEGIC VALUE INVESTORS INTERNATIONAL LTD., and THE PRUDENTIAL INVESTMENT CORPORATION 2 INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT dated as of October 2, 1997 (this "Agreement"), is made by and among STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC, a Delaware limited liability company ("SVI-International" and, together with Prudential Co-Investor (as defined below) and any entities that become parties hereto after the date hereof as described in Article 9 of the Operating Agreement, the "International Fund Entities"), THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, (together with its successors and assigns, "Prudential Co-Investor"), STRATEGIC VALUE INVESTORS INTERNATIONAL LTD., a Cayman Islands company (the "Manager"), and THE PRUDENTIAL INVESTMENT CORPORATION, a New Jersey corporation (the "Investment Advisor"), and a wholly owned subsidiary of The Prudential Insurance Company of America ("Prudential"). Each Person committing capital to any International Fund Entity (each, an "Investor") will sign an annex to this Agreement ("Annex Number 1") confirming such Investor's understanding and obligations with regard to the matters set forth herein and therein. SECTION 1. Definitions. As used in this Agreement, the following definitions shall apply, unless the context requires otherwise: "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a specified Person. "Agreement" is defined in the preamble. "Allocated Percentage" means, with respect to any Investor, the percentage of any Investment Security allocated to such Investor on the books of any International Fund Entity. "Base Rate" means, at any date, the prime rate then in effect for The Chase Manhattan Bank (or, if unavailable, another major money center bank selected by the Investment Advisor), plus 2% per annum. "Capital Commitment" means, with respect to any Investor, such Investor's capital commitment to SVI-International. "Closing" means a closing of SVI-International. 3 "Code" means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated thereunder. "Contributed Capital" means, with respect to any Investor at any date, (1) the aggregate amount of such Investor's Capital Commitment that has been called and delivered by the Investor, less (2) the sum of (A) the amount of such Investor's capital contributions returned to the Investor and (B) such Investor's Allocated Percentage of any realized losses of the International Fund Entities. "Distributions" is defined in the Operating Agreement. "Expenses" is defined in Section 6(a). "Fund" means SVI-U.S., SVI-International, the co-investment arrangement with Prudential Co-Investor, any Redemption Vehicle, any redemption vehicle established in connection with SVI-U.S., and any similar separate or "side" vehicle formed pursuant to the terms of any of the Other Operating Agreements or the terms of the operating agreement of SVI-U.S. or of any redemption vehicle established in connection with SVI-U.S., collectively. "Fund Entity" means any of SVI-U.S., SVI-International, Prudential Co-Investor, any Redemption Vehicle, any redemption vehicle established in connection with SVI-U.S., and any similar separate or "side" vehicle formed pursuant to the terms of any of the Other Operating Agreements or the terms of the operating agreement of SVI-U.S. or any redemption vehicle established in connection with SVI-U.S. "Fund Investors" means any investor in the Fund. "Fund Rate" is defined in Section 5(b). "Indemnitee" is defined in Section 10(a). "Independent Reviewer" means the Person selected by the Investment Advisor to act as the independent reviewer for the Fund, including any replacement or substitute therefor. "Index Rate" means the NAREIT Equity Index (excluding healthcare REITs) or, if such rate is unavailable for any period, the S&P REIT Index (excluding healthcare REITs). "Initial Closing" is defined in Section 3(e). 2 4 "in Interest" means, with respect to any percentage or fraction, the Investors voting for or against the related proposal or issue, as the case may be, expressed in terms of a percentage or fraction of the aggregate Capital Commitments. "Interest" means, with respect to any Investor, the interest of such Investor in the International Fund Entities, measured in terms of such Investor's Capital Commitment. "International Fund Entities" is defined in the preamble. "Investment Advisor" is defined in the preamble. "Investment Advisor Fee" is defined in Section 5(a). "Investment Securities" means REIT Shares. "Investor" is defined in the preamble. "Manager" is defined in the preamble. "Memorandum" means the Private Placement Memorandum dated July 1, 1997, relating to SVI-International, as supplemented by General Supplement No. 1 for SVI-International, pertaining to the offering of the Interests. "Operating Agreement" means the Operating Agreement of SVI-International dated October 2, 1997. "Operating Agreements" means the Operating Agreement and the Other Operating Agreements, collectively. "Other Operating Agreement" is defined in the Operating Agreement. "Partnership Units" means partnership interests in REIT Partnerships. "Performance Fee" is defined in Section 5(b). "Performance Fee Determination Date" is defined in Section 5(b). "Person" means an association, a corporation, an individual, a limited liability company, a partnership, a trust or any other entity or organization, including a government or an agency, board, court, department, official, political subdivision or representative thereof or any other governmental entity. 3 5 "PIMS" means Prudential Investment Management Services LLC, a Delaware limited liability company. "PREI" means Prudential Real Estate Investors, a division of Prudential. "Private Investment Securities" means Investment Securities other than Public Investment Securities. "Prudential" is defined in the preamble. "Prudential Co-Investor" is defined in the preamble. "Public Investment Securities" means publicly traded Investment Securities that are freely transferrable by SVI-International without further registration under the Securities Act and shall not include Investment Securities that are "restricted securities," Investment Securities acquired from a REIT in circumstances that may cause SVI-International to be treated as a statutory underwriter in connection with any resale of such securities, or Investment Securities subject to "lock-up agreements" or other holding periods (for so long as such restrictions remain effective). "Quarterly Contributed Capital" means, for any Investor with respect to any Quarterly Payment Date, the average of such Investor's Contributed Capital as at the last day of each month ending within the period to which such Quarterly Payment Date relates. "Quarterly Payment Date" is defined in Section 5(a). "Redemption Vehicle" is defined in the Operating Agreement. "REIT" means any public or private real estate company or real estate investment trust, whether or not such company qualifies as a real estate investment trust under applicable provisions of the Code. "REIT Partnership" means any partnership in which a REIT owns general partnership interests or other significant partnership interests. "REIT Shares" means shares of REITs or securities convertible, exchangeable or exercisable into shares of REITs. 4 6 "Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Shortfall Amount" is defined in Section 5(b). "Standard of Care" is defined in Section 2(b). "Subsequent Closing" is defined in Section 3(e). "SVI-International" is defined in the preamble. "SVI-U.S." means Strategic Value Investors, LLC, a Delaware limited liability company. "Unaffiliated Investor" means an Investor other than Prudential or Prudential Co-Investor. "Unfunded Commitments" means any Investor Capital Commitments that have not been called and delivered by such Investor, plus any capital contribution returned to such Investor pursuant to Section 8.4 of the Operating Agreement. SECTION 2. Appointment and Authorization; Standard of Care. a. Appointment and Authorization. Subject to and in accordance with the terms of this Agreement, SVI-International, the Manager, Prudential Co-Investor and any Redemption Vehicle that becomes party hereto, on the one hand, and the Investment Advisor, on the other, hereby agree that the Investment Advisor shall and is authorized to provide, on the terms set forth herein, the services to SVI-International and any such Redemption Vehicle as set forth herein, for the compensation hereinafter described. b. Standard of Care. The Prudential Investment Corporation, acting solely in its capacity as investment advisor hereunder, is acting as a fiduciary for SVI-U.S. The Investment Advisor shall discharge its duties hereunder solely in the interests of the Investors and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (the "Standard of Care"). c. Reliance on Others. In performing its duties, the Investment Advisor shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, of the following persons or groups unless they have 5 7 knowledge concerning the matter in question that would cause such reliance to be unwarranted and provided that the Investment Advisor acts in good faith: i. one or more employees or other agents of Investment Advisor whom the Investment Advisor reasonably believes to be reliable and competent in the matters presented; or ii. any attorney, independent accountant, valuation consultant, or other person as to matters that the Investment Advisor reasonably believes to be within such person's professional or expert competence. SECTION 3. Duties of the Investment Advisor. a. Services to be Provided. Subject to the approval of the Manager, the Investment Advisor shall evaluate, structure and cause SVI-International to consummate investments; facilitate the transfer of Investment Securities to Redemption Vehicles formed by the Manager and SVI-International; engage the Independent Reviewer; select any substitute or replacement Independent Reviewer (subject to Section 3(d)); coordinate reviews by the Independent Reviewer; manage the International Fund Entities' portfolio of Investment Securities; effectuate borrowings and repayment of borrowings by Redemption Vehicles in accordance with the terms hereof and of the Operating Agreement; cause the dissolution of any vehicle constituting one of the International Fund Entities as permitted under this Agreement and the applicable operating agreement of such vehicle; value the Investment Securities held by the International Fund Entities; and take such actions as are necessary and appropriate to execute the investment objectives of the International Fund Entities and to fulfill the obligations of the Investment Advisor as set forth herein, as referenced in the Operating Agreement and/or as described in the Memorandum, including, without limitation, actions in connection with the borrowing of funds and the acquisition and disposition of Investment Securities. b. Authority to Bind International Fund Entities. Unless revoked by the Manager, in its sole discretion, the Investment Advisor shall have a power of attorney pursuant to which it may execute on behalf of any International Fund Entity, all documentation necessary or appropriate to the investigation, acquisition, holding and disposition of Investment Securities and the borrowing of money. Nothing in this Agreement shall be deemed to create a joint venture or partnership between the parties with respect to the arrangements set forth in this Agreement. For all purposes herein, the Investment Advisor shall be deemed to be an independent contractor and independent agent, and shall act as an independent agent in all activities undertaken with respect to the Manager and the International Fund Entities. 6 8 c. All Investments Require Manager's Written Approval. The Manager's specific consent and approval in writing shall be required for all Investments made by SVI-International. SVI-International shall not make any Investment for which such consent and approval has not been obtained in accordance with the policies of the Manager for giving such consent and approval. d. Independent Reviewer. i. The initial Independent Reviewer will be Houlihan, Lokey, Howard & Zukin Financial Advisors Inc. ii. If the Person serving as the Independent Reviewer ceases to so serve or is unable (as a result of a conflicts of interest or otherwise) to act with respect to any proposed investment, the Investment Advisor shall select a replacement or substitute Independent Reviewer, as the case may be, which replacement or substitute shall be a Person with significant experience in the valuation, acquisition and trading of equity securities, including securities similar to the Investment Securities intended to be acquired by SVI-International, and shall be independent of, and unaffiliated with, Prudential. The Investment Advisor shall give written notice of such replacement or substitute to the Investors. Such replacement or substitute Independent Reviewer will be deemed approved by the Investors unless one-third or more in Interest of the Unaffiliated Investors object in writing to such proposed replacement or substitute within 15 days after notice with respect thereto is sent to the Investors. Any replacement or substitute Independent Reviewer will be engaged on terms and conditions substantially similar to those on which the initial Independent Reviewer was engaged. e. Closings. i. At the direction of the Manager, the Investment Advisor shall take such steps as may be necessary to facilitate the consummation by SVI-International of an initial closing (the "Initial Closing") subject to receipt of Capital Commitments from Fund Investors other than Prudential totaling $76.5 million or more. ii. If at the Initial Closing, the Fund shall not have received $510 million in Capital Commitments from Fund Investors other than Prudential, at the direction of the Manager, the Investment Advisor shall take such steps as may be necessary to facilitate the consummation by SVI-International of subsequent Closings (each, a "Subsequent Closing") during the next 12 months at which additional Interests may be purchased and Capital Commitments delivered, until $510 million in Capital Commitments have been obtained from Fund Investors other than Prudential. 7 9 iii. Investors acquiring Interests at a Subsequent Closing shall be required to purchase Interests in accordance with Section 8.4 of the Operating Agreement and to pay the expenses therein set forth and the fees herein set forth. iv. Subsequent Closings may involve the purchase by SVI-International of Investment Securities from SVI-US or the sale by SVI-International of Investment Securities to SVI-US in order to generally maintain the proportional relationship between SVI-US and SVI-International. v. The amount contributed to SVI-International at any Subsequent Closing will be distributed to the Investors admitted to SVI-International prior to such Subsequent Closing ratably in proportion to their Capital Commitments; provided that the Investment Advisor may direct a portion of such amounts to instead be paid to SVI-International in order to equitably allocate costs and expenses of SVI-International and SVI-US. f. Valuations. The Investment Advisor shall value Investment Securities quarterly for reporting purposes, and as and when necessary for other purposes. i. The Investment Advisor shall value Public Investment Securities and any short-term marketable securities without discounts for liquidity, block size or otherwise, at the average closing sales price for such security for the five trading days prior to the valuation date, as published in The Wall Street Journal. ii. The Investment Advisor shall value Private Investment Securities based on the value given to such Private Investment Securities by Prudential's Comptroller's Department, Institutional Valuation Unit. Absent known material circumstances, the Investment Advisor may base valuation of such Private Investment Securities on valuations made by third party appraisers or market participants, recent trades of securities determined by the Investment Advisor to be substantially similar for such purposes and other customary methods of valuing private or illiquid securities; provided that Partnership Units, which are, or are expected to become exchangeable for Public Investment Securities will be valued at the value of such Public Investment Securities. Valuations of private companies and their real estate are subject to numerous and various assumptions and limitations. Many different individual assumptions may be supportable and reasonable, but the interplay between different assumptions, or the use of different accepted methodologies, may produce different estimates of value for the same company or property. Valuations should be considered only estimates of value, and not a measure of realizable value, and are subject to change with the passage of time. 8 10 g. PREI to Fulfill Duties. The Investment Advisor will fulfill its responsibilities hereunder through PREI. In addition, the Investment Advisor and PREI may arrange to have certain services the Investment Advisor is obligated to provide performed by Prudential or any of its Affiliates. With the consent of the Manager, the Investment Advisor may also assign its rights and obligations under this Agreement to another entity that is wholly owned, directly or indirectly, by Prudential, or to Prudential, so long as the personnel responsible for providing such services are not substantially changed, such assignee is a registered investment advisor, and such assignee is an independent agent with respect to the International Fund Entities. h. Other Service Providers. With the consent of the Manager, the Investment Advisor may from time to time engage other service providers, including securities advisors, consultants, architects, engineers, appraisers, legal and accounting firms, custodians, and transfer agents. Each service provider shall be compensated by the International Fund Entities in such proportions, on such terms and at such rates as the Investment Advisor deems appropriate in light of the services provided subject to the consent of the Manager. The Investment Advisor may engage Affiliates or utilize in-house staff of Prudential or any of its Affiliates as service providers; provided that (i) the Investment Advisor reasonably believes that engaging an Affiliate or utilizing in-house staff of Prudential or its Affiliate is in the best interests of the International Fund Entities; (ii) the compensation of such Affiliate or in-house staff of Prudential or its Affiliate is comparable to that charged by unaffiliated third parties for similar services; and (iii) the Investment Advisor notifies the Investors of the retention of such an Affiliate or the use of in-house staff. SECTION 4. Investments of the International Fund Entities. a. Permitted Investments. Proceeds from draws on Capital Commitments and co-investment by the Prudential Co-Investor may be invested in REIT Shares and Partnership Units in connection with, or incidentally to, the sale of real estate by Prudential to the relevant REITs or the contribution of real estate by Prudential to related REIT Partnerships, and, in each case, in a manner consistent with the Memorandum. b. Proportionate Investment. It is the intention of the Investment Advisor that investments of SVI-International and SVI-U.S. will be made in parallel in Investment Securities so that, to the extent practicable, Fund Investors will each participate in investments in Investment Securities in proportion to their Capital Commitments. c. Fairness Opinion. Before the acquisition by SVI-International of Investment Securities of a REIT, SVI-International shall have received a fairness opinion with respect to the terms and conditions of such proposed acquisition from the Independent Reviewer. 9 11 d. Investment Restrictions. A substantial majority of the International Fund Entities' investments shall be in entities that qualify for taxation as real estate investment trusts (as defined in Section 856 of the Code). International Fund Entities shall not acquire more than 40% in the aggregate of the Investment Securities of any one REIT and its related REIT Partnerships. Any Partnership Units to be acquired by International Fund Entities shall be acquired and held solely by Prudential Co-Investor. e. Allocation of Expenses. The Investment Advisor shall cause investments and expenses to be allocated between the International Fund Entities (subject to Section 6), on the one hand, and the U.S. Fund Entities, on the other, pro rata in accordance with aggregate capital commitments or contributions, as appropriate. f. Sale of Investment Securities Prior to Termination. The Investment Advisor shall, prior to the termination of this Agreement, endeavor to identify opportunities for the sale, for cash, of all Private Investment Securities; provided, however, that such Investment Securities not theretofore sold or disposed of will be distributed in kind to the applicable Investors on a pro rata basis as is appropriate. g. Co-Investment by Prudential Co-Investor. Whenever the Investment Advisor proposes that SVI-International make an investment in Investment Securities and the Manager approves such investment, the Prudential Co-Investor shall acquire and hold an amount of the pertinent Investment Securities and/or Partnership Units issued by affiliates of the issuer of such Investment Securities such that the Investment Securities and/or Partnership Units held by Prudential Co-Investor shall at all times equal 49% of the sum of the amount of Investment Securities acquired by SVI-International and the amount of Investment Securities and Partnership Units acquired by Prudential Co-Investor (in each case valued on the basis of the price established in the pertinent investment transaction). SECTION 5. Compensation. a. Investment Advisor Fee. Each Investor shall pay to the Investment Advisor a fee (the "Investment Advisor Fee") based on such Investor's Contributed Capital from time to time. The Investment Advisor Fee shall be payable quarterly in arrears on the last day of each calendar quarter (each a "Quarterly Payment Date") or, if such day is not a business day, the next succeeding business day. The amount due on each Quarterly Payment Date will be equal to one-fourth of the sum of (i) 60 basis points times the amount of such Investor's Quarterly Contributed Capital not in excess of $50 million as at such date; (ii) 50 basis points times the amount of such Investor's Quarterly Contributed Capital in excess of $50 million but not in excess of $100 million as at such date; and (iii) 40 basis points times the amount of such Investor's Quarterly Contributed Capital in excess of $100 million as at such date. If the Investment Advisor Fee has not been paid within 30 days of 10 12 the applicable Quarterly Payment Date the pertinent Investor shall be deemed to be a "Defaulting Member" within the meaning of Section 8.3 of the Operating Agreement. b. Performance Fee. i. Each Investor shall pay to the Investment Advisor a fee (the "Performance Fee") based upon such Investor's return on its investment. The Performance Fee shall be payable by an Investor on the date of (a) any actual or deemed Distribution (other than a Distribution made in connection with a Subsequent Closing) to such Investor of cash proceeds from the sale of Investment Securities by any International Fund Entity and (b) any Distribution of Investment Securities to such Investor by any International Fund Entity (any such date, a "Performance Fee Determination Date"). ii. The Performance Fee with respect to any Investor will be equal to the sum of (a) 20% of the relevant Investor's return (after costs, expenses and the Investment Advisor Fee but before the Performance Fee) in excess of the return such Investor would have realized had such Investor's Capital Contributions been invested at the Index Rate and (b) an additional 10% of the relevant Investor's return (after costs, expenses and the Investment Advisor Fee but before the Performance Fee) in excess of the return such Investor would have realized had such Investor's Capital Contributions been invested at a rate equal to the Index Rate plus 500 basis points. iii. On each Performance Fee Determination Date with respect to any Investor, the Performance Fee will be determined with respect to any Investment Securities distributed on such date and any Investment Securities proceeds with respect to which are distributed or deemed distributed on such date. The Performance Fee will be determined by (a) future valuing to the Performance Fee Determination Date, at the Index Rate, each Capital Contribution made by the relevant Investor with respect to the pertinent Investment Securities; (b) future valuing to the Performance Fee Determination Date, at the Index Rate plus 500 basis points, each capital contribution made by the relevant Investor with respect to the pertinent Investment Securities; (c) future valuing to the Performance Fee Determination Date, at the Index Rate, the amount of any Shortfall Amount in respect of the prior Performance Fee Determination Date, and (d) future valuing to the Performance Fee Determination Date, at the Fund Rate, each distribution or deemed distribution (other than any distribution that itself triggered a Performance Fee Determination Date) made to the relevant Investor with respect to the pertinent Investment Securities. The Performance Fee will equal the sum of (i) 20% of the amount, if any, by which (I) the sum of the distribution being made in respect of the pertinent Investment Securities on the Performance Fee Determination Date plus the amount described in clause (d) above exceeds (II) the sum of the amounts described in clauses (a) and (c) above; plus (ii) 10% of the amount, if any, by which (III) the 11 13 sum of the distribution being made in respect of the pertinent Investment Securities on the Performance Fee Determination Date plus the amount described in clause (d) above exceeds (IV) the sum of the amounts described in clauses (b) and (c) above. If on any Performance Fee Determination Date the amount described in clause (II) above exceeds the amount described in clause (I) above, no Performance Fee will be due and such excess will be carried forward to the next Performance Fee Determination Date as a "Shortfall Amount." If on the last Performance Fee Determination Date with respect to any Investor, there exists a Shortfall Amount the Investment Advisor will rebate to such Investor, without interest, an amount of Performance Fees previously paid to the Investment Advisor with respect to such Investor equal to the lesser of the amount of such Shortfall Amount and the amount of such Performance Fees previously paid. For the purposes of calculating the Performance Fee, (x) the "Fund Rate" shall mean the aggregate internal rate of return earned (i) in the case of Prudential Co-Investor, by Prudential Co-Investor's investments and (ii) in the case of any other investment by the International Fund Entities, by such investments, in either case, through the applicable Performance Fee Determination Date, assuming a sale of all such investments for their respective fair market values as of such date and monthly compounding and (y) any distribution that was in fact reduced by the withholding of a payment of the Investment Advisor Fee will be treated as having been so reduced, and any payment of the Investment Advisor Fee made directly by the pertinent Investor and not previously treated as a reduction of a distribution pursuant to this clause will be subtracted from the amount of the distribution being made on the Performance Fee Determination Date. iv. All future value computations shall be made using monthly compounding and the actual number of days elapsed in each month. v. If the Performance Fee has not been paid within 30 days the pertinent Investor shall be deemed to be a "Defaulting Member" within the meaning of Section 8.3 of the Operating Agreement. vi. Notwithstanding the foregoing, if, on the last Performance Fee Determination Date with respect to any Investor, the aggregate amount of capital contributed, and fees paid, by such Investor exceeds the sum of the aggregate amount of cash and the value of all property actually distributed to such Investor, the Investment Advisor will rebate to such Investor Performance Fees previously paid by such Investor in an amount equal to the lesser of (y) such excess and (z) Performance Fees received by the Investment Advisor from such Investor. 12 14 c. Invoices. The Investment Advisor will provide each Investor with an invoice for each of the Investment Advisor Fee and the Performance Fee due from such Investor reflecting any amounts not deducted from Distributions. Each invoice shall reflect the amount of the Investment Advisor Fee or Performance Fee, as the case may be, that has been paid up to the date of such invoice. Any amount that has not been deducted as reflected in any such invoice and that is not paid within 10 days of the date of such invoice shall bear interest at the Base Rate. SECTION 6. Expenses. a. Expenses of the International Fund Entities. Each of the International Fund Entities shall bear its share of organizational costs and expenses and the International Fund Entities, collectively, shall bear their share of all costs and expenses of operating the Fund. The costs and expenses associated with operating the Fund (collectively, "Expenses") will include, without limitation, (i) costs and expenses of meetings of Investors, and of preparing, printing and mailing reports to Investors and of amending organizational documents when necessary; (ii) brokers' commissions and fees of transfer agents chargeable in connection with any securities transactions; (iii) fees and expenses of service providers, whether affiliated with Prudential or not, including, without limitation, securities advisors, attorneys (including, without limitation, SVI-International's share of a one time fee of $15,000.00 to reimburse PREI for the cost of its in-house counsel for services in connection with creation of Fund), accountants, appraisers, contractors, architects, engineers, consultants, insurance consultants, custodians and other agents; and (iv) to the extent not included in the foregoing or paid out of other sources, the costs and expenses connected with the acquisition, disposition and ownership of the Investment Securities, and the termination of the International Fund Entities. All such Expenses shall be allocated among International Fund Entities and among Investors in accordance with the following principles: (1) Expenses that relate to a particular International Fund Entity or to the Investment Securities held thereby shall be allocated to such International Fund Entity and to the Investors therein in proportion to their Allocated Percentages therein at the time the Expense is incurred; (2) Expenses that relate to unconsummated investment transactions shall be allocated to SVI-International and to the Investors therein in proportion to their Allocated Percentages; and (3) Expenses that relate to the Independent Reviewer shall be allocated to the Unaffiliated Investors in proportion to their Allocated Percentages. b. Expenses of the Investment Advisor and Administrative Services. At its expense, the Investment Advisor, Prudential and/or PREI, shall pay the compensation of their respective employees who provide services to the Fund, including, without limitation, administration and portfolio management services, provide adequate office space and any necessary office furnishings and equipment, together with telephone service, heat, utilities, supplies and similar miscellaneous office expenses and shall provide other necessary items of an overhead and administrative nature. 13 15 SECTION 7. Conflicts; Waiver. The Investment Advisor and its Affiliates or associates or any of their legal, financial or other advisors shall in no way be prohibited from, and intend to, spend substantial time in connection with other businesses or activities for third parties unrelated to SVI-International, including, but not limited to, managing investments, advising or managing entities whose investment objectives are the same as or overlap with those of the Fund, participating in actual or potential investments of the Fund, providing consulting, merger and acquisition, structuring or financial advisory services, including with respect to actual, contemplated or potential investments of the Fund, or acting as a director, officer or creditors' committee member of, adviser to, or participant in, any corporation, partnership, trust or other business entity. The Investment Advisor and its Affiliates or associates or any of their legal, financial or other advisors may, and expect to, receive fees or other compensation from third parties for such activities, which fees will be for the benefit of their own account and not the Fund. Such fees may relate to actual, contemplated or potential investments of the Fund and may be payable by entities in which the Fund directly or indirectly, has invested or contemplates investing. Each International Fund Entity and each Investor waives any and all rights of any nature whatsoever that any such Person may have to object to or participate or any such activity. SECTION 8. Representations and Warranties of the Investment Advisor. The Investment Advisor hereby represents and warrants to SVI-International as of the date hereof as follows: a. The Investment Advisor is a corporation, duly incorporated and validly existing under the laws of the State of New Jersey, has the full power and authority to transact the business in which it is presently engaged and is duly qualified under the laws of each jurisdiction where the conduct of its business requires, or the performance of its obligations under this Agreement would require, such qualification. b. The Investment Advisor has full corporate power and authority and has obtained all necessary authorization to execute, deliver and perform this Agreement on the terms and conditions hereof. No consent of any other Person and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, fling or declaration with, any governmental authority is required by the Investment Advisor in connection with this Agreement or the execution, delivery, performance, validity or enforceability hereof. This Agreement constitutes the legal, valid and binding obligation of the Investment Advisor enforceable against the Investment Advisor in accordance with its terms, subject to bankruptcy, insolvency moratorium or 14 16 similar laws affecting generally the enforcement of creditors' rights and general equitable principles. c. The Investment Advisor's execution, delivery and performance of this Agreement and any documents and instruments required hereunder shall not violate any provision of any existing law or regulation binding on the Investment Advisor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Investment Advisor, or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Investment Advisor is a party or by which the Investment Advisor or any of its assets may be bound, and shall not result in or require the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. d. SVI-International is a limited liability company, duly formed and validly existing under the laws of the State of Delaware, has the full power and authority to transact the business in which it is presently engaged and is duly qualified under the laws of each jurisdiction where the conduct of its business requires or the performance of its obligations would require, such qualification. e. The Manager has full power and authority and has obtained all necessary authorization to execute, deliver and perform the Operating Agreement on the terms and conditions thereof. No consent of any other Person and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, fling or declaration with, any governmental authority is required by the Manager in connection with the Operating Agreement or the execution, delivery, performance or validity thereof. The Operating Agreement constitutes the legal, valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms, subject to bankruptcy, insolvency moratorium or similar laws affecting generally the enforcement of creditors' rights and general equitable principles. f. The Manager's execution, delivery and performance of the Operating Agreement and any documents and instruments required hereunder shall not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or government authority binding on the Manager, or of any mortgage, indenture lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager, or any of its assets may be bound, and shall not result in or require the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any 15 17 such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 9. Liability of the Investment Advisor. Except as otherwise required by law, the Investment Advisor and any of its Affiliates, directors, officers, employees, shareholders, assigns, representatives or agents shall not be liable, responsible or accountable in damages or otherwise to the Fund or any Investor for any loss, liability, damage, settlement cost, or other expense (including attorneys' fees) incurred by reason of any act or omission or any such alleged act or omission performed or omitted by such Person (including those in connection with serving on boards of directors for companies in the Fund's portfolio) if such Person acted in a manner consistent with the Standard of Care. SECTION 10. Indemnification. a. Indemnity. To the fullest extent permitted by applicable law, the Investment Advisor, PIMS, PREI, the Independent Reviewer and any of their respective officers, directors, agents, stockholders, partners, members, employees, other Affiliates, and any other Person who serves at the request of the Investment Advisor on behalf of any of the International Fund Entities (each such Person being an "Indemnitee") shall be held harmless and be indemnified by the International Fund Entities for any liability, loss (including amounts paid in settlement), damages or expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by such Indemnitee on behalf of the International Fund Entities or in furtherance of the interests of the International Fund Entities or otherwise arising out of, or in connection, with the International Fund Entities; provided, that such Indemnitee acted in a manner consistent with the Standard of Care. b. Advances. To the fullest extent permitted by law, expenses (including, without limitation, legal fees) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the International Fund Entities prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the International Fund Entities of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 10. c. Limitation on Liability. The individual indemnity obligation of each Investor will be limited to (i) the lesser of the aggregate of: (x) such Investor's Unfunded Commitments; (y) Distributions (including Distributions in redemption) previously made to such Investor; and (z) the Investor's Interest in the International Fund Entities or (ii) such Investor's Capital Commitment. 16 18 SECTION 11. Term of Agreement; Survival of Certain Terms. a. Initial Term. Unless terminated in accordance with its terms this Agreement shall remain in effect with respect to each International Fund Entity until the termination of such International Fund Entity. b. Termination. This Agreement may be terminated at any time with or without cause upon 90 days' prior written notice (i) by SVI-International, (upon the vote of a majority in Interest of the Unaffiliated Investors therein) or (ii) by the Investment Advisor (but in the latter case only if this Agreement is so terminated with respect to all International Fund Entities). Upon such termination, the Investment Advisor shall be entitled to receive all compensation it has earned through the effective date of such termination, including any accrued but unpaid Investment Advisor Fee and Performance Fee. c. Survival. Notwithstanding anything herein to the contrary, Sections 5, 6, 10 and 11 of this Agreement shall survive any termination hereof. SECTION 12. Notices. Unless expressly provided otherwise herein, all notices, requests, demands and other communications required or permitted under this Agreement shall be in writing (including by telecopy) and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of registered or certified mail, postage prepaid, return receipt requested, or, in the case of telecopy notice, when received in legible form, addressed as set forth below: If to SVI-International or the Manager: Strategic Value Investors International Ltd. c/o Coutts (Cayman) Limited Coutts House P.O. Box 707 Grand Cayman, B.W.I. Attention: Andrew Galloway Fax: (345) 945-4799 17 19 with a copy to: Prudential Real Estate Investors 8 Campus Drive, 4th Floor Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Fax: (973) 683-1794 and to: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attention: Jacqueline A. Weiss, Esq. Fax: (212) 326-2061 If to the Investment Advisor or the Prudential Co-Investor: Prudential Real Estate Investors 8 Campus Drive, 4th Floor Parsippany, New Jersey 07054-4493 Attention: SVI Portfolio Manager Fax: (973) 683-1794 with a copy to: O'Melveny & Myers LLP 153 East 53rd Street New York, New York 10022 Attention: Jacqueline A. Weiss, Esq. Fax: (212) 326-2061 Any party may alter the address or telecopy number to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 12 for the giving of notice. 18 20 SECTION 13. Amendments; Waivers. This Agreement may be amended only by agreement in writing of the Investment Advisor and a majority in Interest of the Unaffiliated Investors, provided that any amendment that materially adversely affects the Investors shall require the approval of at least two-thirds in Interest of the Unaffiliated Investor, and provided further that no such amendment shall be effective if the Investment Advisor reasonably determines that such amendment could reasonably be expected to materially adversely affect the Fund taken as a whole. The Investment Advisor shall cause the effectuation of any such amendment duly approved by the appropriate Investors. Except as otherwise provided herein, no waiver of any provision nor consent to any exception to the terms of this Agreement shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided. No failure on the part of any party to exercise or delay in exercising any right hereunder shall be deemed a waiver thereof, nor shall any single or partial exercise preclude any further or other exercise of such or any other right. SECTION 14. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflict of law principles. SECTION 15. Assignment. Neither this Agreement nor any rights or obligations under it are assignable, except that the Investment Advisor may assign its obligations hereunder as set forth in Section 3(h). SECTION 16. Headings. The descriptive headings of the Articles, Sections and subsections of this Agreement are for convenience only and do not constitute a part of this Agreement. SECTION 17. Parties in Interest. This Agreement shall be binding upon and inure to the benefit of each party and their respective permitted successors and assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement, except that the Investors shall be third party beneficiaries hereof. 19 21 SECTION 18. Consent to Jurisdiction and Litigation. All litigation relating to or arising under or in connection with this Agreement shall be brought only in the federal or state courts of competent jurisdiction located in the State and County of New York, which shall have exclusive jurisdiction to resolve any disputes with respect to this Agreement. By execution and delivery of this Agreement, each party hereto irrevocably and unconditionally consents to the jurisdiction of such courts for any actions, suits or proceedings arising out of or relating to this Agreement. The parties hereto irrevocably waive any obligation of the laying of venue or based on the grounds of forum non conveniens that it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction. No party hereto shall be entitled to immunity whatsoever, whether characterized as sovereign immunity or otherwise, from any legal proceedings to enforce the obligations hereunder. Subject to Section 10, in the event of any breach of the provisions of this Agreement, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. SECTION 19. Attorney's Fees. In the event of any action for the breach of this Agreement or misrepresentation by any party, the prevailing party shall be entitled to reasonable attorney's fees, costs and expenses incurred in such action. SECTION 20. Representation By Counsel. Each party hereto acknowledges that such party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. SECTION 21. Interpretation. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties hereto. Any of the terms used herein may, unless the context otherwise requires be used in the singular or the plural depending on the reference. All words or terms used in this Agreement, regardless of the number or gender in which they are used, shall include any other number or gender, as the context may require. Further, "hereof," "herein," "hereunder," "hereto," "this Agreement" and comparable terms refer to the entire instrument, including any exhibits or schedules to the instrument, and not to any particular article, section or other subdivision of the instrument. All references to SVI-International shall include all parallel or subsidiary vehicles including Redemption 20 22 Vehicles, if any, that may be utilized. In such circumstances, references to the Operating Agreement shall be deemed to include references to the applicable Other Operating Agreements. References to actions to be taken by any International Fund Entity shall mean such actions to be taken by the Investment Manager on behalf of such International Fund Entity or, if applicable, to the Investment Manager causing such International Fund Entity to take such action, unless the context clearly requires otherwise. SECTION 22. Further Assurances. Each party agrees to execute and deliver (or to cause the execution and delivery of) such further instruments and to do such further acts as the Investment Advisor deems necessary or advisable to better effectuate this Agreement. SECTION 23. Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any court of competent jurisdiction or other governmental entity, the remaining provisions of this Agreement to the extent permitted by law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for all parties remain valid, binding and enforceable; provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by law, the parties hereby to the same extent waive any provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 24. Counterparts. This Agreement may be executed in any number of counterparts by facsimile or other written form of communication, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. SECTION 25. WAIVER OF JURY TRIAL. EACH PARTY HERETO, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. 21 23 IN WITNESS WHEREOF, each of the parties hereto has caused this Investment Advisory Agreement to be executed by its duly authorized officers as of the day and year first above written. STRATEGIC VALUE INVESTORS INTERNATIONAL, LLC By: Strategic Value Investors International Ltd. Its: Manager By: /s/ TERENCE McHUGH ------------------------------- Name: Terence McHugh Title: Vice President THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ KEVIN R. SMITH ------------------------------- Name: Kevin R. Smith Title: Vice President STRATEGIC VALUE INVESTORS INTERNATIONAL LTD. By: /s/ TERENCE McHUGH ------------------------------- Name: Terence McHugh Title: Vice President THE PRUDENTIAL INVESTMENT CORPORATION By: /s/ JOSEPH D. MARGOLIS ------------------------------- Name: Joseph D. Margolis Title: Vice President S-1 24 ANNEX NUMBER 1 TO INVESTMENT ADVISORY AGREEMENT Date: ______________, 199__ The undersigned acknowledges and agrees as follows: 1. This Annex Number 1 is part of the Investment Advisory Agreement dated October 2, 1997, to which it is attached. 2. The undersigned is a party to and a "Member" under the Operating Agreement and or one or more Other Operating Agreements, and its notice address for purposes hereof it as set forth thereunder. 3. The undersigned has reviewed this Annex Number 1 and the Investment Advisory Agreement and is represented by counsel in connection therewith. 4. The undersigned will pay the Investment Advisor Fee and the Performance Fee in accordance with the Investment Advisory Agreement. 5. The Investment Advisor may deduct or withhold from Distributions to the undersigned any amounts payable by the undersigned in respect of any fees or expenses relating to the Investment Advisory Agreement. 6. No Indemnitee shall be liable to the undersigned and the undersigned shall indemnify each Indemnitee, all as set forth in Section 14 of the Investment Advisory Agreement, and the Investment Advisor may deduct, withhold or make capital calls for any amounts payable by the undersigned in respect thereof. 7. The undersigned shall fulfill any other obligations it may have under Sections 9, 10 or 14 of the Investment Advisory Agreement. 8. This Annex Number 1 shall survive the termination of the Investment Advisory Agreement. 9. Appointment of Investment Advisor as Attorney-in-Fact: The undersigned constitutes and appoints the Investment Advisor, and any replacement or substitute Investment Advisor, as the undersigned's true and lawful attorney-in-fact and agent, with full power and authority in the undersigned's name, place and stead and to take all actions as are necessary and appropriate to fulfill the duties of Investment Advisor as referenced in the Investment Advisory Agreement A-1 25 and the Operating Agreement and/or as described in the Memorandum, including, without limitation, actions in connection with the borrowing of funds and the acquisition and disposition of Investment Securities. The appointment by the undersigned of the Investment Advisor as attorney-in-fact set forth shall be deemed to be a power coupled with an interest and with full power of substitution, in recognition of the fact that the undersigned will be relying upon the Investment Advisor to act as contemplated by the Investment Advisory Agreement and the Operating Agreement in any filing and other action by the Investment Advisor on behalf of SVI-International, and such power shall, to the extent permitted by law, survive the death, disability, incompetency, withdrawal, removal, bankruptcy or insolvency of any Person hereby giving such power and the transfer by the undersigned of all or part of its Interest. The foregoing power of attorney of a transferor shall survive such transfer only until such time as the transferee shall have been admitted to SVI-International as a member and all required documents and instruments shall have been duly executed, filed and recorded to effect such substitution. Any Person dealing with SVI-International may conclusively presume and rely upon the fact that any such instrument executed by such agent and attorney-in-fact is authorized, regular and binding without further inquiry. ----------------------------------- By: _________________________________ Name: Title: Notice Address: _____________________________________________ _____________________________________________ _____________________________________________ Attention: __________________________________ Fax: ________________________________________ A-2 -----END PRIVACY-ENHANCED MESSAGE-----