-----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, ONswck8OcjeVQawcBpTiN6C+ahASmEisG9FnfRoVycSE15IIp2Fakl2pFu/oMl4v zUaU2/mijWsuy4jIRdvmYQ== 0000916641-01-501584.txt : 20020410 0000916641-01-501584.hdr.sgml : 20020410 ACCESSION NUMBER: 0000916641-01-501584 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED DOMINION REALTY TRUST INC CENTRAL INDEX KEY: 0000074208 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 540857512 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10524 FILM NUMBER: 1787148 BUSINESS ADDRESS: STREET 1: 400 EAST CARY STREET CITY: RICHMOND STATE: VA ZIP: 23219-3802 BUSINESS PHONE: 8047802691 MAIL ADDRESS: STREET 1: 400 EAST CARY STREET CITY: RICHMOND STATE: VA ZIP: 23219-3802 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REAL ESTATE INVESTMENT TRUS DATE OF NAME CHANGE: 19741216 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19850110 FORMER COMPANY: FORMER CONFORMED NAME: OLD DOMINION REIT ONE DATE OF NAME CHANGE: 19770921 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED 9/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number 1-10524 ------- UNITED DOMINION REALTY TRUST, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 54-0857512 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 400 East Cary Street, Richmond, Virginia 23219-3802 - -------------------------------------------------------------------------------- (Address of principal executive offices - zip code) (804) 780-2691 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to filing requirements for at least the past 90 days. Yes X No___ --- APPLICABLE ONLY TO CORPORATE USERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of November 9, 2001: Common Stock, $1 Par Value: 99,083,281 _________________ UNITED DOMINION REALTY TRUST, INC. FORM 10-Q INDEX
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000..................... 3 Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000................................................................ 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000................................................................................... 5 Consolidated Statement of Shareholders' Equity for the nine months ended September 30, 2001......................................................................... 6 Notes to Consolidated Financial Statements..................................................... 7-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................. 15-25 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 26 PART II - OTHER INFORMATION Item 1. Legal Proceedings.............................................................................. 27 Item 2. Changes in Securities.......................................................................... 27 Item 3. Defaults Upon Senior Securities................................................................ 27 Item 4. Submission of Matters to a Vote of Security Holders............................................ 27 Item 5. Other Information.............................................................................. 27 Item 6. Exhibits and Reports on Form 8-K............................................................... 27-31 Signatures ................................................................................................. 32
2 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
September 30, December 31, 2001 2000 ----------------------------------------------------------------------------------------------------------------------------- ASSETS Real estate owned: Real estate held for investment (Note 2) $ 3,759,625 $ 3,758,974 Less: accumulated depreciation (608,642) (506,871) ---------------- ---------------- 3,150,983 3,252,103 Real estate under development 54,010 60,366 Real estate held for disposition (net of accumulated depreciation of $0 and $2,534) (Note 3) 15,567 14,446 ---------------- ---------------- Total real estate owned, net of accumulated depreciation 3,220,560 3,326,915 Cash and cash equivalents 7,221 10,305 Restricted cash 34,283 44,943 Deferred financing costs, net 14,240 14,271 Investment in unconsolidated development joint venture (Note 4) 7,515 8,088 Other assets 39,192 49,435 ---------------- ---------------- Total assets $ 3,323,011 $ 3,453,957 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Secured debt (Note 5) $ 991,290 $ 866,115 Unsecured debt (Note 6) 1,076,921 1,126,215 Real estate taxes payable 34,114 30,554 Accrued interest payable 16,421 18,059 Security deposits and prepaid rent 21,494 22,524 Distributions payable 32,310 36,128 Accounts payable, accrued expenses and other liabilities 63,467 47,144 ---------------- ---------------- Total liabilities 2,236,017 2,146,739 Minority interests 77,406 88,326 Shareholders' equity Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized; 0 shares 9.25% Series A Cumulative Redeemable issued and outstanding (3,969,120 in 2000) - 99,228 5,416,009 shares 8.60% Series B Cumulative Redeemable issued and outstanding (5,439,109 in 2000) 135,400 135,978 8,000,000 shares 7.50% Series D Cumulative Convertible Redeemable issued and outstanding (8,000,000 in 2000) 175,000 175,000 Common stock, $1 par value; 150,000,000 shares authorized 99,149,807 shares issued and outstanding (102,219,250 in 2000) 99,150 102,219 Additional paid-in capital 1,047,338 1,081,387 Distributions in excess of net income (424,031) (366,531) Deferred compensation - unearned restricted stock awards (1,751) (828) Notes receivable from officer-shareholders (5,482) (7,561) Accumulated other comprehensive loss (Note 7) (16,036) - ---------------- ---------------- Total shareholders' equity 1,009,588 1,218,892 ---------------- ---------------- Total liabilities and shareholders' equity $ 3,323,011 $ 3,453,957 ================ ================
See accompanying notes to consolidated financial statements. 3 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, 2001 2000 2001 2000 -------------------------------- ------------------------------- REVENUES Rental income $ 153,814 $ 157,041 $ 462,753 $ 470,844 Non-property income 363 1,383 2,168 4,432 ------------ ------------- ------------- ------------ Total revenues 154,177 158,424 464,921 475,276 EXPENSES Rental expenses: Real estate taxes and insurance 16,480 17,042 51,287 52,209 Personnel 16,150 16,311 47,114 49,335 Repair and maintenance 9,795 9,905 26,617 27,568 Utilities 8,557 9,253 27,997 26,585 Administrative and marketing 5,702 6,121 17,074 18,110 Property management 4,487 4,557 12,802 13,960 Other operating expenses 364 337 1,140 1,069 Real estate depreciation 36,029 37,349 114,440 115,305 Interest 36,633 39,100 109,688 117,926 Severance costs and other organizational charges (Note 9) - 1,020 5,404 1,020 Litigation settlement charges - 2,700 - 2,700 Impairment loss on real estate and investments (Note 3) - - 3,188 - General and administrative 4,546 3,546 14,693 11,114 Other depreciation and amortization 844 984 2,579 3,438 ------------ ------------- ------------- ------------ Total expenses 139,587 148,225 434,023 440,339 ------------ ------------- ------------- ------------ Income before gains on sales of investments, minority interests and extraordinary item 14,590 10,199 30,898 34,937 Gains on sales of depreciable property - 10,429 24,748 18,890 Gains on sales of land - 832 - 832 ------------ ------------- ------------- ------------ Income before minority interests and extraordinary item 14,590 21,460 55,646 54,659 Minority interests of outside partnerships (370) (388) (1,659) (1,126) Minority interests of unitholders in operating partnerships (487) (798) (1,718) (1,760) ------------ ------------- ------------- ------------ Income before extraordinary item 13,733 20,274 52,269 51,773 Extraordinary item - early extinguishment of debt (186) (91) (745) 267 ------------ ------------- ------------- ------------ Net income 13,547 20,183 51,524 52,040 Distributions to preferred shareholders - Series A and B (2,912) (5,354) (12,851) (16,333) Distributions to preferred shareholders - Series D (Convertible) (3,857) (3,825) (11,571) (11,475) (Premium) / discount on preferred share repurchases - 157 (3,496) 2,334 ------------ ------------- ------------- ------------ Net income available to common shareholders $ 6,778 $ 11,161 $ 23,606 $ 26,566 ============ ============= ============= ============ Earnings per common share (Note 8): Basic $ 0.07 $ 0.11 $ 0.23 $ 0.26 ============ ============= ============= ============ Diluted $ 0.07 $ 0.11 $ 0.23 $ 0.26 ============ ============= ============= ============ Common distributions declared per share $ 0.2700 $ 0.2675 $ 0.8100 $ 0.8025 ============ ============= ============= ============ Weighted average number of common shares outstanding-basic 99,623 103,258 100,612 103,160 Weighted average number of common shares outstanding-diluted 100,466 103,514 101,292 103,346
See accompanying notes to consolidated financial statements. 4 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 51,524 $ 52,040 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 117,019 118,743 Impairment loss on real estate and investments 3,188 - Gains on sales of investments (24,748) (19,722) Minority interests 3,377 2,886 Extraordinary item-early extinguishment of debt 745 (267) Amortization of deferred financing costs and other 2,666 4,219 Changes in operating assets and liabilities: Increase in operating liabilities 472 3,120 Decrease / (increase) in operating assets 18,021 (2,572) ------------ ----------- Net cash provided by operating activities 172,264 158,447 Investing Activities Proceeds from sales of real estate investments, net 118,565 141,892 Proceeds received for excess expenditures over investment contribution in development joint venture - 33,412 Development of real estate assets and other major improvements (49,852) (66,061) Capital expenditures - real estate assets, net of escrow reimbursement (34,511) (31,603) Acquisition of real estate assets, net of liabilities assumed (8,296) (4,635) Capital expenditures - non-real estate assets (789) (889) ------------ ----------- Net cash provided by investing activities 25,117 72,116 Financing Activities Proceeds from the issuance of secured notes payable 179,600 38,285 Scheduled principal payments on secured notes payable (33,265) (29,420) Non-scheduled principal payments on secured notes payable (31,947) (78,264) Proceeds from the issuance of unsecured notes payable - 146,700 Payments on unsecured notes payable (21,308) (51,246) Net borrowing/(repayment) of short-term bank debt (27,500) (123,100) Payment of financing costs (2,475) (5,441) Cash paid to buy out minority interests (4,267) - Proceeds from the issuance of common stock 8,981 7,524 Proceeds from the issuance of performance shares 1,214 - Distributions paid to minority interests (10,687) (7,548) Distributions paid to preferred shareholders (27,713) (27,780) Distributions paid to common shareholders (81,634) (82,494) Repurchase of common and preferred stock (149,464) (14,572) ------------ ----------- Net cash used in financing activities (200,465) (227,356) Net (decrease) / increase in cash and cash equivalents (3,084) 3,207 Cash and cash equivalents, beginning of period 10,305 7,678 ------------ ----------- Cash and cash equivalents, end of period $ 7,221 $ 10,885 ============ =========== Supplemental Information: Interest paid during the period $ 112,807 $ 113,878 Conversion of operating partnership units to common stock 43 241 Issuance of restricted stock awards 1,547 831 Non-cash transactions associated with the acquisition of properties: Secured debt assumed 18,229 10,130 Non-cash transactions associated with the disposition of properties: Reduction in secured debt 7,694 27,504
See accompanying notes to consolidated financial statements. 5 UNITED DOMINION REALTY TRUST, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In thousands, except share data) (Unaudited)
Preferred Stock Common Stock Paid-in ------------------------------------------------------- Shares Amount Shares Amount Capital - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 17,408,229 $ 410,206 102,219,250 $ 102,219 $ 1,081,387 Comprehensive Income Net income Other comprehensive loss: Cumulative effect of a change in accounting principle (Note 7) Unrealized loss on derivative instruments (Note 7) ------------------------------------------------------------------------------------------------------------------------- Comprehensive income ------------------------------------------------------------------------------------------------------------------------- Issuance of common shares to employees, officers and director-shareholders 349,146 350 3,606 Issuance of common shares through dividend reinvestment and stock purchase plan 254,133 254 3,013 Purchase of common and preferred stock (91,900) (2,298) (3,842,766) (3,843) (45,778) Redemption of Preferred A stock (3,900,320) (97,508) 3,496 Issuance of restricted stock awards 127,100 127 1,420 Adjustment for cash purchase and conversion of minority interests of unitholders in operating partnerships 42,944 43 194 Principal repayments on notes receivable from officer-shareholders Common stock distributions declared ($.81 per share) Preferred stock distributions declared-Series A ($1.05 per share) Preferred stock distributions declared-Series B ($1.58 per share) Preferred stock distributions declared-Series D ($1.44 per share) Amortization of deferred compensation -------------------------------------------------------------------- Balance, September 30, 2001 13,416,009 $ 310,400 99,149,807 $ 99,150 $ 1,047,338 ==================================================================== Deferred Accumulated Distributions Notes Receivable Compensation - Other in Excess of from Officer - Unearned Restricted Comprehensive Net Income Shareholders Stock Awards Loss - -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $ (366,531) $ (7,561) $ (828) $ - Comprehensive Income Net income 51,524 Other comprehensive loss: Cumulative effect of a change in accounting principle (Note 7) (3,848) Unrealized loss on derivative instruments (Note 7) (12,188) ------------------------------------------------------------------------------------------------------------------------ Comprehensive income 51,524 (16,036) ------------------------------------------------------------------------------------------------------------------------ Issuance of common shares to employees, officers and director-shareholders Issuance of common shares through dividend reinvestment and stock purchase plan Purchase of common and preferred stock Redemption of Preferred A stock (3,496) Issuance of restricted stock awards (1,547) Adjustment for cash purchase and conversion of minority interests of unitholders in operating partnerships Principal repayments on notes receivable from officer-shareholders 2,079 Common stock distributions declared ($.81 per share) (81,106) Preferred stock distributions declared-Series A ($1.05 per share) (4,111) Preferred stock distributions declared-Series B ($1.58 per share) (8,740) Preferred stock distributions declared-Series D ($1.44 per share) (11,571) Amortization of deferred compensation 624 ------------------------------------------------------------------- Balance, September 30, 2001 $ (424,031) $ (5,482) $ (1,751) $ (16,036) =================================================================== Total - ----------------------------------------------------------------- Balance, December 31, 2000 $ 1,218,892 Comprehensive Income Net income 51,524 Other comprehensive loss: Cumulative effect of a change in accounting principle (Note 7) (3,848) Unrealized loss on derivative instruments (Note 7) (12,188) --------------------------------------------------------------- Comprehensive income 35,488 --------------------------------------------------------------- Issuance of common shares to employees, officers and director-shareholders 3,956 Issuance of common shares through dividend reinvestment and stock purchase plan 3,267 Purchase of common and preferred stock (51,919) Redemption of Preferred A stock (97,508) Issuance of restricted stock awards - Adjustment for cash purchase and conversion of - minority interests of unitholders in operating partnerships 237 Principal repayments on notes receivable from officer-shareholders 2,079 Common stock distributions declared ($.81 per share) (81,106) Preferred stock distributions declared-Series A ($1.05 per share) (4,111) Preferred stock distributions declared-Series B ($1.58 per share) (8,740) Preferred stock distributions declared-Series D ($1.44 per share) (11,571) Amortization of deferred compensation 624 ----------- Balance, September 30, 2001 $ 1,009,588 ===========
See accompanying notes to consolidated financial statements. 6 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 1. Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of United Dominion and its subsidiaries, including United Dominion Realty, L.P. (the "Operating Partnership"), and Heritage Communities L.P. (the "Heritage OP"), (collectively, "United Dominion"). As of September 30, 2001, there were 74,962,675 units in the Operating Partnership outstanding, of which 68,497,168 units, or 91.4%, were owned by United Dominion and 6,465,507 units, or 8.6%, were owned by non-affiliated limited partners. As of September 30, 2001, there were 5,501,300 units in the Heritage OP outstanding, of which 4,876,208 units, or 88.6%, were owned by United Dominion and 625,092 units, or 11.4%, were owned by non-affiliated limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the operating partnerships. The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and related notes appearing in United Dominion's December 31, 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements reflect all adjustments which are necessary for the fair presentation of financial position at September 30, 2001 and results of operations for the interim periods ended September 30, 2001 and 2000. Such adjustments are normal and recurring in nature. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim results presented are not necessarily indicative of results that can be expected for a full year. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. 2. Real Estate Held for Investment At September 30, 2001 there are 271 communities with 76,431 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment at September 30, 2001 and December 31, 2000 (dollars in thousands):
September 30, December 31, 2001 2000 -------------- -------------- Land and land improvements $ 563,033 $ 668,003 Buildings and improvements 2,990,781 2,902,386 Furniture, fixtures and equipment 205,179 188,321 Construction in progress 632 264 -------------- -------------- Real estate held for investment 3,759,625 3,758,974 Accumulated depreciation (608,642) (506,871) -------------- -------------- Real estate held for investment, net of accumulated depreciation $3,150,983 $3,252,103 ============== ==============
7 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 3. Real Estate Held for Disposition At September 30, 2001, United Dominion had six parcels of land included in real estate held for disposition totaling $15.6 million. During the first quarter of 2001, management performed an analysis of the carrying value of all undeveloped land parcels in connection with the Company's plans to accelerate the disposition of these sites. As a result, an aggregate $2.8 million impairment loss was recognized on seven undeveloped sites in selected markets. An impairment loss was indicated as a result of the net book value of the assets being greater than the estimated fair market value less the cost of disposal. 4. Investment in Unconsolidated Joint Ventures At September 30, 2001, United Dominion's investment in an unconsolidated joint venture ("the venture") consisted of a 25% partnership interest in a development joint venture in which the Company is serving as the managing partner. No gain or loss was recognized on the Company's contribution to the development joint venture. The venture is developing five apartment communities with a total of 1,438 homes for an aggregate total cost of approximately $103 million. Upon closing of the venture in June 2000, United Dominion contributed the projects in return for its equity interest of approximately $8 million in the venture and was reimbursed for approximately $35 million of development outlays that were incurred prior to closing the joint venture. United Dominion serves as the developer, general contractor and property manager for the venture and recognized fee income, to the extent of the outside partner's interest, of approximately $0.9 million for services provided by the Company to the joint venture for the nine months ended September 30, 2001. As of September 30, 2001, construction of all five of the joint venture properties were complete. The Company has the option, but not the obligation, to purchase these properties for fair value through December 31, 2006. If the Company or the joint venture partner elects to not purchase these properties, the joint venture will then dispose of the assets to a third party at the then market price. Although the legal termination date of the joint venture is December 2006, the Company does not anticipate that the venture's useful life will exceed three years. The following is a summary of the financial position of the joint venture as of September 30, 2001 and December 31, 2000 (dollars in thousands):
September 30, December 31, 2001 2000 -------------- -------------- Assets: Real estate, net $ 96,956 $85,644 Other assets 3,823 6,507 -------------- -------------- Total assets $100,779 $92,151 ============== ============== Liabilities and partners' equity: Mortgage notes payable $ 65,938 $49,785 Other liabilities 5,459 11,436 Partners' equity 29,382 30,930 -------------- -------------- Total liabilities and partners' equity $100,779 $92,151 ============== ==============
8 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 5. Secured Debt Secured debt, which encumbers $1.7 billion or 44.9% of United Dominion's real estate owned ($2.1 billion or 55.1% of United Dominion's real estate owned is unencumbered) consists of the following at September 30, 2001 (dollars in thousands):
No. of Weighted Avg. Weighted Avg. Communities Principal Outstanding Interest Rate Years to Maturity Encumbered --------------------------- --------------------------------------------------- September 30, December 31, 2001 2000 2001 2001 2001 - -------------------------------------------------------------- --------------------------------------------------- Fixed Rate Debt Mortgage Notes Payable (a) $502,827 $513,962 7.78% 4.8 73 Tax-Exempt Secured Notes Payable 76,207 79,756 6.91% 12.4 10 Secured Credit Facilities (b) 17,000 17,000 7.04% 12.3 -- --------------------------- ---------------------------------------------------- Total Fixed Rate Secured Debt 596,034 610,718 7.65% 6.0 83 Variable Rate Debt Secured Credit Facilities (b) 360,160 216,960 4.26% 11.4 30 Tax-Exempt Secured Notes Payable 19,915 19,916 2.16% 23.7 3 Mortgage Notes Payable 15,181 18,521 4.64% 6.9 4 --------------------------- ---------------------------------------------------- Total Variable Rate Secured Debt 395,256 255,397 4.17% 11.9 37 --------------------------- ---------------------------------------------------- Total Secured Debt $991,290 $866,115 6.26% 8.4 120 =========================== ====================================================
(a) Includes fair value adjustments aggregating $8.7 million at September 30, 2001 and $10.2 million at December 31, 2000, recorded in connection with the mergers in 1998. (b) At September 30, 2001, United Dominion had $377.2 million outstanding under three revolving credit facilities with the Federal National Mortgage Association (the "FNMA Credit Facilities"). At September 30, 2001, the FNMA Credit Facilities had a weighted average floating rate of interest of 4.39% after giving effect to swap agreements. In order to limit a portion of its interest rate exposure, United Dominion has two interest rate swap agreements associated with the FNMA Credit Facilities. These agreements have an aggregate notional value of $17 million under which United Dominion pays a fixed rate of interest and receives a variable rate on the notional amount. The interest rate swap agreements effectively change United Dominion's interest rate exposure on $17 million of secured debt from a variable rate to a weighted average fixed rate of 7.04%. Approximate principal payments due during each of the next five calendar years and thereafter, as of September 30, 2001, are as follows (dollars in thousands): Total Fixed Rate Variable Rate Secured Year Maturities Maturities Maturities ----------------------------------------------------------- 2001 $ 21,648 $ 70 $ 21,718 2002 49,055 5,399 54,454 2003 55,033 370 55,403 2004 139,201 391 139,592 2005 120,966 5,138 126,104 Thereafter 210,130 383,889 594,019 -------------- --------------------------- Total $ 596,033 $ 395,257 $ 991,290 ============== =========================== 9 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 6. UNSECURED DEBT A summary of unsecured debt at September 30, 2001 and December 31, 2000 is as follows (dollars in thousands):
2001 2000 ------------- ------------- Commercial Banks Borrowings outstanding under an unsecured credit facility due August 2003 (a) (b) $ 216,900 $ 244,400 Borrowings outstanding under an unsecured term loan due May 2004-2005 (c) 100,000 100,000 Senior Unsecured Notes - Other 7.60% Medium-Term Notes due January 2002 46,750 48,750 7.65% Medium-Term Notes due January 2003 (d) 10,000 10,000 7.22% Medium-Term Notes due February 2003 11,815 11,900 5.05% City of Portland, OR Bonds due October 2003 7,345 7,345 8.63% Notes due March 2003 78,030 79,030 7.98% Notes due March 2002-2003 (e) 14,857 22,285 7.67% Medium-Term Notes due January 2004 53,510 54,000 7.73% Medium-Term Notes due April 2005 22,400 22,400 7.02% Medium-Term Notes due November 2005 49,760 50,000 7.95% Medium-Term Notes due July 2006 103,179 107,398 7.07% Medium-Term Notes due November 2006 25,000 25,000 7.25% Notes due January 2007 105,020 110,080 ABAG Tax-Exempt Bonds due August 2008 46,700 46,700 8.50% Monthly Income Notes due November 2008 57,400 57,400 8.50% Debentures due September 2024 (f) 124,920 125,500 Other (g) 3,335 4,027 ------------- ------------ 760,021 781,815 ------------- ------------ Total Unsecured Debt $ 1,076,921 $ 1,126,215 ============= ============
(a) Weighted average interest rate of 6.22% and 7.5% at September 30, 2001 and December 31, 2000, respectively. (b) United Dominion had eight interest rate swap agreements associated with commercial bank borrowings with an aggregate notional value of $155 million under which United Dominion pays a fixed rate of interest and receives a variable rate of interest on the notional amounts. The interest rate swaps effectively change United Dominion's interest rate exposure on these borrowings from a variable rate to a weighted average fixed rate of approximately 6.98%. (c) United Dominion had five interest rate swap agreements associated with borrowings under the term loan with an aggregate notional value of $100 million under which United Dominion pays a fixed rate of interest and receives a variable rate of interest on the notional amounts. The interest rate swaps effectively change United Dominion's interest rate exposure on these borrowings from a variable rate to a weighted average fixed rate of approximately 7.53%. (d) United Dominion had one interest rate swap agreement associated with these unsecured notes with an aggregate notional value of $10 million under which United Dominion pays a fixed rate of interest and receives a variable rate on the notional amount. The interest rate swap agreement effectively changes United Dominion's interest rate exposure on the $10 million from a variable rate to a fixed rate of 7.65%. (e) Payable annually in two equal principal installments of $7.4 million. (f) Includes an investor put feature that grants a one-time option to redeem the debentures in September 2004. (g) Includes $3.2 million and $3.8 million at September 30, 2001 and December 31, 2000, respectively, of deferred gains from the termination of interest rate risk management agreements. 10 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 7. Derivative Instruments and Hedging Activities Statements of Financial Accounting Standards No. 133 and 138, "Accounting for Certain Derivative Instruments and Hedging Activities" became effective on January 1, 2001. The new accounting standards require companies to carry all derivative instruments, including certain embedded derivatives, in the consolidated balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based on the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. At September 30, 2001, all of the Company's derivative financial instruments are designated as cash flow hedges of underlying exposures, and are qualifying hedges for financial reporting purposes. For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings during the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. The adoption of Statements 133 and 138 on January 1, 2001 resulted in a cumulative effect of an accounting change of a $3.8 million loss, all of which was recorded directly to other comprehensive loss. As part of United Dominion's overall interest rate risk management strategy, the Company uses derivative financial instruments as a means to modify the exposure to interest rate risk on variable rate debt obligations or to hedge anticipated financing transactions. The Company's derivative transactions used for interest rate risk management include various interest rate swaps with indices that relate to the pricing of specific financial instruments of United Dominion. Because of the close correlation between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the value of the underlying exposures. As a result, United Dominion believes that it has appropriately controlled the risk so that derivatives used for interest rate risk management will not have a material unintended effect on consolidated earnings. The Company does not enter into derivative financial instruments for trading purposes. The fair value of the Company's derivative instruments is reported on balance sheet at their current fair value. Estimated fair values for interest rate swaps rely on prevailing market interest rates. These fair value amounts should not be viewed in isolation, but rather in relation to the values of the underlying hedging transactions and investments and to the overall reduction in exposure to adverse fluctuations in interest rates. Each interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. The interest rate swaps involve the periodic exchange of payments over the life of the related agreements. Amounts received or paid on the interest rate swaps are recorded on an accrual basis as an adjustment to the related interest expense of the outstanding debt based on the accrual method of accounting. The related amounts payable to and receivable from counterparties are included in other liabilities and other assets, respectively. 11 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) The following table presents the fair values of the Company's derivative instruments outstanding as of September 30, 2001 (dollars in thousands):
--------------------------------------------------------------------------------------- Notional Fixed Type of Effective Contract Fair Value Amount Rate Contract Date Maturity Gain / (Loss) ---------------------------------------------------------------------------------------- Secured Debt: FNMA $ 7,000 6.78% Swap 06/30/99 06/30/04 $ (453) 10,000 7.22% Swap 12/01/99 04/01/04 (704) --------- ---- -------- 17,000 7.04% (1,157) Unsecured Debt: Bank Credit Facility 5,000 7.32% Swap 06/26/95 07/01/04 (360) 10,000 7.14% Swap 10/18/95 10/03/02 (403) 5,000 6.98% Swap 11/21/95 10/03/02 (192) 25,000 7.39% Swap 11/01/00 08/01/03 (1,568) 25,000 7.39% Swap 11/01/00 08/01/03 (1,568) 25,000 7.21% Swap 12/01/00 08/01/03 (1,413) 25,000 7.21% Swap 12/04/00 08/01/03 (1,413) 35,000 5.98% Swap 03/13/01 04/01/03 (1,098) --------- ---- -------- 155,000 6.98% (8,015) Bank Term Loan 25,000 7.49% Swap 11/15/00 05/15/03 (1,385) 20,000 7.49% Swap 11/15/00 05/15/03 (1,109) 23,500 7.62% Swap 11/15/00 05/15/04 (1,773) 23,000 7.62% Swap 11/15/00 05/15/04 (1,736) 8,500 7.26% Swap 12/04/00 05/15/03 (453) --------- ---- -------- 100,000 7.53% (6,456) Medium-Term Notes 10,000 7.65% Swap 01/26/99 01/27/03 (472) --------------------------------------------------------------------------------------- $ 282,000 $(16,100) =======================================================================================
During the quarter ended September 30, 2001, United Dominion recognized $6.2 million of unrealized losses in accumulated other comprehensive loss related to the Company's hedging instruments and $32.7 thousand in net loss related to the ineffective portion of the Company's hedging instruments. For the nine months ended September 30, 2001, the Company has recognized $12.1 million of unrealized losses in accumulated other comprehensive loss, a $64.0 thousand loss in net income, and a $3.8 million loss as a cumulative effect of a change in accounting principle. As of September 30, 2001, United Dominion expects to reclassify $8.6 million of net losses on derivative instruments from accumulated other comprehensive income to earnings (interest expense) during the next twelve months in order to artificially fix the interest rate on the related hedged transactions. 12 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 8. Earnings Per Share Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed based upon common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potential common stock equivalents is determined using the treasury stock method based on United Dominion's average stock price. The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share data):
Three months ended Nine months ended September 30, September 30, 2001 2000 2001 2000 ---------------------- --------- ----------- Numerator for basic and diluted earnings per share- net income available to common shareholders $ 6,778 $ 11,161 $ 23,606 $ 26,566 Denominator: Beginning denominator for basic earnings per share-weighted average common shares outstanding 99,777 103,354 100,766 103,256 Non-vested restricted stock (154) (96) (154) (96) --------- --------- --------- ----------- Denominator for basic earnings per share 99,623 103,258 100,612 103,160 --------- --------- --------- ----------- Non-vested restricted stock 154 96 154 96 Effect of dilutive securities: Employee stock options 689 160 526 90 --------- --------- --------- ----------- Denominator for diluted earnings per share 100,466 103,514 101,292 103,346 ========= ========= ========= =========== Basic earnings per share $ 0.07 $ 0.11 $ 0.23 $ 0.26 ========= ========= ========= =========== Diluted earnings per share $ 0.07 $ 0.11 $ 0.23 $ 0.26 ========= ========= ========= ===========
The effect of the conversion of the operating partnership units and convertible preferred stock is not dilutive and is therefore not included in the above calculations. If the operating partnership units were converted to common stock, the additional shares of common stock outstanding for the three and nine months ended September 30, 2001 and 2000 would be 7,222,480 and 7,354,237 for 2001 and 7,489,450 and 7,498,455 for 2000, respectively. If the convertible preferred stock was converted to common stock, the additional shares of common stock outstanding for the three and nine months ended September 30, 2001 and 2000 would be 12,307,692 common shares. 9. Restructuring Charges During the first quarter of 2001, United Dominion announced the appointment of a new chief executive officer and senior management structure. The new management team began a comprehensive review of the organizational structure of the Company and its operations. As a result of this review, the Company recorded a charge of $5.4 million related to workforce reductions and other miscellaneous costs. These charges are included in the Consolidated Statements of Operations within the line item "Severance costs and other organizational charges." All charges came under consideration subsequent to the appointment of the Company's new CEO in February 2001 and were approved by management and the Board of Directors in March 2001. The planned workforce reductions resulted in a charge of $4.5 million and in the planned termination of approximately 200 full time equivalent positions, or 10% of total staffing in corporate functions, including senior management and general and administrative functions, and in apartment operations. Employee termination benefits include severance packages and related benefits and outplacement services for employees terminated. As of September 30, 2001, approximately 230 employees have been terminated. All of the unpaid charge was paid during the third quarter of 2001. 13 UNITED DOMINION REALTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) A reconciliation of the unpaid severance costs for the nine months ended September 30, 2001, is presented below (dollars in millions): Balance, beginning of period $ -- Accrued severance costs 4.5 Cash payments (0.9) -------------------------------------------------- Balance, March 31, 2001 $ 3.6 Cash payments (2.0) -------------------------------------------------- Balance, June 30, 2001 $ 1.6 Cash payments (1.6) -------------------------------------------------- Balance, September 30, 2001 $ 0.0 -------------------------------------------------- In connection with senior management's review of the Company during the first quarter, United Dominion also recognized $0.4 million related to relocation costs associated with the new executive offices in Denver and $0.5 million related to other miscellaneous costs. 10. Contingencies In May 2001, the shareholders of United Dominion approved the Out-Performance Program (the "Program) pursuant to which officers and other key employees of the Company will be given the opportunity to invest in the Company by purchasing performance shares ("Out-Performance Partnership Shares" or "OPPSs") of the Operating Partnership for an initial investment of $1.27 million. To begin the Program, the Company's performance will be measured over a twenty-eight month period beginning with the month of the new CEO's employment (February 2001). The Program is designed to provide participants with the possibility of substantial returns on their investment if the Company's total return, defined as dividend income plus share price appreciation, on its common stock during the measurement period exceeds the greater of industry average (defined as the total cumulative return of the Morgan Stanley REIT Index over the same period) or a 30% total return (12% annualized-the "minimum return"). At the conclusion of the measurement period, if United Dominion's total return satisfies these criteria, the holders of the OPPSs will receive distributions and allocations of income and loss from the Operating Partnership equal to the distributions and allocations that would be received on the number of interests in the Operating Partnership ("OP Units") obtained by: (i) determining the amount by which the cumulative total return of the Company's common stock over the measurement period exceeds the greater of the cumulative total return of the peer group index (the Morgan Stanley REIT Index) or the minimum return (such being the "excess return"); (ii) multiplying 4% of the excess return by the Company's market capitalization (defined as the average number of shares outstanding over the 28 month period multiplied by the daily closing price of the Company's common stock); and (iii) dividing the number obtained in (ii) by the market value of one share of the Company common stock on the valuation date, as the weighted average price per day of the common stock for the 20 trading days immediately preceding the valuation date. If, on the valuation date, the cumulative total return of United Dominion's common stock does not meet the minimum return or the total return of the peer group and there is no excess return, then the holders of the OPPSs will forfeit their entire initial investment of $1.27 million. The Company has not met the required measurement benchmarks as of September 30, 2001 and; therefore, the Company has not recorded any value to the OPPSs in the consolidated financial statements as of September 30, 2001. 11. Impact of Recently Issued Accounting Standards In August 2001, the FASB issued Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). The Statement supercedes Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of and APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. SFAS No. 144 retains the requirements of Statement 121 relating to the recognition and measurement of an impairment loss and resolves certain implementation issues resulting from Statement 121. This Statement is effective for fiscal years beginning after December 15, 2001. We are currently assessing the impact of this statement on the Company, however, we do not anticipate this statement to have a material impact on the consolidated financial position or results of operations of the Company. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Forward-Looking Statements The following information should be read in conjunction with the United Dominion Realty Trust, Inc. ("United Dominion") 2000 Form 10-K as well as the financial statements and notes included in Item 1 of this report. This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy and rental expense growth. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement of United Dominion to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting United Dominion, or its properties, adverse changes in the real estate markets and general and local economies and business conditions. Although United Dominion believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by United Dominion or any other person that the results or conditions described in such statements or the objectives and plans of United Dominion will be achieved. Overview United Dominion is a real estate investment trust (REIT) with activities related to the ownership, development, acquisition, renovation, management, marketing and strategic disposition of multifamily apartment communities nationwide. Over the past four years, United Dominion has diversified into new markets to create a national platform, upgraded the quality of the portfolio and invested in infrastructure and technology. The Company continues to review its strategy with a goal of enhancing long-term earnings growth on a sustained basis. At September 30, 2001, United Dominion owned 271 communities with 76,431 apartment homes nationwide. 15 The following table summarizes United Dominion's apartment market information by major geographic markets (including real estate under development):
Nine Months Ended Three Months Ended As of September 30, 2001 September 30, 2001 September 30, 2001 ----------------------------------------------------- ------------------------- ---------------------- Number of Total % Of Carrying Average Average Average Average Apartment Apartment Carrying Value Physical Monthly Physical Monthly Communities Homes Value (in thousands Occupancy Rental Rates Occupancy Rental Rates ----------------------------------------------------- ------------------------- ---------------------- Houston, TX 22 5,722 6.0% $ 226,179 93.6% $ 612 94.3% $ 629 Dallas, TX 14 4,533 5.8% 219,537 95.4% 679 95.6% 686 Phoenix, AZ 11 3,618 5.6% 210,720 94.3% 691 93.5% 719 Orlando, FL 14 4,140 5.3% 201,408 93.1% 705 93.3% 713 San Antonio, TX 12 3,827 5.0% 189,368 93.8% 702 88.5% 668 Raleigh, NC 10 3,147 4.3% 163,507 91.0% 723 91.6% 730 Tampa, FL 10 3,372 4.0% 151,373 91.3% 657 94.0% 699 Fort Worth, TX 11 3,561 3.9% 147,687 96.8% 634 96.6% 644 Columbus, OH 6 2,527 3.9% 146,892 93.3% 668 94.0% 676 San Francisco, CA 4 980 3.7% 140,825 97.5% 1,782 96.9% 1,787 Charlotte, NC 10 2,710 3.6% 135,460 89.5% 688 87.4% 702 Nashville, TN 8 2,220 3.2% 119,421 94.1% 688 95.5% 691 Greensboro, NC 8 2,122 2.7% 103,348 91.2% 640 90.4% 646 Monterey Penninsula, CA 9 1,706 2.6% 97,075 96.1% 847 95.5% 875 Memphis, TN 6 1,956 2.6% 96,597 92.8% 634 93.0% 638 Richmond, VA 8 2,372 2.5% 95,782 95.5% 708 94.1% 719 Southern California 5 1,414 2.4% 90,673 95.7% 894 95.6% 921 Wilmington, NC 6 1,869 2.3% 88,792 92.1% 659 95.9% 665 Metropolitan DC 5 1,291 1.9% 73,699 98.3% 832 97.8% 857 Atlanta, GA 6 1,426 1.9% 70,860 93.7% 740 93.4% 747 Baltimore, MD 6 1,291 1.8% 66,939 97.3% 809 96.3% 830 Columbia, SC 6 1,584 1.6% 62,050 94.5% 584 95.5% 588 Jacksonville, FL 3 1,157 1.5% 57,959 92.2% 669 94.7% 672 Norfolk, VA 6 1,437 1.4% 53,906 95.5% 661 95.7% 672 East Lansing, MI 4 1,226 1.3% 48,387 90.8% 658 89.3% 669 Seattle, Wa 3 628 0.9% 33,989 95.4% 738 94.9% 753 Other Western 6 2,474 3.6% 139,749 95.8% 728 95.8% 743 Other Florida 8 2,073 2.7% 100,987 94.0% 694 93.0% 701 Other Southwestern 9 2,212 2.6% 97,398 93.2% 588 91.4% 595 Other Midwestern 10 2,122 2.5% 93,068 92.8% 626 94.6% 633 Other Pacific 7 1,757 2.3% 86,951 92.8% 697 92.2% 709 Other North Carolina 8 1,893 2.0% 74,055 94.9% 564 94.9% 571 Other Mid-Atlantic 5 928 1.1% 42,302 96.1% 766 97.3% 778 Other Southeastern 3 764 1.0% 37,290 94.5% 586 95.7% 588 Other Northeastern 2 372 0.5% 18,049 96.3% 666 95.2% 680 ---------------------------------------------------- ---------------------- ---------------------- Total Apartments 271 76,431 100.0% $3,782,282 93.9% $ 696 93.8% $ 706 ==================================================== ====================== ======================
16 Liquidity and Capital Resources United Dominion's primary source of liquidity is its cash flow from operations as determined by rental rates, occupancy levels and operating expenses related to its portfolio of apartment homes. United Dominion routinely uses its unsecured bank credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing. During the past several years, proceeds from the sales of real estate have been used for both investing and financing activities. United Dominion regularly reviews its short and long-term liquidity requirements and considers the adequacy of its cash flow from operations as well as other liquidity sources to meet these requirements. United Dominion believes that it can fund its short-term liquidity needs such as normal recurring operating expenses, debt service payments, recurring capital expenditures and distributions to common and preferred shareholders through cash provided by operating activities and borrowings from the Company's unsecured bank credit facility, as needed (see discussion that follows under "Financing Activities"). To facilitate future financing activities in the public capital markets, management believes that it is prudent to maintain shelf registration statement capacity. In this regard, United Dominion filed a shelf registration statement in December 1999 providing for the issuance of up to $700 million in common shares, preferred shares and debt securities. In March 2000, United Dominion utilized this shelf registration statement to sell $100 million of senior unsecured notes due March 2003 at an interest rate of 8.625%. As of September 30, 2001, $600 million of equity and debt securities remain available for use under the shelf registration. Future Capital Needs Future development expenditures are expected to be funded primarily through joint ventures or with proceeds from the sale of property, and to a lesser extent, cash flows provided by operating activities. Acquisition activity in strategic markets is expected to be largely financed by the reinvestment of proceeds from the sale of property in non-strategic markets. During the fourth quarter of 2001, United Dominion has approximately $21.7 million of maturing debt which the Company anticipates repaying using proceeds from mortgage refinancing activity or borrowings under the Company's unsecured credit facility. The following discussion explains the changes in net cash provided by operating and investing activities and net cash used in financing activities which are presented in United Dominion's Consolidated Statements of Cash Flows. Operating Activities For the nine months ended September 30, 2001, United Dominion's cash flow from operating activities was $172.3 million compared to $158.4 million for the same period last year. The increase of $13.9 million in the cash flow from operating activities resulted primarily from (i) a change in the level of operating assets as a result of collections on escrow accounts and joint venture receivables and (ii) an increase in the level of operating liabilities due to the timing of payments of certain operating liabilities, both of which were offset by a decline in revenues generated from a smaller portfolio of assets. Investing Activities For the nine months ended September 30, 2001, net cash provided by investing activities was $25.1 million compared to net cash provided by investing activities of $72.1 million for 2000. Changes in the level of investing activities from period to period reflects United Dominion's strategy as it relates to its acquisition, capital expenditure, development and disposition programs, as well as the impact of the capital market environment on these activities. 17 Real Estate under Development Development activity is focused in core markets that have strong operations managers in place. For the nine months ended September 30, 2001, United Dominion invested approximately $43.4 million in real estate projects, down $19.3 million from its 2000 level of $62.7 million. The following projects were under development at September 30, 2001:
Cost to Budgeted Expected No. of Apt. Completed Date Cost Est. Cost Completion Location Homes Apt. Homes (In thousands) (In thousands) Per Home Date ------------- ------------ ------------- --------------- ---------------- ------------- ------------- New Communities: - ------------------------ Dominion Place at Raleigh, NC 332 196 $21,300 $25,700 $77,400 1Q02 Kildaire Farm Additional Phases: - ------------------------ Greensview II Denver, CO 192 48 12,700 16,700 87,000 1Q02 The Meridian II Dallas, TX 270 - 9,100 17,400 64,400 2Q02 ---------- --------- --------------- ---------------- ------------- Subtotal 462 48 21,800 34,100 73,800 ---------- --------- --------------- ---------------- ------------- Total 794 244 $43,100 $59,800 $75,300 ========== ========= =============== ================ =============
In addition, United Dominion owns eight parcels of land that it continues to hold for future development that had a carrying value at September 30, 2001 of $11.0 million. Seven of the eight parcels represent second phases to existing communities. During the third quarter, Red Stone Ranch, a 324 home community located in Austin, Texas and Manor at England Run III, a 120 home community located in Fredericksburg, Virginia, were completed. Both properties were completed on schedule and under budget and were 57.9% and 100.0% leased, respectively, as of September 30, 2001. Development Joint Venture On June 21, 2000, United Dominion completed the formation of a joint venture that will invest approximately $103 million to develop five apartment communities with a total of 1,438 apartment homes. United Dominion owns a 25% interest in the joint venture and is serving as the managing partner of the joint venture as well as the developer, general contractor and property manager. Upon closing of the venture, United Dominion contributed the projects in return for its equity interest of approximately $8 million in the venture and was reimbursed for approximately $35 million of development outlays that were incurred prior to closing the joint venture. For the three and nine months ended September 30, 2001, United Dominion recognized fee income of approximately $0.2 million and $0.9 million, respectively, for general contracting, developer services and management fee provided by the Company to the joint venture. The Company has the option, but not the obligation, to purchase these properties for fair value through December 31, 2006. If the Company or the joint venture partner elects to not purchase these properties, the joint venture will then dispose of the assets to a third party at the then market price. 18 The following joint venture projects were complete as of September 30, 2001:
Development No. of Apt. Cost Cost Per Date Location Homes (In thousands) Home Completed % Leased -------------- ------------- ----------------- -------------- ------------- ------------ New Communities: - -------------------- Meridian I Dallas, TX 250 $16,400 $65,600 6/00 97.6% Parke 33 Lakeland, FL 264 17,100 64,800 2/01 95.5% Sierra Canyon Phoenix, AZ 236 15,400 65,300 3/01 99.2% Oaks at Weston Raleigh, NC 380 28,000 73,700 3/01 79.7% Mandolin Dallas, TX 308 21,100 68,500 9/01 97.1% ------------ ---------------- ------------- Total 1,438 $98,000 $68,200 ============ ================ =============
Disposition of Investments For the nine months ended September 30, 2001, United Dominion sold nine communities with 1,889 apartment homes and two parcels of land for an aggregate sales price of approximately $134.1 million and recognized gains for financial reporting purposes of $24.7 million. Proceeds from the sales were applied primarily to reductions in long-term debt and to the repurchase of common shares, and to a lesser extent, to complete 1031 exchanges in order to defer taxable gains. The Company currently has three development sites under contract for sale for a total consideration of $6.3 million through which no gains or losses are expected to be recognized. These sales are subject to due diligence evaluations by the buyers. Within each market, United Dominion plans to dispose of selected communities with inferior locations, significant capital expense requirements without the potential of a corresponding increase in rent or insufficient growth potential. Proceeds from the 2001 sales, expected to be at levels below that of 2000, are expected to be used to reduce debt, repurchase common and preferred shares, fund development activity and acquire communities. Acquisitions During the nine months ended September 30, 2001, United Dominion acquired two communities with 510 apartment homes at a total cost (including closing costs) of approximately $32.0 million which included the use of tax free exchange funds. During the remainder of 2001 and for 2002, the new senior management team plans to channel new investments to those markets that are projected to provide the best investment returns for the Company over the next ten years. Markets will be targeted based upon refined criteria including past performance, expected job growth, current and anticipated housing supply and demand, ability to attract and support household formation and local market expertise. Capital Expenditures United Dominion capitalizes those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred. During the nine months ended September 30, 2001, $34.5 million or $455 per home was spent on capital expenditures for all of United Dominion's communities excluding development and commercial properties. These capital improvements included turnover related expenditures such as floor coverings and appliances, other recurring capital expenditures such as HVAC equipment, roofs, landscaping, siding, parking lots and other non-revenue enhancing capital expenditures, which aggregated $21.8 million or $287 per home. In addition, revenue enhancing capital expenditures, including water sub-metering, gating and access systems, the addition of microwaves, washer-dryers, interior upgrades and new business and fitness centers totaled $12.7 million or $168 per home for the nine months ended September 30, 2001. United Dominion will continue to selectively add revenue-enhancing improvements that the Company believes will provide a return on investment in excess of United Dominion's cost of capital. Capital expenditures during 2001 are currently expected to be at levels somewhat higher than those experienced in 2000. 19 The following table outlines capital expenditures and repair and maintenance costs for the Company's total portfolio, excluding real estate under development and commercial properties, containing 75,853 and 80,356 apartment homes on a weighted average basis for the nine months ended September 30, 2001 and 2000 respectively (dollars in thousands):
Nine Months Ended Nine Months Ended September 30, September 30, (per unit) -------------------------------------- -------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------------------------------- -------------------------------------- Turnover Capital Expenditures $12,242 $11,261 8.71% $161 $140 15.00% Recurring Capital Expenditures 9,558 8,453 13.07% 126 105 20.00% ------------------------------------ ------------------------------------ Total Recurring Capital Expenditures 21,800 19,714 10.58% 287 245 17.14% Revenue Enhancing Improvements 12,711 11,889 6.91% 168 148 13.51% ------------------------------------ ------------------------------------ Total Capital Improvements $34,511 $31,603 9.20% $455 $393 15.78% ==================================== ==================================== Repair and Maintenance 26,566 27,039 -1.75% 350 336 4.17% ------------------------------------ ------------------------------------ Total Expenditures $61,077 $58,642 4.15% $805 $729 10.43% ==================================== ====================================
Financing Activities Net cash used in financing activities during the nine months ended September 30, 2001 was $200.5 million compared to $227.4 million for 2000, a decrease of $26.9 million. As part of the plan to improve the Company's balance sheet position, United Dominion used proceeds from its disposition program and borrowings under its FNMA credit facility to pay down secured and unsecured debt, to repurchase shares of common and preferred stock and to complete 1031 exchanges in order to defer taxable gains. On June 15, 2001, the Company completed the redemption of all of its outstanding 9.25% Series A Cumulative Redeemable Preferred shares at $25 per share plus accrued dividends utilizing proceeds from its line of credit. For the three months ended September 30, 2001, the Company did not purchase any preferred B shares. For the nine months ended September 30, 2001, United Dominion has repurchased 17,600 Series B preferred shares at an average price of $24.42 per share. For the quarter ended September 30, 2001, the Company repurchased 1,397,419 common shares and operating partnership units at an average price of $14.10. As of September 30, 2001, approximately 3.2 million common shares remained available for purchase under the common share repurchase program. Repurchases of shares will be made from time to time in the open market or in privately negotiated transactions. The timing, volume and purchase price will be at the discretion of the Company. On August 14, 2001, United Dominion closed on a $200 million credit facility with ARCS Commercial Mortgage Co., L.P. ARCS is a Fannie Mae DUS Lender. The initial funding on the facility was $139 million. The adjustable rate loan was provided through Fannie Mae DMBS for a five-year term based on three month LIBOR, with an initial interest rate of 3.99%. The Company has the option to extend the facility for an additional five years. The proceeds of the loan were used principally to replenish the Company's line of credit for the redemption of the $100 million 9.25% Series A Cumulative Redeemable Stock that occurred earlier this year. The balance of the loan proceeds was used to refinance maturing secured loans. For the nine months ended September 30, 2001, the Company has repaid $21.3 million of unsecured debt and $65.2 million of secured debt, was relieved of $7.7 million of secured debt in connection with the disposition of properties and assumed $18.2 million of secured debt in connection with the acquisition of properties. On September 24, 2001, Moody's Investors Service lowered its rating on the securities of the Company to Baa3 from Baa2. This revision will not trigger a material increase in the borrowing rate under the Company's $375 million three-year unsecured revolving credit facility (see discussion under "Credit Facilities" that follows). In addition, management does not anticipate that this revision will prevent the Company from accessing the public or private markets for either secured or unsecured financing. 20 Credit Facilities United Dominion has a $375 million three-year unsecured revolving credit facility (the "Credit Facility") which extends until August 2003. As of September 30, 2001, $216.9 million was outstanding under the Credit Facility. Under the Credit Facility, effective September 24, 2001, the Company may borrow at a rate of LIBOR plus 110 basis points for LIBOR-based borrowings. Under the Credit Facility, the Company pays a facility fee, which is equal to 0.25% of the commitment. The Credit Facility is subject to customary financial covenants and limitations. Information concerning short-term bank borrowings is summarized in the table that follows (dollars in thousands):
Nine months ended Year ended September 30, 2001 December 31, 2000 - ------------------------------------------------------------------------------------------------------- Total revolving credit facilities $375,000 $375,000 Borrowings outstanding at end of period 216,900 244,400 Weighted average daily borrowings during the period 261,956 195,128 Maximum daily borrowings during the period 347,200 308,000 Weighted average interest rate during the period 5.6% 7.3% Weighted average interest rate at end of period 4.4% 7.7%
Derivative Instruments As part of United Dominion's overall interest rate risk management strategy, the Company uses derivatives as a means to modify the interest rate characteristics of variable rate debt obligations or to hedge anticipated financing transactions. The Company's derivative transactions used for interest rate risk management include various interest rate swaps with indices that relate to the pricing of specific financial instruments of United Dominion. The Company believes that it has appropriately controlled its interest rate risk through the use of its derivative instruments. Due to the current interest rate environment, the fair value of the Company's derivative instruments has declined from $(3.8) million at December 31, 2000 to $(16.1) million at September 30, 2001 (see Note 7 - Derivative Instruments and Hedging Activities). Funds from Operations Funds from operations ("FFO") is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (losses) from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. United Dominion computes FFO for all periods presented in accordance with the recommendations set forth by the National Association of Real Estate Investment Trust's October 1, 1999 White Paper. United Dominion considers FFO in evaluating property acquisitions and its operating performance, and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of United Dominion's operating performance and liquidity. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. Adjusted funds from operations ("AFFO") is defined as FFO less recurring capital expenditures for our stabilized portfolio at $350 per unit in 2001 and $311 per unit in 2000. The 2001 unit charge will be adjusted to actual at year end. The Company believes AFFO is the best measure of economic profitability for real estate investment trusts. 21 The following table outlines United Dominion's FFO calculation for the three and nine months ended September 30, (dollars in thousands):
Three Months Ended Nine Months Ended September 30, September 30, --------------------- -------------------- 2001 2000 2001 2000 --------------------- -------------------- Net income $ 13,547 $ 20,183 $51,524 $ 52,040 Adjustments: Distributions to preferred shareholders (6,769) (9,179) (24,422) (27,808) Real estate depreciation, net of outside partners' interest 35,646 36,987 113,188 114,174 Net gains on sale of depreciable property, net of outside partners' interest -- (10,424) (24,005) (18,572) Minority interests of unitholders in operating partnership 487 798 1,718 1,760 Real estate depreciation related to unconsolidated entities 282 79 746 188 Extraordinary item-early extinguishment of debt 186 91 745 (267) --------- --------- -------- --------- Funds From Operations-basic $ 43,379 $ 38,535 $119,494 $ 121,515 ========= ========= ======== ========= Adjustment: Distribution to preferred shareholders-Series D (Convertible) 3,857 3,825 11,571 11,475 --------- --------- -------- --------- Funds From Operations-diluted $ 47,236 $ 42,360 $131,065 $ 132,990 ========= ========= ======== ========= Adjustment: Recurring capital expenditures (6,613) (6,168) (19,911) (18,743) --------- --------- -------- --------- Adjusted Funds From Operations-diluted $ 40,623 $ 36,192 $111,154 $ 114,247 ========= ========= ======== ========= Weighted average number of common shares and OP Units outstanding - basic 107,000 110,774 108,120 110,590 Weighted average number of common shares and OP Units outstanding - diluted 120,032 123,281 120,989 123,069
In the computation of diluted FFO, OP units and the convertible Series D preferred shares are dilutive; therefore, they are included in the diluted share count. Results of Operations Net Income Available to Common Shareholders Net income available to common shareholders decreased $4.4 million for the three months ended September 30, 2001. The decrease in net income available to common shareholders for the quarter was primarily attributable to gains on the sales of investments of $11.3 million recognized during the third quarter of 2000 with no corresponding gains recognized during 2001. These gains were partially offset by two one-time charges recognized in 2000 aggregating $3.7 million related to severance costs and the settlement of litigation. In addition, rental income decreased $3.2 million to $153.8 million and expenses decreased $4.9 million (excluding non-recurring charges in 2000 as mentioned above) due to lower interest costs of $36.6 million for the three months ended September 30, 2001 compared to $39.1 million in 2000. For the nine months ended September 30, 2001, net income available to common shareholders decreased $3.0 million. The decrease for the period was primarily due to an overall decrease in rental income of $8.1 million to $462.8 million offset by an overall decrease in expenses of $11.2 million (excluding non-recurring charges in 2000 as discussed above and charges recognized in 2001 - - see discussion that follows under "Restructuring Charge" and "Impairment Loss on Real Estate and Investments") due to lower interest costs of $109.7 million for the nine months ended September 30, 2001 compared to $117.9 million in 2000. In addition, the Company recognized higher gains on the sale of investments for the nine month period ended 2001; however, these gains were offset by the premium paid to redeem the Company's 9.25% Series A preferred shares. 22 Apartment Community Operations United Dominion's net income is primarily generated from the operations of its apartment communities. The following table summarizes the operating performance for United Dominion's total apartment portfolio for each of the periods presented (dollars in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 2001 2000 % Change 2001 2000 % Change ---------------------------------- ---------------------------------- Property rental income $153,526 $156,720 -2.0% $461,656 $469,743 -1.7% Property rental expenses (excluding property management, depreciation and amortization) (56,451) (58,738) -3.9% (169,897) (173,454) -2.1% -------------------------------- -------------------------------- Property operating income $ 97,075 $ 97,982 -0.9% $291,759 $296,289 -1.5% ================================ ================================ Weighted average number of homes 76,102 80,021 -4.9% 76,421 81,221 -5.9% Physical occupancy 93.8% 94.5% -0.7% 93.9% 94.2% -0.3%
The decrease in property operating income and property operating expenses by the Company's apartment community operations is due to the disposition of 7,724 apartment homes during 2000 and 2001. As a result of these dispositions, the weighted average number of apartment homes declined 5.9% from the nine month period ended September 30, 2000 to the nine month period ended September 30, 2001. Same Communities United Dominion's same communities (those communities acquired, developed or stabilized prior to July 1, 2000 and held on July 1, 2001 which consisted of 73,557 and 73,000 weighted average apartment homes for the three and nine month comparative periods) provided 95% of the Company's property operating income for the nine months ended September 30, 2001. For the third quarter of 2001, property operating income for the same communities increased 2.7% or $2.5 million compared to the same period in 2000. The growth in property operating income resulted from a $3.3 million or 2.3% increase in property rental income over the same period in the prior year. The increase was driven by a $6.6 million or 4.4% increase in rental rates. During the nine months ended September 30, 2001, same community property operating income increased 2.7% or $7.2 million compared to the same period last year. The growth in property operating income resulted primarily from a $14.0 million or 3.3% increase in property rental income that was driven by a $17.7 million or 4.0% increase in average monthly rental rates. For both periods, the increased rental rates were partially offset by higher concessions and an increase in bad debt expense. Physical occupancy decreased 0.7% to 93.8% for the third quarter of 2001 compared to the same period in 2000. For the quarter ended September 30, 2001, property operating expenses at these same communities increased only $0.8 million or 1.5%. The increase in property operating expenses was primarily due to a $0.8 million increase in taxes due to reassessments. During the nine months ended September 30, 2001, same community operating expense increased 4.4% or $6.8 million compared to the same period last year. The increase in property operating expenses resulted primarily from a $3.3 million or 14.1% increase in gas costs (net of reimbursement by residents) experienced during the first half of 2001 due to the run-up in prices for natural gas and overall increases in market rates. In addition, the Company experienced a $1.3 million or 5.6% increase in repair and maintenance and a $0.9 million or 2.4% increase in taxes. As a result of the percentage changes in total property operating income and total property operating expenses, the operating margin (property operating income divided by property rental income) for the three and nine months ended September 30, 2001 was 63.3% compared to 63.0% and 63.7% for the same periods last year. 23 Non-Mature Communities The remaining 5% of United Dominion's property operating income during the nine months ended September 30, 2001 was generated from its non-mature communities (those communities acquired or developed during 2000 and 2001). United Dominion's development communities which included 1,680 apartment homes constructed since January 1, 2000 provided an additional $1.7 million and $6.6 million of property operating income for the three and nine months ended September 30, 2001. In addition, the three communities with 777 apartment homes acquired by United Dominion during 2000 and 2001 provided an additional $1.0 million and $2.7 million of property operating income for the three and nine months ended September 30, 2001. Real Estate Depreciation Real estate depreciation decreased $1.3 million or 3.5% and $0.9 million or 0.8% for the three and nine months ended September 30, 2001, over the same periods last year. The decrease in depreciation expense is attributable to the overall decrease in the weighted average number of apartment homes partially offset by the impact of completed development communities and capital expenditures. Interest Expense Interest expense decreased $2.5 million and $8.2 million for the three and nine months ended September 30, 2001, respectively, over the same periods last year due to a decrease in the level of outstanding debt and decreasing interest rates. For the nine month period, the weighted average amount of debt outstanding decreased 3.8% or $79.1 million from 2000 levels and the weighted average interest rate decreased from 7.6% in 2000 to 7.2% in 2001. For the three month period, the weighted average amount of debt outstanding decreased 3.8% or $81.3 million in 2001 as compared to the same period in the prior year and the weighted average interest rate decreased from 7.6% in 2000 to 7.0% in 2001. The weighted average amount of debt employed during 2001 is lower as a portion of disposition proceeds was used to repay outstanding debt. The decrease in the average interest rate during 2001 reflects the ability of the Company to take advantage of declining interest rates through refinancing and the utilization of variable rate debt. Restructuring Charge During the quarter ended March 31, 2001, United Dominion undertook a comprehensive review of the organizational structure of the Company and its operations subsequent to the appointment of a new senior management team and CEO. As a result, the Company recorded $4.5 million of expense related to the termination of approximately 10% of United Dominion's workforce (ultimately approximately 230 full-time equivalent positions) in operations and at the corporate headquarters. Management anticipates that the reduction in workforce will result in an annualized savings of approximately $3.0 to $3.5 million through ongoing cost efficiencies. These reductions will impact both personnel and general and administrative expenses. As of September 30, 2001, approximately $4.0 million of the accrued charge has been paid with the remainder to be paid during the fourth quarter of 2001. In addition, United Dominion recognized expense in the aggregate of $0.9 million related to relocation costs associated with the new executive offices in Denver and other miscellaneous costs. No adjustments to the existing reserve are contemplated at this time. All charges came under consideration subsequent to the appointment of the Company's new CEO in February 2001 and were approved by management and the Board of Directors in March 2001. Impairment Loss on Real Estate and Investments In connection with the evaluation of the Company's real estate assets and operations during the first quarter of 2001, senior management determined that it was in the Company's best interest to dispose of a majority of its undeveloped tracts of land at an accelerated pace and redeploy the proceeds elsewhere. This represented a change from prior management in the holding period of these assets and their respective values. Prior management had purchased these tracts of land in 1999 and 2000 with the intent to build apartment communities on them. In order to accelerate the disposition of these undeveloped land sites, the Company recorded an aggregate $2.8 million impairment loss during the first quarter for the write down of seven undeveloped sites in selected markets. The $2.8 million charge represents the discount necessary to dispose of these assets in a short time frame coupled with decreases in market value in 2001 for these properties. In addition, the Company recognized a $0.3 million charge for the write down of United Dominion's investment in an online apartment leasing company. 24 General and Administrative For the three and nine months ended September 30, 2001, general and administrative expenses increased $1.0 million or 28.2% and $3.6 million or 32.2% over 2000. The increase was primarily due to an increase in accrued incentive bonus expense. Gains on Sales of Investments For the three and nine months ended September 30, 2001, United Dominion recognized gains for financial reporting purposes of $0 and $24.7 million, respectively, compared to $11.3 million and $19.7 million for the comparable periods last year. Changes in the level of gains recognized from period to period reflect the changing level of United Dominion's divestiture activity from period to period as well as the extent of gains related to specific properties sold. Premium on Preferred Share Repurchases During the second quarter of 2001, United Dominion redeemed all of the Company's 9.25% Series A preferred shares. The amount paid to redeem these shares exceeded the net proceeds received from the initial issuance of shares (due to transaction costs at initial issuance), and that excess is reflected in the Statement of Operations as a reduction of net income available to common shareholders. Contingencies During the third quarter of 2000, the Company agreed to settle a class action lawsuit concerning water usage billing in Texas in the amount of $2.7 million. As a result of the settlement, the Company accrued $2.7 million in 2000 for the settlement amount and estimated fees. The settlement received final court approval during the first quarter of 2001 and the Company subsequently made payment during the second quarter of 2001. Inflation United Dominion believes that the direct effects of inflation on the Company's operations have been inconsequential. Substantially all of the Company's leases are for a term of one year or less which generally minimizes United Dominion's risk from the adverse effects of inflation. 25 Item 3. Quantitative and Qualitative Disclosure of Market Risk United Dominion is exposed to interest rate changes associated with the Company's unsecured credit facility and other variable rate debt as well as refinancing risk on the Company's fixed rate debt. United Dominion's involvement with derivative financial instruments is limited and the Company does not expect to use them for trading or other speculative purposes. United Dominion uses derivative instruments to manage the Company's exposure to interest rates. See United Dominion's Form 10-K for the year ended December 31, 2000 "Item 7A Qualitative and Quantitative Disclosures About Market Risk" for a more complete discussion of our interest rate sensitive assets and liabilities. As of September 30, 2001, United Dominion's market risk has not changed materially from the amounts reported on the Form 10-K for the year ended December 31, 2000. 26 PART II Item 1. LEGAL PROCEEDINGS - ------------------------- United Dominion and its subsidiaries are engaged in various litigations and have a number of unresolved claims pending. The ultimate liability in respect of such litigations and claims cannot be determined at this time. United Dominion is of the opinion that such liability, to the extent not provided for through insurance or otherwise, is not likely to be material in relation to the consolidated financial statements of United Dominion. Item 2. CHANGES IN SECURITIES - ----------------------------- None Item 3. DEFAULTS UPON SENIOR SECURITIES - --------------------------------------- None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- None Item 5. OTHER INFORMATION - ------------------------- None Item 6. EXHIBITS AND REPORTS ON FORM 8-K - ---------------------------------------- (a) The exhibits listed on the accompanying index to exhibits are filed as part of this quarterly report. (b) Reports on Form 8-K A Form 8-K was filed with the Securities and Exchange Commission on August 21, 2001. The filing reported United Dominion's transfer of all of the Company's Series D Cumulative Convertible Redeemable Preferred Stock to Security Capital Preferred Growth Incorporated on August 20, 2001. A Form 8-K was filed with the Securities and Exchange Commission on September 12, 2001. The filing reported United Dominion's closing of a $200 million Fannie Mae revolving credit facility on September 10, 2001. A Form 8-K was filed with the Securities and Exchange Commission on September 26, 2001. The filing included information that United Dominion presented to analysts on Wall Street that are interested in United Dominion and its business, finances or securities as first presented on September 10, 2001. A Form 8-K was filed with the Securities and Exchange Commission on October 12, 2001. The filing included information that United Dominion presented to current and prospective stockholders and other persons and institutions as first presented on October 10, 2001. A Form 8-K was filed with the Securities and Exchange Commission on October 25, 2001. The filing reported United Dominion's 2001 third quarter results of operations as reported on its Press Release issued on October 22, 2001. 27 EXHIBIT INDEX Item 6 (a) The exhibits listed below are filed as part of this Quarterly Report. References under the caption Location to exhibits, forms, or other filings indicate that the form or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference.
Exhibit Description Location - ------- ------------------------------------------- ----------------------------------------------------- (a) Agreement and Plan of Merger dated Exhibit 2(a) to the Company's Form S-4 Registration as of December 19, 1997, between Statement (Registration No. 333-45305) filed with the Company, ASR Investment the Commission on January 30, 1998. Corporation and ASR Acquisition Sub, Inc. 2(b) Agreement of Plan of Merger dated as Exhibit 2(c) to the Company's Form S-3 Registration of September 10, 1998, between the Statement (Registration No. 333-64281) filed with Company and American Apartment the Commission on September 25, 1998. Communities II, Inc. including as exhibits thereto the proposed terms of the Series D Preferred Stock and the proposed form of Investment Agreement between the Company, United Dominion Realty, L.P., American Apartment Communities II, Inc., American Apartment Communities Operating Partnership, L.P., Schnitzer Investment Corp., AAC Management LLC and LF Strategic Realty Investors, L.P. 2(c) Partnership Interest Purchase and Exchange Exhibit 2(d) to the Company's Form S-3 Registration Agreement dated as of September 10, 1998, Statement (Registration No. 333-64281) filed with between the Company, United Dominion the Commission on September 25, 1998. Realty, L.P., American Apartment Communities Operating Partnership, L.P., AAC Management LLC, Schnitzer Investment Corp., Fox Point Ltd. and James D. Klingbeil including as an exhibit thereto the proposed form of the Third Amended and Restated Limited Partnership Agreement of United Dominion Realty, L.P. 3(a) Restated Articles of Incorporation Exhibit 4(a)(ii) to the Company's Form S-3 Registration Statement (Registration No. 333-72885) filed with the Commission on February 24, 1999. 3(b) Restated By-Laws Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
28 4(i)(a) Specimen Common Stock Exhibit 4(i) to the Company's Annual Report Certificate on Form 10-K for the year ended December 31, 1993. 4(i)(c) Form of Certificate for Shares Exhibit 1(e) to the Company's Form 8-A of 8.60% Series B Cumulative Registration Statement dated June 11, 1997. Redeemable Preferred Stock 4(i)(d) Rights Agreement dated as of Exhibit 1 to the Company's Form 8-A January 27, 1998, between the Company Registration Statement dated February 4, 1998. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 4(i)(d)(a) First Amended and Restated Rights Exhibit 4(i)(d)(a) to the Company's Quarterly Agreement dates as of September 14, Report on Form 10-Q for the quarter ended 1999, between the Company and September 30, 1999. ChaseMellon Shareholders Services, L.L.C., as Rights Agent 4(i)(e) Form of Rights Certificate Exhibit 4(e) to the Company's Form 8-A Registration Statement dated February 4, 1998. 4(ii)(e) Note Purchase Agreement dated Exhibit 6(c)(5) to the Company's Form 8-A as of February 15, 1993, between Registration Statement dated April 19, 1990. the Company and CIGNA Property and Casualty Insurance Company, Connecticut General Life Insurance Company, on behalf of one or more separate accounts, Insurance Company of North America, Principal Mutual Life Insurance Company and Aid Association for Lutherans 4(ii)(f) Credit Agreement dated as of Exhibit 4(ii)(g) to the Company's Annual November 14, 2000, between Report on Form 10-K for the year ended the Company and certain subsidiaries December 31, 2000. and a syndicate of banks represented by First Union Nation Bank 4(ii)(g) Credit Agreement dated as of Filed herewith. August 14, 2001, between the Company and certain subsidiaries and ARCS Commercial Mortgage Company, L.P., as Lender. 10(iii) Employment Agreement between Exhibit 10(iii) to the Company's Annual Report the Company and Richard Giannotti on Form 10-K for the year ended December 31, dated December 8, 1998. 1998.
29 10(v) 1985 Stock Option Plan, Exhibit 10(iv) to the Company's Quarterly as amended. Report on Form 10-Q for the quarter ended June 30, 1998. 10(vi) 1991 Stock Purchase and Loan Exhibit 10(viii) to the Company's Quarterly Report Plan. on Form 10-Q for the quarter ended March 31, 1997. 10(vii) Third Amended and Restated Exhibit 10(vi) to the Company's Annual Report Agreement of Limited Partnership of on Form 10-K for the year ended December 31, United Dominion Realty, L.P. 1998. Dated as of December 7, 1998. 10(vii)(a) Subordination Agreement dated Exhibit 10(vi)(a) to the Company's Quarterly April 16, 1998, between the Report on Form 10-Q for the quarter ended Company and United Dominion March 31, 1998. Realty, L.P. 10(vii)(b) First Amendment to Third Amended Filed herewith. and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. 10(viii) Servicing and Purchase Exhibit 10(vii) to the Company's Quarterly Agreement dated as of June 24, Report on Form 10-Q for the quarter ended 1999, including as an exhibit June 30, 1999. thereto the Note and Participation Agreement forms. 10(ix) Description of Restricted Stock Exhibit 10(ix) to the Company's Annual Report Awards Program. on Form 10-K for the year ended December 31, 1999. 10(x) Description of United Dominion Exhibit 10(x) to the Company's Annual Realty Trust, Inc. Shareholder Report on Form 10-K for the year ended Value Plan. December 31, 1999. 10(xi) Description of United Dominion Exhibit 10(xi) to the Company's Annual Realty Trust, Inc. Executive Report on Form 10-K for the year ended Deferral Plan. December 31, 1999. 10(xiii) Employment Agreement between Exhibit 10(xiii) to the Company's Annual the Company and Mark E. Wood Report on Form 10-K for the year ended dated March 21, 2000. December 31, 1999. 10(xv) Retirement Agreement and Covenant Exhibit 10(xv) to the Company's Quarterly Not to Compete between the Company Report on Form 10-Q for the quarter and John P. McCann dated March 20, ended March 31, 2001. 2001. 10(xviii) Description of Out-Performance Program Filed herewith.
30 10(xix) Description of Long Term Incentive Filed herewith. Compensation Plan 12 Computation of Ratio of Earnings Filed herewith. to Fixed Charges. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. United Dominion Realty Trust, Inc. - ----------------------------------- (registrant) Date: November 14, 2001 /s/ Christopher D. Genry - ------------------------------------ ------------------------------- Christopher D. Genry Executive Vice President and Chief Financial Officer Date: November 14, 2001 /s/ Scott A. Shanaberger - ------------------------------------ ------------------------------- Scott A. Shanaberger Vice President and Chief Accounting Officer 32 EX-4.IIG 3 dex4iig.txt EXHIBIT 4(II)(G) EXHIBIT 4(ii)(g) MASTER CREDIT FACILITY AGREEMENT among UNITED DOMINION REALTY TRUST, INC., a Virginia corporation, UDRT OF NORTH CAROLINA, L.L.C., a North Carolina limited liability company, SOUTH WEST PROPERTIES, L.P., a Delaware limited partnership, LA PRIVADA APARTMENTS, L.L.C., an Arizona limited liability company, and ARCS COMMERCIAL MORTGAGE CO., L.P., a California limited partnership, dated as of August 14, 2001 TABLE OF CONTENTS -----------------
Page ---- RECITALS ................................................................................................... 1 - -------- ARTICLE I .................................................................................................. 2 ARTICLE II ................................................................................................. 18 SECTION 2.01 Revolving Facility Commitment............................................................... 18 ----------------------------- SECTION 2.02 Requests for Revolving Advances............................................................. 18 ------------------------------- SECTION 2.03 Maturity Date of Revolving Advances......................................................... 18 ----------------------------------- SECTION 2.04 Interest on Revolving Facility Advances..................................................... 19 --------------------------------------- SECTION 2.05 Coupon Rates for Revolving Advances......................................................... 20 ----------------------------------- SECTION 2.06 Revolving Facility Note..................................................................... 20 ----------------------- SECTION 2.07 Extension of Revolving Facility Termination Date............................................ 20 ------------------------------------------------ ARTICLE III ................................................................................................. 21 SECTION 3.01 Base Facility Commitment.................................................................... 21 ------------------------ SECTION 3.02 Requests for Base Facility Advances......................................................... 21 ----------------------------------- SECTION 3.03 Maturity Date of Base Facility Advances..................................................... 21 --------------------------------------- SECTION 3.04 Interest on Base Facility Advances.......................................................... 21 ---------------------------------- SECTION 3.05 Coupon Rates for Base Facility Advances..................................................... 21 --------------------------------------- SECTION 3.06 Base Facility Note.......................................................................... 22 ------------------ SECTION 3.07 Conversion of Commitment from Revolving Facility Commitment to Base Facility Commitment..... 22 --------------------------------------------------------------------------------------- SECTION 3.08 Limitations on Right to Convert............................................................. 22 ------------------------------- SECTION 3.09 Conditions Precedent to Conversion.......................................................... 22 ---------------------------------- SECTION 3.10 Defeasance.................................................................................. 23 ---------- ARTICLE IV .................................................................................................. 30 SECTION 4.01 Rate Setting for an Advance................................................................. 30 --------------------------- SECTION 4.02 Advance Confirmation Instrument for Revolving Advances...................................... 31 ------------------------------------------------------ SECTION 4.03 Breakage and other Costs.................................................................... 32 ------------------------ ARTICLE V ................................................................................................... 32 SECTION 5.01 Initial Advance............................................................................. 32 --------------- SECTION 5.02 Future Advances............................................................................. 33 --------------- SECTION 5.03 Conditions Precedent to Future Advances..................................................... 33 --------------------------------------- SECTION 5.04 Determination of Allocable Facility Amount and Valuations................................... 34 --------------------------------------------------------- ARTICLE VI .................................................................................................. 34 SECTION 6.01 Right to Add Collateral..................................................................... 34 ----------------------- SECTION 6.02 Procedure for Adding Collateral............................................................. 34 ------------------------------- SECTION 6.03 Conditions Precedent to Addition of an Additional Mortgaged Property to the Collateral Pool. 36 ------------------------------------------------------------------------------------------- ARTICLE VII.................................................................................................. 37 SECTION 7.01 Right to Obtain Releases of Collateral...................................................... 37 -------------------------------------- SECTION 7.02 Procedure for Obtaining Releases of Collateral.............................................. 37 ---------------------------------------------- SECTION 7.03 Conditions Precedent to Release of Collateral Release Property from the Collateral.......... 38 ---------------------------------------------------------------------------------- SECTION 7.04 Substitutions............................................................................... 39 ------------- ARTICLE VIII................................................................................................. 39 SECTION 8.01 Right to Increase Commitment................................................................ 39 ---------------------------- SECTION 8.02 Procedure for Obtaining Increases in Commitment............................................. 40 -----------------------------------------------
i SECTION 8.03 Conditions Precedent to Increase in Commitment.............................................. 40 ---------------------------------------------- ARTICLE IX................................................................................................... 41 SECTION 9.01 Right to Complete or Partial Termination of Facilities...................................... 41 ------------------------------------------------------ SECTION 9.02 Procedure for Complete or Partial Termination of Facilities................................. 41 ----------------------------------------------------------- SECTION 9.03 Conditions Precedent to Complete or Partial Termination of Facilities....................... 42 --------------------------------------------------------------------- ARTICLE X.................................................................................................... 42 SECTION 10.01 Right to Terminate Credit Facility......................................................... 42 ---------------------------------- SECTION 10.02 Procedure for Terminating Credit Facility.................................................. 42 ----------------------------------------- SECTION 10.03 Conditions Precedent to Termination of Credit Facility..................................... 43 ------------------------------------------------------ ARTICLE XI................................................................................................... 43 SECTION 11.01 Conditions Applicable to All Requests...................................................... 43 ------------------------------------- SECTION 11.02 Delivery of Closing Documents Relating to Initial Advance Request, ------------------------------------------------------------------ Collateral Addition Request, Credit Facility Expansion Request or Future Advance Request............. 45 ---------------------------------------------------------------------------------------- SECTION 11.03 Delivery of Property-Related Documents..................................................... 45 -------------------------------------- ARTICLE XII.................................................................................................. 46 SECTION 12.01 Representations and Warranties of the Borrower............................................. 46 ---------------------------------------------- SECTION 12.02 Representations and Warranties of the Borrower............................................. 50 ---------------------------------------------- SECTION 12.03 Representations and Warranties of the Lender............................................... 53 -------------------------------------------- ARTICLE XIII................................................................................................. 53 SECTION 13.01 Compliance with Agreements; No Amendments.................................................. 53 ----------------------------------------- SECTION 13.02 Maintenance of Existence................................................................... 53 ------------------------ SECTION 13.03 Maintenance of REIT Status................................................................. 53 -------------------------- SECTION 13.04 Financial Statements; Accountants' Reports; Other Information.............................. 53 ------------------------------------------------------------- SECTION 13.05 Certificate of Compliance.................................................................. 56 ------------------------- SECTION 13.06 Maintain Licenses.......................................................................... 56 ----------------- SECTION 13.07 Access to Records; Discussions With Officers and Accountants............................... 56 ------------------------------------------------------------ SECTION 13.08 Inform the Lender of Material Events....................................................... 57 ------------------------------------ SECTION 13.09 Intentionally Omitted...................................................................... 58 --------------------- SECTION 13.10 Inspection................................................................................. 58 ---------- SECTION 13.11 Compliance with Applicable Laws............................................................ 58 ------------------------------- SECTION 13.12 Warranty of Title.......................................................................... 58 ----------------- SECTION 13.13 Defense of Actions......................................................................... 58 ------------------ SECTION 13.14 Alterations to the Mortgaged Properties.................................................... 59 --------------------------------------- SECTION 13.15 ERISA...................................................................................... 59 ----- SECTION 13.16 Loan Document Taxes........................................................................ 59 ------------------- SECTION 13.17 Further Assurances......................................................................... 60 ------------------ SECTION 13.18 Monitoring Compliance...................................................................... 60 --------------------- SECTION 13.19 Leases..................................................................................... 60 ------ SECTION 13.20 Appraisals................................................................................. 60 ---------- SECTION 13.21 Transfer of Ownership Interests of the Borrower............................................ 60 ----------------------------------------------- SECTION 13.22 Change in Senior Management................................................................ 62 --------------------------- SECTION 13.23 Date-Down Endorsements..................................................................... 62 ---------------------- SECTION 13.24 Geographical Diversification............................................................... 62 ---------------------------- SECTION 13.25 Ownership of Mortgaged Properties.......................................................... 62 --------------------------------- ARTICLE XIV.................................................................................................. 63 SECTION 14.01 Other Activities........................................................................... 63 ---------------- SECTION 14.02 Value of Security.......................................................................... 63 ----------------- SECTION 14.03 Zoning..................................................................................... 63 ------
ii SECTION 14.04 Liens................................................................................... 63 ----- SECTION 14.05 Sale.................................................................................... 63 ---- SECTION 14.06 Intentionally Omitted................................................................... 63 --------------------- SECTION 14.07 Principal Place of Business............................................................. 64 --------------------------- SECTION 14.08 Intentionally Omitted................................................................... 64 --------------------- SECTION 14.09 Change in Property Management........................................................... 64 ----------------------------- SECTION 14.10 Condominiums............................................................................ 64 ------------ SECTION 14.11 Restrictions on Distributions........................................................... 64 ----------------------------- SECTION 14.12 Conduct of Business..................................................................... 64 ------------------- SECTION 14.13 Limitation on Unimproved Real Property and New Construction............................. 64 ----------------------------------------------------------- SECTION 14.14 No Encumbrance of Collateral Release Property........................................... 64 --------------------------------------------- ARTICLE XV................................................................................................ 64 SECTION 15.01 Financial Definitions................................................................... 65 --------------------- SECTION 15.02 Compliance with Debt Service Coverage Ratios............................................ 69 -------------------------------------------- SECTION 15.03 Compliance with Loan to Value Ratios.................................................... 69 ------------------------------------ SECTION 15.04 Compliance with Concentration Test...................................................... 69 ---------------------------------- SECTION 15.05 Consolidated Adjusted Tangible Net Worth................................................ 69 ---------------------------------------- SECTION 15.06 Consolidated Funded Debt Ratio.......................................................... 69 ------------------------------ SECTION 15.07 Consolidated Total Fixed Charge Coverage Ratio.......................................... 69 ---------------------------------------------- SECTION 15.08 Consolidated Unencumbered Realty to Consolidated Unsecured Debt Ratio................... 69 --------------------------------------------------------------------- SECTION 15.09 Consolidated Unencumbered Interest Coverage Ratio....................................... 69 ------------------------------------------------- ARTICLE XVI............................................................................................... 70 SECTION 16.01 Standby Fee............................................................................. 70 ----------- SECTION 16.02 Origination Fees........................................................................ 70 ---------------- SECTION 16.03 Due Diligence Fees...................................................................... 70 ------------------ SECTION 16.04 Legal Fees and Expenses................................................................. 70 ----------------------- SECTION 16.05 MBS-Related Costs....................................................................... 71 ----------------- SECTION 16.06 Failure to Close any Request............................................................ 71 ---------------------------- SECTION 16.07 Other Fees.............................................................................. 71 ---------- ARTICLE XVII.............................................................................................. 72 SECTION 17.01 Events of Default....................................................................... 72 ----------------- ARTICLE XVIII............................................................................................. 74 SECTION 18.01 Remedies; Waivers....................................................................... 74 ----------------- SECTION 18.02 Waivers; Rescission of Declaration...................................................... 74 ---------------------------------- SECTION 18.03 The Lender's Right to Protect Collateral and Perform Covenants and Other Obligations.... 74 ------------------------------------------------------------------------------------ SECTION 18.04 No Remedy Exclusive..................................................................... 75 ------------------- SECTION 18.05 No Waiver............................................................................... 75 --------- SECTION 18.06 No Notice............................................................................... 75 --------- SECTION 18.07 Application of Payments................................................................. 75 ----------------------- ARTICLE XIX............................................................................................... 75 SECTION 19.01 Special Pool Purchase Contract.......................................................... 75 ------------------------------ SECTION 19.02 Assignment of Rights.................................................................... 75 -------------------- SECTION 19.03 Release of Collateral................................................................... 76 --------------------- SECTION 19.04 Replacement of Lender................................................................... 76 --------------------- SECTION 19.05 Fannie Mae and Lender Fees and Expenses................................................. 76 --------------------------------------- SECTION 19.06 Third-Party Beneficiary................................................................. 76 ----------------------- ARTICLE XX................................................................................................ 76
iii
SECTION 20.01 Insurance and Real Estate Taxes...............................................................76 ------------------------------- SECTION 20.02 Replacement Reserves..........................................................................76 -------------------- ARTICLE XXI.......77 ARTICLE XXII......77 SECTION 22.01 Personal Liability of the Borrower............................................................77 ---------------------------------- ARTICLE XXIII.....77 SECTION 23.01 Counterparts..................................................................................77 ------------ SECTION 23.02 Amendments, Changes and Modifications.........................................................77 ------------------------------------- SECTION 23.03 Payment of Costs, Fees and Expenses...........................................................78 ----------------------------------- SECTION 23.04 Payment Procedure.............................................................................78 ----------------- SECTION 23.05 Payments on Business Days.....................................................................78 ------------------------- SECTION 23.06 Choice of Law; Consent to Jurisdiction; Waiver of Jury Trial..................................79 ------------------------------------------------------------ SECTION 23.07 Severability..................................................................................80 ------------ SECTION 23.08 Notices.......................................................................................80 ------- SECTION 23.09 Further Assurances and Corrective Instruments.................................................82 --------------------------------------------- SECTION 23.10 Term of this Agreement........................................................................83 ---------------------- SECTION 23.11 Assignments; Third-Party Rights...............................................................83 ------------------------------- SECTION 23.12 Headings......................................................................................83 -------- SECTION 23.13 General Interpretive Principles...............................................................83 ------------------------------- SECTION 23.14 Interpretation................................................................................83 -------------- SECTION 23.15 Decisions in Writing..........................................................................83 -------------------- SECTION 23.16 Requests......................................................................................83 --------
EXHIBIT A - Schedule of Initial Mortgaged Properties and Initial Valuations EXHIBIT B - Base Facility Note EXHIBIT C - Intentionally Omitted EXHIBIT D - Compliance Certificate EXHIBIT E - Sample Facility Debt Service EXHIBIT F - Organizational Certificate EXHIBIT G - Intentionally Omitted EXHIBIT H - Revolving Credit Endorsement EXHIBIT I - Revolving Facility Note EXHIBIT J - Tie-In Endorsement EXHIBIT K - Conversion Request EXHIBIT L - Conversion Amendment EXHIBIT M - Rate Setting Form EXHIBIT N - Rate Confirmation Instrument EXHIBIT O - Advance Confirmation Instrument EXHIBIT P - Future Advance Request EXHIBIT Q - Collateral Addition Request EXHIBIT R - Collateral Addition Description Package EXHIBIT S - Collateral Addition Supporting Documents EXHIBIT T - Collateral Release Request EXHIBIT U - Confirmation of Obligations EXHIBIT V - Credit Facility Expansion Request EXHIBIT W - Revolving Facility Termination Request EXHIBIT X - Revolving Facility Termination Document EXHIBIT Y - Credit Facility Termination Request EXHIBIT Z Intentionally Omitted EXHIBIT AA - Independent Unit Encumbrances v MASTER CREDIT FACILITY AGREEMENT THIS MASTER CREDIT FACILITY AGREEMENT is made as of the 14/th/ day of August, 2001 by (i) UNITED DOMINION REALTY TRUST, INC., a Virginia corporation ("UDRT"), (ii) UDRT OF NORTH CAROLINA, L.L.C., a North Carolina limited ---- liability company ("UDRT-NC"), (iii) SOUTH WEST PROPERTIES, L.P., a Delaware ------- limited partnership ("South West"), (iv) LA PRIVADA APARTMENTS, L.L.C., an ---------- Arizona limited liability company ("La Privada") (individually and collectively, ---------- UDRT, UDRT-NC, South West and La Privada, the "Borrower"), and (v) ARCS -------- COMMERCIAL MORTGAGE CO., L.P., a California limited partnership (the "Lender"). ------ RECITALS -------- A. The Borrower owns one or more Multifamily Residential Properties (capitalized terms used but not defined shall have the meanings ascribed to such terms in Article I of this Agreement) as more particularly described in Exhibit ------- A to this Agreement. - - B. The Borrower has requested that the Lender establish a $138,875,000 Credit Facility in favor of the Borrower, comprised initially of a $138,875,000.00 Revolving Facility, all or part of which can be converted to a Base Facility in accordance with, and subject to, the terms and conditions of this Agreement and a $0 Base Facility. C. To secure the obligations of the Borrower under this Agreement and the other Loan Documents issued in connection with the Credit Facility, the Borrower shall create a Collateral Pool in favor of the Lender. The Collateral Pool shall be comprised of (i) Security Instruments on all of the Multifamily Residential Properties owned by the Borrower listed on Exhibit A to this Agreement and (ii) --------- any other Security Documents executed by the Borrower pursuant to this Agreement or any other Loan Documents. D. Each of the Security Documents shall be cross-defaulted (i.e., a default under any Security Document, or under this Agreement, shall constitute a default under each Security Document, and this Agreement) and cross-collateralized (i.e., each Security Instrument shall secure all of the Borrower's obligations under this Agreement and the other Loan Documents issued in connection with the Credit Facility) and it is the intent of the parties to this Agreement that the Lender may accelerate any Note without the necessity to accelerate any other Note and that in the exercise of its rights and remedies under the Loan Documents, Lender may exercise and perfect any and all of its rights in and under the Loan Documents with regard to any Mortgaged Property without the necessity to exercise and perfect its rights and remedies with respect to any other Mortgaged Property and that any such exercise shall be without regard to the Allocable Facility Amount assigned to such Mortgaged Property and that Lender may recover an amount equal to the full amount outstanding in respect of any of the Notes in connection with such exercise and any such amount shall be applied as determined by Lender in its sole and absolute discretion. -1- E. Subject to the terms, conditions and limitations of this Agreement, the Lender has agreed to establish the Credit Facility. NOW, THEREFORE, the Borrower and the Lender, in consideration of the mutual promises and agreements contained in this Agreement, hereby agree as follows: ARTICLE I DEFINITIONS For all purposes of this Agreement, the following terms shall have the respective meanings set forth below: "Acquiring Person" means a "person" or "group of persons" within the ---------------- meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended. "Additional Mortgaged Property" means each Multifamily Residential ----------------------------- Property owned by the Borrower (either in fee simple or as tenant under a ground lease meeting all of the requirements of the DUS Guide) and added to the Collateral Pool after the Initial Closing Date pursuant to Article VI. "Advance" means a Revolving Advance or a Base Facility Advance. ------- "Advance Confirmation Instrument" shall have the meaning set forth in ------------------------------- Section 4.02. "Affiliate" means, with respect to any Person, any other Person (i) --------- directly or indirectly controlling or controlled by or under direct or indirect common control with such Person or (ii) directly or indirectly owning or holding five percent (5%) or more of the equity interest in such Person. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Aggregate Debt Service Coverage Ratio for the Trailing 12 Month --------------------------------------------------------------- Period" means, for any specified date, the ratio (expressed as a ------ percentage) of-- (a) the aggregate of the Net Operating Income for the Trailing 12 Month Period for the Mortgaged Properties to -- (b) the Facility Debt Service on the specified date. "Aggregate Loan to Value Ratio for the Trailing 12 Month Period" means, -------------------------------------------------------------- for any specified date, the ratio (expressed as a percentage) of-- (a) the Advances Outstanding on the specified date, -2- to -- (b) the aggregate of the Valuations most recently obtained prior to the specified date for all of the Mortgaged Properties. "Agreement" means this Master Credit Facility Agreement, as it may be --------- amended, supplemented or otherwise modified from time to time, including all Recitals and Exhibits to this Agreement, each of which is hereby incorporated into this Agreement by this reference. "Allocable Facility Amount" means the portion of the Credit Facility ------------------------- allocated to a particular Mortgaged Property by Lender in accordance with this Agreement. Lender shall determine the Allocable Facility Amount for each Mortgaged Property on the Initial Closing Date and on or before September 1 of each year (commencing September 1, 2002) during the term of this Agreement and at such other times as provided by this Agreement (the "Determination Date"). Once determined by Lender as aforesaid, the Allocable Facility Amount for each Mortgaged Property shall be promptly disclosed to Borrower by Lender and shall remain in effect until the next Determination Date. The Allocable Facility Amount for any Additional Mortgaged Property shall be 55% of the Valuation of such Mortgaged Property on the date such Mortgaged Property is added to the Collateral Pool. "Amortization Period" means, with respect to each Base Facility ------------------- Advance, the period of 30 years. "Applicable Law" means (a) all applicable provisions of all -------------- constitutions, statutes, rules, regulations and orders of all governmental bodies, all Governmental Approvals and all orders, judgments and decrees of all courts and arbitrators, (b) all zoning, building, environmental and other laws, ordinances, rules, regulations and restrictions of any Governmental Authority affecting the ownership, management, use, operation, maintenance or repair of any Mortgaged Property, including the Americans with Disabilities Act (if applicable), the Fair Housing Amendment Act of 1988 and Hazardous Materials Laws, (c) any building permits or any conditions, easements, rights-of-way, covenants, restrictions of record or any recorded or unrecorded agreement affecting or concerning any Mortgaged Property including planned development permits, condominium declarations, and reciprocal easement and regulatory agreements with any Governmental Authority, (d) all laws, ordinances, rules and regulations, whether in the form of rent control, rent stabilization or otherwise, that limit or impose conditions on the amount of rent that may be collected from the units of any Mortgaged Property, and (e) requirements of insurance companies or similar organizations, affecting the operation or use of any Mortgaged Property or the consummation of the transactions to be effected by this Agreement or any of the other Loan Documents. "Appraisal" means an appraisal of a Multifamily Residential Property or --------- Multifamily Residential Properties conforming to the requirements of Chapter 5 of Part III of the DUS Guide, and accepted by the Lender. "Appraised Value" means the value set forth in an Appraisal. --------------- -3- "Base Facility" means the agreement of the Lender to make Base Facility ------------- Advances to the Borrower pursuant to Section 3.01. "Base Facility Advance" means a loan made by the Lender to the Borrower --------------------- under the Base Facility Commitment. "Base Facility Availability Period" means the period beginning on the --------------------------------- Initial Closing Date and ending on the date five (5) years after the Initial Closing Date. "Base Facility Commitment" means $0, plus such amount as the Borrower ------------------------ may elect to add to the Base Facility Commitment in accordance with Articles III or VIII. "Base Facility Fee" means (i) 32 basis points for a Base Facility ----------------- Advance drawn from the Base Facility Commitment initially available under this Agreement or converted from the Revolving Commitment during the period ending on the date 12 months after the Initial Closing Date, and (ii) for any Base Facility Advance drawn from any portion of the Base Facility Commitment increased under Article VIII or converted from any portion of the Revolving Commitment after the period ending on the date 12 months after the Initial Closing Date, the number of basis points determined at the time of such increase by the Lender as the Base Facility Fee for such Base Facility Advances, provided that in no event shall the Base Facility Fee for Base Facility Advances converted from the Revolving Commitment (expressed as a number of basis points) exceed the Revolving Facility Fee. "Base Facility Note" means a promissory note, in the form attached as ------------------ Exhibit B to this Agreement, which will be issued by the Borrower to the --------- Lender, concurrently with the funding of each Base Facility Advance, to evidence the Borrower's obligation to repay the Base Facility Advance. "Borrower" means, individually and collectively, United Dominion Realty -------- Trust, Inc., a Virginia corporation, UDRT of North Carolina, L.L.C., a North Carolina limited liability company, South West Properties, L.P., a Delaware limited partnership, and La Privada Apartments, L.L.C., an Arizona limited liability company. "Business Day" means a day on which Fannie Mae is open for business. ------------ "Calendar Quarter" means, with respect to any year, any of the ---------------- following three month periods: (a) January-February-March; (b) April-May-June; (c) July-August-September; and (d) October-November-December. "Cap Rate" means, for each Mortgaged Property, a capitalization rate -------- reasonably selected by the Lender for use in determining the Valuations, as disclosed to the Borrower from time to time. "Change of Control" means the earliest to occur of: (a) the date on ----------------- which UDRT shall cease for any reason to be the holder, directly or indirectly, of at least 70% of the voting interests of any other Borrower or to own, directly or indirectly at least 70% of the equity, profits or other partnership interest in, or Voting Equity Capital (or any other Securities or ownership interests) of any other Borrower, (b) the date on which an Acquiring -4- Person or Acquiring Persons becomes (by acquisition, consolidation, merger or otherwise), directly or indirectly, the beneficial owner of more than, in the aggregate, 30% of the total Voting Equity Capital (or of any other Securities or ownership interest) of the Borrower then outstanding, or (c) the replacement (other than solely by reason of retirement at age sixty-five or older, death or disability) of more than 50% (or such lesser percentage as is required for decision-making by the board of directors or an equivalent governing body) of the members of the board of directors (or an equivalent governing body) of the Borrower over a one-year period from the directors who constituted such board of directors at the beginning of such period and such replacement shall not have been approved by a vote of at least a majority of the board of directors of the Borrower then still in office who either were members of such board of directors at the beginning of such one-year period or whose election as members of the board of directors was previously so approved (it being understood and agreed that in the case of any entity governed by a trustee, board of managers, or other similar governing body, the foregoing clause (c) shall apply thereto by substituting such governing body and the members thereof for the board of directors and members thereof, respectively). "Closing Date" means the Initial Closing Date and each date after the ------------ Initial Closing Date on which the funding or other transaction requested in a Request is required to take place. "Collateral" means, the Mortgaged Properties and other collateral from ---------- time to time or at any time encumbered by the Security Instruments, or any other property securing any of the Borrower's obligations under the Loan Documents. "Collateral Addition Fee" means, with respect to a Multifamily ----------------------- Residential Property added to the Collateral Pool in accordance with Article VI-- (i) 75 basis points, multiplied by (ii) 55% of the Initial Valuation of the Multifamily Residential Property, as determined by the Lender. "Collateral Addition Loan Documents" means the Security Instrument ---------------------------------- covering an Additional Mortgaged Property and any other documents, instruments or certificates required by the Lender in connection with the addition of the Additional Mortgaged Property to the Collateral Pool pursuant to Article VI. "Collateral Addition Request" shall have the meaning set forth in --------------------------- Section 6.02(a). "Collateral Pool" means the aggregate total of the Collateral. --------------- "Collateral Release Request" shall have the meaning set forth in -------------------------- Section 7.02(a). "Collateral Release Property" shall have the meaning set forth in --------------------------- Section 7.02(a). "Commitment" means, at any time, the sum of the Base Facility ---------- Commitment and the Revolving Facility Commitment. -5- "Complete Revolving Facility Termination" shall have the meaning set --------------------------------------- forth in Section 9.02(a). "Compliance Certificate" means a certificate of the Borrower in the ---------------------- form attached as Exhibit D to this Agreement. --------- "Conversion Documents" has the meaning specified in Section 3.07(b) -------------------- hereof. "Conversion Request" has the meaning specified in Section 3.07(a) ------------------ hereof. "Coupon Rate" means, with respect a Revolving Advance, the imputed ----------- interest rate determined by the Lender pursuant to Section 2.05 for the Revolving Advance and, with respect a Base Facility Advance, the interest rate determined by the Lender pursuant to Section 3.05 for the Base Facility Advance. "Coverage and LTV Tests" mean, for any specified date, each of the ---------------------- following financial tests: (a) The Aggregate Debt Service Coverage Ratio for the Trailing 12 Month Period is not less than 155%. (b) The Aggregate Loan to Value Ratio for the Trailing 12 Month Period does not exceed 55%. "Credit Facility" means the Base Facility and the Revolving Facility. --------------- "Credit Facility Expansion" means an increase in the Commitment made in ------------------------- accordance with Article VIII. "Credit Facility Expansion Loan Documents" means amendments to the ---------------------------------------- Revolving Facility Note or the Base Facility Note, as the case may be, increasing the amount of such Note to the amount of the Commitment, as expanded in accordance with Article VIII and amendments to the Security Instruments, increasing the amount secured by such Security Instruments to the amount of the Commitment. "Credit Facility Expansion Request" shall have the meaning set forth in --------------------------------- Section 8.02(a). "Credit Facility Termination Request" shall have the meaning set forth ----------------------------------- in Section 10.02(a). "Debt Service Coverage Ratio for the Trailing 12 Month Period" means, ------------------------------------------------------------ for any Mortgaged Property, for any specified date, the ratio (expressed as a percentage) of -- (a) the aggregate of the Net Operating Income for the Trailing 12 Month Period for the subject Mortgaged Property to -- -6- (b) the Facility Debt Service on the specified date, assuming, for the purpose of calculating the Facility Debt Service for this definition, that Advances Outstanding shall be the Allocable Facility Amount for the subject Mortgaged Property. "Discount" means, with respect to any Revolving Advance, an amount -------- equal to the excess of -- (i) the face amount of the MBS backed by the Revolving Advance, over (ii) the Price of the MBS backed by the Revolving Advance. "DUS Guide" means the Fannie Mae Multifamily Delegated Underwriting and --------- Servicing (DUS) Guide, as such Guide may be amended from time to time, including exhibits to the DUS Guide and amendments in the form of Lender Memos, Guide Updates and Guide Announcements (and, if such Guide is no longer used by Fannie Mae, the term "DUS Guide" as used in this Agreement means the Fannie Mae Multifamily Negotiated Transactions Guide, as such Guide may be amended from time to time, including amendments in the form of Lender Memos, Guide Updates and Guide Announcements). All references to specific articles and sections of, and exhibits to, the DUS Guide shall be deemed references to such articles, sections and exhibits as they may be amended, modified, updated, superseded, supplemented or replaced from time to time. "DUS Underwriting Requirements" means the overall underwriting ----------------------------- requirements for Multifamily Residential Properties as set forth in the DUS Guide. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "Event of Default" means any event defined to be an "Event of Default" ---------------- under Article XVII. "Facility Debt Service" means, as of any specified date, the sum of: --------------------- (a) the amount of interest and principal amortization, during the 12 month period immediately succeeding the specified date, with respect to the Advances Outstanding on the specified date, except that, for these purposes: (i) each Revolving Advance shall be deemed to require level monthly payments of principal and interest (at the Coupon Rate for the Revolving Advance) in an amount necessary to fully amortize the original principal amount of the Revolving Advance over a 30-year period, with such amortization deemed to commence on the first day of the 12 month period; and (ii) each Base Facility Advance shall require level monthly payments of principal and interest (at the Coupon Rate for the Base Facility Advance) in an amount necessary to fully amortize the original principal amount of the Base Facility Advance over a 30-year period, -7- with such amortization to commence on the first day of the 12 month period; and (b) the amount of the Standby Fees payable to the Lender pursuant to Section 16.01 during such 12 month period (assuming, for these purposes, that the Advances Outstanding throughout the 12 month period are always equal to the amount of Advances Outstanding on the specified date). Exhibit E to this Agreement contains an example of the determination of the --------- Facility Debt Service. "Facility Termination Fee" means, with respect to a reduction in the ------------------------ Revolving Facility Commitment pursuant to Articles IX or X, an amount equal to the product obtained by multiplying-- (1) the reduction in the Revolving Facility Commitment, by (2) the Revolving Facility Fee in effect at such time, by (3) the present value factor calculated using the following formula: 1 - (1 + r)/-n/ ----------- r [r = Yield Rate n = the number of years, and any fraction thereof, remaining between the Closing Date for the reduction in the Revolving Facility Commitment and the Revolving Facility Termination Date] The "Yield Rate" means the rate on the Three-Month LIBOR on the second Business Day preceding, as applicable, (x) the date of the reduction in the Commitment, (y) the date of the Complete Facility Termination or (z) the date of Lender's acceleration of the unpaid principal balance of the Facility Note. "Fannie Mae" means the federally-chartered and stockholder-owned ---------- corporation organized and existing under the Federal National Mortgage Association Charter Act, 12 U.S.C. (S) 1716 et seq. -- --- "Financial Covenants" means the covenants set forth in Article XV. ------------------- "Future Advance" means an Advance made after the Initial Closing Date. -------------- "Future Advance Request" shall have the meaning set forth in Section ---------------------- 5.02. "GAAP" means generally accepted accounting principles in the United ---- States in effect from time to time, consistently applied. "General Conditions" shall have the meaning set forth in Article XI. ------------------ -8- "Geographical Diversification Requirements" means, prior to the ----------------------------------------- occurrence of an increase in the Commitment pursuant to Article VIII, a requirement that the Collateral Pool consist of at least four (4) Mortgaged Properties located in at least two (2) SMSA's and, upon the occurrence of any increase in the Commitment pursuant to Article VIII, such requirements as to the geographical diversity of the Collateral Pool as the Lender may reasonably determine and notify Borrower of prior to the time of the increase. "Governmental Approval" means an authorization, permit, consent, --------------------- approval, license, registration or exemption from registration or filing with, or report to, any Governmental Authority. "Governmental Authority" means any court, board, agency, commission, ---------------------- office or authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence. "Gross Revenues" means, for any specified period, with respect to any -------------- Multifamily Residential Property, all income in respect of such Multifamily Residential Property, as determined by the Lender in accordance with the method described in paragraph 3 of Section 403.02 of Part III of the DUS Guide, except that for these purposes the financial statements to be used need not be audited and paragraph (b) of such paragraph 3 shall be taken into account in the Lender's discretion. "Hazardous Materials", with respect to any Mortgaged Property, shall ------------------- have the meaning given that term in the Security Instrument encumbering the Mortgaged Property. "Hazardous Materials Law", with respect to any Mortgaged Property, ----------------------- shall have the meaning given that term in the Security Instrument encumbering the Mortgaged Property. "Hazardous Substance Activity" means any storage, holding, existence, ---------------------------- release, spill, leaking, pumping, pouring, injection, escaping, deposit, disposal, dispersal, leaching, migration, use, treatment, emission, discharge, generation, processing, abatement, removal, disposition, handling or transportation of any Hazardous Materials from, under, into or on any Mortgaged Property in violation of Hazardous Materials Laws, including the discharge of any Hazardous Materials emanating from any Mortgaged Property in violation of Hazardous Materials Laws through the air, soil, surface water, groundwater or property and also including the abandonment or disposal of any barrels, containers and other receptacles containing any Hazardous Materials from or on any Mortgaged Property in violation of Hazardous Materials Laws, in each case whether sudden or nonsudden, accidental or nonaccidental. "Impositions" means, with respect to any Mortgaged Property, all (1) ----------- water and sewer charges which, if not paid, may result in a lien on all or any part of the Mortgaged Property, (2) premiums for fire and other hazard insurance, rent loss insurance and such other insurance as Lender may require under any Security Instrument, (3) Taxes, and (4) amounts for other charges and expenses which Lender at any time reasonably deems necessary to protect the Mortgaged Property, to prevent the imposition of liens on the Mortgaged Property, or otherwise to protect Lender's interests. -9- "Indebtedness" means, with respect to any Person, as of any ------------ specified date, without duplication, all: (a) indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices); (b) other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument; (c) obligations of such Person under any lease of property, real or personal, the obligations of the lessee in respect of which are required by GAAP to be capitalized on a balance sheet of the lessee or to be otherwise disclosed as such in a note to such balance sheet; (d) obligations of such Person in respect of acceptances (as defined in Article 3 of the Uniform Commercial Code of the Commonwealth of Virginia) issued or created for the account of such Person; (e) liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment of such liabilities; and (f) as to any Person ("guaranteeing person"), any ------------------- obligation of (a) the guaranteeing person or (b) another Person (including any bank under any letter of credit) to induce the creation of a primary obligation (as defined below) with respect to which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing, or in effect guaranteeing, any indebtedness, lease, dividend or other obligation ("primary obligations") of any third person ("primary obligor") in any ------------------- --------------- manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, to (1) purchase any such primary obligation or any property constituting direct or indirect security therefor, (2) advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (3) purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (4) otherwise assure or hold harmless the owner of any such primary obligation against loss in respect of the primary obligation, provided, however, that the term "Contingent Obligation" shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation of any guaranteeing person shall be deemed to be the lesser of (i) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made and (ii) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Contingent Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the -10- amount of such Contingent Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by Owner in good faith. "Initial Advance" means the Revolving Advance made on the --------------- Initial Closing Date in the amount of $138,875,000.00. "Initial Advance Request" shall have the meaning set forth in ----------------------- Section 5.01. "Initial Closing Date" means the date of this Agreement. -------------------- "Initial Mortgaged Properties" means the Multifamily ---------------------------- Residential Properties described on Exhibit A to this Agreement and which represent the Multifamily Residential Properties which are made part of the Collateral Pool on the Initial Closing Date. "Initial Security Instruments" means the Security Instruments ---------------------------- covering the Initial Mortgaged Properties. "Initial Valuation" means, when used with reference to ----------------- specified Collateral, the Valuation initially performed for the Collateral as of the date on which the Collateral was added to the Collateral Pool. The Initial Valuation for each of the Initial Mortgaged Properties is as set forth in Exhibit A to this Agreement. "Insurance Policy" means, with respect to a Mortgaged ---------------- Property, the insurance coverage and insurance certificates evidencing such insurance required to be maintained pursuant to the Security Instrument encumbering the Mortgaged Property. "Internal Revenue Code" means the Internal Revenue Code of --------------------- 1986, as amended. Each reference to the Internal Revenue Code shall be deemed to include (a) any successor internal revenue law and (b) the applicable regulations whether final, temporary or proposed. "Lease" means any lease, any sublease or subsublease, license, ----- concession or other agreement (whether written or oral and whether now or hereafter in effect) pursuant to which any Person is granted a possessory interest in, or right to use or occupy all or any portion of any space in any Mortgaged Property, and every modification, amendment or other agreement relating to such lease, sublease, subsublease or other agreement entered into in connection with such lease, sublease, subsublease or other agreement, and every guarantee of the performance and observance of the covenants, conditions and agreements to be performed and observed by the other party thereto. "Lender" shall have the meaning set forth in the first ------ paragraph of this Agreement, but shall refer to any replacement Lender if the initial Lender is replaced pursuant to the terms of Section 19.04. "Lien" means any mortgage, pledge, hypothecation, assignment, ----- deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or -11- notice filed under the Uniform Commercial Code as adopted and in effect in the relevant jurisdiction or other similar recording or notice statute, and any lease in the nature thereof). "Loan Documents" means this Agreement, the Notes, the Advance -------------- Confirmation Instruments for the Revolving Advances, the Security Documents, all documents executed by the Borrower pursuant to the General Conditions set forth in Article XI of this Agreement and any other documents executed by the Borrower from time to time in connection with this Agreement or the transactions contemplated by this Agreement. "Loan to Value Ratio for the Trailing 12 Month Period" means, ---------------------------------------------------- for a Mortgaged Property, for any specified date, the ratio (expressed as a percentage) of -- (a) the Allocable Facility Amount of the subject Mortgaged Property on the specified date, to -- (b) the Valuation most recently obtained prior to the specified date for the subject Mortgaged Property. "Loan Year" means the 12-month period from the first day of --------- the first calendar month after the Initial Closing Date to and including the last day before the first anniversary of the Initial Closing Date, and each 12-month period thereafter. "Material Adverse Effect" means, with respect to any ----------------------- circumstance, act, condition or event of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, or circumstance or circumstances, whether or not related, a material adverse change in or a materially adverse effect upon any of (a) the business, operations, property or condition (financial or otherwise) of the Borrower, (b) the present or future ability of the Borrower to perform the Obligations for which it is liable, (c) the validity, priority, perfection or enforceability of this Agreement or any other Loan Document or the rights or remedies of the Lender under any Loan Document, or (d) the value of, or the Lender's ability to have recourse against, any Mortgaged Property. "MBS" means a mortgage-backed security which is "backed" by an --- Advance which is secured by an interest in the Notes and the Collateral Pool securing the Notes, which interest permits the holder of the MBS to participate in the Notes and the Collateral Pool to the extent of such Advance. "MBS Imputed Interest Rate" shall have the meaning set forth ------------------------- in Section 2.05(a). "MBS Issue Date" means the date on which a Fannie Mae MBS is -------------- issued by Fannie Mae. "MBS Delivery Date" means the date on which a Fannie Mae MBS ----------------- is delivered by Fannie Mae. -12- "MBS Pass-Through Rate" for a Base Facility Advance means the --------------------- interest rate as determined by the Lender (rounded to three places) payable in respect of the Fannie Mae MBS issued pursuant to the MBS Commitment backed by the Base Facility Advance as determined in accordance with Section 4.01. "Mortgaged Properties" means, collectively, the Additional -------------------- Mortgaged Properties and the Initial Mortgaged Properties, but excluding each Collateral Release Property from and after the date of the release of the Collateral Release Property from the Collateral Pool. "Multifamily Residential Property" means a residential -------------------------------- property, located in the United States, containing five or more dwelling units in which not more than twenty percent (20%) of the net rentable area is or will be rented to non-residential tenants, and conforming to the requirements of Sections 201 and 203 of Part III of the DUS Guide. "Net Operating Income" means, for any specified period, with -------------------- respect to any Multifamily Residential Property, the aggregate net income during such period equal to Gross Revenues during such period less the aggregate Operating Expenses during such period. If a Mortgaged Property is not owned by the Borrower for the entire specified period, the Net Operating Income for the Mortgaged Property for the time within the specified period during which the Mortgaged Property was owned by the Borrower shall be the Mortgaged Property's pro forma net operating income determined by the Lender in accordance with the underwriting procedures set forth in Chapter 4 of Part III of the DUS Guide. "Note" means a Base Facility Note or the Revolving Facility ---- Note. "Obligations" means the aggregate of the obligations of the ----------- Borrower under this Agreement and the other Loan Documents. "Operating Expenses" means, for any period, with respect to ------------------ any Multifamily Residential Property, all expenses in respect of the Multifamily Residential Property, as determined by the Lender in accordance with the method described in paragraph 3 of Section 403.02 of Part III of the DUS Guide (Estimated Expenses), including replacement reserves, if any, under the Replacement Reserve Agreements for the Mortgaged Properties. "Organizational Certificate" means a certificate of the -------------------------- Borrower in the form attached as Exhibit F to this Agreement. --------- "Organizational Documents" means all certificates, instruments ------------------------ and other documents pursuant to which an organization is organized or operates, including but not limited to, (i) with respect to a corporation, its articles of incorporation and bylaws, (ii) with respect to a limited partnership, its limited partnership certificate and partnership agreement, (iii) with respect to a general partnership or joint venture, its partnership or joint venture agreement and (iv) with respect to a limited liability company, its articles of organization and operating agreement. "Outstanding" means, when used in connection with promissory ----------- notes, other debt instruments or Advances, for a specified date, promissory notes or other debt instruments -13- which have been issued, or Advances which have been made, but have not been repaid in full as of the specified date. "Ownership Interests" means, with respect to any entity, any ------------------- ownership interests in the entity and any economic rights (such as a right to distributions, net cash flow or net income) to which the owner of such ownership interests is entitled. "PBGC" means the Pension Benefit Guaranty Corporation or any ---- entity succeeding to any or all of its functions under ERISA. "Permits" means all permits, or similar licenses or approvals ------- issued and/or required by an applicable Governmental Authority or any Applicable Law in connection with the ownership, use, occupancy, leasing, management, operation, repair, maintenance or rehabilitation of any Mortgaged Property or the Borrower's business. "Permitted Liens" means, with respect to a Mortgaged Property, --------------- (i) the exceptions to title to the Mortgaged Property set forth in the Title Insurance Policy for the Mortgaged Property which are approved by the Lender, (ii) the Security Instrument encumbering the Mortgaged Property, and (iii) any other Liens approved by the Lender. "Person" means an individual, an estate, a trust, a ------ corporation, a partnership, a limited liability company or any other organization or entity (whether governmental or private). "Potential Event of Default" means any event which, with the -------------------------- giving of notice or the passage of time, or both, would constitute an Event of Default. "Price" means, with respect to an Advance, the proceeds of the ----- sale of the MBS backed by the Advance. "Property" means any estate or interest in any kind of -------- property or asset, whether real, personal or mixed, and whether tangible or intangible. "Rate Confirmation Form" shall have the meaning set forth in ---------------------- Section 4.01(c). "Rate Setting Date" shall have the meaning set forth in ----------------- Section 4.01(b). "Rate Setting Form" shall have the meaning set forth in ----------------- Section 4.01(b). "Release Price" shall have the meaning set forth in Section ------------- 7.02(c). "Rent Roll" means, with respect to any Multifamily Residential --------- Property, a rent roll prepared and certified by the owner of the Multifamily Residential Property, on Fannie Mae Form 4243, as set forth in Exhibit III-3 of the DUS Guide, or on another form approved by the Lender and containing substantially the same information as Form 4243 requires. -14- "Replacement Reserve Agreement" means a Replacement Reserve ----------------------------- and Security Agreement, reasonably required by the Lender, and completed in accordance with the requirements of the DUS Guide. "Request" means a Collateral Addition Request, a Collateral ------- Release Request, a Conversion Request, a Credit Facility Expansion Request, a Credit Facility Termination Request, a Future Advance Request, an Initial Advance Request or a Revolving Facility Termination Request. "Revolving Advance" means a loan made by the Lender to the ----------------- Borrower under the Revolving Facility Commitment. "Revolving Credit Endorsement" means an endorsement to a Title ---------------------------- Insurance Policy which contains substantially the same coverages, and is subject to substantially the same or fewer exceptions (or such other exceptions as the Lender may approve), as the form attached as Exhibit ------- H to this Agreement. - "Revolving Facility" means the agreement of the Lender to make ------------------ Advances to the Borrower pursuant to Section 2.01. "Revolving Facility Availability Period" means the period -------------------------------------- beginning on the Initial Closing Date and ending on the 90th day before the Revolving Facility Termination Date. "Revolving Facility Commitment" means an aggregate amount of ----------------------------- $138,875,000.00 which shall be evidenced by the Revolving Facility Note in the form attached hereto as Exhibit I, plus such amount as the --------- Borrower may elect to add to the Revolving Facility Commitment in accordance with Article VIII, and less such amount as the Borrower may elect to convert from the Revolving Facility Commitment to the Base Facility Commitment in accordance with Article III and less such amount by which the Borrower may elect to reduce the Revolving Facility Commitment in accordance with Article IX. "Revolving Facility Fee" means (i) 52 basis points per annum ---------------------- for a Revolving Advance drawn from the Revolving Commitment initially available under this Agreement, (ii) for any extended term of the Revolving Facility, the number of basis points per annum determined by the Lender as the Revolving Facility Fee for such period, which fee shall be set by Lender not less than 30 days prior to the commencement of such period, and (iii) for any Revolving Advance drawn from any portion of the Revolving Commitment increased under Article VIII, the number of basis points per annum determined at the time of such increase by the Lender as the Revolving Facility Fee for such Revolving Advances. "Revolving Facility Note" means the promissory note, in the ----------------------- form attached as Exhibit I to this Agreement, which has been issued by --------- the Borrower to the Lender to evidence the Borrower's obligation to repay Revolving Advances. "Revolving Facility Termination Date" means the last day of ----------------------------------- the fifth Loan Year, as such date may be extended pursuant to Section 2.07 of this Agreement. -15- "Security" means a "security" as set forth in Section 2(1) of -------- the Securities Act of 1933, as amended. "Security Documents" means the Security Instruments, the ------------------ Replacement Reserve Agreements and any other documents executed by a Borrower from time to time to secure any of the Borrower's obligations under the Loan Documents. "Security Instrument" means, for each Mortgaged Property, a ------------------- separate Multifamily Mortgage, Deed of Trust or Deed to Secure Debt, Assignment of Leases and Rents and Security Agreement given by the Borrower to or for the benefit of the Lender to secure the obligations of the Borrower under the Loan Documents. With respect to each Mortgaged Property owned by the Borrower, the Security Instrument shall be substantially in the form published by Fannie Mae for use in the state in which the Mortgaged Property is located. The amount secured by the Security Instrument shall be equal to the Commitment in effect from time to time. "Senior Management" means (i) the Chief Executive Officer, ----------------- Chairman of the Board, President, Chief Financial Officer and Chief Operating Officer of UDRT, and (ii) any other individuals with responsibility for any of the functions typically performed in a corporation by the officers described in clause (i). "SMSA" means a "standard metropolitan statistical area," as ---- defined from time to time by the United States Office of Management and Budget. "Standby Fee" means, for any month, an amount equal to the ----------- product obtained by multiplying: (i) 1/12, by (ii) 12.5 basis points, by (iii) the Unused Capacity for such month. "Subsidiary" means, as to any Person, any corporation, ---------- partnership, limited liability company or other entity of which securities or other ownership interest having an ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. Unless otherwise provided, references to a "Subsidiary" or "Subsidiaries" shall mean a Subsidiary or Subsidiaries of the Borrower. "Surveys" means the as-built surveys of the Mortgaged ------- Properties prepared in accordance with the requirements of Section 113 of the DUS Guide, or otherwise approved by the Lender. "Taxes" means all taxes, assessments, vault rentals and other ----- charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, will become a lien, on the Mortgaged Properties. "Term of this Agreement" shall be determined as provided in ---------------------- Section 23.10 to this Agreement. "Termination Date" means, at any time during which Base ---------------- Facility Advances are Outstanding, the latest maturity date for any Base Facility Advance Outstanding, and, at any -16- time during which Base Facility Advances are not Outstanding, the Revolving Facility Termination Date. "Three-Month LIBOR" means the London interbank offered rate ----------------- for three-month U.S. dollar deposits, as such rate is reported in The Wall Street Journal. In the event that a rate is not published for the Three-Month LIBOR, then the nearest equivalent duration London interbank offered rate for U.S. Dollar deposits shall be selected at Lender's reasonable discretion. If the publication of Three-Month LIBOR is discontinued, Lender shall determine such rate from another source reasonably selected by Lender which reasonably correlates (as to rate and volatility) historically to Three-Month LIBOR. "Tie-In Endorsement" means an endorsement to a Title Insurance ------------------ Policy which contains substantially the same coverages, and is subject to substantially the same or fewer exceptions (or such other exceptions as the Lender may approve), as the form attached as Exhibit J to this --------- Agreement. "Title Company" means Fidelity National Title Insurance ------------- Corporation. "Title Insurance Policies" means the mortgagee's policies of ------------------------ title insurance issued by the Title Company from time to time relating to each of the Security Instruments, conforming to the requirements of Section 111 of the DUS Guide, together with such endorsements, coinsurance, reinsurance and direct access agreements with respect to such policies as the Lender may, from time to time, consider necessary or appropriate, whether or not required by the DUS Guide, including Revolving Credit Endorsements, if available, and Tie-In Endorsements, if available, and with a limit of liability under the policy (subject to the limitations contained in Sections 6(a)(i) and 6(a)(iii) of the Stipulations and Conditions of the policy) equal to the Commitment. "Trailing 12 Month Period" means, for any specified date, the ------------------------ 12 month period ending with the last day of the most recent Calendar Quarter for which financial statements have been delivered by the Borrower to the Lender pursuant to Sections 13.04(c) and (d). "Transfer" means a sale, assignment, lease, pledge, transfer -------- or other disposition (whether voluntary or by operation of law) of, or the granting or creating of a lien, encumbrance or security interest in, any estate, rights, title or interest in a Mortgaged Property, or any portion thereof. "Transfer" does not include (i) a conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under any Security Instrument or (ii) the Mortgaged Property becoming part of a bankruptcy estate by operation of law under the United States Bankruptcy Code. "Unused Capacity" means, for any month, the sum of the daily --------------- average during such month of the undrawn amount of the Commitment available under this Agreement, without regard to any unclosed Requests or to the fact that a Request must satisfy conditions precedent. "Valuation" means, for any specified date, with respect to a --------- Multifamily Residential Property, (a) if an Appraisal of the Multifamily Residential Property was more recently obtained than a Cap Rate for the Multifamily Residential Property, the Appraised Value of -17- such Multifamily Residential Property, or (b) if a Cap Rate for the Multifamily Residential Property was more recently obtained than an Appraisal of the Multifamily Residential Property, the value derived by dividing-- (i) the Net Operating Income of such Multifamily Residential Property for the Trailing 12 Month Period, by (ii) the most recent Cap Rate determined by the Lender. Notwithstanding the foregoing, any Valuation for a Multifamily Residential Property calculated for a date occurring before the first anniversary of the date on which the Multifamily Residential Property becomes a part of the Collateral Pool shall equal the Appraised Value of such Multifamily Residential Property, unless the Lender determines that changed market or property conditions warrant that the value be determined as set forth in the preceding sentence. Any special risk factors taken into account in connection with the Initial Valuation of a Multifamily Residential Property shall apply to any subsequent Valuation of such Multifamily Residential Property unless Lender shall determine that such special risk factor no longer applies to such Multifamily Residential Property. "Voting Equity Capital" means Securities or partnership --------------------- interests of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the board of directors (or Persons performing similar functions). ARTICLE II THE REVOLVING FACILITY COMMITMENT SECTION 2.01 Revolving Facility Commitment. Subject to the terms, conditions and ----------------------------- limitations of this Agreement, the Lender agrees to make Revolving Advances to the Borrower from time to time during the Revolving Facility Availability Period. The aggregate unpaid principal balance of the Revolving Advances Outstanding at any time shall not exceed the Revolving Facility Commitment. Subject to the terms, conditions and limitations of this Agreement, the Borrower may re-borrow any amounts under the Revolving Facility which it has previously borrowed and repaid under the Revolving Facility. SECTION 2.02 Requests for Revolving Advances. The Borrower shall request a ------------------------------- Revolving Advance by giving the Lender an Initial Advance Request in accordance with Section 5.01 or a Future Advance Request in accordance with Section 5.02, as applicable. SECTION 2.03 Maturity Date of Revolving Advances. Regardless of the date on ----------------------------------- which a Revolving Advance is made, the maturity date of each Revolving Advance shall be a date selected by the Borrower in its Request for the Revolving Advance, which date shall be the first day of a calendar month occurring: (a) no earlier than the date which completes three full months after the Closing Date for the Revolving Advance; and -18- (b) no later than the date which completes nine full months after the Closing Date for the Revolving Advance. For these purposes, a year shall be deemed to consist of 12 30-day months. For example, the date which completes three full months after September 15 shall be December 15; and the date which completes three full months after November 30 shall be February 28 or February 29 in 2000 and any leap year thereafter. SECTION 2.04 Interest on Revolving Facility Advances. --------------------------------------- (a) Discount. Each Revolving Advance shall be a discount loan. -------- The original stated principal amount of a Revolving Advance shall be the sum of the Price of the Revolving Advance and the Discount of the Revolving Advance. The Price and Discount of each Revolving Advance shall be determined in accordance with the procedures set out in Section 4.01. The proceeds of the Revolving Advance made available by the Lender to the Borrower will equal the Price of the Revolving Advance. The entire unpaid principal of each Revolving Advance shall be due and payable by the Borrower to the Lender on the maturity date of the Revolving Advance. However, if the Borrower has requested that the maturing Revolving Advance (in whole or in part) be renewed with a new Revolving Advance or converted to a Base Facility Advance, to take effect on the maturity date of the maturing Revolving Advance, then the amount the Borrower is required to pay on account of the maturing Revolving Advance will be reduced by, as the case may, that amount of the Price of the new Revolving Advance allocable to the principal of the maturing Revolving Advance being renewed, or that amount of the net proceeds of the MBS related to the Base Facility Advance then converted from the maturing Revolving Advance. (b) Partial Month Interest. Notwithstanding anything to the ---------------------- contrary in this Section, if a Revolving Advance is not made on the first day of a calendar month, and the MBS Issue Date for the MBS backed by the Revolving Advance is the first day of the month following the month in which the Revolving Advance is made, the Borrower shall pay interest on the original stated principal amount of the Revolving Advance for the partial month period commencing on the Closing Date for the Revolving Advance and ending on the last day of the calendar month in which the Closing Date occurs, at a rate per annum equal to the greater of (i) the Coupon Rate for the Revolving Advance as determined in accordance with Section 2.05(b) and (ii) a rate reasonably determined by the Lender, based on the Lender's cost of funds and approved in advance, in writing, by the Borrower, pursuant to the procedures mutually agreed upon by the Borrower and the Lender. (c) Revolving Facility Fee. In addition to paying the Discount ---------------------- and the partial month interest, if any, the Borrower shall pay monthly installments of the Revolving Facility Fee to the Lender on account of each Revolving Advance over the whole number of calendar months the MBS backed by the Revolving Advance is to run from the MBS Issue Date to the maturity date of the MBS. The Revolving Facility Fee shall be payable in advance, in accordance with the terms of the Revolving Facility Note. The first installment shall be payable on or prior to the Closing Date for the Revolving Advance and shall apply to the first full calendar month of the MBS backed by the Revolving Advance. Subsequent installments shall be payable on the first day of each calendar month, commencing on the first day of the second full calendar month of such MBS, until the maturity of such MBS. Each installment of the Revolving Facility Fee shall be in an amount equal -19- to the product of multiplying (i) the Revolving Facility Fee, by (ii) the amount of the Revolving Advance, by (iii) 1/12. SECTION 2.05 Coupon Rates for Revolving Advances. The Coupon Rate for a ----------------------------------- Revolving Advance shall be a rate, per annum, as follows: (a) The Coupon Rate for a Revolving Advance shall equal the sum of (i) an interest rate as determined by the Lender (rounded to three places) payable for the Fannie Mae MBS pursuant to the MBS Commitment backed by the Revolving Advance ("MBS Imputed Interest Rate") and (ii) the Revolving Facility Fee. (b) Notwithstanding anything to the contrary in this Section, if a Revolving Advance is not made on the first day of a calendar month, and the MBS Issue Date for the MBS backed by the Revolving Advance is the first day of the month following the month in which the Revolving Advance is made, the Coupon Rate for such Revolving Advance for such period shall be the greater of (i) the rate for the Revolving Advance determined in accordance with subsection (a) of this Section and (ii) a rate determined by the Lender, based on the Lender's cost of funds, and approved in advance, in writing, by the Borrower, pursuant to procedures mutually agreed upon by the Borrower and the Lender. SECTION 2.06 Revolving Facility Note. The obligation of the Borrower to repay ----------------------- the Revolving Advances will be evidenced by the Revolving Facility Note. The Revolving Facility Note shall be payable to the order of the Lender and shall be made in the aggregate amount of the Revolving Facility Commitment. SECTION 2.07 Extension of Revolving Facility Termination Date. The Borrower ------------------------------------------------ shall have the right to extend the Revolving Facility Termination Date for one (1) five (5) year period upon satisfaction of each of the following conditions: (a) The Borrower provides written notice to the Lender not less than thirty (30) nor more than ninety (90) days prior to the then effective Revolving Facility Termination Date requesting that the Revolving Facility Termination Date be extended. (b) No Event of Default or Potential Event of Default exists on either the date the notice required by paragraph (a) of this Section is given or on the then effective Revolving Facility Termination Date. (c) All of the representations and warranties of the Borrower set forth in Article XII of this Agreement and the Other Loan Documents are true and correct in all material respects on the date the notice required by paragraph (a) of this Section is given and on the then effective Revolving Facility Termination Date. (d) The relevant Borrower is in compliance with all of the covenants set forth in Article XIII, Article XIV and Article XV on the date the notice required by paragraph (a) of this Section is given and on the then effective Revolving Facility Termination Date. Upon receipt of the notice required in paragraph (a) of this Section and upon compliance with the other conditions set forth above, the Revolving Facility Termination Date shall be extended for five -20- (5) years on the terms and conditions set forth in this Agreement and the Other Loan Documents, provided that the maturity and pricing applicable to the Revolving Facility during the period after the then effective Revolving Facility Termination Date shall be acceptable to Lender in its discretion. ARTICLE III THE BASE FACILITY COMMITMENT SECTION 3.01 Base Facility Commitment. Subject to the terms, conditions and ------------------------ limitations set forth in this Article, the Lender agrees to make Base Facility Advances to the Borrower from time to time during the Base Facility Availability Period. The aggregate original principal of the Base Facility Advances shall not exceed the Base Facility Commitment. The borrowing of a Base Facility Advance shall permanently reduce the Base Facility Commitment by the original principal amount of the Base Facility Advance. The Borrower may not re-borrow any part of the Base Facility Advance which it has previously borrowed and repaid. SECTION 3.02 Requests for Base Facility Advances. The Borrower shall request a ----------------------------------- Base Facility Advance by giving the Lender an Initial Advance Request in accordance with Section 5.01 or a Future Advance Request in accordance with Section 5.02, as applicable. SECTION 3.03 Maturity Date of Base Facility Advances. The maturity date of each --------------------------------------- Base Facility Advance shall be the maturity date selected by the Borrower at the time of the making of each such Base Facility Advance, provided that such maturity date shall not be later than the 10th anniversary of the Initial Closing Date. SECTION 3.04 Interest on Base Facility Advances. ---------------------------------- (a) Advances. Each Base Facility Advance shall bear interest at a -------- rate, per annum, equal to the sum of (i) the MBS Pass-Through Rate determined for such Base Facility Advance and (ii) the Base Facility Fee. (b) Partial Month Interest. Notwithstanding anything to the contrary ---------------------- in this Section, if a Base Facility Advance is not made on the first day of a calendar month, and the MBS Issue Date for the MBS backed by the Base Facility Advance is the first day of the month following the month in which the Base Facility Advance is made, the Borrower shall pay interest on the original stated principal amount of the Base Facility Advance for the partial month period commencing on the Closing Date for the Base Facility Advance and ending on the last day of the calendar month in which the Closing Date occurs at a rate, per annum, equal to the greater of (i) the interest rate for the Base Facility Advance described in the first sentence of this Section and (ii) a rate reasonably determined by the Lender, based on the Lender's cost of funds, and approved in advance, in writing, by the Borrower, pursuant to procedures mutually agreed upon by the Borrower and the Lender. SECTION 3.05 Coupon Rates for Base Facility Advances. The Coupon Rate for a Base --------------------------------------- Facility Advance shall be the rate of interest applicable to such Base Facility Advance pursuant to Section 3.04. -21- SECTION 3.06 Base Facility Note. The obligation of the Borrower to repay a Base ------------------ Facility Advance will be evidenced by a Base Facility Note. The Base Facility Notes shall be payable to the order of the Lender and shall be made in the original principal amount of each Base Facility Advance. SECTION 3.07 Conversion of Commitment from Revolving Facility Commitment to Base ------------------------------------------------------------------- Facility Commitment. The Borrower shall have the right, from time to time during - ------------------- the Base Facility Availability Period, to convert all or a portion of a Revolving Facility Commitment to the Base Facility Commitment, in which event the Revolving Facility Commitment shall be reduced by, and the Base Facility Commitment shall be increased by, the amount of the conversion. (a) Request. In order to convert all or a portion of the Revolving ------- Facility Commitment to the Base Facility Commitment, the Borrower shall deliver a written request for a conversion ("Conversion Request") to the Lender, in the ------------------ form attached as Exhibit K to this Agreement. Each Conversion Request shall be --------- accompanied by a designation of the amount of the conversion and a designation of any Revolving Advances Outstanding which will be prepaid on or before the Closing Date for the conversion as required by Section 3.08(c). (b) Closing. If none of the limitations contained in Section 3.08 is ------- violated, and all conditions contained in Section 3.09 are satisfied, the Lender shall permit the requested conversion, at a closing to be held at offices designated by the Lender on a Closing Date selected by the Lender, and occurring within 30 Business Days after the Lender's receipt of the Conversion Request (or on such other date to which the Borrower and the Lender may agree), by executing and delivering, all at the sole cost and expense of the Borrower, an amendment to this Agreement, in the form attached as Exhibit L to this Agreement, together --------- with an amendment to each Security Document and other applicable Loan Documents, in form and substance satisfactory to the Lender, reflecting the change in the Base Facility Commitment and the Revolving Facility Commitment. The documents and instruments referred to in the preceding sentence are referred to in this Article as the "Conversion Documents." -------------------- SECTION 3.08 Limitations on Right to Convert. The right of the Borrower to ------------------------------- convert all or a portion of the Revolving Facility Commitment to the Base Facility Commitment is subject to the following limitations: (a) Closing Date. The Closing Date shall occur during the Base ------------ Facility Availability Period. (b) Minimum Request. Each Request for a conversion shall be in the --------------- minimum amount of $10,000,000. (c) Obligation to Prepay Revolving Advances. If, after the --------------------------------------- conversion, the aggregate unpaid principal balance of all Revolving Advances Outstanding will exceed the Revolving Facility Commitment, the Borrower shall be obligated to prepay, as a condition precedent to the conversion, an amount of Revolving Advances Outstanding which is at least equal to the amount of the excess. SECTION 3.09 Conditions Precedent to Conversion. The conversion of all or a ---------------------------------- portion of the Revolving Facility Commitment to the Base Facility Commitment is subject to the satisfaction of the following conditions precedent on or before the Closing Date: -22- (a) After giving effect to the requested conversion, the Coverage and LTV Tests will be satisfied; (b) Prepayment by the Borrower in full of any Revolving Advances Outstanding which the Borrower has designated for payment, together with any associated prepayment premiums and other amounts due with respect to the prepayment of such Revolving Advances; (c) The receipt by the Lender of an endorsement to each Title Insurance Policy, amending the effective date of the Title Insurance Policy to the Closing Date and showing no additional exceptions to coverage other than the exceptions shown on the Initial Closing Date and other exceptions approved by the Lender; (d) Receipt by the Lender of one or more counterparts of each Conversion Document, dated as of the Closing Date, signed by each of the parties (other than the Lender) who is a party to such Conversion Document; and (e) The satisfaction of all applicable General Conditions set forth in Article XI. SECTION 3.10 Defeasance. If at any time the Borrower elects to convert all or a ---------- portion of the Revolving Facility Commitment to a Base Facility Commitment pursuant to Section 3.07 of this Agreement, or elects that any portion of any expansion of the Commitment shall be a Base Facility Commitment, the Conversion Request or the Credit Facility Expansion Request for the first Base Facility Commitment shall select defeasance or yield maintenance with respect to prepayments of Base Facility Advances. If defeasance is selected, this Section 3.10 shall apply. The election of the Borrower as to defeasance or yield maintenance in the first Conversion Request or Credit Facility Expansion Request relating to a Base Facility Commitment shall apply to all Base Facility Advances during the term of this Agreement. Base Facility Advances are not prepayable at any time, provided that, notwithstanding the foregoing, Borrower may prepay any Base Facility Advance during the last one hundred eighty (180) days of the term of such Base Facility Advance and provided that Base Facility Advances may be defeased pursuant to the terms and conditions of this Section. This Section 3.10 shall not apply to Mortgaged Properties released from a Security Instrument in connection with a substitution of Collateral pursuant to Section 7.04 of this Agreement. (a) Conditions. Subject to Section 3.10(d), Borrower shall have the ---------- right to obtain the release of Mortgaged Properties from the lien of the related Security Instruments (and all collateral derived from such Mortgage Properties, including assignment of leases, fixture filings and other documents and instruments evidencing a lien or security interest in Borrower's assets [except the Substitute Collateral] shall be released) upon the satisfaction of all of the following conditions: (1) Defeasance Notice. Borrower shall give Lender a notice (the ----------------- "Defeasance Notice", in the manner specified in Section 3.10(g)(4), on ----------------- a form provided by Lender, specifying a Business Day (the "Defeasance ---------- Closing Date") which Borrower desires to consummate the Defeasance. ------------ The Defeasance Closing Date specified by Borrower may not be more than 45 calendar days, nor less than 30 calendar days, after the date on which the Defeasance Notice is received by Lender. -23- Borrower shall also specify in the Defeasance Notice the name, address and telephone number of Borrower for notices pursuant to Section 3.10(g)(4). The form Defeasance Notice provided by Lender specifies: (i) which Mortgaged Properties Borrower proposes to be released; (ii) the name, address and telephone number of Lender for notices pursuant to Section 3.10(g)(4); (iii) the account(s) to which payments to Lender are to be made; (iv) whether a Fannie Mae Investment Security will be offered for use as the Substitute Collateral and, if not, that U.S. Treasury Securities will be the Substitute Collateral; (v) whether the Successor Borrower will be designated by Lender or Borrower; and (vi) if a Fannie Mae Investment Security is offered for use as the Substitute Collateral, the Defeasance Notice shall also include the amount of the Defeasance Commitment Fee. Any applicable Defeasance Commitment fee must be paid by Borrower and received by Lender no later than the date and time when Lender receives the Defeasance Notice from Borrower. (2) Confirmation. After Lender has confirmed that the Defeasance ------------ is then permitted as provided in Section 3.10(d), and has confirmed that the terms of the Defeasance Notice are acceptable to Lender, Lender shall, with reasonable promptness, notify Borrower of such confirmation by signing the Defeasance Notice, attaching the Annual Yields for the Mortgage Payments beginning on the first day of the second calendar month after the Defeasance Closing Date and ending on the Stated Maturity Date (if a Fannie Mae Investment Security is offered as Substitute Collateral) and transmitting the signed Defeasance Notice to Borrower pursuant to Section 3.10(g)(4). If, after Lender has notified Borrower of its confirmation in accordance with the foregoing, Lender does not receive the Defeasance Commitment Fee within five (5) Business Days after the Defeasance Notice Effective Date, then Borrower's right to obtain Defeasance pursuant to that Defeasance Notice shall terminate. (3) Substitute Collateral. On or before the Defeasance Closing --------------------- Date, Borrower shall deliver to Lender a pledge and security agreement, in form and substance satisfactory to Lender in its sole discretion (the "Pledge Agreement"), creating a first priority ---------------- perfected security interest in favor of Lender in substitute collateral constituting an Investment Security (the "Substitute ---------- Collateral"). The Pledge Agreement shall provide Borrower's ---------- authorization and direction that all interest on, principal of and other amounts payable with respect to the Substitute Collateral shall be paid directly to Lender to be applied to Mortgage Payments due under the Base Facility Note subject to Defeasance. If the Substitute Collateral is issued in a certificated form and Borrower has possession of the certificate, the certificate shall be endorsed (either on the certificate or on a separate writing attached thereto) by Borrower as directed by Lender and delivered to Lender. If the Substitute Collateral is issued in an uncertificated form, or in a certificated form but Borrower does not have possession of the certificate, Borrower shall execute and deliver to Lender all documents and instruments required by Lender to create in Lender's favor a first priority perfected security interest in such Substitute Collateral, -24- including a securities account control agreement or any other instrument or document required to perfect a security interest in each Substitute Collateral. (4) Closing Documents. Borrower shall deliver to Lender on or ----------------- before the Defeasance Closing Date the documents described in Section 3.10(b). (5) Amounts Payable by Borrower. On or before the Defeasance --------------------------- Closing Date, Borrower shall pay to Lender an amount equal to the sum of: (A) the Next Scheduled P&I Payment; (B) all other sums then due and payable under the Base Facility Note subject to Defeasance, the Security Instruments related to the Mortgaged Properties to be released; and (C) all costs and expenses incurred by Lender or Servicer in connection with the Defeasance, including the reasonable fees and disbursements of Lender's or Servicer's legal counsel. (6) Defeasance Deposit. If a Fannie Mae Investment Security will ------------------ be the Substitute Collateral, then, on or before 3:00 p.m., Washington, D.C. time, on the Defeasance Closing Date, Borrower shall pay the Defeasance Deposit (reduced by the Defeasance Commitment Fee) to Lender to be used by Lender to purchase the Fannie Mae Investment Security as Borrower's agent. (7) Covenants, Representations and Warranties. On the Defeasance ----------------------------------------- Closing Date, all of the covenants of the relevant Borrower set forth in Articles XIII, XIV and XV of this Agreement and all of the representations and warranties of the Borrower set forth in Article XII of this Agreement are true and correct in all material respects. (8) Geographical Diversification. If, as a result of the ---------------------------- Defeasance, Lender determines that the geographical diversification of the Collateral Pool is compromised (whether or not the Geographical Diversification Requirement is met), Lender may require that Borrower add or substitute Multifamily Residential Properties to the Collateral Pool in a number and having a valuation required to restore the geographical diversification of the Collateral Pool to a level at least as diverse as before the Defeasance. (b) Closing Documents. The documents required to be delivered to ----------------- Lender on or before the Defeasance Closing Date pursuant to Section 3.10(a)(4) are: (1) an opinion of counsel for Borrower, in form and substance satisfactory to Lender, to the effect that Lender has a valid and perfected lien and security interest of first priority in the Substitute Collateral and the principal and interest payable thereunder; -25- (2) an opinion of counsel for Borrower, in form and substance satisfactory to Lender, that the Defeasance, including both Borrower's granting to Lender of a lien and security interest in the Substitute Collateral and the assignment and assumption by Successor Borrower, and each of them, when considered in combination and separately, are not subject to avoidance under any applicable federal or state laws, including Sections 547 and 548 of the U.S. Bankruptcy Code; (3) if a Fannie Mae Investment Security is not used as Substitute Collateral, and unless waived by Lender, a certificate in form and substance satisfactory to Lender, issued by an independent certified public accountant, or financial institution, approved by Lender, to the effect that the Substitute Collateral will generate the Scheduled Defeasance Payments; (4) unless waived by Lender, an opinion of counsel for Borrower in form and substance satisfactory to Lender, that the Defeasance will not result in a "sale or exchange" of any Base Facility Note within the meaning of Section 1001(c) of the Internal Revenue Code and the temporary and final regulations promulgated thereunder; (5) such other opinions, certificates, documents or instruments as Lender may reasonably request; and (6) three counterparts of the executed Assignment and Assumption Agreement described in Section 3.10(e). (c) Release. Upon Borrower's compliance with the requirements of ------- Sections 3.10(a)(1) through (7), the Mortgaged Properties shall be released from the lien of the Security Instruments (and all collateral derived from such Mortgaged Properties, including assignments of leases, fixture filings and other documents and instruments evidencing a lien or security interest in Borrower's assets [except the Substitute Collateral] shall be released). Lender shall, with reasonable promptness, execute and deliver to Borrower, at Borrower's cost and expense, any additional documents reasonably requested by Borrower in order to evidence or confirm the release of Lender's liens and security interests described in the immediately preceding sentence. (d) Defeasance Not Allowed. Borrower shall not have the right to ---------------------- obtain Defeasance at any of the following times: (1) before the third anniversary of the date of the relevant Base Facility Note; (2) after the expiration of the Defeasance Period; or (3) after Lender has accelerated the maturity of the unpaid principal balance of, accrued interest on, and other amounts payable under, any Note pursuant to Paragraph 6 of such Note. -26- (e) Assignment and Assumption. Upon Borrower's compliance with ------------------------- the requirements of Section 3.10(a), Borrower shall assign all its obligations and rights under the relevant Base Facility Note, together with the Substitute Collateral, to a successor entity (the "Successor --------- Borrower") designated by Lender or, if not so designated by Lender, -------- designated by Borrower and acceptable to Lender in its sole discretion. Borrower and Successor Borrower shall execute and deliver to Lender an assignment and assumption agreement on a form provided by Lender (the "Assignment and Assumption Agreement"). The Assignment and ----------------------------------- Assumption Agreement shall provide for (i) the transfer and assignment by Borrower to Successor Borrower of the Substitute Collateral, subject to the lien and security interest in favor of Lender, (ii) the assumption by Successor Borrower of all liabilities and obligations of Borrower under the relevant Base Facility Note, and (iii) the release by Lender of Borrower from all liabilities and obligations under the relevant Base Facility Note. Lender shall, at Borrower's request and expense, execute and deliver releases, reconveyances and security interest terminations with respect to the released Mortgage Properties and all other collateral held by Lender (except the Defeasance Deposit). The Assignment and Assumption Agreement shall be executed by Lender with a counterpart to be returned by Lender to Borrower and Successor Borrower thereafter; provided, however, in all events that it shall not be a condition of Defeasance that the Assignment and Assumption Agreement be executed by Lender, or any Successor Borrower that is designated by Lender. (f) Agent. If the Defeasance Notice provides that Lender will ----- make available a Fannie Mae Investment Security for purchase by Borrower for use as the Substitute Collateral, Borrower hereby authorizes Lender to use, and appoints Lender as its agent and attorney-in-fact for the purpose of using, the Defeasance Deposit (including any portion thereof that constitutes the Defeasance Commitment Fee) to purchase a Fannie Mae Investment Security. (g) Administrative Provisions. ------------------------- (1) Fannie Mae Security Liquidated Damages. If Borrower -------------------------------------- timely pays the Defeasance Commitment Fee, and Lender and Borrower timely transmit a signed facsimile copy of the Defeasance Notice pursuant to Section 3.10(a)(2), but Borrower fails to perform its other obligations under Sections 3.10(a) and Section 3.10(e), Lender shall have the right to retain the Defeasance Commitment Fee as liquidated damages for Borrower's default, as Lender's sole and exclusive remedy, and, except as provided in Section 3.10(g)(2), Borrower shall be released from all further obligations under this Section 3.10. Borrower acknowledges that, from and after the date on which Lender has executed the Defeasance Notice under Section 3.10(a)(2) and Borrower has delivered the Defeasance Commitment Fee, Lender will incur financing costs in arranging and preparing for the purchase of the Substitute Collateral and in arranging and preparing for the release of the Mortgaged Properties from the lien of the Security Instruments in reliance on the executed Defeasance Notice. Borrower agrees that the Defeasance Commitment Fee represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Agreement, of the damages Lender will incur by reason of Borrower's default. -27- (2) Third Party Costs. In the event that the Defeasance is not ----------------- consummated on the Defeasance Closing Date for any reason, Borrower agrees to reimburse Lender and Servicer for all third party costs and expenses (other than financing costs covered by Section 3.10(g)(1) above), including attorneys' fees and expenses, incurred by Lender in reliance on the executed Defeasance Notice, within 10 Business Days after Borrower receives a written demand for payment, accompanied by a statement, in reasonable detail, of Lender's and Servicer's third party costs and expenses. (3) Payments. All payments required to be made by Borrower to -------- Lender or Servicer pursuant to this Section 3.10 shall be made by wire transfer of immediately available finds to the account(s) designated by Lender or Servicer, as the case may be, in the Defeasance Notice. (4) Notice. The Defeasance Notice delivered pursuant to this ------ Section 3.10(g)(4) shall be in writing and shall be sent by telecopier or facsimile machine which automatically generates a transmission report that states the date and time of the transmission, the length of the document transmitted and the telephone number of the recipient's telecopier or facsimile machine (or shall be sent by any distribution media, whether currently existing or hereafter developed, including electronic mail and internet distribution, as approved by Lender). Any notice so sent addressed to the parties at their respective addresses designated in the Defeasance Notice pursuant to Section 3.10(a), shall be deemed to have been received on the date and time indicated on the transmission report of recipient. To be effective, Borrower must send the Defeasance Notice (as described above) so that Lender receives the Defeasance Notice no earlier than 11:00 a.m. and no later than 3:00 p.m. Washington, D.C. time on a Business Day. (h) Definitions. For purposes of this Section 3.10, the following ----------- terms shall have the following meanings: (1) The term "Annual Yield" means the yield for the theoretical ------------ zero coupon U.S. Treasury Security as calculated from the current "on-the-run" U.S. Treasury yield curve with a term to maturity that most closely matches the Applicable Defeasance Term for the Mortgage Payment, as published by Fannie Mae on MORNET(R) (or in an alternative electronic format) at 2:00 p.m. Washington, D.C. time on the Business Day that Lender receives the Defeasance Notice in accordance with Section 3.10(g)(4). If the publication of yields on MORNET(R) is unavailable, Lender shall determine yields from another source reasonably determined by Lender. (2) The term "Applicable Defeasance Term" means, in the case of -------------------------- each Mortgage Payment, the number of calendar months, based on a year containing 12 calendar months with 30 days each, in the period beginning on the first day of the first calendar month after the Defeasance Closing Date to the date on which such Mortgage Payment is due and payable. -28- (3) The term "Defeasance" means the transaction in which all (but ---------- not less than all) of the Mortgaged Properties are released from the lien of the Security Instruments and Lender receives, as substitute collateral, a valid and perfected lien and security interest of first priority in the Substitute Collateral and the principal and interest payable thereunder. (4) The term "Defeasance Commitment Fee" means the amount ------------------------- specified in the Defeasance Notice as Borrower's good faith deposit to ensure performance of its obligations under this Section, which shall equal two percent (2%) of the aggregate unpaid principal balance of the Base Facility Note subject to Defeasance as of the Defeasance Notice Effective Date, if the Successor Borrower is designated by Borrower under Section 3.10(e), or one percent (1%) of the aggregate unpaid principal balance of the Base Facility Note subject to Defeasance as of the Defeasance Notice Effective Date if the Successor Borrower is designated by Lender under Section 3.10(e). No Defeasance Commitment Fee will be applicable if U.S. Treasury Securities are specified in the Defeasance Notice as the applicable Investment Security. (5) The term "Defeasance Deposit" means an amount equal to the sum of the present value of each Mortgage Payment that becomes due and payable during the period beginning on the first day of the second calendar month after the Defeasance Closing Date and ending on the Stated Maturity Date, where the present value of each Mortgage Payment is determined using the following formula: the amount of the Mortgage Payment -------------------------------------------- (1 + (the Annual Yield/12))/n/ For this purpose, the last Mortgage Payment due and payable on the Stated Maturity Date shall include the amounts that would constitute the unpaid principal balance of the Base Facility Note subject to Defeasance on the Stated Maturity Date if all prior Mortgage Payments were paid on their due dates and "n" shall equal the Applicable Defeasance Term. (6) The term "Defeasance Period" means the period beginning on ----------------- the earliest permitted date determined under Section 3.10(d)(l) and ending on the 180th day before the Stated Maturity Date. (7) The term "Defeasance Notice Effective Date" means the date on -------------------------------- which Lender provides confirmation of the Defeasance Notice pursuant to Section 3.10(a)(2). (8) The term "Fannie Mae Investment Security" means any bond, ------------------------------ debenture, note, participation certificate or other similar obligation issued by Fannie Mae in connection with the Defeasance which provides for Scheduled Defeasance Payments beginning in the second calendar month after the Defeasance Closing Date. (9) The term "Investment Security" means: ------------------- -29- (A) If offered by Lender pursuant to the Defeasance Notice, a Fannie Mae Investment Security purchased in the manner described in Sections 3.10(a)(6) and 3.10(f), and (B) If no Fannie Mae Investment Security is offered by Lender pursuant to the Defeasance Notice, U.S. Treasury Securities. (10) The term "Mortgage Payment" means the amount of each ---------------- regularly scheduled monthly payment of principal and interest due and payable under the Base Facility Note subject to Defeasance during the period beginning on the first day of the second calendar month after the Defeasance Closing Date and ending on the Stated Maturity Date, and the amount that would constitute the aggregate unpaid principal balance of the Base Facility Note subject to Defeasance on the Stated Maturity Date if all prior Mortgage Payments were paid on their due dates. (11) The term "Next Scheduled P&I Payment" means an amount equal -------------------------- to the monthly installment of principal and interest due under the Base Facility Note subject to Defeasance on the first day of the first calendar month after the Defeasance Closing Date. (12) The term "Scheduled Defeasance Payments" means payments ----------------------------- prior and as close as possible to (but in no event later than) the successive scheduled dates on which Mortgage Payments are required to be paid under the Base Facility Note subject to Defeasance and in amounts equal to or greater than the scheduled Mortgage Payments due and payable on such dates under the Base Facility Note subject to Defeasance. (13) The term "Stated Maturity Date" means the Maturity Date -------------------- specified in the Base Facility Note subject to Defeasance determined without regard to Lender's exercise of any right of acceleration of the Base Facility Note subject to Defeasance. (14) The term "U.S. Treasury Securities" means direct, ------------------------ non-callable and non-redeemable obligations of the United States of America which provided for Scheduled Defeasance Payments beginning in the second calendar month after the Defeasance Closing Date. ARTICLE IV RATE SETTING FOR THE ADVANCES SECTION 4.01 Rate Setting for an Advance. Rates for an Advance shall be set in --------------------------- accordance with the following procedures: (a) Preliminary, Nonbinding Quote. At the Borrower's request the ----------------------------- Lender shall quote to the Borrower an estimate of the MBS Pass-Through Rate (for a pro+posed Base Facility Advance) or MBS Imputed Interest Rate (for a proposed Revolving Advance) for a Fannie Mae MBS backed by a proposed Advance. The Lender's quote shall be based on (i) a solicitation of at -30- least three (3) bids from institutional investors selected by the Lender and (ii) the proposed terms and amount of the Advance selected by the Borrower. The quote shall not be binding upon the Lender. (b) Rate Setting. If the Borrower satisfies all of the conditions to ------------ the Lender's obligation to make the Advance in accordance with Article V, then the Borrower may propose a MBS Pass-Through Rate (for a Base Facility Advance) or MBS Imputed Interest Rate (for a Revolving Advance) by submitting to the Lender by facsimile transmission a completed and executed document, in the form attached as Exhibit M to this Agreement ("Rate Setting Form"), before 1:00 p.m. --------- ----------------- Washington, D.C. time on any Business Day ("Rate Setting Date"). The Rate ----------------- Setting Form contains various factual certifications required by the Lender and specifies: (i) for a Revolving Advance, the amount, term, MBS Issue Date, Revolving Facility Fee, the proposed maximum Coupon Rate ("Maximum Annual -------------- Coupon Rate") and Closing Date for the Advance; and ----------- (ii) for a Base Facility Advance, the amount, term, MBS Issue Date, Base Facility Fee, Maximum Annual Coupon Rate, Price (which will be in a range between 99-1/2 and 100-1/2), Yield Maintenance Period, if applicable, Yield Rate Security, if applicable, Amortization Period and Closing Date for the Advance. (c) Rate Confirmation. Within one Business Day after receipt of the ----------------- completed and executed Rate Setting Form, the Lender shall solicit bids from institutional investors selected by the Lender based on the information in the Rate Setting Form and, provided the actual Coupon Rate (if the low bid were accepted) would be at or below the Maximum Annual Coupon Rate, shall obtain a commitment ("MBS Commitment") for the purchase of a Fannie Mae MBS having the -------------- bid terms described in the related Rate Setting Form, and shall immediately deliver to the Borrower by facsimile transmission a completed document, in the form attached as Exhibit N to this Agreement ("Rate Confirmation Form"). The --------- ---------------------- Rate Confirmation Form will confirm: (i) for a Revolving Advance, the amount, term, MBS Issue Date, MBS Delivery Date, MBS Imputed Interest Rate, Revolving Facility Fee, Coupon Rate, Discount, Price, and Closing Date for the Advance; and (ii) for a Base Facility Advance, the amount, term, MBS Issue Date, MBS Delivery Date, MBS Pass-Through Rate, Base Facility Fee, Coupon Rate, Price, Yield Maintenance Period, Specified U.S. Treasury Security, Amortization Period and Closing Date for the Advance. SECTION 4.02 Advance Confirmation Instrument for Revolving Advances. On or ------------------------------------------------------ before the Closing Date for a Revolving Advance, the Borrower shall execute and deliver to the Lender an instrument ("Advance Confirmation Instrument"), in the ------------------------------- form attached as Exhibit O to this Agreement, confirming the amount, term, MBS --------- Issue Date, MBS Delivery Date, MBS Imputed Interest Rate, Revolving Facility Fee, Coupon Rate, Discount, Price and Closing Date for the Advance, and the Borrower's obligation to repay the Advance in accordance with the terms of the Notes and this Agreement. Upon the funding of the Revolving Advance, the Lender shall note the date of funding in the appropriate space at the foot of the Advance Confirmation Instrument and -31- deliver a copy of the completed Advance Confirmation Instrument to the Borrower. The Lender's failure to do so shall not invalidate the Advance Confirmation Instrument or otherwise affect in any way any obligation of the Borrower to repay Revolving Advances in accordance with the Advance Confirmation Instrument, the Revolving Facility Note or the other Loan Documents, but is merely meant to facilitate evidencing the date of funding and to confirm that the Advance Confirmation Instrument is not effective until the date of funding. SECTION 4.03 Breakage and other Costs. In the event that the Lender obtains an ------------------------ MBS Commitment and the Lender fails to fulfill the MBS Commitment because the Advance is not made (for a reason other than the default of the Lender to make the Advance or the failure of the purchaser of the MBS to purchase such MBS), the Borrower shall pay all breakage and other costs, fees and damages incurred by the Lender in connection with its failure to fulfill the MBS Commitment. The Lender reserves the right to require that the Borrower post a deposit at the time the MBS Commitment is obtained. ARTICLE V MAKING THE ADVANCES SECTION 5.01 Initial Advance. The Borrower may make a request ("Initial Advance --------------- --------------- Request") for the Lender to make the Initial Advance. If all conditions - ------- contained in this Section are satisfied on or before the Closing Date for the Initial Advance, the Lender shall make the Initial Advance on the Initial Closing Date or on another date selected by the Borrower and approved by the Lender. The obligation of the Lender to make the Initial Advance is subject to the following conditions precedent: (a) Receipt by the Lender of the Initial Advance Request; (b) [Intentionally Deleted] (c) The delivery to the Title Company, for filing and/or recording in all applicable jurisdictions, of all applicable Loan Documents required by the Lender, including duly executed and delivered original copies of the Revolving Facility Note, a Base Facility Note, the Initial Security Instruments covering the Initial Mortgaged Properties and UCC-1 Financing Statements covering the portion of the Collateral comprised of personal property, and other appropriate instruments, in form and substance satisfactory to the Lender and in form proper for recordation, as may be necessary in the opinion of the Lender to perfect the Liens created by the applicable Security Instruments and any other Loan Documents creating a Lien in favor of the Lender, and the payment of all taxes, fees and other charges payable in connection with such execution, delivery, recording and filing; (d) If the Advance is a Revolving Advance, the receipt by the Lender of the first installment of Revolving Facility Fee for the Revolving Advance and the entire Discount for the Revolving Advance payable by the Borrower pursuant to Section 2.04; (e) The receipt by the Lender of the Initial Origination Fee pursuant to Section 16.02(a), the Initial Due Diligence Fee pursuant to Section 16.03(a) to the extent calculated by Lender at such time (any portion of the Initial Due Diligence Fee not paid by the Borrower on the -32- Initial Closing Date shall be paid promptly upon demand by Lender), all legal fees and expenses payable pursuant to Section 16.04(a) and all legal fees and expenses payable in connection with the Initial Advance pursuant to Section 16.04(b); and (f) The satisfaction of all applicable General Conditions set forth in Article XI. SECTION 5.02 Future Advances. In order to obtain a Future Advance, the Borrower --------------- may from time to time deliver a written request for a Future Advance ("Future ------ Advance Request") to the Lender, in the form attached as Exhibit P to this - --------------- --------- Agreement. Each Future Advance Request shall be accompanied by (a) a designation of the amount of the Future Advance requested, and (b) a designation of the maturity date of the Advance. Each Future Advance Request shall be in the minimum amount of $3,000,000. If all conditions contained in Section 5.03 are satisfied, the Lender shall make the requested Future Advance, at a closing to be held at offices designated by the Lender on a Closing Date selected by the Lender, and occurring on a date selected by the Borrower, which date shall be not more than three (3) Business Days, after the Lender's receipt of the Future Advance Request and the Borrower's receipt of the Rate Confirmation Form (or on such other date to which the Borrower and the Lender may agree). The Lender reserves the right to require that the Borrower post a deposit at the time the MBS Commitment is obtained as an additional condition to the Lender's obligation to make the Future Advance. SECTION 5.03 Conditions Precedent to Future Advances. The obligation of the --------------------------------------- Lender to make a requested Future Advance is subject to the following conditions precedent: (a) The receipt by the Lender of a Future Advance Request; (b) The Lender has delivered the Rate Setting Form for the Future Advance to the Borrower; (c) After giving effect to the requested Future Advance, the Coverage and LTV Tests will be satisfied; (d) If the Advance is a Base Facility Advance, delivery of a Base Facility Note, duly executed by the Borrower, in the amount of the Advance, reflecting all of the terms of the Base Facility Advance; (e) If the Advance is a Revolving Advance, delivery of the Advance Confirmation Instrument, duly executed by the Borrower; (f) For any Title Insurance Policy not containing a Revolving Credit Endorsement, the receipt by the Lender of an endorsement to the Title Insurance Policy, amending the effective date of the Title Insurance Policy to the Closing Date and showing no additional exceptions to coverage other than the exceptions shown on the Initial Closing Date and other exceptions approved by the Lender; (g) If the Advance is a Revolving Advance, the receipt by the Lender of the first installment of Revolving Facility Fee for the Revolving Advance and the entire Discount for the Revolving Advance payable by the Borrower pursuant to Section 2.04; -33- (h) The receipt by the Lender of all legal fees and expenses payable by the Borrower in connection with the Future Advance pursuant to Section 16.04(b); and (i) The satisfaction of all applicable General Conditions set forth in Article XI. SECTION 5.04 Determination of Allocable Facility Amount and Valuations. --------------------------------------------------------- (a) Initial Determinations. On the Initial Closing Date, Lender shall ---------------------- determine (i) the Allocable Facility Amount and Valuation for each Mortgaged Property and (ii) the Aggregate Debt Service Coverage Ratio for the Trailing 12 Month Period and the Aggregate Loan to Value Ratio for the Trailing 12 Month Period. The determinations made as of the Initial Closing Date shall remain unchanged until the first anniversary of the Initial Closing Date. (b) Monitoring Determinations. (i) Once each Calendar Quarter or, if ------------------------- the Commitment consists only of a Base Facility Commitment, once each Calendar Year, within twenty (20) Business Days after Borrower has delivered to Lender the reports required in Section 13.04, Lender shall determine the Aggregate Debt Service Coverage Ratio for the Trailing 12 Month Period and the Aggregate Loan to Value Ratio for the Trailing 12 Month Period with the other covenants set forth in the Loan Documents, and whether the Borrower is in compliance, (ii) After the first anniversary of the Initial Closing Date, on an annual basis, and if Lender reasonably decides that changed market or property conditions warrant, Lender shall determine Allocable Facility Amounts and Valuations, (iii) Lender shall also redetermine Allocable Facility Amounts to take account of any addition, release or substitution of Collateral or other event which invalidates the outstanding determinations. ARTICLE VI ADDITIONS OF COLLATERAL SECTION 6.01 Right to Add Collateral. Subject to the terms and conditions of ----------------------- this Article, the Borrower shall have the right, from time to time during the Term of this Agreement, to add Multifamily Residential Properties to the Collateral Pool in accordance with the provisions of this Article. SECTION 6.02 Procedure for Adding Collateral. The procedure for adding ------------------------------- Collateral set forth in this Section 6.02 shall apply to all additions of Collateral in connection with this Agreement, including but not limited to additions of Collateral in connection with substitutions of Collateral and expansion of the Credit Facility. (a) Request. The Borrower may, not more than once each Calendar ------- Quarter, deliver a written request ("Collateral Addition Request") to the --------------------------- Lender, in the form attached as Exhibit Q to this Agreement, to add one or more --------- Multifamily Residential Properties to the Collateral Pool. Each Collateral Addition Request shall be accompanied by the following: (i) The information relating to the proposed Additional Mortgaged Property required by the form attached as Exhibit R to this --------- Agreement ("Collateral Addition Description Package"), as amended from --------------------------------------- time to time to include information required under the DUS Guide; and -34- (ii) The payment of all Additional Collateral Due Diligence Fees pursuant to Section 16.03(b) to the extent calculated by Lender at such time (any portion of any Additional Collateral Due Diligence Fee not paid by Borrower with the Collateral Additional Request shall be paid promptly upon demand by Lender). (b) Additional Information. The Borrower shall promptly deliver ---------------------- to the Lender any additional information concerning the proposed Additional Mortgaged Property that the Lender may from time to time reasonably request. (c) Underwriting. The Lender shall evaluate the proposed ------------ Additional Mortgaged Property, and shall make underwriting determinations as to (A) the Aggregate Debt Service Coverage Ratios for the Trailing 12 Month Period and the Aggregate Loan to Value Ratio for the Trailing 12 Month Period applicable to the Collateral Pool, and (B) the Debt Service Coverage Ratio for the Trailing 12 Month Period and the Loan to Value Ratio for the Trailing 12 Month Period applicable to the proposed Additional Property on the basis of the lesser of (i) the acquisition price of the proposed Additional Mortgaged Property or (ii) a Valuation made with respect to the proposed Additional Mortgaged Property, and otherwise in accordance with Fannie Mae's DUS Underwriting Requirements. Within 30 days after receipt of (i) the Collateral Addition Request for the Additional Mortgaged Property and (ii) all reports, certificates and documents set forth on Exhibit S to this Agreement, including a --------- zoning analysis undertaken in accordance with Section 206 of the DUS Guide, the Lender shall notify the Borrower whether or not it shall consent to the addition of the proposed Additional Mortgaged Property to the Collateral Pool and, if it shall so consent, shall set forth the Aggregate Debt Service Coverage Ratios for the Trailing 12 Month Period and the Aggregate Loan to Value Ratio for the Trailing 12 Month Period which it estimates shall result from the addition of the proposed Additional Mortgaged Property to the Collateral Pool. If the Lender declines to consent to the addition of the proposed Additional Mortgaged Property to the Collateral Pool, the Lender shall include, in its notice, a brief statement of the reasons for doing so. Within five Business Days after receipt of the Lender's notice that it shall consent to the addition of the proposed Additional Mortgaged Property to the Collateral Pool, the Borrower shall notify the Lender whether or not it elects to cause the proposed Additional Mortgaged Property to be added to the Collateral Pool. If the Borrower fails to respond within the period of five Business Days, it shall be conclusively deemed to have elected not to cause the proposed Additional Mortgaged Property to be added to the Collateral Pool. (d) Closing. If, pursuant to subsection (c), the Lender consents ------- to the addition of the proposed Additional Mortgaged Property to the Collateral Pool, the Borrower timely elects to cause the proposed Additional Mortgaged Property to be added to the Collateral Pool and all conditions contained in Section 6.03 are satisfied, the Lender shall permit the proposed Additional Mortgaged Property to be added to the Collateral Pool, at a closing to be held at offices designated by the Lender on a Closing Date selected by the Lender, and occurring within 30 Business Days after the Lender's receipt of the Borrower's election (or on such other date to which the Borrower and the Lender may agree), provided that in any Calendar Quarter, the Closing Date for any addition of an Additional Mortgaged Property to the Collateral Pool shall be on the same day as the Closing Date of any release or substitution pursuant to Article VII of this Agreement and any increase in the Credit Facility pursuant to Article VIII of this Agreement. -35- SECTION 6.03 Conditions Precedent to Addition of an Additional Mortgaged ----------------------------------------------------------- Property to the Collateral Pool. The addition of an Additional Mortgaged - ------------------------------- Property to the Collateral Pool on the Closing Date applicable to the Additional Mortgaged Property is subject to the satisfaction of the following conditions precedent: (a) If the Additional Mortgaged Property is being added to the Collateral Pool prior to the first anniversary of the Initial Closing Date, the Coverage and LTV Tests will be satisfied; (b) If the Additional Mortgaged Property is being added to the Collateral Pool after the first anniversary of the Initial Closing Date, the proposed Additional Mortgaged Property has a Debt Service Coverage Ratio for the Trailing 12 Month Period of not less than 155% and a Loan to Value Ratio for the Trailing 12 Month Period of not more than 55% and immediately after giving effect to the requested addition, the Coverage and LTV Tests will be satisfied, and in the case of any substitution effected pursuant to Section 7.04 of this Agreement, the Coverage and LTV Tests are not adversely affected after giving effect to the proposed substitution; (c) The receipt by the Lender of the Collateral Addition Fee and all legal fees and expenses payable by the Borrower in connection with the Collateral Addition pursuant to Section 16.04(b); (d) The delivery to the Title Company, with fully executed instructions directing the Title Company to file and/or record in all applicable jurisdictions, all applicable Collateral Addition Loan Documents required by the Lender, including duly executed and delivered original copies of any Security Instruments and UCC-1 Financing Statements covering the portion of the Additional Mortgaged Property comprised of personal property, and other appropriate documents, in form and substance satisfactory to the Lender and in form proper for recordation, as may be necessary in the opinion of the Lender to perfect the Lien created by the applicable additional Security Instrument, and any other Collateral Addition Loan Document creating a Lien in favor of the Lender, and the payment of all taxes, fees and other charges payable in connection with such execution, delivery, recording and filing; (e) If required by the Lender, amendments to the Notes and the Security Instruments, reflecting the addition of the Additional Mortgaged Property to the Collateral Pool and, as to any Security Instrument so amended, the receipt by the Lender of an endorsement to the Title Insurance Policy insuring the Security Instrument, amending the effective date of the Title Insurance Policy to the Closing Date and showing no additional exceptions to coverage other than the exceptions shown on the Initial Closing Date and other exceptions approved by the Lender; (f) If the Title Insurance Policy for the Additional Mortgaged Property contains a Tie-In Endorsement, an endorsement to each other Title Insurance Policy containing a Tie-In Endorsement, adding a reference to the Additional Mortgaged Property; and (g) The satisfaction of all applicable General Conditions set forth in Article XI. -36- ARTICLE VII RELEASES OF COLLATERAL SECTION 7.01 Right to Obtain Releases of Collateral. Subject to the terms and -------------------------------------- conditions of this Article, the Borrower shall have the right to obtain a release of Collateral from the Collateral Pool in accordance with the provisions of this Article. SECTION 7.02 Procedure for Obtaining Releases of Collateral. ---------------------------------------------- (a) Request. In order to obtain a release of Collateral from the ------- Collateral Pool, the Borrower may deliver a written request for the release of Collateral from the Collateral Pool ("Collateral Release Request") to the -------------------------- Lender, in the form attached as Exhibit T to this Agreement. The Collateral --------- Release Request shall not result in a termination of all or any part of the Credit Facility. The Borrower may only terminate all or any part of the Credit Facility by delivering a Revolving Facility Termination Request or Credit Facility Termination Request pursuant to Articles IX or X. The Collateral Release Request shall be accompanied by (and shall not be effective unless it is accompanied by) the name, address and location of the Mortgaged Property to be released from the Collateral Pool ("Collateral Release Property"). --------------------------- (b) Closing. If all conditions contained in Section 7.03 are ------- satisfied, the Lender shall cause the Collateral Release Property to be released from the Collateral Pool, at a closing to be held at offices designated by the Lender on a Closing Date selected by the Lender, and occurring within 30 days after the Lender's receipt of the Collateral Release Request (or on such other date to which the Borrower and the Lender may agree, provided that in any Calendar Quarter, the Closing Date for any release shall be on the same day as the Closing Date of any addition of an Additional Mortgaged Property to the Collateral Pool pursuant to Article VI of this Agreement or any increase in the Credit Facility pursuant to Article VIII of this Agreement), by executing and delivering, and causing all applicable parties to execute and deliver, all at the sole cost and expense of the Borrower, instruments, in the form customarily used by the Lender and reasonably satisfactory to the Title Company for releases in the jurisdiction governing the perfection of the security interest being released, releasing the applicable Security Instrument as a Lien on the Collateral Release Property, and UCC-3 Termination Statements terminating the UCC-1 Financing Statements perfecting a Lien on the portion of the Collateral Release Property comprised of personal property and such other documents and instruments as the Borrower may reasonably request evidencing the release of the applicable Collateral from any lien securing the Obligations (including a termination of any restriction on the use of any accounts relating to the Collateral Release Property) and the release and return to the Borrower of any and all escrowed amounts relating thereto. The instruments referred to in the preceding sentence are referred to in this Article as the "Collateral Release ------------------ Documents." - --------- (c) Release Price. The "Release Price" for each Mortgaged Property ------------- ------------- other than Mortgaged Properties released from a Security Instrument in connection with a Substitution of Collateral pursuant to Section 7.04 of this Agreement means the greater of (i) the Allocable Facility Amount for the Mortgaged Property to be released and (ii) the amount, if any, of Advances Outstanding which are required to be repaid by the Borrower to the Lender in connection with the proposed release of the Mortgaged Property from the Collateral Pool, so that, immediately after the release, the Coverage and LTV Tests will be satisfied and neither the Aggregate Debt Service -37- Coverage Ratios for the Trailing 12 Month Period will be reduced nor the Aggregate Loan to Value Ratio for the Trailing 12 Month Period will be increased as a result of such release. In addition to the Release Price, the Borrower shall pay to the Lender all associated prepayment premiums and other amounts due under the Notes and any Advance Confirmation Instruments evidencing the Advances being repaid. (d) Application of Release Price. The Release Price shall be applied ---------------------------- against the Revolving Advances Outstanding until there are no further Revolving Advances Outstanding, and thereafter shall be held by the Lender (or its appointed collateral agent) as substituted Collateral ("Substituted Cash ---------------- Collateral"), in accordance with a security agreement and other documents in - ---------- form and substance acceptable to the Lender (or, at the Borrower's option, may be applied against the prepayment of Base Facility Advances, so long as the prepayment is permitted under the Base Facility Note for the Base Facility Advance). Any portion of the Release Price held as Substituted Cash Collateral may be released if, immediately after giving effect to the release, each of the conditions set forth in Section 7.03(a) below shall have been satisfied. If, on the date on which the Borrower pays the Release Price, Revolving Advances are Outstanding but are not then due and payable, the Lender shall hold the payments as additional Collateral for the Credit Facility, until the next date on which Revolving Advances are due and payable, at which time the Lender shall apply the amounts held by it to the amounts of the Revolving Advances due and payable. SECTION 7.03 Conditions Precedent to Release of Collateral Release Property from ------------------------------------------------------------------- the Collateral. The obligation of the Lender to release a Collateral Release - -------------- Property from the Collateral Pool by executing and delivering the Collateral Release Documents on the Closing Date, are subject to the satisfaction of the following conditions precedent on or before the Closing Date: (a) Immediately after giving effect to the requested release the Coverage and LTV Tests will be satisfied, and in the case of any substitution effected pursuant to Section 7.04 of this Agreement, the Coverage and LTV Tests are not adversely affected after giving effect to the proposed substitution; (b) Receipt by the Lender of the Release Price; (c) Receipt by the Lender of all legal fees and expenses payable by the Borrower in connection with the release pursuant to Section 16.04(b); (d) Receipt by the Lender on the Closing Date of one or more counterparts of each Collateral Release Document, dated as of the Closing Date, signed by each of the parties (other than the Lender) who is a party to such Collateral Release Document; (e) If required by the Lender, amendments to the Notes and the Security Instruments, reflecting the release of the Collateral Release Property from the Collateral Pool and, as to any Security Instrument so amended, the receipt by the Lender of an endorsement to the Title Insurance Policy insuring the Security Instrument, amending the effective date of the Title Insurance Policy to the Closing Date and showing no additional exceptions to coverage other than the exceptions shown on the Initial Closing Date and other exceptions approved by the Lender; (f) If the Lender determines the Collateral Release Property to be one phase of a project, and one or more other phases of the project are Mortgaged Properties which will remain in -38- the Collateral Pool ("Remaining Mortgaged Properties"), the Lender's ------------------------------ determination that the Remaining Mortgaged Properties can be operated separately from the Collateral Release Property and any other phases of the project which are not Mortgaged Properties. In making this determination, the Lender shall evaluate whether the Remaining Mortgaged Properties comply with the terms of Sections 203 and 208 of the DUS Guide, which, as of the date of this Agreement, require, among other things, that a phase which constitutes collateral for a loan made in accordance with the terms of the DUS Guide (i) have adequate ingress and egress to existing public roadways, either by location of the phase on a dedicated, all-weather road or by access to such a road by means of a satisfactory easement, (ii) have access which is sufficiently attractive and direct from major thoroughfares to be conducive to continued good marketing, (iii) have a location which is not (A) inferior to other phases, (B) such that inadequate maintenance of other phases would have a significant negative impact on the phase, and (C) such that the phase is visible only after passing through the other phases of the project and (iv) comply with such other issues as are dictated by prudent practice; (g) Receipt by the Lender of endorsements to the Tie-In Endorsements of the Title Insurance Policies, if deemed necessary by the Lender, to reflect the release; (h) Receipt by the Lender on the Closing Date of a writing, dated as of the Closing Date, signed by the Borrower, in the form attached as Exhibit ------- U to this Agreement, pursuant to which the Borrower confirms that its - - obligations under the Loan Documents are not adversely affected by the release of the Collateral Release Property from the Collateral; (i) The remaining Mortgaged Properties in the Collateral Pool shall satisfy the then-existing Geographical Diversification Requirements; (j) The satisfaction of all applicable General Conditions set forth in Article XI; and (k) Notwithstanding the other provisions of this Section 7.03, no release of any of the Mortgaged Properties shall be made unless the Borrower has provided title insurance to Lender in respect of each of the remaining Mortgage Properties in the Collateral Pool in an amount equal to 150% of the Initial Value of each such Mortgaged Property. SECTION 7.04 Substitutions. Subject to the terms, conditions and limitations of ------------- Articles VI and VII and provided that the Valuation of the Multifamily Residential Property sought to be added to the Collateral Pool equals or exceeds the Valuation of the Mortgaged Property sought to be released from the Collateral Pool, the Borrower may simultaneously add a Multifamily Residential Property to the Collateral Pool and release a Mortgaged Property from the Collateral Pool, thereby effecting a substitution of Collateral, provided that Sections 7.02(c), 7.02(d) and 7.03(b) shall not apply to a substitution of Collateral. ARTICLE VIII EXPANSION OF CREDIT FACILITY SECTION 8.01 Right to Increase Commitment. Subject to the terms, conditions and ---------------------------- limitations of this Article, the Borrower shall have the right to increase the Base Facility Commitment, the -39- Revolving Facility Commitment, or both. The Borrower's right to increase the Commitment is subject to the following limitations: (a) Commitment. After giving effect to the proposed increase, the ---------- Commitment (without regard to the actual amount of Revolving Advances Outstanding, but taking into account the aggregate original principal amount of all Base Facility Advances made under this Agreement to the Closing Date) shall not exceed $200,000,000. (b) Minimum Request. Each Request for an increase in the Commitment --------------- shall be in the minimum amount of $10,000,000. (c) Terms and Conditions. The terms and conditions of this -------------------- Agreement shall apply to any increase in the Commitment. SECTION 8.02 Procedure for Obtaining Increases in Commitment. ----------------------------------------------- (a) Request. In order to obtain an increase in the Commitment, the ------- Borrower shall deliver a written request for an increase (a "Credit Facility --------------- Expansion Request") to the Lender, in the form attached as Exhibit V to this - ----------------- --------- Agreement. Each Credit Facility Expansion Request shall be accompanied by the following: (i) A designation of the amount of the proposed increase; (ii) A designation of the increase in the Base Facility Credit Commitment and the Revolving Facility Credit Commitment; (iii) A request that the Lender inform the Borrower of any change in the Geographical Diversification Requirements; and (iv) A request that the Lender inform the Borrower of the Base Facility Fee and the Revolving Facility Fee to apply to Advances drawn from such increase in the Commitment. (b) Closing. If all conditions contained in Section 8.03 are ------- satisfied, the Lender shall permit the requested increase in the Commitment, at a closing to be held at offices designated by the Lender on a Closing Date selected by the Lender, and occurring within fifteen (15) Business Days after the Lender's receipt of the Credit Facility Expansion Request (or on such other date to which the Borrower and the Lender may agree), provided that in any Calendar Quarter the Closing Date for addition of an Additional Mortgaged Property to the Collateral Pool pursuant to Article VI of this Agreement and any increase of the Credit Facility shall be on the same day as the Closing Date for any release or substitution pursuant to Article VII of this Agreement. SECTION 8.03 Conditions Precedent to Increase in Commitment. The right of the ---------------------------------------------- Borrower to increase the Commitment is subject to the satisfaction of the following conditions precedent on or before the Closing Date: (a) After giving effect to the requested increase the Coverage and LTV Tests will be satisfied; -40- (b) Payment by the Borrower of the Expansion Origination Fee in accordance with Section 16.02(b) and all legal fees and expenses payable by the Borrower in connection with the expansion of the Commitment pursuant to Section 16.04(b); (c) The receipt by the Lender of an endorsement to each Title Insurance Policy, amending the effective date of the Title Insurance Policy to the Closing Date, increasing the limits of liability to the Commitment, as increased under this Article, showing no additional exceptions to coverage other than the exceptions shown on the Initial Closing Date (or, if applicable, the last Closing Date with respect to which the Title Insurance Policy was endorsed) and other exceptions approved by the Lender, together with any reinsurance agreements required by the Lender; (d) The receipt by the Lender of fully executed original copies of all Credit Facility Expansion Loan Documents, each of which shall be in full force and effect, and in form and substance satisfactory to the Lender in all respects; (e) if determined necessary by the Lender, the Borrower's agreement to such geographical diversification requirements as the Lender may determine; and (f) The satisfaction of all applicable General Conditions set forth in Article XI. ARTICLE IX COMPLETE OR PARTIAL TERMINATION OF FACILITIES SECTION 9.01 Right to Complete or Partial Termination of Facilities. Subject to ------------------------------------------------------ the terms and conditions of this Article, the Borrower shall have the right to permanently reduce the Revolving Facility Commitment and the Base Facility Commitment in accordance with the provisions of this Article. SECTION 9.02 Procedure for Complete or Partial Termination of Facilities. ----------------------------------------------------------- (a) Request. In order to permanently reduce the Revolving Facility ------- Commitment (other than in connection with a conversion of all or a portion of the Revolving Loan Commitment to a Base Facility Commitment, which reduction shall be automatic) or the Base Facility Commitment, the Borrower may deliver a written request for the reduction ("Facility Termination Request") to the ---------------------------- Lender, in the form attached as Exhibit W to this Agreement. A permanent --------- reduction of the Revolving Facility Commitment to $0 shall be referred to as a "Complete Revolving Facility Termination." A permanent reduction of the Base --------------------------------------- Facility Commitment to $0 shall be referred to as a "Complete Base Facility ---------------------- Termination." The Facility Termination Request shall be accompanied by the - ----------- following: (i) A designation of the proposed amount of the reduction in the Commitment; and (ii) Unless there is a Complete Revolving Facility Termination or a Complete Base Facility Termination, a designation by the Borrower of any Revolving Advances which will be prepaid or Fixed Advances which will be prepaid, as the case may be. -41- Any release of Collateral, whether or not made in connection with a Facility Termination Request, must comply with all conditions to a release which are set forth in Article VII. (b) Closing. If all conditions contained in Section 9.03 are ------- satisfied, the Lender shall permit the Revolving Facility Commitment or Base Facility Commitment, as the case may be, to be reduced to the amount designated by the Borrower, at a closing to be held at offices designated by the Lender on a Closing Date selected by the Lender, within fifteen (15) Business Days after the Lender's receipt of the Facility Termination Request (or on such other date to which the Borrower and the Lender may agree), by executing and delivering a counterpart of an amendment to this Agreement, in the form attached as Exhibit X --------- to this Agreement, evidencing the reduction in the Commitment. The document referred to in the preceding sentence is referred to in this Article as the "Facility Termination Document." ----------------------------- SECTION 9.03 Conditions Precedent to Complete or Partial Termination of ---------------------------------------------------------- Facilities. The right of the Borrower to reduce the Commitments and the - ---------- obligation of the Lender to execute the Facility Termination Document, are subject to the satisfaction of the following conditions precedent on or before the Closing Date: (a) Payment by the Borrower in full of all of the Revolving Advances Outstanding required to be paid in order that the aggregate unpaid principal balance of all Revolving Advances Outstanding is not greater than the Revolving Facility Commitment, including any associated prepayment premiums or other amounts due under the Notes (but if the Borrower is not required to prepay all of the Revolving Advances, the Borrower shall have the right to select which of the Revolving Advances shall be repaid); (b) If applicable, payment by the Borrower of the Facility Termination Fee; (c) Receipt by the Lender on the Closing Date of one or more counterparts of the Facility Termination Document, dated as of the Closing Date, signed by each of the parties (other than the Lender) who is a party to such Facility Termination Document; and (d) The satisfaction of all applicable General Conditions set forth in Article XI. ARTICLE X TERMINATION OF CREDIT FACILITY SECTION 10.01 Right to Terminate Credit Facility. Subject to the terms and ---------------------------------- conditions of this Article, the Borrower shall have the right to terminate this Agreement and the Credit Facility and receive a release of all of the Collateral from the Collateral Pool in accordance with the provisions of this Article. SECTION 10.02 Procedure for Terminating Credit Facility. ----------------------------------------- (a) Request. In order to terminate this Agreement and the ------- Credit Facility, the Borrower shall deliver a written request for the termination ("Credit Facility Termination Request") to the Lender, in the form ----------------------------------- attached as Exhibit Y to this Agreement. --------- -42- (b) Closing. If all conditions contained in Section 10.03 are ------- satisfied, this Agreement shall terminate, and the Lender shall cause all of the Collateral to be released from the Collateral Pool, at a closing to be held at offices designated by the Lender on a Closing Date selected by the Lender, within 30 Business Days after the Lender's receipt of the Credit Facility Termination Request (or on such other date to which the Borrower and the Lender may agree), by executing and delivering, and causing all applicable parties to execute and deliver, all at the sole cost and expense of the Borrower, (i) instruments, in the form customarily used by the Lender for releases in the jurisdictions in which the Mortgaged Properties are located, releasing all of the Security Instruments as a Lien on the Mortgaged Properties, (ii) UCC-3 Termination Statements terminating all of the UCC-1 Financing Statements perfecting a Lien on the personal property located on the Mortgaged Properties, in form customarily used in the jurisdiction governing the perfection of the security interest being released, (iii) such other documents and instruments as the Borrower may reasonably request evidencing the release of the Collateral from any lien securing the Obligations (including a termination of any restriction on the use of any accounts relating to the Collateral) and the release and return to the Borrower of any and all escrowed amounts relating thereto, (iv) instruments releasing the Borrower from its obligations under this Agreement and any and all other Loan Documents, and (v) the Notes, each marked paid and canceled. The instruments referred to in the preceding sentence are referred to in this Article as the "Facility Termination Documents." ------------------------------ SECTION 10.03 Conditions Precedent to Termination of Credit Facility. The right ------------------------------------------------------ of the Borrower to terminate this Agreement and the Credit Facility and to receive a release of all of the Collateral from the Collateral Pool and the Lender's obligation to execute and deliver the Facility Termination Documents on the Closing Date are subject to the following conditions precedent: (a) Payment by the Borrower in full of all of the Notes Outstanding on the Closing Date, including any associated prepayment premiums or other amounts due under the Notes and all other amounts owing by the Borrower to the Lender under this Agreement; (b) If applicable, defeasance by the Borrower, in accordance with the provisions of Section 3.10 of this Agreement, with respect to all Base Facility Notes Outstanding on the Closing Date; (c) If applicable, payment of the Facility Termination Fee; and (d) The satisfaction of all applicable General Conditions set forth in Article XI. ARTICLE XI GENERAL CONDITIONS PRECEDENT TO ALL REQUESTS The obligation of the Lender to close the transaction requested in a Request shall be subject to the following conditions precedent ("General ------- Conditions") in addition to any other conditions precedent set forth in this - ---------- Agreement: SECTION 11.01 Conditions Applicable to All Requests. Each of the following ------------------------------------- conditions precedent shall apply to all Requests: -43- (a) Payment of Expenses. The payment by the Borrower of the ------------------- Lender's reasonable fees and expenses payable in accordance with this Agreement for which the Lender has presented an invoice on or before the Closing Date for the Request. (b) No Material Adverse Change. There has been no material -------------------------- adverse change in the financial condition, business or prospects of the Borrower or in the physical condition, operating performance or value of any of the Mortgaged Properties since the Initial Closing Date (or, with respect to the conditions precedent to the Initial Advance, from the condition, business or prospects reflected in the financial statements, reports and other information obtained by the Lender during its review of the Borrower and the Initial Mortgaged Properties). (c) No Default. There shall exist no Event of Default or ---------- Potential Event of Default on the Closing Date for the Request and, after giving effect to the transaction requested in the Request, no Event of Default or Potential Event of Default shall have occurred. (d) No Insolvency. The Borrower is not insolvent (within the ------------- meaning of any applicable federal or state laws relating to bankruptcy or fraudulent transfers) nor will it be rendered insolvent by the transactions contemplated by the Loan Documents, including the making of a Future Advance, or, after giving effect to such transactions, will be left with an unreasonably small capital with which to engage in its business or undertakings, or will have intended to incur, or believe that it has incurred, debts beyond its ability to pay such debts as they mature or will have intended to hinder, delay or defraud any existing or future creditor. (e) No Untrue Statements. The Loan Documents shall not contain -------------------- any untrue or misleading statement of a material fact and shall not fail to state a material fact necessary in order to make the information contained therein not misleading. (f) Representations and Warranties. All representations and ------------------------------ warranties made by the Borrower in the Loan Documents shall be true and correct in all material respects on the Closing Date for the Request with the same force and effect as if such representations and warranties had been made on and as of the Closing Date for the Request. (g) No Condemnation or Casualty. There shall not be pending or --------------------------- threatened any condemnation or other taking, whether direct or indirect, against any Mortgaged Property and there shall not have occurred any casualty to any improvements located on any Mortgaged Property. (h) Delivery of Closing Documents. The receipt by the ------------------------------ Lender of the following, each dated as of the Closing Date for the Request, in form and substance satisfactory to the Lender in all respects: (i) A Compliance Certificate; (ii) An Organizational Certificate; and (iii) Such other documents, instruments, approvals (and, if requested by the Lender, certified duplicates of executed copies thereof) and opinions as the Lender may request. -44- (i) Covenants. The relevant Borrower is in full compliance --------- with each of the covenants set forth in Articles XIII, XIV and XV of this Agreement, without giving effect to any notice and cure rights of the relevant Borrower. SECTION 11.02 Delivery of Closing Documents Relating to Initial Advance Request, ------------------------------------------------------------------ Collateral Addition Request, Credit Facility Expansion Request or Future Advance - -------------------------------------------------------------------------------- Request. With respect to the closing of the Initial Advance Request, a - ------- Collateral Addition Request, a Credit Facility Expansion Request, or a Future Advance Request, it shall be a condition precedent that the Lender receives each of the following, each dated as of the Closing Date for the Request, in form and substance satisfactory to the Lender in all respects: (a) Loan Documents. Fully executed original copies of each -------------- Loan Document required to be executed in connection with the Request, duly executed and delivered by the parties thereto (other than the Lender), each of which shall be in full force and effect. (b) Opinion. Favorable opinions of counsel to the Borrower, as ------- to the due organization and qualification of the Borrower, the due authorization, execution, delivery and enforceability of each Loan Document executed in connection with the Request and such other matters as the Lender may reasonably require. SECTION 11.03 Delivery of Property-Related Documents. With respect to each of -------------------------------------- the Mortgaged Properties to be made part of the Collateral Pool on the Closing Date for the Initial Advance Request or a Collateral Addition Request, it shall be a condition precedent that the Lender receive each of the following, each dated as of the Closing Date for the Initial Advance Request or Collateral Addition Request, as the case may be, in form and substance satisfactory to the Lender in all respects: (a) A favorable opinion of local counsel to the Borrower or the Lender as to the enforceability of the Security Instrument, and any other Loan Documents, executed in connection with the Request. (b) A commitment for the Title Insurance Policy applicable to the Mortgaged Property and a pro forma Title Insurance Policy based on the Commitment. (c) The Insurance Policy (or a certified copy of the Insurance Policy) applicable to the Mortgaged Property. (d) The Survey applicable to the Mortgaged Property. (e) Evidence satisfactory to the Lender of compliance of the Mortgaged Property with property laws as required by Sections 205 and 206 of Part III of the DUS Guide. (f) An Appraisal of the Mortgaged Property. (g) A Replacement Reserve Agreement, providing for the establishment of a replacement reserve account, to be pledged to the Lender, in which the owner shall (unless waived by the Lender) periodically deposit amounts for replacements for improvements at the Mortgaged Property and as additional security for the Borrower's obligations under the Loan Documents. -45- (h) A Completion/Repair and Security Agreement, on the standard form required by the DUS Guide. (i) If no management agreement is in effect for a Mortgaged Property, an Agreement Regarding Management Agreement or, if a management agreement is in effect for a Mortgaged Property, an Assignment of Management Agreement, on the standard form required by the DUS Guide. (j) An Assignment of Leases and Rents, if the Lender determines one to be necessary or desirable, provided that the provisions of any such assignment shall be substantively identical to those in the Security Instrument covering the Collateral, with such modifications as may be necessitated by applicable state or local law. (k) With respect to a Collateral Addition Request, adding the Borrower as a party and adding a Property Account for the Mortgaged Property. ARTICLE XII REPRESENTATIONS AND WARRANTIES SECTION 12.01 Representations and Warranties of the Borrower. The Borrower ---------------------------------------------- hereby represents and warrants to the Lender as follows: (a) Due Organization; Qualification. ------------------------------- (1) The Borrower is a duly formed and existing corporation. The Borrower is qualified to transact business and is in good standing in each other jurisdiction in which such qualification and/or standing is necessary to the conduct of its business and where the failure to be so qualified would adversely affect the validity of, the enforceability of, or the ability of the Borrower to perform the Obligations under this Agreement and the other Loan Documents. The Borrower is qualified to transact business and is in good standing in each State in which it owns a Mortgaged Property. (2) The Borrower's principal place of business, principal office and office where it keeps its books and records as to the Collateral is located at its address set out in Section 23.08. (3) The Borrower has observed all customary formalities regarding its corporate existence. (b) Power and Authority. The Borrower has the requisite power ------------------- and authority (i) to own its properties and to carry on its business as now conducted and as contemplated to be conducted in connection with the performance of the Obligations hereunder and under the other Loan Documents and (ii) to execute and deliver this Agreement and the other Loan Documents and to carry out the transactions contemplated by this Agreement and the other Loan Documents. (c) Due Authorization. The execution, delivery and ----------------- performance of this Agreement and the other Loan Documents have been duly authorized by all necessary action and -46- proceedings by or on behalf of the Borrower, and no further approvals or filings of any kind, including any approval of or filing with any Governmental Authority, are required by or on behalf of the Borrower as a condition to the valid execution, delivery and performance by the Borrower of this Agreement or any of the other Loan Documents. (d) Valid and Binding Obligations. This Agreement and the ----------------------------- other Loan Documents have been duly authorized, executed and delivered by the Borrower and constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles affecting the enforcement of creditors' rights generally or by equitable principles or by the exercise of discretion by any court. (e) Non-contravention; No Liens. Neither the execution and ---------------------------- delivery of this Agreement and the other Loan Documents, nor the fulfillment of or compliance with the terms and conditions of this Agreement and the other Loan Documents nor the performance of the Obligations: (1) does or will conflict with or result in any breach or violation of any Applicable Law enacted or issued by any Governmental Authority or other agency having jurisdiction over the Borrower, any of the Mortgaged Properties or any other portion of the Collateral or other assets of the Borrower, or any judgment or order applicable to the Borrower or to which the Borrower, any of the Mortgaged Properties or other assets of the Borrower are subject; (2) does or will conflict with or result in any material breach or violation of, or constitute a default under, any of the terms, conditions or provisions of the Borrower's Organizational Documents, any indenture, existing agreement or other instrument to which the Borrower is a party or to which the Borrower, any of the Mortgaged Properties or any other portion of the Collateral or other assets of the Borrower are subject; (3) does or will result in or require the creation of any Lien on all or any portion of the Collateral or any of the Mortgaged Properties, except for the Permitted Liens; or (4) does or will require the consent or approval of any creditor of the Borrower, any Governmental Authority or any other Person except such consents or approvals which have already been obtained. (f) Pending Litigation or other Proceedings. There is no --------------------------------------- pending or, to the best knowledge of the Borrower, threatened action, suit, proceeding or investigation, at law or in equity, before any court, board, body or official of any Governmental Authority or arbitrator against or affecting any Mortgaged Property or any other portion of the Collateral or other assets of the Borrower, which, if decided adversely to the Borrower, would have, or may reasonably be expected to have, a Material Adverse Effect. The Borrower is not in default with respect to any order of any Governmental Authority. -47- (g) Solvency. The Borrower is not insolvent and will not be -------- rendered insolvent by the transactions contemplated by this Agreement or the other Loan Documents and after giving effect to such transactions, the Borrower will not be left with an unreasonably small amount of capital with which to engage in its business or undertakings, nor will the Borrower have incurred, have intended to incur, or believe that it has incurred, debts beyond its ability to pay such debts as they mature. The Borrower did not receive less than a reasonably equivalent value in exchange for incurrence of the Obligations. There (i) is no contemplated, pending or, to the best of the Borrower's knowledge, threatened bankruptcy, reorganization, receivership, insolvency or like proceeding, whether voluntary or involuntary, affecting the Borrower or any of the Mortgaged Properties and (ii) has been no assertion or exercise of jurisdiction over the Borrower or any of the Mortgaged Properties by any court empowered to exercise bankruptcy powers. (h) No Contractual Defaults. There are no defaults by the ----------------------- Borrower or, to the knowledge of the Borrower, by any other Person under any contract to which the Borrower is a party relating to any Mortgaged Property, including any management, rental, service, supply, security, maintenance or similar contract, other than defaults which do not permit the non-defaulting party to terminate the contract and which do not have, and are not reasonably expected to have, a Material Adverse Effect. Neither the Borrower nor, to the knowledge of the Borrower, any other Person, has received notice or has any knowledge of any existing circumstances in respect of which it could receive any notice of default or breach in respect of any contracts affecting or concerning any Mortgaged Property, which would have a Material Adverse Effect. (i) Compliance with the Loan Documents. The Borrower is in ---------------------------------- compliance with all provisions of the Loan Documents to which it is a party or by which it is bound. The representations and warranties made by the Borrower in the Loan Documents are true, complete and correct as of the Closing Date and do not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (j) ERISA. The Borrower is in compliance in all material ----- respects with all applicable provisions of ERISA and has not incurred any liability to the PBGC on a Plan under Title IV of ERISA. None of the assets of the Borrower constitute plan assets (within the meaning of Department of Labor Regulation (S) 2510.3-101) of any employee benefit plan subject to Title I of ERISA. (k) Financial Information. The financial projections relating --------------------- to the Borrower and delivered to the Lender on or prior to the date hereof, if any, were prepared on the basis of assumptions believed by the Borrower, in good faith at the time of preparation, to be reasonable and the Borrower is not aware of any fact or information that would lead it to believe that such assumptions are incorrect or misleading in any material respect; provided, however, that no representation or warranty is made that any result set forth in such financial projections shall be achieved. The financial statements of the Borrower which have been furnished to the Lender are complete and accurate in all material respects and present fairly the financial condition of the Borrower, as of its date in accordance with GAAP, applied on a consistent basis, and since the date of the most recent of such financial statements no event has occurred which would have, or may reasonably be expected to have a Material Adverse Effect, and there has not been any material transaction entered into by the Borrower other than transactions in the ordinary course of business. -48- The Borrower has no material contingent obligations which are not otherwise disclosed in its most recent financial statements. (l) Accuracy of Information. No information, statement or ----------------------- report furnished in writing to the Lender by the Borrower in connection with this Agreement or any other Loan Document or in connection with the consummation of the transactions contemplated hereby and thereby contains any material misstatement of fact or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading; and the representations and warranties of the Borrower and the statements, information and descriptions contained in the Borrower's closing certificates, as of the Closing Date, are true, correct and complete in all material respects, do not contain any untrue statement or misleading statement of a material fact, and do not omit to state a material fact required to be stated therein or necessary to make the certifications, representations, warranties, statements, information and descriptions contained therein, in light of the circumstances under which they were made, not misleading; and the estimates and the assumptions contained herein and in any certificate of the Borrower delivered as of the Closing Date are reasonable and based on the best information available to the Borrower. (m) Intentionally Omitted. --------------------- (n) Governmental Approvals. No Governmental Approval not ----------------------- already obtained or made is required for the execution and delivery of this Agreement or any other Loan Document or the performance of the terms and provisions hereof or thereof by the Borrower. (o) Governmental Orders. The Borrower is not presently under ------------------- any cease or desist order or other orders of a similar nature, temporary or permanent, of any Governmental Authority which would have the effect of preventing or hindering performance of its duties hereunder, nor are there any proceedings presently in progress or to its knowledge contemplated which would, if successful, lead to the issuance of any such order. (p) No Reliance. The Borrower acknowledges, represents and ----------- warrants that it understands the nature and structure of the transactions contemplated by this Agreement and the other Loan Documents, that it is familiar with the provisions of all of the documents and instruments relating to such transactions; that it understands the risks inherent in such transactions, including the risk of loss of all or any of the Mortgaged Properties; and that it has not relied on the Lender or Fannie Mae for any guidance or expertise in analyzing the financial or other consequences of the transactions contemplated by this Agreement or any other Loan Document or otherwise relied on the Lender or Fannie Mae in any manner in connection with interpreting, entering into or otherwise in connection with this Agreement, any other Loan Document or any of the matters contemplated hereby or thereby. (q) Compliance with Applicable Law. The Borrower is in ------------------------------ compliance with Applicable Law, including all Governmental Approvals, if any, except for such items of noncompliance that, singly or in the aggregate, have not had and are not reasonably expected to cause, a Material Adverse Effect. -49- (r) Contracts with Affiliates. Except as otherwise approved in ------------------------- writing by the Lender, the Borrower has not entered into and is not a party to any contract, lease or other agreement with any Affiliate of the Borrower for the provision of any service, materials or supplies to any Mortgaged Property (including any contract, lease or agreement for the provision of property management services, cable television services or equipment, gas, electric or other utilities, security services or equipment, laundry services or equipment or telephone services or equipment). (s) Lines of Business. Not less than sixty percent (60%) of ----------------- the Consolidated Total Assets of each Borrower consist of Multifamily Residential Properties. (t) Status as a Real Estate Investment Trust. UDRT is ---------------------------------------- qualified, and is taxed as, a real estate investment trust under Subchapter M of the Internal Revenue Code, and is not engaged in any activities which would jeopardize such qualification and tax treatment. SECTION 12.02 Representations and Warranties of the Borrower. The Borrower ---------------------------------------------- owning a Mortgaged Property hereby represents and warrants to the Lender as follows with respect to each of the Mortgaged Properties owned by it: (a) Title. The relevant Borrower has good, valid, marketable ----- and indefeasible title to each Mortgaged Property (either in fee simple or as tenant under a ground lease meeting all of the requirements of the DUS Guide), free and clear of all Liens whatsoever except the Permitted Liens. Each Security Instrument, if and when properly recorded in the appropriate records, together with any Uniform Commercial Code financing statements required to be filed in connection therewith, will create a valid, perfected first lien on the Mortgaged Property intended to be encumbered thereby (including the Leases related to such Mortgaged Property and the rents and all rights to collect rents under such Leases), subject only to Permitted Liens. Except for any Permitted Liens, there are no Liens or claims for work, labor or materials affecting any Mortgaged Property which are or may be prior to, subordinate to, or of equal priority with, the Liens created by the Loan Documents. The Permitted Liens do not have, and may not reasonably be expected to have, a Material Adverse Effect. (b) Impositions. The Borrower has filed all property and ----------- similar tax returns required to have been filed by it with respect to each Mortgaged Property and has paid and discharged, or caused to be paid and discharged, all installments for the payment of all Taxes due to date, and all other material Impositions imposed against, affecting or relating to each Mortgaged Property other than those which have not become due, together with any fine, penalty, interest or cost for nonpayment pursuant to such returns or pursuant to any assessment received by it. Except for any Tax, levy or other assessment or charge resulting from a reassessment of the value of a Mortgaged Property in the ordinary course of business, the Borrower has no knowledge of any new proposed Tax, levy or other governmental or private assessment or charge in respect of any Mortgaged Property which has not been disclosed in writing to the Lender. (c) Zoning. Each Mortgaged Property complies in all material ------ respects with all Applicable Laws affecting such Mortgaged Property. Without limiting the foregoing, all material Permits, including certificates of occupancy, have been issued and are in full force and effect. Neither the Borrower nor, to the knowledge of the Borrower, any former owner of any Mortgaged Property, has received any written notification or threat of any actions or proceedings regarding the -50- noncompliance or nonconformity of any Mortgaged Property with any Applicable Laws or Permits, nor is the Borrower otherwise aware of any such pending actions or proceedings. (d) Leases. The Borrower has delivered to the Lender a true ------ and correct copy of its form apartment lease for each Mortgaged Property (and, with respect to leases executed prior to the date on which the Borrower first owned the Mortgaged Property, the form apartment lease used for such leases), and each Lease with respect to such Mortgaged Property is in the form thereof, with no material modifications thereto, except as previously disclosed in writing to the Lender. Except as set forth in a Rent Roll, no Lease for any unit in any Mortgaged Property (i) is for a term in excess of one year, including any renewal or extension period unless such renewal or extension period is subject to termination by the Borrower upon not more than 30 days' written notice, (ii) provides for prepayment of more than one month's rent, or (iii) was entered into in other than the ordinary course of business. (e) Rent Roll. The Borrower has executed and delivered to the --------- Lender a Rent Roll for each Mortgaged Property, each dated as of and delivered within 30 days prior to the Closing Date. Each Rent Roll sets forth each and every unit subject to a Lease which is in full force and effect as of the date of such Rent Roll. The information set forth on each Rent Roll is true, correct and complete in all material respects as of its date and there has occurred no material adverse change in the information shown on any Rent Roll from the date of each such Rent Roll to the Closing Date. Except as disclosed in the Rent Roll with respect to each Mortgaged Property or otherwise previously disclosed in writing to the Lender, no Lease is in effect as of the date of the Rent Roll with respect to such Mortgaged Property. Notwithstanding the foregoing, any representation in this subsection (e) made with respect to a time period occurring prior to the date on which the Borrower owned the Mortgaged Property is made to the best of the Borrower's knowledge. (f) Status of Landlord under Leases. Except for any assignment ------------------------------- of leases and rents which is a Permitted Lien or which is to be released in connection with the consummation of the transactions contemplated by this Agreement, the Borrower is the owner and holder of the landlord's interest under each of the Leases of units in each Mortgaged Property and there are no prior outstanding assignments of any such Lease, or any portion of the rents, additional rents, charges, issues or profits due and payable or to become due and payable thereunder. (g) Enforceability of Leases. Each Lease constitutes the ------------------------ legal, valid and binding obligation of the Borrower and, to the knowledge of the Borrower, of each of the other parties thereto, enforceable in accordance with its terms, subject only to bankruptcy, insolvency, reorganization or other similar laws relating to creditors' rights generally, and equitable principles, and except as disclosed in writing to the Lender, no notice of any default by the Borrower which remains uncured has been sent by any tenant under any such Lease, other than defaults which do not have, and are not reasonably expected to have, a Material Adverse Effect on the Mortgaged Property subject to the Lease. (h) No Lease Options. All premises demised to tenants under ---------------- Leases are occupied by such tenants as tenants only. No Lease contains any option or right to purchase, right of first refusal or any other similar provisions. No option or right to purchase, right of first refusal, purchase contract or similar right exists with respect to any Mortgaged Property. -51- (i) Insurance. The Borrower has delivered to the Lender true and --------- correct certified copies of all Insurance Policies currently in effect as of the date of this Agreement with respect to the Mortgaged Property which it owns. Each such Insurance Policy complies in all material respects with the requirements set forth in the Loan Documents. (j) Tax Parcels. Each Mortgaged Property is on one or more separate ----------- tax parcels, and each such parcel (or parcels) is (or are) separate and apart from any other property. (k) Encroachments. Except as disclosed on the Survey with respect to ------------- each Mortgaged Property, none of the improvements located on any Mortgaged Property encroaches upon the property of any other Person or upon any easement encumbering the Mortgaged Property, nor lies outside of the boundaries and building restriction lines of such Mortgaged Property and no improvement located on property adjoining such Mortgaged Property lies within the boundaries of or in any way encroaches upon such Mortgaged Property. (l) Independent Unit. Except for Permitted Liens and as disclosed on ---------------- Exhibit AA to this Agreement, or as disclosed in a Title Insurance Policy or - ---------- Survey for the Mortgaged Property, each Mortgaged Property is an independent unit which does not rely on any drainage, sewer, access, parking, structural or other facilities located on any Property not included either in such Mortgaged Property or on public or utility easements for the (i) fulfillment of any zoning, building code or other requirement of any Governmental Authority that has jurisdiction over such Mortgaged Property, (ii) structural support, or (iii) the fulfillment of the requirements of any Lease or other agreement affecting such Mortgaged Property. The Borrower, directly or indirectly, has the right to use all amenities, easements, public or private utilities, parking, access routes or other items necessary or currently used for the operation of each Mortgaged Property. All public utilities are installed and operating at each Mortgaged Property and all billed installation and connection charges have been paid in full. Each Mortgaged Property is either (x) contiguous to or (y) benefits from an irrevocable unsubordinated easement permitting access from such Mortgaged Property to a physically open, dedicated public street, and has all necessary permits for ingress and egress and is adequately serviced by public water, sewer systems and utilities. No building or other improvement not located on a Mortgaged Property relies on any part of the Mortgaged Property to fulfill any zoning requirements, building code or other requirement of any Governmental Authority that has jurisdiction over the Mortgaged Property, for structural support or to furnish to such building or improvement any essential building systems or utilities. (m) Condition of the Mortgaged Properties. Except as disclosed in any ------------------------------------- third party report delivered to the Lender prior to the date on which the Borrower's Mortgaged Property is added to the Collateral Pool, or otherwise disclosed in writing by the Borrower to the Lender prior to such date, each Mortgaged Property is in good condition, order and repair, there exist no structural or other material defects in such Mortgaged Property (whether patent or, to the best knowledge of the Borrower, latent or otherwise) and the Borrower has not received notice from any insurance company or bonding company of any defects or inadequacies in such Mortgaged Property, or any part of it, which would adversely affect the insurability of such Mortgaged Property or cause the imposition of extraordinary premiums or charges for insurance or of any termination or threatened termination of any policy of insurance or bond. No claims have been made against any contractor, architect or other party with respect to the condition of any Mortgaged Property or the existence of any structural or other material defect therein. No Mortgaged Property -52- has been materially damaged by casualty which has not been fully repaired or for which insurance proceeds have not been received or are not expected to be received except as previously disclosed in writing to the Lender. There are no proceedings pending for partial or total condemnation of any Mortgaged Property except as disclosed in writing to the Lender. SECTION 12.03 Representations and Warranties of the Lender. The Lender hereby -------------------------------------------- represents and warrants to the Borrower as follows: (a) Due Organization. The Lender is a corporation duly organized, ---------------- validly existing and in good standing under the laws of Ohio. (b) Power and Authority. The Lender has the requisite power and ------------------- authority to execute and deliver this Agreement and to perform its obligations under this Agreement. (c) Due Authorization. The execution and delivery by the Lender of ----------------- this Agreement, and the consummation by it of the transactions contemplated thereby, and the performance by it of its obligations thereunder, have been duly and validly authorized by all necessary action and proceedings by it or on its behalf. ARTICLE XIII AFFIRMATIVE COVENANTS OF THE BORROWER The Borrower agrees and covenants with the Lender that, at all times during the Term of this Agreement: SECTION 13.01 Compliance with Agreements; No Amendments. The Borrower shall ----------------------------------------- comply with all the terms and conditions of each Loan Document to which it is a party or by which it is bound; provided, however, that the Borrower's failure to comply with such terms and conditions shall not be an Event of Default until the expiration of the applicable notice and cure periods, if any, specified in the applicable Loan Document. SECTION 13.02 Maintenance of Existence. The Borrower shall maintain its ------------------------ existence and continue to be a corporation, limited liability company or limited partnership, as applicable, organized under the laws of the state of its organization. The Borrower shall continue to be duly qualified to do business in each jurisdiction in which such qualification is necessary to the conduct of its business and where the failure to be so qualified would adversely affect the validity of, the enforceability of, or the ability to perform, its obligations under this Agreement or any other Loan Document. SECTION 13.03 Maintenance of REIT Status. During the Term of this Agreement, -------------------------- UDRT shall qualify, and be taxed as, a real estate investment trust under Subchapter M of the Internal Revenue Code, and will not be engaged in any activities which would jeopardize such qualification and tax treatment. SECTION 13.04 Financial Statements; Accountants' Reports; Other Information. The ------------------------------------------------------------- Borrower shall keep and maintain at all times complete and accurate books of accounts and records in sufficient detail to correctly reflect (x) all of the Borrower's financial transactions and assets and -53- (y) the results of the operation of each Mortgaged Property and copies of all written contracts, Leases and other instruments which affect each Mortgaged Property (including all bills, invoices and contracts for electrical service, gas service, water and sewer service, waste management service, telephone service and management services). In addition, the Borrower shall furnish, or cause to be furnished, to the Lender: (a) Annual Financial Statements. As soon as available, and in any --------------------------- event within 90 days after the close of its fiscal year during the Term of this Agreement, the audited balance sheet of UDRT and its Subsidiaries as of the end of such fiscal year, the audited statement of income, UDRT's equity and retained earnings of the UDRT and its Subsidiaries for such fiscal year and the audited statement of cash flows of UDRT and its Subsidiaries for such fiscal year, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the prior fiscal year, prepared in accordance with GAAP, consistently applied, and accompanied by a certificate of UDRT's independent certified public accountants to the effect that such financial statements have been prepared in accordance with GAAP, consistently applied, and that such financial statements fairly present the results of its operations and financial condition for the periods and dates indicated, with such certification to be free of exceptions and qualifications as to the scope of the audit or as to the going concern nature of the business. (b) Quarterly Financial Statements. As soon as available, and in any ------------------------------ event within 45 days after each of the first three fiscal quarters of each fiscal year during the Term of this Agreement, the unaudited balance sheet of UDRT and its Subsidiaries as of the end of such fiscal quarter, the unaudited statement of income and retained earnings of UDRT and its Subsidiaries and the unaudited statement of cash flows of UDRT and its Subsidiaries for the portion of the fiscal year ended with the last day of such quarter, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the previous fiscal year, accompanied by a certificate of the Chief Financial Officer or the Vice President of Finance of UDRT to the effect that such financial statements have been prepared in accordance with GAAP, consistently applied, and that such financial statements fairly present the results of its operations and financial condition for the periods and dates indicated subject to year end adjustments in accordance with GAAP. (c) Quarterly Property Statements. As soon as available, and in any ----------------------------- event within forty-five (45) days after each Calendar Quarter, a statement of income and expenses of each Mortgaged Property accompanied by a certificate of the Chief Financial Officer of UDRT to the effect that each such statement of income and expenses fairly, accurately and completely presents the operations of each such Mortgaged Property for the period indicated. (d) Annual Property Statements. On an annual basis within ninety (90) -------------------------- days of the end of its fiscal year, an annual statement of income and expenses of each Mortgaged Property accompanied by a certificate of the Chief Financial Officer of UDRT to the effect that each such statement of income and expenses fairly, accurately and completely presents the operations of each such Mortgaged Property for the period indicated. (e) Updated Rent Rolls. As soon as available, and in any event within ------------------ forty-five (45) days after each Calendar Quarter, a current Rent Roll for each Mortgaged Property, showing the name of each tenant, and for each tenant, the space occupied, the lease expiration date, the rent payable, the rent paid and any other information requested by the Lender and accompanied by a -54- certificate of the Chief Financial Officer of UDRT to the effect that each such Rent Roll fairly, accurately and completely presents the information required therein. (f) Security Deposit Information. Upon the Lender's request, an ---------------------------- accounting of all security deposits held in connection with any Lease of any part of any Mortgaged Property, including the name and identification number of the accounts in which such security deposits are held, the name and address of the financial institutions in which such security deposits are held and the name and telephone number of the person to contact at such financial institution, along with any authority or release necessary for the Lender to access information regarding such accounts. (g) Security Law Reporting Information. So long as UDRT is a reporting ---------------------------------- company under the Securities and Exchange Act of 1934, promptly upon becoming available, (a) copies of all financial statements, reports and proxy statements sent or made available generally by UDRT, or any of its Affiliates, to its respective security holders, (b) all regular and periodic reports and all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or a similar form) and prospectuses, if any, filed by UDRT, or any of its Affiliates, with the Securities and Exchange Commission or other Governmental Authorities, and (c) all press releases and other statements made available generally by UDRT, or any of its Affiliates, to the public concerning material developments in the business of UDRT or other party. (h) Accountants' Reports. Promptly upon receipt thereof, copies of any -------------------- reports or management letters submitted to the Borrower by its independent certified public accountants in connection with the examination of its financial statements made by such accountants (except for reports otherwise provided pursuant to subsection (a) above); provided, however, that the Borrower shall only be required to deliver such reports and management letters to the extent that they relate to any Borrower or any Mortgaged Property. (i) Annual Budgets. Promptly, and in any event within 60 days after -------------- the start of its fiscal year, an annual budget for each Mortgaged Property for such fiscal year, setting forth an estimate of all of the costs and expenses, including capital expenses, of maintaining and operating each Mortgaged Property. (j) Borrower Plans and Projections. To the extent prepared in the ------------------------------ ordinary course of business of the Borrower and in the form prepared by the Borrower in the ordinary course of business, within 30 days after its preparation, copies of (1) the Borrower's business plan for the current and the succeeding two fiscal years, (2) the Borrower's annual budget (including capital expenditure budgets) and projections for each Mortgaged Property; and (3) the Borrower's financial projections for the current and the succeeding two fiscal years. (k) Strategic Plan. To the extent prepared in the ordinary course of -------------- business of the Borrower and in the form prepared by the Borrower in the ordinary course of business, within 30 days after its preparation, a written narrative discussing the Borrower's short and long range plans, including its plans for operations, mergers, acquisitions and management, and accompanied by supporting financial projections and schedules, certified by a member of Senior Management as true, correct and complete ("Strategic Plan") If the Borrower's Strategic Plan materially changes, then such person shall deliver to the Lender the Strategic Plan as so changed. -55- (l) Annual Rental and Sales Comparable Analysis. To the extent ------------------------------------------- prepared in the ordinary course of business of the Borrower and in the form prepared by the Borrower in the ordinary course of business, within 30 days after its preparation, a rental and sales comparable analysis of the local real estate market in which each Mortgaged Property is located. (m) Other Reports. Promptly upon receipt thereof, all schedules, ------------- financial statements or other similar reports delivered by the Borrower pursuant to the Loan Documents or requested by the Lender with respect to the Borrower's business affairs or condition (financial or otherwise) or any of the Mortgaged Properties. (n) Certification. All certifications required to be delivered ------------- pursuant to this Section 13.04 shall run directly to and be for the benefit of Lender and Fannie Mae. SECTION 13.05 Certificate of Compliance. The Borrower shall deliver to the ------------------------- Lender concurrently with the delivery of the financial statements and/or reports required to be delivered pursuant to Section 13.04 (a) and (b) above a certificate signed by the Chief Financial Officer, Treasurer or Vice President of Finance of UDRT stating that, to the best knowledge of such individual following reasonable inquiry, (i) setting forth in reasonable detail the calculations required to establish whether UDRT was in compliance with the requirements of Sections 15.02 through 15.09 on the date of such financial statements, and (ii) stating that, to the best knowledge of such individual following reasonable inquiry, no Event of Default or Potential Event of Default has occurred, or if an Event of Default or Potential Event of Default has occurred, specifying the nature thereof in reasonable detail and the action which UDRT is taking or proposes to take with respect thereto. Any certificate required by this Section 13.05 shall run directly to and be for the benefit of Lender and Fannie Mae. SECTION 13.06 Maintain Licenses. The Borrower shall procure and maintain in full ----------------- force and effect all licenses, Permits, charters and registrations which are material to the conduct of its business and shall abide by and satisfy all terms and conditions of all such licenses, Permits, charters and registrations. SECTION 13.07 Access to Records; Discussions With Officers and Accountants. To ------------------------------------------------------------ the extent permitted by law and in addition to the applicable requirements of the Security Instruments, the Borrower shall permit the Lender, upon reasonable notice to the Borrower and provided Lender observes reasonable security and confidentiality procedures of the Borrower: (a) to inspect, make copies and abstracts of, and have reviewed or audited, such of the Borrower's books and records as may relate to the Obligations or any Mortgaged Property; (b) to discuss the Borrower's affairs, finances and accounts with any of UDRT's Chief Operating Officer, Chief Financial Officer, Vice President of Finance, Treasurer, Assistant Treasurer, Comptroller and any other person performing the functions of said officers; (c) to discuss the Borrower's affairs, finances and accounts with its independent public accountants, provided that the Chief Financial Officer of UDRT has been given the opportunity by the Lender to be a party to such discussions; and -56- (d) to receive any other information that the Lender deems necessary or relevant in connection with any Advance, any Loan Document or the Obligations. Notwithstanding the foregoing, prior to an Event of Default or Potential Event of Default, all inspections shall be conducted at reasonable times during normal business hours. SECTION 13.08 Inform the Lender of Material Events. The Borrower shall promptly ------------------------------------ inform the Lender in writing of any of the following (and shall deliver to the Lender copies of any related written communications, complaints, orders, judgments and other documents relating to the following) of which the Borrower has actual knowledge: (a) Defaults. The occurrence of any Event of Default or any Potential -------- Event of Default under this Agreement or any other Loan Document; (b) Regulatory Proceedings. The commencement of any rulemaking or ---------------------- disciplinary proceeding or the promulgation of any proposed or final rule which would have, or may reasonably be expected to have, a Material Adverse Effect; (c) Legal Proceedings. The commencement or threat of, or amendment ----------------- to, any proceedings by or against the Borrower in any Federal, state or local court or before any Governmental Authority, or before any arbitrator, which, if adversely determined, would have, or at the time of determination may reasonably be expected to have, a Material Adverse Effect; (d) Bankruptcy Proceedings. The commencement of any proceedings by or ---------------------- against the Borrower under any applicable bankruptcy, reorganization, liquidation, insolvency or other similar law now or hereafter in effect or of any proceeding in which a receiver, liquidator, trustee or other similar official is sought to be appointed for it; (e) Regulatory Supervision or Penalty. The receipt of notice from any --------------------------------- Governmental Authority having jurisdiction over the Borrower that (A) the Borrower is being placed under regulatory supervision, (B) any license, Permit, charter, membership or registration material to the conduct of the Borrower's business or the Mortgaged Properties is to be suspended or revoked or (C) the Borrower is to cease and desist any practice, procedure or policy employed by the Borrower, as the case may be, in the conduct of its business, and such cessation would have, or may reasonably be expected to have, a Material Adverse Effect; (f) Environmental Claim. The receipt from any Governmental Authority ------------------- or other Person of any notice of violation, claim, demand, abatement, order or other order or direction (conditional or otherwise) for any damage, including personal injury (including sickness, disease or death), tangible or intangible property damage, contribution, indemnity, indirect or consequential damages, damage to the environment, pollution, contamination or other adverse effects on the environment, removal, cleanup or remedial action or for fines, penalties or restrictions, resulting from or based upon (a) the existence or occurrence, or the alleged existence or occurrence, of a Hazardous Substance Activity or (b) the violation, or alleged violation, of any Hazardous Materials Laws in connection with any Mortgaged Property or any of the other assets of the Borrower; -57- (g) Material Adverse Effects. The occurrence of any act, omission, ------------------------ change or event which has a Material Adverse Effect, subsequent to the date of the most recent audited financial statements of the Borrower delivered to the Lender pursuant to Section 13.04; (h) Accounting Changes. Any material change in the Borrower's ------------------ accounting policies or financial reporting practices; and (i) Legal and Regulatory Status. The occurrence of any act, omission, --------------------------- change or event, including any Governmental Approval, the result of which is to change or alter in any way the legal or regulatory status of the Borrower. SECTION 13.09 Intentionally Omitted. --------------------- SECTION 13.10 Inspection. Subject to the rights of tenants and upon reasonable ---------- notice, the Borrower shall permit any Person designated by the Lender: (i) to make entries upon and inspections of the Mortgaged Properties; and (ii) to otherwise verify, examine and inspect the amount, quantity, quality, value and/or condition of, or any other matter relating to, any Mortgaged Property; provided, however, that prior to an Event of Default or Potential Event of Default, all such entries, examinations and inspections shall be conducted at reasonable times during normal business hours. SECTION 13.11 Compliance with Applicable Laws. The Borrower shall comply in all ------------------------------- material respects with all Applicable Laws now or hereafter affecting any Mortgaged Property or any part of any Mortgaged Property or requiring any alterations, repairs or improvements to any Mortgaged Property. The Borrower shall procure and continuously maintain in full force and effect, and shall abide by and satisfy all material terms and conditions of all Permits. SECTION 13.12 Warranty of Title. The Borrower shall warrant and defend (a) the ----------------- title to each Mortgaged Property and every part of each Mortgaged Property, subject only to Permitted Liens, and (b) the validity and priority of the lien of the applicable Loan Documents, subject only to Permitted Liens, in each case against the claims of all Persons whatsoever. The Borrower shall reimburse the Lender for any losses, costs, damages or expenses (including reasonable attorneys' fees and court costs) incurred by the Lender if an interest in any Mortgaged Property, other than with respect to a Permitted Lien, is claimed by others. SECTION 13.13 Defense of Actions. The Borrower shall appear in and defend ------------------ (whether or not such defense is provided by Borrower's insurance) any action or proceeding purporting to affect the security for this Agreement or the rights or power of the Lender hereunder, and shall pay all costs and expenses, including the cost of evidence of title and reasonable attorneys' fees, in any such action or proceeding in which the Lender may appear. If the claim is insured and Borrower's insurance company provides a defense, Borrower may rely on such defense. If the Borrower fails to perform any of the covenants or agreements contained in this Agreement, or if any action or proceeding is commenced that is not diligently defended by the Borrower which affects in any material respect the Lender's interest in any Mortgaged Property or any part thereof, including eminent domain, code enforcement or proceedings of any nature whatsoever under any Applicable Law, whether now existing or hereafter enacted or amended, then the Lender may, but without obligation to do so and without notice to or demand upon the Borrower and without releasing the -58- Borrower from any Obligation, make such appearances, disburse such sums and take such action as the Lender deems necessary or appropriate to protect the Lender's interest, including disbursement of attorney's fees, entry upon such Mortgaged Property to make repairs or take other action to protect the security of said Mortgaged Property, and payment, purchase, contest or compromise of any encumbrance, charge or lien which in the judgment of the Lender appears to be prior or superior to the Loan Documents. In the event (i) that any Security Instrument is foreclosed in whole or in part or that any Loan Document is put into the hands of an attorney for collection, suit, action or foreclosure, or (ii) of the foreclosure of any mortgage, deed to secure debt, deed of trust or other security instrument prior to or subsequent to any Security Instrument or any Loan Document in which proceeding the Lender is made a party or (iii) of the bankruptcy of the Borrower or an assignment by the Borrower for the benefit of their respective creditors, the Borrower shall be chargeable with and agrees to pay all costs of collection and defense, including actual attorneys' fees in connection therewith and in connection with any appellate proceeding or post-judgment action involved therein, which shall be due and payable together with all required service or use taxes. SECTION 13.14 Alterations to the Mortgaged Properties. Except as otherwise --------------------------------------- provided in the Loan Documents, the Borrower shall have the right to undertake any alteration, improvement, demolition, removal or construction (collectively, "Alterations") to the Mortgaged Property which it owns without the prior consent ----------- of the Lender; provided, however, that in any case, no such Alteration shall be -------- ------- made to any Mortgaged Property without the prior written consent of the Lender if (i) such Alteration could reasonably be expected to adversely affect the value of such Mortgaged Property or its operation as a multifamily housing facility in substantially the same manner in which it is being operated on the date such property became Collateral, (ii) the construction of such Alteration could reasonably be expected to result in interference to the occupancy of tenants of such Mortgaged Property such that tenants in occupancy with respect to five percent (5%) or more of the Leases would be permitted to terminate their Leases or to abate the payment of all or any portion of their rent, or (iii) such Alteration will be completed in more than 12 months from the date of commencement or in the last year of the Term of this Agreement. Notwithstanding the foregoing, the Borrower must obtain the Lender's prior written consent to construct Alterations with respect to the Mortgaged Property costing in excess of the lesser of (i) five percent (5%) of the Allocable Facility Amount of such Mortgaged Property and (ii) $250,000 and the Borrower must give prior written notice to the Lender of its intent to construct Alterations with respect to such Mortgaged Property costing in excess of $100,000; provided, however, that the preceding requirements shall not be applicable to Alterations made, conducted or undertaken by the Borrower as part of the Borrower's routine maintenance and repair of the Mortgaged Properties as required by the Loan Documents. SECTION 13.15 ERISA. The Borrower shall at all times remain in compliance in all ----- material respects with all applicable provisions of ERISA and similar requirements of the PBGC. SECTION 13.16 Loan Document Taxes. If any tax, assessment or Imposition (other ------------------- than a franchise tax imposed on or measured by, the net income or capital (including branch profits tax) of the Lender (or any transferee or assignee thereof, including a participation holder)) ("Loan Document Taxes") is levied, ------------------- assessed or charged by the United States, or any State in the United States, or any political subdivision or taxing authority thereof or therein upon any of the Loan Documents or the obligations secured thereby, the interest of the Lender in the Mortgaged -59- Properties, or the Lender by reason of or as holder of the Loan Documents, the Borrower shall pay all such Loan Document Taxes to, for, or on account of the Lender (or provide funds to the Lender for such payment, as the case may be) as they become due and payable and shall promptly furnish proof of such payment to the Lender, as applicable. In the event of passage of any law or regulation permitting, authorizing or requiring such Loan Document Taxes to be levied, assessed or charged, which law or regulation in the opinion of counsel to the Lender may prohibit the Borrower from paying the Loan Document Taxes to or for the Lender, the Borrower shall enter into such further instruments as may be permitted by law to obligate the Borrower to pay such Loan Document Taxes. SECTION 13.17 Further Assurances. The Borrower, at the request of the Lender, ------------------ shall execute and deliver and, if necessary, file or record such statements, documents, agreements, UCC financing and continuation statements and such other instruments and take such further action as the Lender from time to time may request as reasonably necessary, desirable or proper to carry out more effectively the purposes of this Agreement or any of the other Loan Documents or to subject the Collateral to the lien and security interests of the Loan Documents or to evidence, perfect or otherwise implement, to assure the lien and security interests intended by the terms of the Loan Documents or in order to exercise or enforce its rights under the Loan Documents. SECTION 13.18 Monitoring Compliance. Upon the request of the Lender, from time --------------------- to time, the Borrower shall promptly provide to the Lender such documents, certificates and other information as may be deemed necessary to enable the Lender to perform its functions under the Servicing Agreement. SECTION 13.19 Leases. Each unit in each Mortgaged Property will be leased ------ pursuant to the form lease delivered to, and acceptable to, the Lender, with no material modifications to such approved form lease, except as disclosed in writing to the Lender. SECTION 13.20 Appraisals. At any time and from time to time (but not to exceed ---------- once per calendar year), the Lender shall be entitled to obtain an Appraisal of any Mortgaged Property. At the time of the addition of a Mortgaged Property to the Collateral Pool, the Lender shall be entitled to obtain an Appraisal of such Mortgaged Property. The Borrower shall pay all of the Lender's costs of obtaining the Appraisal. SECTION 13.21 Transfer of Ownership Interests of the Borrower. ----------------------------------------------- (a) Prohibition on Transfers and Changes of Control. The Borrower ----------------------------------------------- shall not cause or permit a Transfer or a Change of Control. (b) Permitted Acts. Notwithstanding the provisions of paragraph (a) of -------------- this Section 13.21, the following Transfers and transactions by the Borrower are permitted without the consent of the Lender: (i) The grant of a leasehold interest in individual dwelling units or commercial spaces in any Mortgaged Property in accordance with the Security Instrument. (ii) A sale or other disposition of obsolete or worn out personal property located in any Mortgaged Property which is contemporaneously replaced by comparable -60- personal property of equal or greater value which is free and clear of liens, encumbrances and security interests other than those created by the Loan Documents. (iii) The creation of a mechanic's or materialmen's lien or judgment lien against a Mortgaged Property which is released of record or otherwise remedied to Lender's satisfaction within 30 days of the date of creation. (iv) The grant of an easement, if prior to the granting of the easement the Borrower causes to be submitted to Lender all information required by Lender to evaluate the easement, and if Lender consents to such easement based upon Lender's determination that the easement will not materially affect the operation of the Mortgaged Property or Lender's interest in the Mortgaged Property and Borrower pays to Lender, on demand, all costs and expenses incurred by Lender in connection with reviewing Borrower's request. Lender shall not unreasonably withhold its consent to or withhold its agreement to subordinate the lien of a Security Instrument to (A) the grant of a utility easement serving a Mortgaged Property to a publicly operated utility, or (B) the grant of an easement related to expansion or widening of roadways, provided that any such easement is in form and substance reasonably acceptable to Lender and does not materially and adversely affect the access, use or marketability of a Mortgaged Property. (v) The transfer of shares of common stock, membership interests, or other beneficial or ownership interest or other forms of securities in the Borrower, and the issuance of all varieties of convertible debt, equity and other similar securities of the Borrower, and the subsequent transfer of such securities; provided, however, that no Change in Control occurs as a result of such transfer, either upon such transfer or upon the subsequent conversion to equity or such convertible debt or other securities. (vi) The issuance by Borrower of additional limited partnership units or convertible debt, equity, membership interests, and other similar securities, and the subsequent transfer of such units or other securities; provided, however, that no Change in Control occurs as the result of such transfer, either upon such transfer or upon the subsequent conversion to equity of such convertible debt or other securities. (vii) A merger with or acquisition of another entity by Borrower, provided that (A) Borrower is the surviving entity after such merger or acquisition, (B) no Change in Control occurs, and (C) such merger or acquisition does not result in an Event of Default, as such terms are defined in this Agreement. (viii) A Transfer in connection with any substitution or release pursuant to the terms and conditions of Article VII of this Agreement. (c) Consent to Prohibited Acts. Lender may, in its sole and -------------------------- absolute discretion, consent to a Transfer or Change of Control that would otherwise violate this Section 13.21 if, prior to the Transfer or Change of Control, Borrower has satisfied each of the following requirements: (i) the submission to Lender of all information required by Lender to make the determination required by this Section 13.21(c); -61- (ii) the absence of any Event of Default; (iii) the transferee meets all of the eligibility, credit, management and other standards (including any standards with respect to previous relationships between Lender and the transferee and the organization of the transferee) customarily applied by Lender at the time of the proposed transaction to the approval of borrowers in connection with the origination or purchase of similar mortgages, deeds of trust or deeds to secure debt on multifamily properties; (iv) in the case of a transfer of direct or indirect ownership interests in Borrower, if transferor or any other person has obligations under any Loan Documents, the execution by the transferee of one or more individuals or entities acceptable to Lender of an assumption agreement that is acceptable to Lender and that, among other things, requires the transferee to perform all obligations of transferor or such person set forth in such Loan Document, and may require that the transferee comply with any provisions of this Instrument or any other Loan Document which previously may have been waived by Lender; (v) Lender's receipt of all of the following: (A) a transfer fee equal to 1 percent of the Commitment immediately prior to the transfer. (B) In addition, Borrower shall be required to reimburse Lender for all of Lender's out-of-pocket costs (including reasonable attorneys' fees) incurred in reviewing the Borrower's request. SECTION 13.22 Change in Senior Management. The Borrower shall give the Lender --------------------------- notice of any change in the identity of the Chief Executive Officer or the Chief Financial Officer of UDRT. SECTION 13.23 Date-Down Endorsements. At any time and from time to time, a ---------------------- Lender may obtain an endorsement to each Title Insurance Policy containing a Revolving Credit Endorsement, amending the effective date of the Title Insurance Policy to the date of the title search performed in connection with the endorsement. The Borrower shall pay for the cost and expenses incurred by the Lender to the Title Company in obtaining such endorsement, provided that, for each Title Insurance Policy, it shall not be liable to pay for more than one such endorsement in any consecutive 12 month period. SECTION 13.24 Geographical Diversification. The Borrower shall maintain ---------------------------- Mortgaged Properties in the Collateral Pool so that the Collateral Pool consists of at least four (4) Mortgaged Properties located in at least two (2) SMSA's, provided, however, that, upon the occurrence of any increase in the Commitment pursuant to Article VIII, the Borrower shall at all times thereafter cause the Collateral Pool to satisfy such other Geographical Diversification Requirements as the Lender may determine and notify Borrower of at the time of the increase. SECTION 13.25 Ownership of Mortgaged Properties. The Borrower shall be the sole --------------------------------- owner of each of the Mortgaged Properties free and clear of any Liens other than Permitted Liens. -62- ARTICLE XIV NEGATIVE COVENANTS OF THE BORROWER The Borrower agrees and covenants with the Lender that, at all times during the Term of this Agreement: SECTION 14.01 Other Activities. The Borrower shall not: ---------------- (a) either directly or indirectly sell, transfer, exchange or otherwise dispose of any of its assets if such sale, transfer, exchange or disposal would result in an Event of Default or Potential Event of Default; (b) amend its Organizational Documents in any material respect without the prior written consent of the Lender except in connection with a stock split or the issuance of stock of the Borrower, provided such stock split or issuance does not result in an Event of Default or Potential Event of Default; (c) dissolve or liquidate in whole or in part, unless the surviving entity is in compliance with the terms and conditions of this Agreement and the Other Loan Documents; (d) merge or consolidate with any Person, unless the surviving entity is in compliance with the terms and conditions of this Agreement and the Other Loan Documents; or (e) use, or permit to be used, any Mortgaged Property for any uses or purposes other than as a Multifamily Residential Property. SECTION 14.02 Value of Security. The Borrower shall not take any action which ----------------- could reasonably be expected to have any Material Adverse Effect. SECTION 14.03 Zoning. The Borrower shall not initiate or consent to any zoning ------ reclassification of any Mortgaged Property or seek any variance under any zoning ordinance or use or permit the use of any Mortgaged Property in any manner that could result in the use becoming a nonconforming use under any zoning ordinance or any other applicable land use law, rule or regulation. SECTION 14.04 Liens. The Borrower shall not create, incur, assume or suffer to ----- exist any Lien on any Mortgaged Property or any part of any Mortgaged Property, except the Permitted Liens. SECTION 14.05 Sale. The Borrower shall not Transfer any Mortgaged Property or ---- any part of any Mortgaged Property without the prior written consent of the Lender (which consent may be granted or withheld in the Lender's discretion), or any interest in any Mortgaged Property, other than to enter into Leases for units in a Mortgaged Property to any tenant in the ordinary course of business. SECTION 14.06 Intentionally Omitted. --------------------- -63- SECTION 14.07 Principal Place of Business. The Borrower shall not change its --------------------------- principal place of business or the location of its books and records, each as set forth in Section 12.01(a), without first giving 30 days' prior written notice to the Lender. SECTION 14.08 Intentionally Omitted. --------------------- SECTION 14.09 Change in Property Management. The Borrower shall not change the ----------------------------- management agent for any Mortgaged Property except to a management agent which the Lender determines is qualified in accordance with the criteria set forth in Section 701 of the DUS Guide. SECTION 14.10 Condominiums. The Borrower shall not submit any Mortgaged Property ------------ to a condominium regime during the Term of this Agreement. SECTION 14.11 Restrictions on Distributions. The Borrower shall not make any ----------------------------- distributions of any nature or kind whatsoever to the owners of its Ownership Interests as such if, at the time of such distribution, a Potential Event of Default or an Event of Default has occurred and remains uncured. SECTION 14.12 Conduct of Business. The conduct of the Borrower's businesses ------------------- shall not violate the Organizational Documents pursuant to which it is formed. SECTION 14.13 Limitation on Unimproved Real Property and New Construction. The ----------------------------------------------------------- Borrower shall not permit: (a) the value of its real property which is not improved (except real property on which phases of a Mortgaged Property are contemplated to be constructed) by one or more buildings leased, or held out for lease, to third parties ("Unimproved Real Property") to exceed 10% of the value of all of its "Real Estate Assets" (as that term is defined in Section 856(c)(6)(B) of the Internal Revenue Code and the regulations thereunder); and (b) the sum of (i) the value of its Unimproved Real Property and (ii) the value of its Real Estate Assets which are under construction or subject to substantial rehabilitation to exceed 20% of the value of all of its Real Estate Assets. All of the foregoing values shall be reasonably determined by the Lender. SECTION 14.14 No Encumbrance of Collateral Release Property. Unless the Borrower --------------------------------------------- sells a Collateral Release Property to a Person who is not an Affiliate of the Borrower substantially simultaneously with the release of the Collateral Release Property from the Collateral Pool, the Borrower shall not encumber the Collateral Release Property for a period of 120 days following the release of the Collateral Release Property from the Collateral Pool. ARTICLE XV FINANCIAL COVENANTS OF THE BORROWER The Borrower agrees and covenants with the Lender that, at all times during the Term of this Agreement: -64- SECTION 15.01 Financial Definitions. For all purposes of this Agreement, the --------------------- following terms shall have the respective meanings set forth below: "Cash Equivalents" means (a) securities issued or directly and fully ---------------- guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) U.S. dollar denominated time deposits and certificates of deposit of (i) any Lender, or (ii) any domestic commercial bank of recognized standing (y) having capital and surplus in excess of $500,000,000 and (z) whose short-term commercial paper rating from S&P is at least A-2 (and not lower than A-3) or the equivalent thereof or from Moody's is at least P-2 (and not lower than P-3) or the equivalent thereof (any such bank being an "Approved Bank"), in each case with maturities of not more ------------- than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated at least A-2 (and not lower than A-3) or the equivalent thereof by S&P or at least P-2 (and not lower than P-3) or the equivalent by Moody's and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by a Person with a bank or trust company (including any of the Lenders) or recognized securities dealer having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the United States of America in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations, (e) obligations of any State of the United States or any political subdivision thereof, the interest with respect to which is exempt from federal income taxation under Section 103 of the Code, having a long term rating of at least AA- or Aa-3 by S&P or Moody's, respectively, and maturing within three years from the date of acquisition thereof, (f) Investments in municipal auction preferred stock (i) rated A- (or the equivalent thereof) or better by S&P or A3 (or the equivalent thereof) or better by Moody's and (ii) with dividends that reset at least once every 365 days and (g) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Borrower Act of 1940, as amended, which are administered by reputable financial institutions having capital of at least $100,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing subdivisions (a) through (f). "Consolidated Adjusted EBITDA" means for any period the Consolidated Group ---------------------------- the sum of Consolidated EBITDA for such period minus a reserve equal to $62.50 per apartment unit per quarter ($250 per apartment unit per year). Except as expressly provided otherwise, the applicable period shall be for the single fiscal quarter ending as of the date of determination. "Consolidated EBITDA" means for any period for the Consolidated Group, the ------------------- sum of Consolidated Net Income plus Consolidated Interest Expense plus all provisions for any Federal, state, or other income taxes plus depreciation, amortization and other non cash charges, in each case on a consolidated basis determined in accordance with GAAP applied on a consistent basis, but excluding in any event gains and losses on Investments and extraordinary gains and losses, and taxes on such excluded gains and tax deductions or credit on account of such excluded losses. Except as expressly provided otherwise, the applicable period shall be for the single fiscal quarter ending as of the date of determination. -65- "Consolidated Adjusted Tangible Net Worth" means at any rate: ---------------------------------------- (i) the sum of (A) the consolidated shareholders equity of the Consolidated Group (net of Minority Interests) plus (B) accumulated depreciation of real estate owned to the extent reflected in the then book value of the Consolidated Assets, minus without duplication (ii) the Intangible Assets of the Consolidated Group. "Consolidated Funded Debt" means total Debt of the Consolidated Group ------------------------ on a consolidated basis determined in accordance with GAAP applied on a consistent basis. "Consolidated Group" means the Borrower and its consolidated ------------------ Subsidiaries, as determined in accordance with GAAP. "Consolidated Interest Expense" means for any period for the ----------------------------- Consolidated Group, all interest expense, including the amortization of debt discount and premium, the interest component under capital leases and the implied interest component under Securitization Transactions in each case on a consolidated basis determined in accordance with GAAP applied on a consistent basis. "Consolidated Net Income" means for any period the net income of the ----------------------- Consolidated Group on a consolidated basis determined in accordance with GAAP applied on a consistent basis. "Consolidated Net Operating Income from Realty" means for any period --------------------------------------------- for any Realty of the Consolidated Group, an amount equal to the aggregate rental and other income from the operation of such Realty during such period; minus all expenses and other proper charges incurred in connection with the operation of such Realty (including, without limitation, real estate taxes and bad debt expenses) during such period; but in any case, before payment of provision for debt service charges for such period, income taxes for such period, and depreciation, amortization and other non-cash expenses for such period, all on a consolidated basis determined in accordance with GAAP on a consistent basis. "Consolidated Net Operating Income from Unencumbered Realty" (i) the ---------------------------------------------------------- aggregate rental and other income from the operation of such Realty during such period; minus all expenses and other proper charges incurred in connection with the operation of such Realty (including, without limitation, real estate taxes and bad debt expenses) during such period; but in any case, before payment of provision for debt service charges for such period, income taxes for such period, and depreciation, amortization and other non-cash expenses for such period, all on a consolidated basis determined in accordance with GAAP on a consistent basis minus (ii) a reserve equal to $62.50 per apartment unit per quarter ($250 per apartment unit per year) for such period. "Consolidated Total Fixed Charges" means as of the last day of each -------------------------------- fiscal quarter for the Consolidated Group, the sum of (i) the cash portion of Consolidated Interest Expense paid in the fiscal quarter ending on such day plus (ii) scheduled maturities of Consolidated Funded Debt (excluding the amount by which a final installment exceeds the next preceding principal installment thereon and further excluding amortization on Insurance Company Debt which shall not exceed $7.5 million annually) in the fiscal quarter ending on such day plus (iii) all cash dividends and distributions on preferred stock or other preferred beneficial interests of members of the -66- Consolidated Group paid in the fiscal quarter ending on such day, all on a consolidated basis determined in accordance with GAAP on a consistent basis. "Consolidated Unsecured Debt" means, for the Consolidated Group on a --------------------------- consolidated basis, all unsecured Consolidated Funded Debt. "Consolidated Unencumbered Realty" means for the Consolidated Group on -------------------------------- a consolidated basis, all Realty which is not encumbered by a Lien securing Debt. For purposes of the covenant, Consolidated Unencumbered Realty as of any date, for the Consolidated Group, shall be valued at the sum (without duplication) of (a) with respect to any consolidated Unencumbered Realty purchased or developed prior to January 1 of the year preceding such date, (i) Consolidated Net Operating Income from Unencumbered Realty for the fiscal quarter most recently ended prior to such date multiplied by four, divided by (ii) 9.25%; plus (b) with respect to any Consolidated Unencumbered Realty purchased or developed on or after January 1 of the year preceding such date, the actual costs of such Realty; plus (c) with respect to any Consolidated Unencumbered Realty that also constitutes consolidated Unimproved Realty, the sum of (i) fifty percent (50%) of the GAAP value of the land associated with such Realty plus (ii) an amount equal to fifty percent (50%) of the actual expenditures for improvements on such Realty; plus (d) fifty percent (50%) of the Consolidated Group's pro rata share of the GAAP value of any Realty contributed to or otherwise invested in joint ventures which is not encumbered by a Lien securing Debt. "Debt" of any Person means at any date, without duplication, (i) all ---- obligations of such Person for borrowed money, (ii) all obligations of such person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business), (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to purchase securities or other property which arise out of or in connection with the sale of the same or substantially similar securities or property, (vi) all obligations of such person to reimburse any bank or other person in respect of amounts payable under a letter of credit or similar instrument (being the amount available to be drawn thereunder, whether or not then drawn), (vii) all obligations of others secured by a Lien on any asset of such Person, whether or not such obligation is assumed by such Person, (viii) all obligations of others Guaranteed by such Person, (ix) all obligations which in accordance with GAAP would be shown as liabilities on a balance sheet of such Person, (x) the Attributed Principal Amount under any Securitization Transaction and (xi) all obligations of such person owing under any synthetic lease, tax retention operating lease, off balance sheet loan or similar off balance sheet financing product to which such Person is a party, where such transaction is considered borrowed money indebtedness for tax purposes, but classified as an operating lease in accordance with GAAP. Debt of any Person shall include Debt of any partnership or joint venture in which such Person is a general partner or joint venturer to the extent of such Person's pro rata portion of the ownership of such partnership or joint venture (except if such Debt is recourse to such Person, in which case the greater of such Person's pro rata portion of such Debt or the amount of the recourse portion of the Debt, shall be included as Debt of such Person). "Insurance Company Debt" means Debt owed by the Borrower with respect ---------------------- to the 7.98% Notes due March 2000-2003 as more fully described in note 4 of the consolidated financial -67- statements contained in the Borrower's report on form 10 - K filed with the Securities and Exchange commission for fiscal year 1999. "Intangible Assets" of any Person means at any date the amount of (i) ----------------- all write ups (other than write-ups resulting from write-ups of assets of a going concern business made within twelve months after the acquisition of such business) in the book value of any asset owned by such Person and (ii) all unamortized debt discount and expense, unamortized deferred charges, capitalized start up costs, goodwill, patents, licenses, trademarks, trade names, copyrights, organization or developmental expenses, covenants not to compete and other intangible items. "Minority Interest" means any shares of stock (or other equity ----------------- interests) of any class of a Subsidiary (other than directors' qualifying shares as required by law) that are not owned by the Borrower and/or one or more Wholly Owned Subsidiaries. Minority Interests constituting preferred stock shall be valued at the voluntary or involuntary liquidation value of such preferred stock, whichever is greater, and by valuing common stock at the book value of the capitalized surplus applicable thereto adjusted by the foregoing method of valuing Minority Interests in preferred stock. "Realty" means all real property and interests therein, together with ------ all improvements thereon. "Securitization Transaction" means any financing transaction or series -------------------------- of financing transactions that have been or may be entered into by a member of the Consolidated Group pursuant to which such member of the Consolidated Group may sell, convey or otherwise transfer to (i) a Subsidiary or affiliate (a "Securitization Subsidiary") or (ii) any other Person, or may grant a security interest in, any Receivables or interest therein secured by merchandise or services financed thereby (whether such Receivables are then existing or arising in the future) of such member of the Consolidated Group, and any assets related thereto, including without limitation, all security interests in merchandise or services financed thereby, the proceeds of such Receivables, and other assets which are customarily sold or in respect of which security interests are customarily granted in connection with securitization transactions involving such assets. (Receivables means any right of payment from or on behalf of any obligor, whether constituting an account, chattel paper, instrument, general intangible or otherwise, arising from the sale or financing by a member of the Consolidated Group or merchandise or services, and monies due thereunder, security in the merchandise and services financed thereby, records related thereto, and the right to payment of any interest or finance charges and other obligations with respect thereto, proceeds from claims on insurance policies related thereto, any other proceeds related thereto, and any other related rights.) "Tangible Fair Market Value of Assets" means, as of any date for the ------------------------------------ Consolidated Group, the sum (without duplication) of (a) with respect to any Realty owned by a member of the Consolidated Group and purchased or developed prior to January 1 of the year preceding such date, (i) the sum of (A) Consolidated Net Operating Income for Realty for the fiscal quarter most recently ended prior to such date multiplied by four, minus (B) a reserve of $250 per apartment unit, divided by (ii) 9.25%, plus (b) with respect to any Realty owned by a member of the Consolidated Group and purchased or developed on or after January 1 of the year preceding such date, the actual cost of such Realty, plus (c) with respect to any Consolidated Unimproved Realty, the sum of (i) one hundred percent (100%) of the GAAP value of the land associated with such Realty plus (ii) an -68- amount equal to 100% (100%) of the actual expenditures for improvements on such Realty, plus (d) cash and Cash Equivalents, in each case on a consolidated basis determined in accordance with GAAP applied on a consistent basis, plus (e) one hundred (100%) of the Consolidated Group's pro rata share of the GAAP value of any asset contributed to or otherwise invested in joint ventures. "Wholly Owned Subsidiary" means as to any person, any Subsidiary all of ----------------------- the voting stock or other similar voting interest are owned directly or indirectly by such Person. Unless otherwise provided, references to "Wholly Owned Subsidiary" shall mean Wholly Owned Subsidiaries of the Borrower. SECTION 15.02 Compliance with Debt Service Coverage Ratios. The Borrower shall -------------------------------------------- at all times maintain the Aggregate Debt Service Coverage Ratio for the Trailing 12 Month Period so that it is not less than 1.55:1.0. SECTION 15.03 Compliance with Loan to Value Ratios. The Borrower shall at all ------------------------------------ times maintain the Aggregate Loan to Value Ratio for the Trailing 12 Month Period so that it is not greater than 55%. SECTION 15.04 Compliance with Concentration Test. ---------------------------------- (a) The Borrower shall at all times maintain the Collateral so that the aggregate Valuations of any group of Mortgaged Properties located within a one mile radius shall not exceed 30% of the aggregate Valuations of all Mortgaged Properties. (b) The Borrower shall at all times maintain the Collateral so that the Valuation of any one Mortgaged Property shall not exceed 30% of the aggregate Valuations of all Mortgaged Properties. SECTION 15.05 Consolidated Adjusted Tangible Net Worth. Consolidated Adjusted ---------------------------------------- Tangible Net Worth of UDRT will not at any time be less than the sum of (i) $1,500,000,000 plus (ii) 90% of the net proceeds (after customary underwriting discounts and commissions and reasonable offering expenses) from Equity Transactions occurring after December 31, 1999. SECTION 15.06 Consolidated Funded Debt Ratio. As of the last day of each fiscal ------------------------------ quarter Consolidated Funded Debt of UDRT shall not exceed 60% of Tangible Fair Market Value of Assets. SECTION 15.07 Consolidated Total Fixed Charge Coverage Ratio. As of the end of ---------------------------------------------- each fiscal quarter, the ratio of Consolidated Adjusted EBITDA of UDRT to Consolidated Total Fixed Charges for the fiscal quarter then ended shall be not less than 1.4:1.0. SECTION 15.08 Consolidated Unencumbered Realty to Consolidated Unsecured Debt --------------------------------------------------------------- Ratio. As of the last day of each fiscal quarter, the ratio of Consolidated - ----- Unsecured Debt of UDRT to Consolidated Unencumbered Realty of UDRT shall not exceed 60%. SECTION 15.09 Consolidated Unencumbered Interest Coverage Ratio. As of the end ------------------------------------------------- of each fiscal quarter, the ratio of Consolidated Net Operating Income of UDRT from Unencumbered -69- Realty of UDRT to Consolidated Interest Expense relating to Consolidated Unsecured Debt of UDRT for the fiscal quarter then ended shall not be less than 1.75:1.0. ARTICLE XVI FEES SECTION 16.01 Standby Fee. The Borrower shall pay the Standby Fee to the Lender ----------- for the period from the date of this Agreement to the end of the Term of this Agreement. The Standby Fee shall be payable monthly, in arrears, on the first Business Day following the end of the month, except that the Standby Fee for the last month during the Term of this Agreement shall be paid on the last day of the Term of this Agreement. SECTION 16.02 Origination Fees. ---------------- (a) Initial Origination Fee. The Borrower shall pay to the Lender ----------------------- an origination fee ("Initial Origination Fee") equal to $750,000 (which is equal ----------------------- to the product obtained by multiplying (i) the Commitment as of the date of this Agreement ($100,000,000), by (ii) .75%). The Borrower shall pay the Initial Origination Fee on the date of this Agreement. (b) Expansion Origination Fee. Upon the closing of a Credit ------------------------- Facility Expansion Request under Article VIII, the Borrower shall pay to the Lender an origination fee ("Expansion Origination Fee") equal to the product ------------------------- obtained by multiplying (i) the increase in the Commitment made on the Closing Date for the Credit Facility Expansion Request, by (ii) .75%. The Borrower shall pay the Expansion Origination Fee on or before the Closing Date for the Credit Facility Expansion Request. SECTION 16.03 Due Diligence Fees. ------------------ (a) Initial Due Diligence Fees. The Borrower shall pay to the -------------------------- Lender due diligence fees ("Initial Due Diligence Fees") with respect to the -------------------------- Initial Mortgaged Properties in an amount equal to Lender's reasonable actual out-of-pocket due diligence costs and expenses plus $1,000 per Mortgaged Property. The Borrower has previously paid to the Lender a portion of the Initial Due Diligence Fees and shall pay the remainder of the Initial Due Diligence Fees to the Lender on the Initial Closing Date. (b) Additional Due Diligence Fees for Additional Collateral. The ------------------------------------------------------- Borrower shall pay to the Lender additional due diligence fees (the "Additional ---------- Collateral Due Diligence Fees") with respect to each Additional Mortgaged - ----------------------------- Property in an amount equal to Lender's reasonable out-of-pocket due diligence costs and expenses plus $2,500. The Borrower shall pay Additional Collateral Due Diligence Fees for the Additional Mortgaged Property to the Lender on the date on which it submits the Collateral Addition Request for the addition of the Additional Mortgaged Property to the Collateral Pool. SECTION 16.04 Legal Fees and Expenses. ----------------------- (a) Initial Legal Fees. The Borrower shall pay, or reimburse the ------------------ Lender for, all reasonable out-of-pocket legal fees and expenses incurred by the Lender and by Fannie Mae in -70- connection with the preparation, review and negotiation of this Agreement and any other Loan Documents executed on the date of this Agreement. On the date of this Agreement, the Borrower shall pay all such legal fees and expenses not previously paid or for which funds have not been previously provided. (b) Fees and Expenses Associated with Requests. The Borrower shall ------------------------------------------ pay, or reimburse the Lender for, all costs and expenses incurred by the Lender, including the reasonable out-of-pocket legal fees and expenses incurred by the Lender in connection with the preparation, review and negotiation of all documents, instruments and certificates to be executed and delivered in connection with each Request, the performance by the Lender of any of its obligations with respect to the Request, the satisfaction of all conditions precedent to the Borrower's rights or the Lender's obligations with respect to the Request, and all transactions related to any of the foregoing, including the cost of title insurance premiums and applicable recordation and transfer taxes and charges and all other costs and expenses in connection with a Request. The obligations of the Borrower under this subsection shall be absolute and unconditional, regardless of whether the transaction requested in the Request actually occurs. The Borrower shall pay such costs and expenses to the Lender on the Closing Date for the Request, or, as the case may be, after demand by the Lender when the Lender determines that such Request will not close. SECTION 16.05 MBS-Related Costs. The Borrower shall pay to the Lender, within 30 ----------------- days after demand, all fees and expenses incurred by the Lender or Fannie Mae in connection with the issuance of any MBS backed by an Advance, including the fees charged by Depository Trust Company and State Street Bank or any successor fiscal agent or custodian. SECTION 16.06 Failure to Close any Request. If the Borrower makes a Request and ---------------------------- fails to close on the Request for any reason other than the default by the Lender or, if applicable, the failure of the purchaser of an MBS to purchase such MBS, then the Borrower shall pay to the Lender and Fannie Mae all damages incurred by the Lender and Fannie Mae in connection with the failure to close. SECTION 16.07 Other Fees. The Borrower shall pay the following additional fees ---------- and payments, if and when required pursuant to the terms of this Agreement: (a) The Collateral Addition Fee, pursuant to Section 6.03(c), in connection with the addition of an Additional Mortgaged Property to the Collateral Pool pursuant to Article VI; (b) The Release Price, pursuant to Section 7.02(c), in connection with the release of a Mortgaged Property from the Collateral Pool pursuant to Article VII; (c) The Facility Termination Fee, pursuant to Section 9.03(b) in connection with a complete or partial termination of the Revolving Facility pursuant to Article IX; and (d) The Facility Termination Fee, pursuant to Section 10.03(b), in connection with the termination of the Credit Facility pursuant to Article X. -71- ARTICLE XVII EVENTS OF DEFAULT SECTION 17.01 Events of Default. Each of the following events shall constitute ----------------- an "Event of Default" under this Agreement, whatever the reason for such event and whether it shall be voluntary or involuntary, or within or without the control of the Borrower, or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any Governmental Authority: (a) the occurrence of a default under any Loan Document beyond the cure period, if any, set forth therein; or (b) the failure by the Borrower to pay when due any amount payable by the Borrower under any Note, any Mortgage, this Agreement or any other Loan Document, including any fees, costs or expenses; or (c) the failure by the Borrower to perform or observe any covenant set forth in Sections 13.01 through 13.25 or Sections 14.01 through 14.14 within thirty (30) days after receipt of notice from Lender identifying such failure, provided that such period shall be extended for up to forty-five (45) additional days if the Borrower, in the discretion of the Lender, is diligently pursuing a cure of such default; or (d) any warranty, representation or other written statement made by or on behalf of the Borrower contained in this Agreement, any other Loan Document or in any instrument furnished in compliance with or in reference to any of the foregoing, is false or misleading in any material respect on any date when made or deemed made; or (e) any other Indebtedness in an aggregate amount in excess of $5,000,000 of the Borrower or assumed by the Borrower (i) is not paid when due nor within any applicable grace period in any agreement or instrument relating to such Indebtedness or (ii) becomes due and payable before its normal maturity by reason of a default or event of default, however described, or any other event of default shall occur and continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or (f) (i) The Borrower shall (A) commence a voluntary case under the Federal bankruptcy laws (as now or hereafter in effect), (B) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, debt adjustment, winding up or composition or adjustment of debts, (C) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (D) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of a substantial part of its property, domestic or foreign, (E) admit in writing its inability to pay, or generally not be paying, its debts as they become due, (F) make a general assignment for the benefit of creditors, (G) assert that the Borrower has no liability or obligations under this Agreement or any other Loan Document to which it is a party; or (H) take any action for the purpose of effecting any of the foregoing; or (ii) a case or other proceeding shall be commenced against the Borrower in any court of competent jurisdiction seeking (A) relief under the Federal bankruptcy laws (as now or -72- hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding upon or composition or adjustment of debts, or (B) the appointment of a trustee, receiver, custodian, liquidator or the like of the Borrower, or of all or a substantial part of the property, domestic or foreign, of the Borrower and any such case or proceeding shall continue undismissed or unstayed for a period of 60 consecutive calendar days, or any order granting the relief requested in any such case or proceeding against the Borrower (including an order for relief under such Federal bankruptcy laws) shall be entered; or (g) if any provision of this Agreement or any other Loan Document or the lien and security interest purported to be created hereunder or under any Loan Document shall at any time for any reason cease to be valid and binding in accordance with its terms on the Borrower, or shall be declared to be null and void, or the validity or enforceability hereof or thereof or the validity or priority of the lien and security interest created hereunder or under any other Loan Document shall be contested by the Borrower seeking to establish the invalidity or unenforceability hereof or thereof, or the Borrower shall deny that it has any further liability or obligation hereunder or thereunder; or (h) (i) the execution by the Borrower without the prior written consent of the Lender of a chattel mortgage or other security agreement on any materials, fixtures or articles used in the construction or operation of the improvements located on any Mortgaged Property or on articles of personal property located therein, or (ii) if, without the prior written consent of the Lender, any such materials, fixtures or articles are purchased pursuant to any conditional sales contract or other security agreement or otherwise so that the Ownership thereof will not vest unconditionally in the Borrower free from encumbrances, or (iii) if the Borrower does not furnish to the Lender upon request the contracts, bills of sale, statements, receipted vouchers and agreements, or any of them, under which the Borrower claims title to such materials, fixtures, or articles; or (i) the failure by the Borrower to comply with any requirement of any Governmental Authority within 30 days after written notice of such requirement shall have been given to the Borrower by such Governmental Authority; provided that, if action is commenced and diligently pursued by the Borrower within such 30 days, then the Borrower shall have an additional 45 days to comply with such requirement; or (j) a dissolution or liquidation for any reason (whether voluntary or involuntary) of the Borrower; or (k) any judgment against the Borrower, any attachment or other levy against any portion of the Borrower's assets with respect to a claim or claims in an amount in excess of $2,500,000 in the aggregate remains unpaid, unstayed on appeal undischarged, unbonded, not fully insured or undismissed for a period of 60 days; or (l) [Intentionally Deleted] (m) The failure of the Borrower to perform or observe any of the Financial Covenants, which failure shall continue for a period of 30 days after the date on which the Borrower receives a notice from the Lender specifying the failure; or -73- (n) the failure by the Borrower to perform or observe any term, covenant, condition or agreement hereunder, other than as set forth in subsections (a) through (m) above, or in any other Loan Document, within 30 days after receipt of notice from the Lender identifying such failure. ARTICLE XVIII REMEDIES SECTION 18.01 Remedies; Waivers. Upon the occurrence of an Event of Default, the ----------------- Lender may do any one or more of the following (without presentment, protest or notice of protest, all of which are expressly waived by the Borrower): (a) by written notice to the Borrower, to be effective upon dispatch, terminate the Commitment and declare the principal of, and interest on, the Advances and all other sums owing by the Borrower to the Lender under any of the Loan Documents forthwith due and payable, whereupon the Commitment will terminate and the principal of, and interest on, the Advances and all other sums owing by the Borrower to the Lender under any of the Loan Documents will become forthwith due and payable. (b) The Lender shall have the right to pursue any other remedies available to it under any of the Loan Documents. (c) The Lender shall have the right to pursue all remedies available to it at law or in equity, including obtaining specific performance and injunctive relief. SECTION 18.02 Waivers; Rescission of Declaration. The Lender shall have the ---------------------------------- right, to be exercised in its complete discretion, to waive any breach hereunder (including the occurrence of an Event of Default), by a writing setting forth the terms, conditions, and extent of such waiver signed by the Lender and delivered to the Borrower. Unless such writing expressly provides to the contrary, any waiver so granted shall extend only to the specific event or occurrence which gave rise to the waiver and not to any other similar event or occurrence which occurs subsequent to the date of such waiver. SECTION 18.03 The Lender's Right to Protect Collateral and Perform Covenants and ------------------------------------------------------------------ Other Obligations. If the Borrower fails to perform the covenants and agreements - ----------------- contained in this Agreement or any of the other Loan Documents, then the Lender at the Lender's option may make such appearances, disburse such sums and take such action as the Lender deems necessary, in its sole discretion, to protect the Lender's interest, including (i) disbursement of attorneys' fees, (ii) entry upon the Mortgaged Property to make repairs and Replacements, (iii) procurement of satisfactory insurance as provided in paragraph 5 of the Security Instrument encumbering the Mortgaged Property, and (iv) if the Security Instrument is on a leasehold, exercise of any option to renew or extend the ground lease on behalf of the Borrower and the curing of any default of the Borrower in the terms and conditions of the ground lease. Any amounts disbursed by the Lender pursuant to this Section, with interest thereon, shall become additional indebtedness of the Borrower secured by the Loan Documents. Unless the Borrower and the Lender agree to other terms of payment, such amounts shall be immediately due and payable and shall bear interest from the date of disbursement at the weighted average, as determined by Lender, of the interest rates in effect -74- from time to time for each Advance unless collection from the Borrower of interest at such rate would be contrary to applicable law, in which event such amounts shall bear interest at the highest rate which may be collected from the Borrower under applicable law. Nothing contained in this Section shall require the Lender to incur any expense or take any action hereunder. SECTION 18.04 No Remedy Exclusive. Unless otherwise expressly provided, no ------------------- remedy herein conferred upon or reserved is intended to be exclusive of any other available remedy, but each remedy shall be cumulative and shall be in addition to other remedies given under the Loan Documents or existing at law or in equity. SECTION 18.05 No Waiver. No delay or omission to exercise any right or power --------- accruing under any Loan Document upon the happening of any Event of Default or Potential Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. SECTION 18.06 No Notice. In order to entitle the Lender to exercise any remedy --------- reserved to the Lender in this Article, it shall not be necessary to give any notice, other than such notice as may be required under the applicable provisions of this Agreement or any of the other Loan Documents. SECTION 18.07 Application of Payments. Except as otherwise expressly provided in ----------------------- the Loan Documents, and unless applicable law provides otherwise, (i) all payments received by the Lender from the Borrower under the Loan Documents shall be applied by the Lender against any amounts then due and payable under the Loan Documents by the Borrower, in any order of priority that the Lender may determine and (ii) the Borrower shall have no right to determine the order of priority or the allocation of any payment it makes to the Lender. ARTICLE XIX RIGHTS OF FANNIE MAE SECTION 19.01 Special Pool Purchase Contract. The Borrower acknowledges that ------------------------------ Fannie Mae is entering into an agreement with the Lender ("Special Pool Purchase --------------------- Contract"), pursuant to which, inter alia, (i) the Lender shall agree to assign - -------- ---------- all of its rights under this Agreement to Fannie Mae, (ii) Fannie Mae shall accept the assignment of the rights, (iii) subject to the terms, limitations and conditions set forth in the Special Pool Purchase Contract, Fannie Mae shall agree to purchase a 100% participation interest in each Advance issued under this Agreement by issuing to the Lender a Fannie Mae MBS, in the amount and for a term equal to the Advance purchased and backed by an interest in the Base Facility Note or the Revolving Facility Note, as the case may be, and the Collateral Pool securing the Notes, (iv) the Lender shall agree to assign to Fannie Mae all of the Lender's interest in the Notes and Collateral Pool securing the Notes, and (v) the Lender shall agree to service the loans evidenced by the Notes. SECTION 19.02 Assignment of Rights. The Borrower acknowledges and consents to -------------------- the assignment to Fannie Mae of all of the rights of the Lender under this Agreement and all other Loan Documents, including the right and power to make all decisions on the part of the Lender to be made under this Agreement and the other Loan Documents, but Fannie Mae, by virtue of this assignment, shall not be obligated to perform the obligations of the Lender under this Agreement or the other Loan Documents. -75- SECTION 19.03 Release of Collateral. The Borrower hereby acknowledges that, --------------------- after the assignment of Loan Documents contemplated in Section 19.02, the Lender shall not have the right or power to effect a release of any Collateral pursuant to Articles VII or X. The Borrower acknowledges that the Security Instruments provide for the release of the Collateral under Articles VII and X. Accordingly, the Borrower shall not look to the Lender for performance of any obligations set forth in Articles VII and X, but shall look solely to the party secured by the Collateral to be released for such performance. The Lender represents and warrants to the Borrower that the party secured by the Collateral shall be subject to the release and substitution provisions contained in Articles VII and X by virtue of the release provisions in each Security Instrument. SECTION 19.04 Replacement of Lender. At the request of Fannie Mae, the Borrower --------------------- and the Lender shall agree to the assumption by another lender designated by Fannie Mae, of all of the obligations of the Lender under this Agreement and the other Loan Documents, and/or any related servicing obligations, and, at Fannie Mae's option, the concurrent release of the Lender from its obligations under this Agreement and the other Loan Documents, and/or any related servicing obligations, and shall execute all releases, modifications and other documents which Fannie Mae determines are necessary or desirable to effect such assumption. SECTION 19.05 Fannie Mae and Lender Fees and Expenses. The Borrower agrees that --------------------------------------- any provision providing for the payment of fees, costs or expenses incurred or charged by the Lender pursuant to this Agreement shall be deemed to provide for the Borrower's payment of all reasonable fees, costs and expenses incurred or charged by the Lender or Fannie Mae in connection with the matter for which fees, costs or expenses are payable. SECTION 19.06 Third-Party Beneficiary. The Borrower hereby acknowledges and ----------------------- agrees that Fannie Mae is a third party beneficiary of all of the representations, warranties and covenants made by the Borrower to, and all rights under this Agreement conferred upon, the Lender, and, by virtue of its status as third-party beneficiary and/or assignee of the Lender's rights under this Agreement, Fannie Mae shall have the right to enforce all of the provisions of this Agreement against the Borrower. ARTICLE XX INSURANCE, REAL ESTATE TAXES AND REPLACEMENT RESERVES SECTION 20.01 Insurance and Real Estate Taxes. The Borrower shall (unless waived ------------------------------- by Lender) establish funds for taxes, insurance premiums and certain other charges for each Mortgaged Property in accordance with Section 7(a) of the Security Instrument for each Mortgaged Property. The Borrower may provide a letter of credit in lieu of deposits required by the preceding sentence. Any letter of credit provided by the Borrower shall be (i) issued by a financial institution reasonably acceptable to the Lender, (ii) be an amount reasonably deferred, from time to time by the Lender and, (iii) in a form reasonably satisfactory to Lender. SECTION 20.02 Replacement Reserves. The Borrower shall execute a Replacement -------------------- Reserve Agreement for the Mortgaged Property which it owns and shall (unless waived by the Lender) make -76- all deposits for replacement reserves in accordance with the terms of the Replacement Reserve Agreement. ARTICLE XXI INTENTIONALLY OMITTED ARTICLE XXII PERSONAL LIABILITY OF THE BORROWER SECTION 22.01 Personal Liability of the Borrower. ---------------------------------- (a) Full Recourse. The Borrower is and shall remain personally ------------- liable to the Lender for the payment and performance of all Obligations throughout the term of this Agreement. (b) Transfer Not Release. No Transfer by any Person of its -------------------- Ownership Interests in the Borrower shall release the Borrower from liability under this Article, this Agreement or any other Loan Document, unless the Lender shall have approved the Transfer and shall have expressly released the Borrower in connection with the Transfer. (c) Miscellaneous. The Lender may exercise its rights against the ------------- Borrower personally without regard to whether the Lender has exercised any rights against the Mortgaged Property or any other security, or pursued any rights against any guarantor, or pursued any other rights available to the Lender under the Loan Documents or applicable law. For purposes of this Article, the term "Mortgaged Property" shall not include any funds that (1) have been applied by the Borrower as required or permitted by the Loan Documents prior to the occurrence of an Event of Default, or (2) are owned by the Borrower and which the Borrower was unable to apply as required or permitted by the Loan Documents because of a bankruptcy, receivership, or similar judicial proceeding. ARTICLE XXIII MISCELLANEOUS PROVISIONS SECTION 23.01 Counterparts. To facilitate execution, this Agreement may be ------------ executed in any number of counterparts. It shall not be necessary that the signatures of, or on behalf of, each party, or that the signatures of all persons required to bind any party, appear on each counterpart, but it shall be sufficient that the signature of, or on behalf of, each party, appear on one or more counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than the number of counterparts containing the respective signatures of, or on behalf of, all of the parties hereto. SECTION 23.02 Amendments, Changes and Modifications. This Agreement may be ------------------------------------- amended, changed, modified, altered or terminated only by written instrument or written instruments signed by all of the parties hereto. -77- SECTION 23.03 Payment of Costs, Fees and Expenses. The Borrower shall pay, on ----------------------------------- demand, all reasonable fees, costs, charges or expenses (including the fees and expenses of attorneys, accountants and other experts) incurred by the Lender in connection with: (a) Any amendment, consent or waiver to this Agreement or any of the Loan Documents (whether or not any such amendments, consents or waivers are entered into). (b) Defending or participating in any litigation arising from actions by third parties and brought against or involving the Lender with respect to (i) any Mortgaged Property, (ii) any event, act, condition or circumstance in connection with any Mortgaged Property or (iii) the relationship between the Lender and the Borrower in connection with this Agreement or any of the transactions contemplated by this Agreement. (c) The administration (to the extent of actual out-of-pocket fees, costs, charges or expenses) or enforcement of, or preservation of rights or remedies under, this Agreement or any other Loan Documents or in connection with the foreclosure upon, sale of or other disposition of any Collateral granted pursuant to the Loan Documents. (d) UDRT's Registration Statement, or similar disclosure documents, including fees payable to any rating agencies, including the fees and expenses of the Lender's attorneys and accountants. The Borrower shall also pay, on demand, any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution, delivery, filing, recordation, performance or enforcement of any of the Loan Documents or the Advances. However, the Borrower will not be obligated to pay any franchise, estate, inheritance, income, excess profits or similar tax on the Lender. Any attorneys' fees and expenses payable by the Borrower pursuant to this Section shall be recoverable separately from and in addition to any other amount included in such judgment, and such obligation is intended to be severable from the other provisions of this Agreement and to survive and not be merged into any such judgment. Any amounts payable by the Borrower pursuant to this Section, with interest thereon if not paid when due, shall become additional indebtedness of the Borrower secured by the Loan Documents. Such amounts shall bear interest from the date such amounts are due until paid in full at the weighted average, as determined by Lender, of the interest rates in effect from time to time for each Advance unless collection from the Borrower of interest at such rate would be contrary to applicable law, in which event such amounts shall bear interest at the highest rate which may be collected from the Borrower under applicable law. The provisions of this Section are cumulative with, and do not exclude the application and benefit to the Lender of, any provision of any other Loan Document relating to any of the matters covered by this Section. SECTION 23.04 Payment Procedure. All payments to be made to the Lender pursuant ----------------- to this Agreement or any of the Loan Documents shall be made in lawful currency of the United States of America and in immediately available funds by wire transfer to an account designated by the Lender before 1:00 p.m. (Washington, D.C. time) on the date when due. SECTION 23.05 Payments on Business Days. In any case in which the date of ------------------------- payment to the Lender or the expiration of any time period hereunder occurs on a day which is not a Business Day, -78- then such payment or expiration of such time period need not occur on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the day of maturity or expiration of such period, except that interest shall continue to accrue for the period after such date to the next Business Day. SECTION 23.06 Choice of Law; Consent to Jurisdiction; Waiver of Jury Trial. ------------------------------------------------------------ NOTWITHSTANDING ANYTHING IN THE NOTES, THE SECURITY DOCUMENTS OR ANY OF THE OTHER LOAN DOCUMENTS TO THE CONTRARY, EACH OF THE TERMS AND PROVISIONS, AND RIGHTS AND OBLIGATIONS OF THE BORROWER UNDER THE NOTES, AND THE BORROWER UNDER THE OTHER LOAN DOCUMENTS, SHALL BE GOVERNED BY, INTERPRETED, CONSTRUED AND ENFORCED PURSUANT TO AND IN ACCORDANCE WITH THE LAWS OF VIRGINIA (EXCLUDING THE LAW APPLICABLE TO CONFLICTS OR CHOICE OF LAW) EXCEPT TO THE EXTENT OF PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO (1) THE CREATION, PERFECTION AND FORECLOSURE OF LIENS AND SECURITY INTERESTS, AND ENFORCEMENT OF THE RIGHTS AND REMEDIES, AGAINST THE MORTGAGED PROPERTIES, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE JURISDICTION IN WHICH THE MORTGAGED PROPERTY IS LOCATED, (2) THE PERFECTION, THE EFFECT OF PERFECTION AND NON-PERFECTION AND FORECLOSURE OF SECURITY INTERESTS ON PERSONAL PROPERTY (OTHER THAN DEPOSIT ACCOUNTS), WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE JURISDICTION DETERMINED BY THE CHOICE OF LAW PROVISIONS OF THE VIRGINIA UNIFORM COMMERCIAL CODE AND (3) THE PERFECTION, THE EFFECT OF PERFECTION AND NON-PERFECTION AND FORECLOSURE OF DEPOSIT ACCOUNTS, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE JURISDICTION IN WHICH THE DEPOSIT ACCOUNT IS LOCATED. THE BORROWER AGREES THAT ANY CONTROVERSY ARISING UNDER OR IN RELATION TO THE NOTES, THE SECURITY DOCUMENTS OR ANY OTHER LOAN DOCUMENT SHALL BE, EXCEPT AS OTHERWISE PROVIDED HEREIN, LITIGATED IN VIRGINIA. THE LOCAL AND FEDERAL COURTS AND AUTHORITIES WITH JURISDICTION IN VIRGINIA SHALL, EXCEPT AS OTHERWISE PROVIDED HEREIN, HAVE JURISDICTION OVER ALL CONTROVERSIES WHICH MAY ARISE UNDER OR IN RELATION TO THE LOAN DOCUMENTS, INCLUDING THOSE CONTROVERSIES RELATING TO THE EXECUTION, JURISDICTION, BREACH, ENFORCEMENT OR COMPLIANCE WITH THE NOTES, THE SECURITY DOCUMENTS OR ANY OTHER ISSUE ARISING UNDER, RELATING TO, OR IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS. THE BORROWER IRREVOCABLY CONSENTS TO SERVICE, JURISDICTION, AND VENUE OF SUCH COURTS FOR ANY LITIGATION ARISING FROM THE NOTES, THE SECURITY DOCUMENTS OR ANY OF THE OTHER LOAN DOCUMENTS, AND WAIVES ANY OTHER VENUE TO WHICH IT MIGHT BE ENTITLED BY VIRTUE OF DOMICILE, HABITUAL RESIDENCE OR OTHERWISE. NOTHING CONTAINED HEREIN, HOWEVER, SHALL PREVENT THE LENDER FROM BRINGING ANY SUIT, ACTION OR PROCEEDING OR EXERCISING ANY RIGHTS AGAINST THE BORROWER AND AGAINST THE COLLATERAL IN ANY OTHER JURISDICTION. INITIATING SUCH SUIT, ACTION OR PROCEEDING OR TAKING SUCH ACTION IN ANY OTHER JURISDICTION SHALL IN NO EVENT CONSTITUTE A WAIVER OF THE AGREEMENT CONTAINED HEREIN THAT THE LAWS OF VIRGINIA SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF THE BORROWER AND THE LENDER AS -79- PROVIDED HEREIN OR THE SUBMISSION HEREIN BY THE BORROWER TO PERSONAL JURISDICTION WITHIN VIRGINIA. THE BORROWER (I) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING UNDER ANY OF THE LOAN DOCUMENTS TRIABLE BY A JURY AND (II) WAIVES ANY RIGHT TO TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. FURTHER, THE BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING, BUT NOT LIMITED TO, LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO THE BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THE PROVISIONS OF THIS SECTION. THE FOREGOING PROVISIONS WERE KNOWINGLY, WILLINGLY AND VOLUNTARILY AGREED TO BY THE BORROWER UPON CONSULTATION WITH INDEPENDENT LEGAL COUNSEL SELECTED BY THE BORROWER'S FREE WILL. SECTION 23.07 Severability. In the event any provision of this Agreement or in ------------ any other Loan Document shall be held invalid, illegal or unenforceable in any jurisdiction, such provision will be severable from the remainder hereof as to such jurisdiction and the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired in any jurisdiction. SECTION 23.08 Notices. ------- (a) Manner of Giving Notice. Each notice, direction, certificate or ----------------------- other communication hereunder (in this Section referred to collectively as "notices" and singly as a "notice") which any party is required or permitted to give to the other party pursuant to this Agreement shall be in writing and shall be deemed to have been duly and sufficiently given if: (1) personally delivered with proof of delivery thereof (any notice so delivered shall be deemed to have been received at the time so delivered); (2) sent by Federal Express (or other similar overnight courier) designating morning delivery (any notice so delivered shall be deemed to have been received on the Business Day it is delivered by the courier); (3) sent by United States registered or certified mail, return receipt requested, postage prepaid, at a post office regularly maintained by the United States Postal Service (any notice so sent shall be deemed to have been received on the Business Day it is delivered); or (4) sent by telecopier or facsimile machine which automatically generates a transmission report that states the date and time of the transmission, the length of the document transmitted, and the telephone number of the recipient's telecopier or facsimile machine (to be confirmed with a copy thereof sent in accordance with paragraphs (1), (2) or (3) above within two Business Days) (any notice so delivered shall be deemed to have been received (i) on the date of transmission, if so transmitted before 5:00 p.m. (local time of the recipient) on a Business Day, or (ii) on the next Business Day, if so transmitted on or after -80- 5:00 p.m. (local time of the recipient) on a Business Day or if transmitted on a day other than a Business Day); addressed to the parties as follows: As to [any] Borrower: c/o United Dominion Realty Trust, Inc. 1745 Shea Center Drive Fourth Floor Highlands Ranch, Colorado 80126 Attention: Ella S. Neyland Telecopy No.: 720-344-5110 with a copy to: c/o United Dominion Realty Trust, Inc. 1745 Shea Center Drive Fourth Floor Highlands Ranch, Colorado 80126 Attention: -------------------------- Telecopy No.: -------------------------- with a copy to: Hirschler, Fleischer, Weinberg, Cox & Allen 701 East Byrd Street Richmond, Virginia 23219 Attention: Mike Terry, Esq. Telecopy No.: 804-644-0957 As to the Lender: ARCS Commercial Mortgage Co., L.P. 144 2nd Avenue North Suite 333 Nashville, Tennessee 37201 Attention: Joseph H. Torrence Telecopy No.: (615) 256-5085 with a copy to: ARCS Commercial Mortgage 26901 Agoura Road, #200 Calabasas, California 91301 Attn: Loan Administration Dept. -81- As to Fannie Mae: Fannie Mae 3939 Wisconsin Avenue, N.W. Washington, D.C. 20016-2899 Attention: Vice President for Multifamily Asset Management Telecopy No.: (202) 752-5016 with a copy to: Arter & Hadden LLP 1801 K Street, N.W. Suite 400K Washington, D.C. 200006 Attention: Lawrence H. Gesner, Esq. Telecopy No.: (202) 857-0172 (b) Change of Notice Address. Any party may, by notice ------------------------ given pursuant to this Section, change the person or persons and/or address or addresses, or designate an additional person or persons or an additional address or addresses, for its notices, but notice of a change of address shall only be effective upon receipt. Each party agrees that it shall not refuse or reject delivery of any notice given hereunder, that it shall acknowledge, in writing, receipt of the same upon request by the other party and that any notice rejected or refused by it shall be deemed for all purposes of this Agreement to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service, the courier service or facsimile. SECTION 23.09 Further Assurances and Corrective Instruments. --------------------------------------------- (a) Further Assurances. To the extent permitted by law, ------------------ the parties hereto agree that they shall, from time to time, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such supplements hereto and such further instruments as the Lender or the Borrower may request and as may be required in the opinion of the Lender or its counsel to effectuate the intention of or facilitate the performance of this Agreement or any Loan Document. (b) Further Documentation. Without limiting the --------------------- generality of subsection (a), in the event any further documentation or information is required by the Lender to correct patent mistakes in the Loan Documents, materials relating to the Title Insurance Policies or the funding of the Advances, the Borrower shall provide, or cause to be provided to the Lender, at its cost and expense, such documentation or information. The Borrower shall execute and deliver to the Lender such documentation, including any amendments, corrections, deletions or additions to the Notes, the Security Instruments or the other Loan Documents as is required by the Lender. (c) Compliance with Investor Requirements. Without ------------------------------------- limiting the generality of subsection (a), the Borrower shall do anything reasonably necessary to comply with the requirements of the Lender in order to enable the Lender to sell the MBS backed by an Advance. -82- SECTION 23.10 Term of this Agreement. This Agreement shall continue in effect until the Credit Facility Termination Date. SECTION 23.11 Assignments; Third-Party Rights. The Borrower shall not assign this Agreement, or delegate any of its obligations hereunder, without the prior written consent of the Lender. The Lender may assign its rights and obligations under this Agreement separately or together, without the Borrower's consent, only to Fannie Mae, but may not delegate its obligations under this Agreement unless required to do so pursuant to Section 19.04. SECTION 23.12 Headings. Article and Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 23.13 General Interpretive Principles. For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, (i) the terms defined in Article I, Section 15.01, Section 16.01 and elsewhere in this Agreement have the meanings assigned to them in this Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other genders; (ii) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (iii) references herein to "Articles," "Sections," "subsections," "paragraphs" and other subdivisions without reference to a document are to designated Articles, Sections, subsections, paragraphs and other subdivisions of this Agreement; (iv) a reference to a subsection without further reference to a Section is a reference to such subsection as contained in the same Section in which the reference appears, and this rule shall also apply to paragraphs and other subdivisions; (v) a reference to an Exhibit or a Schedule without a further reference to the document to which the Exhibit or Schedule is attached is a reference to an Exhibit or Schedule to this Agreement; (vi) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and (vii) the word "including" means "including, but not limited to." SECTION 23.14 Interpretation. The parties hereto acknowledge that each party and their respective counsel have participated in the drafting and revision of this Agreement and the Loan Documents. Accordingly, the parties agree that any rule of construction which disfavors the drafting party shall not apply in the interpretation of this Agreement and the Loan Documents or any amendment or supplement or exhibit hereto or thereto. SECTION 23.15 Decisions in Writing. Any approval, designation, determination, selection, action or decision of the Lender must be in writing to be effective. SECTION 23.16 Requests. The Borrower may make up to a total of eight (8) Collateral Addition Requests, Collateral Release Requests and Collateral Substitution Requests in each Loan Year. [THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK] -83- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Borrower UNITED DOMINION REALTY TRUST, INC., a Virginia corporation By: ------------------------------------------ Name: Ella S. Neyland Title: Executive Vice President and Treasurer UDRT OF NORTH CAROLINA, L.L.C., a North Carolina limited liability company By: UNITED DOMINION REALTY TRUST, INC., a Virginia corporation, its sole member By: ------------------------------------------ Name: Ella S. Neyland Title: Executive Vice President and Treasurer SOUTH WEST PROPERTIES, L.P., a Delaware limited partnership By: UDR HOLDINGS, LLC, its general partner By: UNITED DOMINION REALTY, L.P., its sole member By: UNITED DOMINION REALTY TRUST, INC., its general partner By: ------------------------------ Name: Ella S. Neyland Title: Executive Vice President and Treasurer -84- LA PRIVADA APARTMENTS, L.L.C., an Arizona limited liability company By: ASC PROPERTIES, INC., its managing member By: ---------------------------------- Name: Ella S. Neyland Title: Executive Vice President and Treasurer Lender ARCS COMMERCIAL MORTGAGE CO., L.P., a California limited partnership By: ACMC Realty, Inc., a California Corporation, its General Partner By:__________________________________ Name: Kathy Millhouse Title: Senior Vice President -85- EX-10.7B 4 dex107b.txt EXHIBIT 10(VII)(B) EXHIBIT 10(vii)(b) FIRST AMENDMENT TO THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF UNITED DOMINION REALTY, L.P. This FIRST AMENDMENT TO THE THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF UNITED DOMINION REALTY, L.P., dated as of June 1, 2001 (this "Amendment"), is being executed by United Dominion Realty Trust, Inc., a Virginia corporation (the "Company"), as the general partner of United Dominion Realty, L.P., a Virginia limited partnership (the "Partnership"), pursuant to the authority conferred upon the Company by Section 4.2(a) of the Third Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of December 7, 1998, as amended and/or supplemented from time to time (the "Agreement"). Capitalized terms used, but not otherwise defined herein, shall have the respective meanings ascribed thereto in the Agreement. WHEREAS, pursuant to Section 4.2(a) of the Agreement, the Company is authorized to determine the designations, preferences and relative, participating, optional or other special rights, powers and duties of Partnership Units. NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: (1) The Agreement is hereby amended by the addition of a new exhibit, entitled "Exhibit C," in the form attached hereto, which shall be attached and made a part of the Agreement. (2) Except as specifically amended hereby, the terms, covenants, provisions and conditions of the Agreement shall remain unmodified and continue in full force and effect and, except as amended hereby, all of the terms, covenants, provisions and conditions of the Agreement are hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, this Amendment has been executed as of the date first written above. UNITED DOMINION REALTY TRUST, INC. By: /s/ Thomas W. Toomey -------------------- Thomas W. Toomey President and Chief Executive Officer EXHIBIT C PARTNERSHIP UNIT DESIGNATION OF THE CLASS I OUT-PERFORMANCE PARTNERSHIP SHARES OF UNITED DOMINION REALTY, L.P. 1. NUMBER OF UNITS AND DESIGNATION. A class of Partnership Units is hereby designated as "Class I Out-Performance Partnership Shares," and the number of Partnership Units initially constituting such class shall be one million two hundred and seventy thousand (1,270,000). 2. DEFINITIONS. For purposes of this Partnership Unit Designation, the following terms shall have the meanings indicated in this Section 2. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. "Change of Control" shall mean the occurrence of any of the following events: (i) an acquisition of any voting securities of the Company (the "Voting Securities) by any "person" (as the term "person" is used for purposes of Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) immediately after which such person has "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) ("Beneficial Ownership") of 30% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities that are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition that would cause a Change in Control. "Non-Control Acquisition" shall mean an acquisition by (A) an employee benefit plan (or a trust forming a part thereof) maintained by (1) the Company or (2) any corporation, partnership or other person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company or in which the Company serves as a general partner or manager (a "Subsidiary"), (B) the Company or any Subsidiary, or (C) any person in connection with a Non-Control Transaction (as hereinafter defined); (ii) the individuals who constitute the Board of Directors of the Company as of May 9, 2001 (the "Incumbent Board") cease for any reason to constitute at least two-thirds (2/3) of the members of the Board of Directors of the Company; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds (2/3) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided, further, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in Rule 14a-11 promulgated under the Exchange Act) (an "Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of the Company (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or 2 (iii) approval by stockholders of the Company of: (A) a merger, consolidation, share exchange or reorganization involving the Company, unless (1) the stockholders of the Company immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 60% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization, (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation, share exchange or reorganization constitute at least two-thirds (2/3) of the members of the board of directors of the Surviving Company, and (3) no persons (other than the Company or any Subsidiary of the Company, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Company or any Subsidiary of the Company, or any person who, immediately prior to such merger, consolidation, share exchange or reorganization had Beneficial Ownership of 30% or more of the then outstanding Voting Securities has Beneficial Ownership of 30% or more of the combined voting power of the Surviving Company's then outstanding voting securities (a transaction described in clauses (1) through (3) is referred to herein as a "Non-Control Transaction"); (B) a complete liquidation or dissolution of the Company; or (C) an agreement for the sale or other disposition of all or substantially all of the assets of the Company to any person (other than a transfer to a Subsidiary of the Company). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any person (a "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company that, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by such Subject Person, provided that if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, such Subject Person becomes the Beneficial Owner of any additional Voting Securities that increases the percentage of the then outstanding Voting Securities Beneficially Owned by such Subject Person, then a Change of Control shall occur. "Class I Out-Performance Partnership Share" shall mean a Partnership Unit with the designations, preferences and relative, participating, optional or other special rights, powers and duties as are set forth in this Exhibit C. "Class I Out-Performance Valuation Date" shall mean the earlier to occur of (i) June 1, 2003, or (ii) the date on which a Change of Control occurs. "Conversion Factor" shall mean the quotient obtained by dividing (i) the quotient obtained by dividing (x) the product of (A) 4% of the Excess Return multiplied by (B) the UDR Market Capitalization, by (y) the Value of a REIT Share on the Class I Out-Performance Valuation Date by (ii) the number of Class I Out-Performance Partnership Shares outstanding at the Class I Out-Performance Valuation Date; provided, however, that the amount determined pursuant to clause (x) shall not exceed an amount equal to 2% of the UDR Market Capitalization. The Conversion Factor shall be adjusted pursuant to Section 8.05(f) of the Agreement. 3 "Determination Date" shall mean (i) when used with respect to any dividend or other distribution, the date fixed for the determination of the holders of the securities entitled to receive such dividend or distribution, or, if a dividend or distribution is paid or made without fixing such a date, the date of such dividend or distribution, and (ii) when used with respect to any split, subdivision, reverse stock split, combination or reclassification of securities, the date upon which such split, subdivision, reverse stock split, combination or reclassification becomes effective. "Excess Return" shall mean the amount, if any, by which the UDR Total Return over the Measurement Period exceeds the greater of (i) the Industry Total Return or (ii) the Minimum Return. "Ex-Date" shall mean (i) when used with respect to any dividend or distribution, the first date on which the securities on which the dividend or distribution is payable trade regular way on the relevant exchange or in the relevant market without the right to receive such dividend or distribution, and (ii) when used with respect to any split, subdivision, reverse stock split, combination or reclassification of securities, the first date on which the securities trade regular way on such exchange or in such market to reflect such split, subdivision, reverse stock split, combination or reclassification becoming effective. "Extraordinary Distribution" shall mean the distribution by the Company, by dividend or otherwise, to all holders of its REIT Shares of evidences of its indebtedness or assets (including securities) other than cash. "Family Controlled Entity" means, as to any holder of Class I Out-Performance Shares, (a) any corporation more than 50% of the outstanding voting stock of which is owned by such holder and such holder's Family Members, (b) any trust, whether or not revocable, of which such holder and such holder's Family Members are the sole beneficiaries, (c) any partnership of which such holder and such holder's Family Members hold partnership interests representing at least 25% of such partnership's capital and profits and (d) any limited liability company of which such holder is the manager and in which such holder and such holder's Family Members hold membership interests representing at least 25% of such limited liability company's capital and profits. "Family Members" means, as to a Person that is an individual, such Person's spouse, ancestors, descendants (whether by blood or by adoption), brothers, sisters and inter vivos or testamentary trusts of which only such Person and his spouse, ancestors, descendants (whether by blood or by adoption), brothers and sisters are beneficiaries. "Industry Total Return" shall mean the Total Return of the securities included in the Industry Peer Group Index for the Measurement Period, with such average determined in a manner consistent with the manner in which such index is calculated; provided, however, that if such Industry Total Return would be less than zero without giving effect to the reinvestment of dividends, then the "Industry Total Return" shall be equal to zero. "Industry Peer Group Index" shall mean the Morgan Stanley REIT Index. "Initial Holder" shall mean UDR Out-Performance I, LLC, a Virginia limited liability company. 4 "Measurement Period" shall mean the period from and including February 1, 2001 to but excluding the Class I Out-Performance Valuation Date. "Minimum Return" shall mean 30% (compounded annually) for the Measurement Period or, if the Class I Out-Performance Valuation Date is not June 1, 2003, 12% (compounded annually) per annum from February 1, 2001. "Morgan Stanley REIT Index" shall mean the Morgan Stanley REIT Index quoted on the American Stock Exchange under the symbol "RMS". "Partnership" shall mean United Dominion Realty, L.P., a Virginia limited partnership. "Total Return" shall mean, for any security or index and for any period, the cumulative total return for such security or index over such period, as measured by (i) the sum of (A) the cumulative amount of dividends paid in respect of such security or index for such period (assuming that all dividends other than Extraordinary Distributions are reinvested in such security or index as of the payment date for such dividend based on the security price on the dividend payment date), and (B) an amount equal to (1) the security price or index value at the end of such period, minus (2) the security price or index value at the beginning of such period, divided by (ii) the security price or index value at the beginning of such period; provided, however, that if the foregoing calculation results in a negative number, the "Total Return" shall be equal to zero. "UDR Market Capitalization" shall mean the average number of shares outstanding over the Measurement Period (including, for this purpose, REIT Shares and Partnership Units, but not including outstanding options, convertible securities or Class I Out-Performance Partnership Shares) multiplied by the daily closing price of the REIT Shares. "UDR Total Return" shall mean the Total Return of the REIT Shares for the Measurement Period. 3. ForFeiture. If, on the Class I Out-Performance Valuation Date, there is no Excess Return, then, from and after such date, each Class I Out-Performance Partnership Share shall, without any action on the part of the Partnership, the Company or the holder thereof, be automatically forfeited and be no longer outstanding. 4. DISTRIBUTIONS. On and after the Class I Out-Performance Valuation Date, the holders of Class I Out-Performance Partnership Shares not forfeited under Section 3 shall be entitled to receive distributions at the same time and in the same amount that would be received on the number of Partnership Units held by Outside Partners (assuming such Partnership Units were originally issued on the Class I Out-Performance Valuation Date) that is obtained by multiplying the number of Class I Out-Performance Partnership Shares by the Conversion Factor. 5 5. ALLOCATIONS. (a) From and after the Class I Out-Performance Valuation Date, Profits and Losses shall be allocated to each of the holders of Class I Out-Performance Partnership Shares not forfeited under Section 3 at the same time and in the same amount that would be allocated on the number of Partnership Units held by Outside Partners (assuming such Partnership Units were originally issued on the Class I Out-Performance Valuation Date) that is obtained by multiplying the number of Class I Out-Performance Partnership Shares by the Conversion Factor. (b) In the event that the Partnership disposes of all or substantially all of its assets in a transaction that will lead to a liquidation of the Partnership pursuant to Article II of the Agreement, then, notwithstanding Section 5.06 of the Agreement, each holder of Class I Out-Performance Partnership Shares not forfeited under Section 3 shall be specifically allocated items of Partnership income and gain in an amount sufficient to cause the Capital Account of such holder to be equal to that of an Outside Partner that holds Partnership Units equal to the number of Class I Out-Performance Partnership Shares held by such holder multiplied by the Conversion Factor. 6. EXCHANGE. If the Class I Out-Performance Partnership Shares have not been forfeited under Section 3 and the Class I Out-Performance Partnership Shares have been transferred by the Initial Holder in accordance with Section 8, the transferree and subsequent transferees of the Class I Out-Performance Partnership Shares may exchange from time to time some or all of the Class I Out-Performance Partnership Shares for a number Partnership Units equal to the Class I Out-Performance Partnership Shares multiplied by the Conversion Factor. 7. REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control, and subject to the applicable requirements of Federal securities laws and any securities exchange or quotation system rules or regulations, each holder of Class I Out-Performance Partnership Shares shall have the redemption rights of Limited Partners set forth in Section 8.05 of the Agreement with respect to a number of Partnership Units equal to the number of Class I Out-Performance Partnership Shares multiplied by the Conversion Factor and the 40-month transfer limitation period applicable to the Class I Out-Performance Partnership Shares shall be deemed to have passed. 8. RESTRICTIONS ON OWNERSHIP AND TRANSFER. The restrictions on Transfer set forth in Article IX of the Agreement shall not apply to Transfers of Class I Out-Performance Partnership Shares. Prior to the Class I Out-Performance Valuation Date, the Class I Out-Performance Partnership Shares shall be owned and held solely by the Initial Holder. On or after the later of the Class I Out-Performance Valuation Date and the forty (40) month period from the date the Class I Out-Performance Partnership Shares are issued, the Class I Out-Performance Partnership Shares may be Transferred (i) by the Initial Holder to (a) any Person who is a member (a "Member") of the Initial Holder immediately prior to such transfer, (b) a Family Member of a Member, (c) a Family Controlled Entity of a Member, (c) any Person with respect to whom the Member constitutes a Family Controlled Entity, (d) 6 upon the death of a Member, by will or by the laws of descent and distribution to any Family Member or Family Controlled Entity, and (ii) by any other Person to (a) a Family Member of a such Person, (b) a Family Controlled Entity of such Person, (c) any other Person with respect to whom such Person constitutes a Family Controlled Entity, (d) upon the death of such Person, by will or by the laws of descent and distribution to any Family Member or Family Controlled Entity; provided, however, that, until May 31, 2004, the Class I Out-Performance Partnership Shares may not be Transferred by the Initial Holder without the approval of the managers of the Initial Holder. 9. ADJUSTMENTS. (a) In the event of any Extraordinary Distribution occurring on or after February 1, 2001, for purposes of determining the Value of a REIT Share or the UDR Total Return, each price of a REIT Share determined as of a date on or after the Ex-Date for such Extraordinary Distribution shall be adjusted by multiplying such price by a fraction (i) the numerator of which shall be the price of a REIT Share on the date immediately prior to such Ex-Date, and (ii) the denominator of which shall be (A) the price of a REIT Share on the date immediately prior to such Ex-Date, minus (B) the fair market value on the date fixed for such determination of the portion of the evidences of indebtedness or assets so distributed applicable to one REIT Share (as determined by the Company, whose determination shall be conclusive); provided further, that such amount shall be so adjusted for each such Extraordinary Distribution occurring on or after February 1, 2001. (b) In the event that, on or after February 1, 2001, the Company (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) splits or subdivides its outstanding REIT Shares, (iii) effects a reverse stock split or otherwise combines its outstanding REIT Shares into a smaller number of REIT Shares, or (iv) otherwise reclassifies its outstanding REIT Shares, then, for purposes of determining the Value of a REIT Share or the UDR Total Return, each price of a REIT Share determined as of a date on or after the Ex-Date for such transaction shall be adjusted by multiplying such price by a fraction (x) the numerator of which shall be the number of REIT Shares issued and outstanding on the Determination Date for such dividend, distribution, split, subdivision, reverse stock split, combination or reclassification (assuming for such purposes that such dividend, distribution, split, subdivision, reverse split or combination has occurred as of such time) and (y) the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the Determination Date for such dividend, distribution, split, subdivision, reverse stock split, combination or reclassification. (c) The Company shall have authority to appropriately adjust the UDR Market Capitalization, the UDR Total Return or the Value of a REIT Share if any other transaction or circumstance occurs or arises that without such adjustment would have an inequitable result. 7 10. GENERAL. The ownership of Class I Out-Performance Partnership Shares may (but need not, in the sole and absolute discretion of the Company) be evidenced by one or more certificates. The Company shall amend Exhibit A to the Agreement from time to time to the extent necessary to reflect accurately the issuance of, and subsequent conversion, redemption, or any other event having an effect on the ownership of Class I Out-Performance Partnership Shares. 8 EX-10.18 5 dex1018.txt EXHIBIT 10(XVIII) EXHIBIT 10(xviii) UNITED DOMINION REALTY TRUST DESCRIPTION OF THE OUT-PERFORMANCE PROGRAM Background The Company competes for management talent with both public and private real estate investment vehicles and constantly reviews compensation structures and practices in an effort to remain highly competitive. The Company's compensation programs are designed to further its primary goal of increasing dividend income and share price appreciation. The Board of Directors intends for these goals to be the primary economic motivation of its executive officers and other key employees. The Board of Directors believes that it is in the best interest of the shareholders to attract and retain a management team that has a meaningful equity stake in the long-term success of the Company. To this end it is recommending that the shareholders approve the Out-Performance Program (the "Program") pursuant to which officers and other key employees will be given the opportunity to invest in the Company by purchasing performance shares ("Out-Performance Partnership Shares" or "OPPSs") of United Dominion Realty, L.P., a Virginia limited partnership in which the Company is the sole general partner ("Dominion Realty"). The Program is designed to provide participants with the possibility of substantial returns on their investment if the Company's total return on its Common Stock exceeds targeted levels, while putting the participants' investment at risk if those levels are not exceeded. The Program will be administered by the Company's Board of Directors. Members of the Board of Directors who are not employees of the Company are not eligible to participate in the Program. If the Program is approved, the Board of Directors anticipates authorizing every other year the sale of a class of OPPSs to a limited liability company (sometimes referred to as an "LLC") to be formed for the benefit of selected officers and key employees who agree to invest in that class of OPPSs. The participants will contribute the funds for the LLC to purchase the OPPSs and will share ownership of the LLC on the basis of each participant's investment in the LLC. The purchase price for each class of OPPSs will be set by the Company's Board of Directors based upon the advice of an independent valuation expert. The Board of Directors expects that the specific features of each class of OPPSs, the designation of officers and key employees as potential participants in the class and the level of participation of a particular participant will vary from class to class. Participation in Class I OPPSs The Board of Directors has developed the principal terms of the Class I OPPSs that it intends to offer to participants in 2001. For the Class I OPPSs, participation rights will be approximately as follows: OPPSs to Participant be Offered ----------------------------------- -------------------- Chief Executive Officer 444,500 Senior Executive Vice President 190,500 Chief Financial Officer 127,000 Treasurer/Investor Relations 127,000 Other Key Employees 381,000 -------------------- 1,270,000 ==================== The purchase price for the Class I OPPSs has been determined by the Board of Directors to be $1,270,000 based on a valuation by Salomon Smith Barney, Inc. That valuation took into account that any investment in the Class I OPPSs will become worthless if the targeted Total Return is not achieved. The value of the Class I OPPSs also has been discounted significantly because of the substantial restrictions on transfer and the limited redemption rights provided for with respect to Class I OPPSs. It is important to recognize that any officer or other employee who is provided the opportunity to invest is under no obligation to exercise that right. The Class I OPPSs must be fully subscribed within 45 days of shareholder approval, if obtained. If some of those eligible to participate elect not to participate, the remaining OPPSs shall be retained by the Company. The Board of Directors may elect to loan Company funds to participants to permit them to invest in a class of OPPSs. For the Class I OPPSs, the Board has determined that participants can borrow some or all of the funds they need to participate with a loan maturity date at the earlier of the fifth anniversary of the date of the loan or 60 days from the date the participant ceases to be employed by the Company for any reason. Loans to the Chief Executive Officer, the Senior Executive Vice President, the Chief Financial Officer and the Treasurer/Investor Relations will be 100% recourse. All other participants will be at risk personally for at least 25% of the amount he or she invests with respect to the Class I OPPSs. Interest will be payable annually and the interest rate will be the same as the Company's cost of funds, as determined on an annual basis. To begin the Program, for the Class I OPPSs the Company's performance will be measured over a twenty-eight month period beginning with the month Mr. Toomey's employment began (February, 2001). The LLC that holds the Class I OPPS will have no right to receive distributions or allocations of income or loss, or to redeem those shares prior to the date (the "Valuation Date") that is the earlier of (i) the expiration of the measurement period for the class (June 1, 2003), or (ii) the date of a change of control of the Company (defined as a "Transaction" in Dominion Realty's Agreement of Limited Partnership). The Class I OPPSs will only be entitled to receive distributions and allocations of income and loss if, as of the Valuation Date, the cumulative Total Return of the Company Common Stock during the measurement period . exceeds the cumulative Total Return of the designated peer group index over the same period; and . is at least the equivalent of a 30% Total Return or 12% annualized (the "Minimum Return"). If the thresholds are met, holders of the OPPSs will be entitled to begin receiving distributions and allocations of income and loss from Dominion Realty equal to the distributions and allocations that would be received on the number of interests in Dominion Realty ("OP Units") obtained by: . (i) determining the amount by which the cumulative Total Return of the Company Common Stock over the measurement period exceeds the greater of the cumulative Total Return of the Morgan Stanley REIT Index (peer group index) or the Minimum Return (such excess being the "Excess Return"); . (ii) multiplying 4% of the Excess Return by the Company's Market Capitalization; and . (iii) dividing the number obtained in clause (ii) by the market value of one share of the Company Common Stock on the Valuation Date, as the weighted average price per day of the Common Stock for the 20 trading days immediately preceding the Valuation Date. For the Class I OPPSs, the number determined pursuant to clause (ii) in the preceding paragraph is capped at 2% of Market Capitalization (approximately 1% per year). "Market Capitalization" is defined as the average number of shares outstanding over the 28 month period (that includes Common Stock and OP Units but does not include outstanding options or convertible securities) multiplied by the daily closing price of the Company's Common Stock. If, on the Valuation Date, the cumulative Total Return of the Company Common Stock does not meet the Minimum Return, the Total Return of the Morgan Stanley REIT Index and there is no Excess Return, then holders of Class I OPPSs will forfeit their initial investment of $1.27 million. The Morgan Stanley REIT Index will be used as the peer group index for purposes of measuring the Class I Out-Performance Partnership Shares. The Morgan Stanley REIT Index is a capitalization-weighted index with dividends reinvested of the most actively traded real estate investment trusts. The Morgan Stanley REIT Index is comprised of approximately 113 real estate investment trusts selected by Morgan Stanley & Co. Incorporated and a total market cap of $123.6 billion. The Board of Directors of the Company has selected this index because it believes that it is the real estate investment trust index most widely reported and accepted among institutional investors. For the historical performance of the Morgan Stanley REIT Index, see the Performance Graph on page 24. The Board of Directors has the ability to select a different index for future classes of OPPSs. For example, the Board of Directors may select a different index if it determines that the Morgan Stanley REIT Index is no longer an appropriate comparison for the Company; if the Morgan Stanley REIT Index is not maintained throughout the Measurement Period; or for any other reason that the Board of Directors determines. "Total Return" means, for any security or index and for any period, the cumulative total return for such security or index over such period, as measured by the sum of (a) the cumulative amount of dividends paid in respect of such security or index for such period (assuming that all cash dividends are reinvested in such security as of the payment date for such dividend based on the security price on the dividend payment date), and (b) an amount equal to (x) the security price or index value at the end of such period, minus (y) the security price or index value at the beginning of the measurement period. LLC Governance and Restrictions on Transfer The Class I OPPSs cannot be transferred by the LLC without the approval of the managers of the LLC, who are expected to be the two largest participants in the LLC, as long as they are employees of the Company, and representatives of the independent Directors. Class I OPPSs may only be transferred by the LLC after targeted returns have been exceeded and a forty-month vesting period from the date of issuance has passed. At that time transfers may only be made to participants or to one of their family members (or a family-owned entity). Individuals who receive OPPSs after the vesting period may exchange them for an equivalent number of OP Units. They may not transfer any OPPSs or OP Units received except to a family member (or a family-owned entity) or in the event of death or disability. The terms of the operating agreement of the Class I LLC will restrict the participants' ability to transfer their interests in the LLC. The LLC will have the right to repurchase the interest of any participant in the LLC at the original purchase price if prior to the end of the forty-month vesting period such participant's employment with the Company is terminated for any reason other than by death or disability. In this case, the participant will be entitled to retain any distributions that he or she received on the OPPSs subsequent to the Valuation Date. The LLC will be used as a vehicle to purchase the OPPSs to ensure that there would be no opportunity for the participants to profit from the ownership of those OPPSs prior to the Valuation Date. The Class I Out-Performance Partnership Shares are not convertible into Common Stock. However, in the event of a change of control of the Company, the LLC or any participant that holds any OPPSs will have the same redemption rights as other holders of OP Units. Upon the occurrence of a change of control, the LLC or participant that holds OPPSs may require Dominion Realty to redeem all or a portion of the units held by such party in exchange for a cash payment per unit equal to the market value of a share of Common Stock at the time of redemption. However, in the event that any units are tendered for redemption, Dominion Realty's obligation to pay the redemption price will be subject to the prior right of the Company to acquire such units in exchange for an equal number of shares of Common Stock. Examples of the Value of Class I OPPSs The following tables illustrate the value of the Class I OPPSs under different share prices and total returns at the Valuation Date. For the two year period ended December 31, 2000, the minimum thresholds for the Class I OPPSs would not have been met. This table assumes that the cumulative Total Return of the Morgan Stanley REIT Index is less than the 30% minimum return: Value to Shareholders --------------------------------------- Value of Stock Price at UDR Total Shareholder Value Opps Valuation Date Return (1) Achieved (2) to Management (3) - ---------------- ------------ ------------------- ------------------- (Millions) (Millions) $12.00 28.8% $ 349.2 $ 0.0 $13.00 39.5% $ 479.4 $ 5.4 $14.00 50.3% $ 609.6 $ 12.4 $15.00 61.0% $ 739.8 $ 20.3 $16.00 71.7% $ 870.0 $ 29.1 $17.00 82.5% $ 1,000.1 $ 37.0 $18.00 93.2% $ 1,130.3 $ 39.2 This table assumes that the cumulative Total Return of the Morgan Stanley REIT Index is 50% and therefore is the operative threshold instead of the 30% minimum return. Value to Shareholders --------------------------------------- Value of Stock Price at UDR Total Shareholder Value Opps Valuation Date Return (1) Achieved (2) to Management (3) - ---------------- ------------ ------------------- ------------------- (Millions) (Millions) $12.00 28.8% $ 349.2 $ 0.0 $13.00 39.5% $ 479.4 $ 0.0 $14.00 50.3% $ 609.6 $ 0.2 $15.00 61.0% $ 739.8 $ 7.2 $16.00 71.7% $ 870.0 $ 15.1 $17.00 82.5% $ 1,000.1 $ 24.0 $18.00 93.2% $ 1,130.3 $ 33.8 (1) Total Return to the UDR shareholders, assuming an 8% annual dividend rate. (2) Total Return multiplied by average market capitalization of $1,305 million (108.78 million shares and OP Units outstanding multiplied by the share price at the Valuation Date). (3) Out-Performance shareholder value multiplied by management participation of 4% subject to 2% dilution limit. The numbers used in the table are for illustrative purposes only and there can be no assurance that actual outcomes will be within the ranges used. Some of the factors that could affect the results set forth in the table are the Total Return on the Company Common Stock relative to the Total Return of the Morgan Stanley REIT Index, and the market value of the average outstanding equity of the Company during any Measurement Period. These factors may be affected by general economic conditions, local real estate conditions and the dividend policy of the Company. Possible Negative Effects of the OPPSs Although the Company does not believe that the sale of Out-Performance Partnership Shares will have an antitakeover effect, the OPPSs could increase the potential cost of acquiring control of the Company and thereby discourage an attempt to take control of the Company. However, the Board of Directors is not aware of any attempt to take control of the Company and the Board of Directors has not approved the sale of the OPPSs with the intention of discouraging any such attempt. If with respect to the Class I OPPSs the Total Return on the Company Common Stock over the Measurement Period exceeds both the Total Return of the Morgan Stanley REIT Index and exceeds the Minimum Return, then the LLC that holds the OPPSs could be entitled to receive the same distributions and allocations as the holder of a significant number of OP Units of Dominion Realty. This could have a dilutive effect on future earnings per share of Company Common Stock, and on the Company's equity ownership in Dominion Realty. EX-10.19 6 dex1019.txt EXHIBIT 10(XIX) EXHIBIT 10(xix) UNITED DOMINION REALTY TRUST DESCRIPTION OF THE LONG TERM INCENTIVE COMPENSATION PLAN Background In 1998, the shareholders approved an amendment to the Company's 1985 Stock Option Plan which limited the amount of shares of Common Stock issuable on the exercise of options outstanding at any given time to 8% of the number of shares issued and outstanding at that time, subject to a maximum aggregate limit of 10,000,000 shares. The Board of Directors has approved, in various stages, a 1999 Long-Term Incentive Plan ("LTIP") for the purpose of granting awards of restricted stock and cash performance unit awards. On March 20, 2001, our Board approved amendments of the LTIP to include a possible award of options. The LTIP is being submitted for approval by our shareholders at the annual meeting so that incentive stock options may be awarded and so that future awards made under the LTIP may be fully deductible without regard for the deduction limits of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). As of March 9, 2001, there were 3,781,175 shares of Common Stock available for grant under the 1985 Stock Option Plan, and 218,825 shares of restricted stock have been awarded pursuant to the LTIP. We have reserved 4,000,000 shares for issuance upon the grant or exercise of awards pursuant to the LTIP. If the shareholders approve the LTIP, no additional grants will be made under the 1985 Stock Option Plan. Approximately 2,000 employees are eligible to participate in the LTIP. The purpose of the LTIP is to promote our success by linking the personal interests of our employees, officers and directors to those of our shareholders, and by providing participants with an incentive for outstanding performance. The LTIP authorizes the granting of awards in any of the following forms: . options to purchase shares of Common Stock . stock appreciation rights . restricted stock . dividend equivalents . other stock-based awards . any other right or interest relating to Common Stock, or . cash. No more than 15% of the shares authorized under the LTIP may be granted as awards of restricted stock or unrestricted stock awards. The maximum number of shares of Common Stock with respect to one or more options and/or stock appreciation rights that may be granted during any one calendar year under the LTIP to any one person is 500,000. The maximum fair market value of any awards (other than options and stock appreciation rights) that may be received by a participant (less any consideration paid by the participant for such award) during any one calendar year under the LTIP is $1,000,000. Administration The LTIP is administered by the Compensation Committee of our Board of Directors. The Committee has the authority to designate participants; determine the type or types of awards to be granted to each participant and the number, terms and conditions thereof; establish, adopt or revise any rules and regulations as it may deem advisable to administer the plan; and make all other decisions and determinations that may be required under the plan. The Board of Directors may at any time administer the plan. If it does so, it will have all the powers of the Committee. Formula Grants to Non-Employee Directors The LTIP provides for the automatic grant of non-qualified stock options to our non-employee directors. On the day that such director first joins the Board (or on the day of the 2001 annual meeting if he or she is already on the Board at that time), each non-employee director will receive a grant of options to purchase 5,000 shares of Common Stock. These initial options are immediately exercisable and have a five-year term. In addition, on the day after each annual meeting of our shareholders beginning with the 2001 annual meeting, each non-employee director then in office will receive an option to purchase 2,000 shares of Common Stock. These annual options are immediately exercisable and have a 10-year term. Pro-rata grants will be made if at any time there are insufficient shares under the LTIP to make the full scheduled grants of non-employee director options. The exercise price for each of these options will be the fair market value of our Common Stock on the date of grant. A director's options will not automatically lapse if he or she ceases to qualify as a non-employee director, as long as he or she remains a member of the Board. However, such options will lapse 30 days after the director ceases to serve as a member of the Board, unless he or she retires. The Committee may make discretionary awards to non-employee directors pursuant to the other provisions of the plan. Discretionary Awards Stock Options. The Committee is authorized to grant incentive stock options or non-qualified stock options under the plan. The terms of an incentive stock option must meet the requirements of Section 422 of the Code. All options will be evidenced by a written award agreement with the participant, which will include any provisions specified by the Committee. However, the exercise price of an option may not be less than the fair market value of the underlying stock on the date of grant and no option may have a term of more than 10 years. In addition, the Committee is not permitted to grant options with a "re-load" feature, which provides for the automatic grant of a new option if the optionee delivers shares of stock as full or partial payment of the exercise price of the original option. Stock Appreciation Rights. The Committee may grant stock appreciation rights under the plan. Upon the exercise of a stock appreciation right, the participant has the right to receive the excess, if any, of: the fair market value of one share of Common Stock on the date of exercise, over the grant price of the stock appreciation right as determined by the Committee, which will not be less than the fair market value of one share of Common Stock on the date of grant. All awards of stock appreciation rights will be evidenced by an award agreement, reflecting the terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of the stock appreciation right, as determined by the Committee at the time of grant. Restricted Stock Awards. The Committee may make awards of restricted stock to participants, which will be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote restricted stock or the right to receive dividends, if any, on the restricted stock). No more than 15% of the shares authorized under the LTIP may be granted as awards of restricted stock or unrestricted stock awards. Dividend Equivalents. The Committee is authorized to grant dividend equivalents to participants subject to such terms and conditions as may be selected by the Committee. Dividend equivalents entitle the participant to receive payments equal to dividends with respect to all or a portion of the number of shares of Common Stock subject to an option award or stock appreciation right award, as determined by the Committee. The Committee may provide that dividend equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional shares of Common Stock or otherwise reinvested. Other Stock-Based Awards. The Committee may, subject to limitations under applicable law, grant to participants such other awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares of Common Stock as deemed by the Committee to be consistent with the purposes of the plan, including without limitation of shares of Common Stock awarded purely as a bonus and not subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of Common Stock, and awards valued by reference to book value of shares of Common Stock or the value of securities of or the performance of specified parents or subsidiaries. The Committee will determine the terms and conditions of any such awards. . Performance Goals. The Committee may determine that any award will be determined solely on the basis of . our achievement (or the achievement of our parent or subsidiary) of a specified target return, or target growth in return, on equity or assets, . our total shareholder return (stock price plus reinvested dividends) relative to a defined comparison group or target over a specific performance period, . our stock price, . the achievement by an individual, us, or a business unit of ours or our parent or subsidiary, of a specified target, or target growth in, revenues, net income or earnings per share, . the achievement of objectively determinable goals with respect to product delivery, product quality, customer satisfaction, meeting budgets and/or retention of employees, or . any combination of the above. If an award is made on such basis, the Committee must establish goals prior to the beginning of the period for which such performance goal relates (or such later date as may be permitted under applicable tax regulations) and the Committee may for any reason reduce (but not increase) any award, notwithstanding the achievement of a specified goal. Any payment of an award granted with performance goals will be conditioned on the written certification of the Committee in each case that the performance goals and any other material conditions were satisfied. Limitations on Transfer; Beneficiaries. No award will be assignable or transferable by a participant other than by will or the laws of descent and distribution or, except in the case of an incentive stock option, pursuant to a qualified domestic relations order; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability does not result in accelerated taxation, does not cause any option intended to be an incentive stock option to fail to qualify as such, and is otherwise appropriate and desirable, taking into account any factors deemed relevant, including without limitation, any state or federal tax or securities laws or regulations applicable to transferable awards. A participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the participant and to receive any distribution with respect to any award upon the participant's death. Acceleration Upon Certain Events. Upon a participant's death, disability or retirement, all of his or her outstanding options, stock appreciation rights, and other awards in the nature of rights that may be exercised will become fully exercisable and all restrictions on his or her outstanding awards will lapse, except that in the case of retirement such awards will remain exercisable for the full original term. Any of his or her options or stock appreciation rights will thereafter continue or lapse in accordance with the other provisions of the LTIP and the award agreement. Unless otherwise provided in an award agreement, upon the occurrence of a change in control of the Company (as defined in the plan), all outstanding options, stock appreciation rights, and other awards in the nature of rights that may be exercised will become fully vested and all restrictions on all outstanding awards will lapse; provided, however that such acceleration will not occur if, in the opinion of our accountants, such acceleration would preclude the use of pooling of interest accounting treatment for a change in control transaction that would otherwise qualify for such accounting treatment and is contingent upon qualifying for such accounting treatment. In addition, the Committee may at its discretion declare any or all awards to be fully vested, and/or all restrictions on all outstanding awards to lapse. The Committee may discriminate among participants or among awards in exercising such discretion. Termination and Amendment Our Board of Directors or the Committee may, at any time and from time to time, terminate, amend or modify the LTIP without shareholder approval; but they may condition any amendment on the approval of our shareholders if such approval is necessary under tax, securities or other applicable laws, policies or regulations. No termination or amendment of the LTIP may adversely affect any award previously granted under the LTIP without the written consent of the participant. The Committee may amend or terminate outstanding awards. However, such amendments may require the consent of the participant and, unless approved by the shareholders or permitted by the anti-dilution provisions of the plan, the exercise price of an outstanding option may not be reduced. Certain Federal Tax Effects of the Grant, Exercise and Transfer of Options Non-qualified Stock Options. There will be no federal income tax consequences to the optionee or to us upon the grant of a non-qualified stock option under the plan. When the optionee exercises a non-qualified option, however, he or she will realize ordinary income in an amount equal to the excess of the fair market value of the Common Stock received upon exercise of the option at the time of exercise over the exercise price, and we will be allowed a corresponding deduction, subject to applicable limitations under Code Section 162(m). Any gain that the optionee realizes when he or she later sells or disposes of the option shares will be short-term or long-term capital gain, depending on how long the shares were held. Incentive Stock Options. There typically will be no federal income tax consequences to the optionee or to us upon the grant or exercise of an incentive stock option. If the optionee holds the option shares for the required holding period of at least two years after the date the option was granted or one year after exercise, the difference between the exercise price and the amount realized upon sale or disposition of the option shares will be long-term capital gain or loss, and we will not be entitled to a federal income tax deduction. If the optionee disposes of the option shares in a sale, exchange, or other disqualifying disposition before the required holding period ends, he or she will realize taxable ordinary income in an amount equal to the excess of the fair market value of the option shares at the time of exercise over the exercise price, and we will be allowed a federal income tax deduction equal to such amount, subject to applicable limitations under Code Section 162(m). While the exercise of an incentive stock option does not result in current taxable income, the excess of the fair market value of the option shares at the time of exercise over the exercise price will be an item of adjustment for purposes of determining the optionee's alternative minimum taxable income. Transfers of Options. The Committee may, but is not required to, permit the transfer of non-qualified stock options granted under the plan. Based on current tax and securities regulations, such transfers, if permitted, are likely to be limited to gifts to members of the optionee's immediate family or certain entities controlled by the optionee or such family members. The following paragraphs summarize the likely income, estate, and gift tax consequences to the optionee, us, and any transferees, under present federal tax regulations, upon the transfer and exercise of such options. Federal Income Tax. There will be no federal income tax consequences to the optionee, us, or the transferee upon the transfer of a non-qualified stock option. However, the optionee will recognize ordinary income when the transferee exercises the option, in an amount equal to the excess of the fair market value of the option shares upon the exercise of such option over the exercise price, and we will be allowed a corresponding deduction, subject to applicable limitations under Code Section 162(m). The gain, if any, realized upon the transferee's subsequent sale or disposition of the option shares will constitute short-term or long-term capital gain to the transferee, depending on the transferee's holding period. The transferee's basis in the stock will be the fair market value of such stock at the time of exercise of the option. Federal Estate and Gift Tax. If an optionee transfers a non-qualified stock option to a transferee during the optionee's life but before the option has become exercisable, the optionee will not be treated as having made a completed gift for federal gift tax purposes until the option becomes exercisable. However, if the optionee transfers a fully exercisable option during the optionee's life, he or she will be treated as having made a completed gift for federal gift tax purposes at the time of the transfer. If the optionee transfers an option to a transferee by reason of death, the option will be included in the decedent's gross estate for federal estate tax purposes. The value of such option for federal estate or gift tax purposes may be determined using a "Black-Scholes" or other appropriate option pricing methodology, in accordance with IRS requirements. EX-12 7 dex12.txt EXHIBIT 12 EXHIBIT 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Dollars in thousands)
Three Months ended September 30, Nine Months ended September 30, --------------------------------- ------------------------------- 2001 2000 2001 2000 -------------- ----------- ------------- ---------- Net income before extraordinary items $ 13,733 $ 20,274 $ 52,269 $ 51,773 Add: Portion of rents representative of the interest factor 197 209 593 707 Minority interests 857 1,186 3,377 2,886 Loss on equity investment in joint venture 79 21 497 23 Interest on indebtedness 36,633 39,100 109,688 117,926 -------------- ----------- ------------- ----------- Earnings $ 51,499 $ 60,790 $ 166,424 $ 173,315 ============== =========== ============= =========== Fixed charges and preferred stock dividend: Interest on indebtedness 36,633 39,100 109,688 117,926 Capitalized interest 638 876 2,317 2,829 Portion of rents representative of the interest factor 197 209 593 707 -------------- ----------- ------------- ----------- Fixed charges 37,468 40,185 112,598 121,462 -------------- ----------- ------------- ----------- Add: Preferred stock dividend 6,769 9,179 24,422 27,808 -------------- ----------- ------------- ----------- Combined fixed charges and preferred stock dividend $ 44,237 $ 49,364 $ 137,020 $ 149,270 ============== =========== ============= =========== Ratio of earnings to fixed charges 1.37 x 1.51 x 1.48 x 1.43 x Ratio of earnings to combined fixed charges and preferred stock dividend 1.16 x 1.23 x 1.21 x 1.16 x
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