-----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, MGUR88YwvQcGeCRtY557775Em4ernI7ClP6eHFFEHWO8uevY0bf9rOMue1ZptNSl 7m1y2IxsmWmvaLQkVllX4w== 0000768834-98-000004.txt : 19980403 0000768834-98-000004.hdr.sgml : 19980403 ACCESSION NUMBER: 0000768834-98-000004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980402 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTORS FIRST STAGED EQUITY L P CENTRAL INDEX KEY: 0000768834 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 363310965 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-14470 FILM NUMBER: 98585950 BUSINESS ADDRESS: STREET 1: 630 DUNDEE ROAD STREET 2: SUITE 220 CITY: NORTHBROOK STATE: IL ZIP: 60062 BUSINESS PHONE: 8032391000 MAIL ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLAZA STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 10KSB 1 FORM 10-KSB--ANNUAL OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) FORM 10-KSB (Mark One) [X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 1997 or [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from........to......... Commission file number 0-14470 INVESTORS FIRST-STAGED EQUITY L.P. (Name of small business issuer in its charter) Delaware 36-3310965 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 630 Dundee Road, Suite 220 Northbrook, Illinois 60062 (Address of principal executive offices) (Zip Code) Issuer's telephone number (847) 562-4537 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Units of Limited Partnership Interest (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $9,835,000 State the aggregate market value of the voting partnership interests held by non-affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests, as of a specified date within the past 60 days. Market value information for the Registrant's partnership interests is not available. Should a trading market develop for these interests, it is the General Partners' belief that the aggregate market value of the voting partnership interests would not exceed $25,000,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Prospectus of the Registrant dated August 16, 1985, as supplemented by Supplement numbers 1, 2, 3, and 4 dated January 6, 1986, January 30, 1986, December 18, 1986 and September 9, 1987 (collectively, the "Prospectus"), and filed pursuant to Rules 424(b) and (c) under the Securities Act of 1933 are incorporated by reference into Part I of this Annual Report on Form 10-KSB. PART I ITEM 1. DESCRIPTION OF BUSINESS Investors First-Staged Equity L.P. (the "Partnership" or "Registrant") is a limited partnership formed in May 1985 under the Delaware Revised Uniform Limited Partnership Act. The business of the Partnership is to own, manage and ultimately dispose of income-producing residential and commercial properties. The Partnership raised total equity of $48,802,000 from the sale of Limited Partnership Interests (the "Units", the "Limited Partnership Units") to the public in 1985 pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933 (Registration Statement No. 2-97608). The Partnership was subsequently granted on June 27, 1986, a 1934 Act file number (0-14470) because of the Partnership's registration on Form 8-A as a Section 12(g) reporting company under the Securities Exchange Act of 1934. A total of 16,511 units were sold to the public at $3,000 per unit as of the termination date of the offering, December 31, 1985. Limited Partners in the Partnership paid $1,000 per unit upon subscription and executed a non-recourse note for the remaining $2,000 per unit. The non-recourse note provided for the optional payment, without interest, of $1,000 per unit on each of February 15, 1986 and 1987. The Partnership has collected capital contributions totaling $48,802,000; $16,511,000 pertaining to the payments due in 1985, $16,511,000 pertaining to the payments due in 1986 and the remarketed units sold in 1986 and $15,780,000 pertaining to the payments due in 1987 and the remarketed units sold in 1987. As each whole unit represents capital contributions aggregating $3,000, the final number of units outstanding is 16,267. The Limited Partners share in the ownership of the Partnership's real property investments according to the number of Limited Partnership Units held. On October 2, 1985, the Partnership acquired interests in six (6) real property investments, two of which, Village Green Apartments and Woodland Meadows Apartments, were sold at foreclosure sales to parties unaffiliated with the Partnership in May 1990 and June 1991, respectively. East Bluff Apartments was foreclosed upon by the Federal Deposit Insurance Corporation ("FDIC"), holder of the second mortgage, on May 23, 1994. The three (3) remaining real property investments are described under "Description of Properties" in "Item 2". The Partnership acquired interests in the properties by purchasing a 99.99% interest in each subpartnership which directly owned fee title to the individual properties. Proceeds of the offering were used for the payment of the costs associated with the offering and the costs of acquiring the interests in the properties, including acquisition fees payable to the General Partner and the assumption of liabilities of the acquired subpartnerships. Such liabilities included advances and accrued interest thereon made by affiliates of the General Partner to the subpartnerships and expenses reimbursable to and brokerage fees paid to non-affiliated entities by affiliates in connection with the acquisition of properties by the subpartnerships. Additional information regarding the properties is included on pages 40 through 61 of the Prospectus dated August 16, 1985, which is incorporated herein by reference. The Partnership's real property investments are subject to competition from similar types of properties owned by both affiliates and non-affiliates. Average annual occupancy levels for the properties currently owned by the Partnership are set forth in "Item 2, Description of Properties". The Partnership's existing real property investments are located in California. The Partnership is engaged solely in the business of real estate investment. Therefore, a presentation of industry segment information is not applicable. On January 1, 1986, the VMS organization underwent a restructuring. Under this reorganization, the General Partner's name was changed from VMS Realty Partners to VMS Realty Investment and certain of its assets were transferred by assignment to a new partnership created under the laws of the State of Illinois. Effective January 1, 1986, the General Partner, VMS Realty Investment (formerly known as VMS Realty Partners) assigned its interest in future profits, losses, operating cash flow and liquidation proceeds of the Partnership to VMS Realty Investment II, which subsequently became the General Partner. VMS Realty Investment II is a general partnership formed to be the sole general partner of Investors First-Staged Equity L.P. and has the same constituent partners as VMS Realty Investment, its predecessor. Effective January 1, 1987, VMS Realty Investment II assigned its beneficial interest in the Partnership to VMS Realty Investment. Effective January 2, 1998, the current General Partner was replaced by MAERIL, Inc., an affiliate of Insignia Financial Group, Inc. ("Insignia"). MAERIL is a Delaware corporation, formed in March 1994, for the purpose of serving as general partner of various Partnerships. MAE GP Corporation ("MAE GP") is the sole stockholder of MAERIL and Metropolitan Asset Enhancement, L.P. ("MAE") is the sole stockholder of MAE GP Corporation. Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT") which is an affiliate of Insignia. Thus, the General Partner is now a wholly-owned subsidiary of IPT. On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. The Partnership has no employees. Affiliates of Insignia have provided real estate advisory and asset management services to the Partnership since January 1, 1994. As advisor, such affiliates provide all partnership accounting and administrative services, investment management and supervisory services over property management and leasing. INSPECTOR GENERAL AUDIT The Office of the Inspector General (OIG) for the Department of Housing and Urban Development (HUD) has completed an audit of the books and records of VMS Realty Management, Inc. relative to seven HUD projects which VMS Realty Management, Inc. managed from 1987 to 1991, the years which were the subject of the OIG audit. The OIG concluded that VMS Realty Management, Inc. did not comply with the terms and conditions for the HUD Regulatory Agreements and applicable HUD regulations and instructions relating to the financial and general management practices for six of the seven HUD projects reviewed. Specifically, the OIG audit concluded that VMS Management, Inc. inappropriately disbursed $6,366,000 from the projects' funds for partnership expenses from 1987 to 1991 when the projects were in a non-surplus cash position or lacked adequate surplus cash for the payments as the term "surplus cash" is defined pursuant to the HUD Regulatory Agreements. $3,776,000 of the $6,366,000 which the OIG has concluded to have been inappropriately disbursed in payment of partnership obligations relates to two projects in which the Partnership is a partner. These inappropriate disbursements included payments for second mortgages, asset management fees, notes payable and other partnership expenses. The OIG's Audit Report to HUD recommended that (1) the projects' owners reimburse $6,366,000 to the projects' accounts for the excess distributions and if the owners fail to comply, then HUD should initiate action for double damages remedy, (2) take action to debar VMS Realty Management, Inc. and the individuals which comprise it, and (3) require the appropriate HUD Regional/Field Offices to conduct reviews of the 13 remaining HUD projects which VMS Realty Management, Inc. previously managed which were not the subject of the OIG audit. The Partnership, VMS Realty Management, Inc. and HUD entered into a Settlement Agreement dated December 9, 1996, related to the appropriateness of certain Richardson Highlands and Rivercrest Village disbursements totaling approximately $2,168,000 and $1,608,000, respectively, made during the years 1987 through 1991. The Settlement Agreement provided an aggregate payment of $550,000 to the Federal government, $391,000 of which was paid from available funds of Richardson Highlands and the remainder of the settlement payment of $159,000 was paid by entities other than the Partnership and its subpartnerships. ITEM 2. DESCRIPTION OF PROPERTIES: The following table sets forth the Registrant's investments in properties: Date of Property Purchase Type of Ownership Use Rivercrest Village 10/85 Fee ownership subject Apartment Apartments to first and second 328 units mortgage Richardson Highlands 10/85 Fee ownership subject Apartment Apartments to first and second 198 units mortgage Serramonte Plaza 10/85 Fee ownership subject Commercial complex Office Center to first mortgage of approx. 219,000 s.f. located on approx. 15.4 acres SCHEDULE OF PROPERTIES: (dollar amounts in thousands) Gross Carrying Accumulated Federal Property Value Depreciation Rate Method Tax Basis Rivercrest Village 5-7 yrs 150% B Apartments $18,088 $10,882 17-25 yrs S/L $ 5,077 Richardson Highlands 5-7 yrs 150% B Apartments 17,019 7,590 17-25 yrs S/L 8,132 Serramonte Plaza 5-7 yrs Office Center 12,465 5,690 20-25 yrs S/L 6,256 $47,572 $24,162 $19,465 See "Note A" of the Consolidated Financial Statements included in "Item 7" for a description of the Partnership's depreciation policy. SCHEDULE OF MORTGAGES: (dollar amounts in thousands) Principal Principal Balance At Balance December 31, Interest Period Maturity Due At Property 1997 Rate Amortized Date Maturity Rivercrest Village 1st mortgage $11,600 7.35% 30 yrs 01/01/08 $10,053 2nd mortgage 3,620 10.0% (1) 01/15/00 3,620 Richardson Highlands 1st mortgage 16,900 7.33% 30 yrs 01/01/05 15,502 2nd mortgage 1,867 10.0% (1) 01/15/00 1,867 Serramonte Plaza 1st mortgage 11,943 8.67% 25 yrs 07/01/04 10,721 $45,930 1) Interest only payments at a 7% rate are made to the extent of surplus cash. In June 1997, the Partnership refinanced the mortgage indebtedness encumbering Serramonte Plaza. The previous mortgage note of approximately $7,365,000 was repaid from loan proceeds received from the refinancing. The new mortgage debt of $12,000,000 carries a stated interest rate of 8.67%, with a balloon payment due July 1, 2004. An extraordinary loss on early extinguishment of debt of approximately $1,348,000 was realized during the second quarter of 1997 due to the payment of approximately $1,102,000 in early payment mortgage fees and a loss of approximately $246,000 on the write-off of unamortized loan costs. In conjunction with the refinancing, a capital improvement reserve of approximately $500,000 was established and approximately $371,000 in loan costs were incurred. In October 1990, the Partnership defaulted on the Richardson Highlands and Rivercrest Village subordinate notes payable (the second mortgage loans) due to the failure to make the required monthly debt service payments. The Partnership and the lender finalized an agreement on June 22, 1994, retroactive to July 1, 1993, to restructure the debt held on Richardson Highlands and Rivercrest Village. The junior lien mortgages were restructured to mature on January 15, 2000, and provide for a 10% interest rate (with a 7% pay rate), based on the "Agreed Valuation Amount", as defined in the restructure agreement. Interest payments are payable from surplus cash. The Agreed Valuation Amounts for Richardson Highlands and Rivercrest Village were approximately $7,268,000 and $7,110,000, respectively. A Note Face Amount of $8,126,000 for Richardson Highlands and $8,417,000 for Rivercrest Village was payable if an event of default under the restructure agreements was uncured. Prior to the restructuring of the loans, interest accrued under the terms of the original subordinate notes payable. This accrued interest of $1,732,000 for Richardson Highlands and $2,327,000 for Rivercrest Village was added to the carrying amount of the loans at the date of restructure. The debt restructurings were accounted for as a modification of terms in which total future cash payments under the restructured loans exceeded the carrying values of the loans as of the date of restructure. Consequently, the carrying amounts of the loans were not changed and no gains were recognized on the restructurings. Interest accrued at an effective interest rate of 6.14% for Richardson Highlands and 4.37% for Rivercrest Village to equate the present values of the total future cash payments under the new terms with the carrying amounts of the loans at the date of restructure. During 1995 and 1996, the Partnership was in default of the provisions of these restructured subordinate loans as a result of not paying the scheduled interest payments. Subsequently, during the fourth quarter of 1996, the Partnership disbursed approximately $1,290,000 and $678,000 from available cash at Richardson Highlands and Rivercrest Village, respectively, which was applied to the accrued interest related to the subordinate notes payable. These payments effectively cured the default. Excess proceeds from the 1997 refinancing of the first mortgages on Richardson Highlands and Rivercrest Village (as discussed below) were used to make payments of approximately $8,250,000 and $8,000,000, respectively, on the properties second mortgages. At December 31, 1997, the total estimated future cash payments are less than the recorded balance. Therefore, in compliance with Financial Accounting Standards 15, the Partnership reduced the carrying balance to the estimated future cash payments of $1,867,000 (Richardson Highlands) and $3,620,000 (Rivercrest Village) recognizing an extraordinary gain of approximately $1,887,000 on the partial extinguishment of debt. At December 31, 1997, the Agreed Valuation Amounts are $864,000 for Richardson Highlands and $1,934,000 for Rivercrest Village. The Note Face Amounts are $1,722,000 for Richardson Highlands and $3,241,000 for Rivercrest Village. On December 31, 1997, the Richardson Highlands' first mortgage and Rivercrest Village's first mortgage were refinanced by Lehman Brothers Holdings, Inc. ("LBHI") with the outstanding principal balance being increased to $16,900,000 and $11,600,000, respectively. The old mortgage notes in the amount of $6,182,000 and $6,137,000 were repaid from loan proceeds received from the refinancing. The new Richardson Highlands' mortgage note carries a stated interest rate of 7.326%, with a balloon payment due January, 1, 2005, and requires monthly principal and interest payments. The new Rivercrest Village's mortgage note carries a stated interest rate of 7.348%, with a balloon payment due January 1, 2008, and requires monthly principal and interest payments. An extraordinary loss on early extinguishment of debt of approximately $32,000 on Richardson Highlands and $19,000 on Rivercrest Village was realized during the fourth quarter of 1997 due to prepayment penalties. In conjunction with the refinancing, a Repair Escrow of approximately $145,000 for Richardson Highlands and $190,000 for Rivercrest Village was established and loan costs of approximately $413,000 for Richardson Highlands and $299,000 for Rivercrest Village were incurred. SCHEDULE OF RENTAL RATES AND OCCUPANCY: Average Annual Average Rental Rates Occupancy Property 1997 1996 1997 1996 Rivercrest Village $ 7,509/unit $ 7,355/unit 91% 91% Richardson Highlands $13,060/unit $11,886/unit 98% 98% Serramonte Plaza $12.82/sq.ft. $11.71/sq.ft. 88% 88% As noted under "Item 1. Description of Business", the real estate industry is highly competitive. All of the properties of the Partnership are subject to competition from other buildings in the area. The General Partner believes that all of the properties are adequately insured. The following is a schedule of the lease expirations for the years 1998-2008: (dollar amounts in thousands) Number of % of Gross Expirations Square Feet Annual Rent Annual Rent Serramonte Plaza 1998 20 23,054 $463 18% 1999 9 39,453 498 20% 2000 11 17,571 308 12% 2001 5 13,793 127 5% 2002 9 31,562 565 22% 2003 -- -- -- -- 2004 1 2,419 54 2% 2005 1 12,317 214 9% 2006 5 14,619 239 10% 2007 1 48,492 48 2% 2008 -- -- -- -- The following schedule reflects information on tenants occupying 10% or more of the leasable square feet for Serramonte Plaza, the Partnership's only commercial property: Nature of Square Footage Annual Rent Per Lease Business Leased Square Foot Expiration Office Space 48,492 $ .99 1/16/07 SCHEDULE OF REAL ESTATE TAXES AND RATES: (dollar amounts in thousands) 1997 1997 Taxes Rate Rivercrest Village $ 154 1.14% Richardson Highlands 202 1.40% Serramonte Plaza 96 1.12% ITEM 3. LEGAL PROCEEDINGS The Registrant is unaware of any pending or outstanding litigation that is not of a routine nature. The Managing General Partner of the Registrant believes that all such pending or outstanding litigation will be resolved without a material adverse effect upon the business, financial condition, or operations of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fiscal year ended December 31, 1997, no matter was submitted to a vote of unit holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR PARTNERSHIP EQUITY AND RELATED PARTNER MATTERS MARKET INFORMATION AND HOLDERS As of December 31, 1997, there were 3,015 holders of record owning an aggregate of 16,267 Units. There is not, nor is it anticipated that there will be, a public market for the Units. The General Partner will not redeem or repurchase the Units, nor will the General Partner facilitate the matching of potential buyers and sellers of Units. Pursuant to the terms of the Restated Limited Partnership Agreement, there are restrictions on the ability of the Limited Partners to transfer their Units. In all cases, the General Partner must consent to any transfer. CASH DISTRIBUTIONS In accordance with the Restated Limited Partnership Agreement, there are no material restrictions on the Partnership's ability to make cash distributions. The amount of cash distributions is dependent upon the ability of the Partnership's properties to generate positive cash flow and the sale or refinancing of these properties in future years. In the short term, it is unlikely that the Partnership will be able to make cash distributions. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION This item should be read in conjunction with the consolidated financial statements and other items contained else where in this report. RESULTS OF OPERATIONS The Partnership's net income for the year ended December 31, 1997, was approximately $1,102,000 compared to a net loss of approximately $2,118,000 in 1996. The increase in net income for December 31, 1997, versus the corresponding period of 1996, resulted from the gain of approximately $2,042,000 realized on the sale of buildings and land at Serramonte Plaza in the second quarter of 1997 and the extraordinary net gain on early extinguishment of debt of approximately $488,000 realized on the refinancing of all of the Partnership's investment properties (see discussion below). The increase in net income also resulted from an increase in rental income and a decrease in both general and administrative and depreciation expenses. Rental income increased primarily due to rental rate increases at Richardson Highlands and Rivercrest Village Apartments. Occupancy remained stable at all properties for 1997. General and administrative expense decreased primarily due to the reduced legal expenses incurred by Serramonte, LP, relating to VMS Apt-Port II's HUD settlement agreement reached in 1996. Excess proceeds from the 1997 refinancing of the first mortgages on Richardson Highlands and Rivercrest Village (as discussed below) were used to make payments of approximately $8,250,000 and $8,000,000, respectively, on the properties second mortgages. At December 31, 1997, the total estimated future cash payments are less than the recorded balance. Therefore, in compliance with Financial Accounting Standards 15, the Partnership reduced the carrying balance to the estimated future cash payments of $1,867,000 (Richardson Highlands) and $3,620,000 (Rivercrest Village), recognizing an extraordinary gain of approximately $1,887,000 on the partial extinguishment of debt. At December 31, 1997, the Agreed Valuation Amounts are $864,000 for Richardson Highlands and $1,934,000 for Rivercrest Village. The Note Face Amounts are $1,722,000 for Richardson Highlands and $3,241,000 for Rivercrest Village. On December 31, 1997, the Richardson Highlands' first mortgage and Rivercrest Village's first mortgage were refinanced by Lehman Brothers Holdings, Inc. ("LBHI") with the outstanding principal balance being increased to $16,900,000 and $11,600,000, respectively. The old mortgage notes in the amount of $6,182,000 and $6,137,000 were repaid from loan proceeds received from the refinancing. The new Richardson Highlands' mortgage note carries a stated interest rate of 7.326%, with a balloon payment due January, 1, 2005, and requires monthly principal and interest payments. The new Rivercrest Village's mortgage note carries a stated interest rate of 7.348%, with a balloon payment due January 1, 2008, and requires monthly principal and interest payments. An extraordinary loss on early extinguishment of debt of approximately $32,000 on Richardson Highlands and $19,000 on Rivercrest Village was realized during the fourth quarter of 1997 due to prepayment penalties. In conjunction with the refinancing, a Repair Escrow of approximately $145,000 for Richardson Highlands and $190,000 for Rivercrest Village was established and loan costs of approximately $413,000 for Richardson Highlands and $299,000 for Rivercrest Village were incurred. On April 10, 1997, the Partnership sold three buildings and two parcels of land associated with Serramonte Plaza located in Daly City, California, to an unaffiliated party, Daly City Partners, LLC, a California limited liability company. The property was sold in an effort to maximize the Partnership's return on its investment. The sales price for the three buildings and two parcels of land was approximately $4,778,000 and was determined primarily by reference to appraised values. The sale resulted in net proceeds of approximately $4,360,000, after payment of closing costs, and the gain on the sale amounted to approximately $2,042,000. The proceeds from the sale were used to reduce the mortgage debt secured by Serramonte Plaza. In June 1997, the Partnership refinanced the mortgage indebtedness encumbering Serramonte Plaza. The previous mortgage note of approximately $7,365,000 was repaid from loan proceeds received from the refinancing. The new mortgage debt of $12,000,000 carries a stated interest rate of 8.67%, with a balloon payment due July 1, 2004. An extraordinary loss on early extinguishment of debt of approximately $1,348,000 was realized during the second quarter of 1997 due to the payment of approximately $1,102,000 in early payment mortgage fees and a loss of approximately $246,000 on the write-off of unamortized loan costs. In conjunction with the refinancing, a capital improvement reserve of approximately $500,000 was established and approximately $371,000 in loan costs were incurred. These loan costs are included in "Other assets" on the accompanying balance sheet and will be amortized over the term of the loan. Included in operating expense for 1997 is approximately $185,000 of major repairs and maintenance comprised primarily of exterior painting, parking lot repairs, major landscaping and exterior building improvements. For 1996 approximately $207,000 of major repairs and maintenance comprised primarily of exterior building improvements, major landscaping and exterior painting are included in operating expense. As part of the ongoing business plan of the Partnership, the General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expenses. As part of this plan, the General Partner attempts to protect the Partnership from the burden of inflation-related increase in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee the General Partner will be able to sustain such a plan. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Partnership held cash and cash equivalents of approximately $2,640,000 compared to approximately $1,557,000 at December 31, 1996. The net increase (decrease) in cash and cash equivalents for the years ended December 31, 1997 and 1996 was $1,083,000 and ($1,250,000), respectively. Net cash used in operating activities decreased primarily due to net income in the current year compared to a net loss in 1996. The increase is offset by gains realized on the sale of investment properties and the early extinguishment of debt. Net cash provided by investing activities increased primarily as a result of the proceeds received from the sale of buildings and land at Serramonte Plaza (See Item 7: Note H - Sale of Property), a decrease in restricted escrows and an increase in property improvements and replacements. Net cash used in financing activities increased primarily as a result of the refinancing of all of the investment properties. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the properties to adequately maintain the physical assets and other operating needs of the Partnership. The mortgage indebtedness of approximately $45,930,000, matures from January 2000 until January 2008, with balloon payments due at maturity, at which time the properties will either be refinanced or sold. Future cash distributions will depend on the levels of cash generated from operations, property sales, and availability of cash reserves. No cash distributions were paid during the year ended December 31, 1997 or December 31, 1996. Year 2000 The Partnership is dependent upon the General Partner and Insignia for management and administrative services. Insignia has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter (the "Year 2000 Issue"). The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The General Partner believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Partnership. Other Certain items discussed in this annual report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such forward-looking statements speak only as of the date of this annual report. The Partnership expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Partnership's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 7.FINANCIAL STATEMENTS INVESTORS FIRST-STAGED EQUITY L.P. LIST OF CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Report Consolidated Balance Sheet at December 31, 1997 Consolidated Statements of Operations for the years ended December 31, 1997 and 1996 Consolidated Statements of Changes in Partners' Deficit for the years ended December 31, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners Investors First-Staged Equity L.P. We have audited the accompanying consolidated balance sheet of Investors First- Staged Equity L.P. (A Limited Partnership) as of December 31, 1997, and the related consolidated statements of operations, changes in partners' deficit and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Partnership's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors First- Staged Equity L.P. at December 31, 1997, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Greenville, South Carolina March 3, 1998, except for Note L, as to which the date is March 17, 1998 INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED BALANCE SHEET (in thousands, except unit data) December 31, 1997 Assets Cash and cash equivalents $ 2,640 Receivables and deposits (Note E) 712 Restricted escrows 766 Other assets 1,501 Investment properties (Notes C, H and I): Land $ 8,402 Buildings and related improvements 39,170 47,572 Less accumulated depreciation (24,162) 23,410 $ 29,029 Liabilities and Partners' Deficit Liabilities Accounts payable $ 52 Accrued interest 183 Tenant security deposit liabilities 391 Other liabilities 101 Advances from affiliates of General Partner 320 Mortgage notes payable (Note C) 45,930 Partners' Deficit General partner $ (361) Limited partners (16,267 units issued and outstanding) (17,587) (17,948) $ 29,029 See Accompanying Notes to Consolidated Financial Statements INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except unit data) Years Ended December 31, 1997 1996 Revenues: Rental income $ 7,408 $ 7,071 Other income 385 292 Gain on sale of investment property 2,042 -- Total revenues 9,835 7,363 Expenses: Operating 2,842 2,704 General and administrative 194 529 Depreciation 1,844 1,907 Interest 3,884 3,887 Property taxes 457 454 Total expenses 9,221 9,481 Income (loss) before extraordinary item 614 (2,118) Extraordinary item - net gain on early extinguishment of debt (Note C) 488 -- Net income (loss) $ 1,102 $ (2,118) Net income (loss) allocated to general partners (1%) $ 11 $ (21) Net income (loss) allocated to limited partners (99%) 1,091 (2,097) $ 1,102 $ (2,118) Per limited partnership unit: Income (loss) before extraordinary item $ 37.37 $(128.91) Extraordinary item 29.70 -- Net income (loss) $ 67.07 $(128.91) See Accompanying Notes to Consolidated Financial Statements INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands, except unit data) Limited Partnership General Limited Units Partners Partners Total Partners' deficit at December 31, 1995 16,267 $(351) $(16,581) $(16,932) Net loss for the year ended December 31, 1996 -- (21) (2,097) (2,118) Partner's deficit at December 31, 1996 16,267 $(372) $(18,678) $(19,050) Net income for the year ended December 31, 1997 -- 11 1,091 1,102 Partners' deficit at December 31, 1997 16,267 $(361) $(17,587) $(17,948) See Accompanying Notes to Consolidated Financial Statements INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 1997 1996 Cash flows from operating activities: Net income (loss) $ 1,102 $ (2,118) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 1,844 1,907 Amortization of loan costs and leasing commissions 120 114 Bad debt expense -- 119 Gain on sale of investment property (2,042) -- Extraordinary net gain on early extinguishment of debt (488) -- Change in accounts: Receivables and deposits 114 154 Other assets (212) (137) Accounts payable (26) (17) Accrued interest (416) (391) Tenant security deposit liabilities (55) 40 Other liabilities (83) (191) Net cash used in operating activities (142) (520) Cash flows from investing activities: Proceeds from sale of investment property 4,360 -- Property improvements and replacements (652) (193) Withdrawals from (deposits to) restricted escrows 131 (457) Collections on note receivable 44 40 Net cash provided by (used in) investing activities 3,883 (610) Cash flows from financing activities: Payment of loan costs (1,083) (368) Prepayment penalty (51) -- Payments on mortgage notes payable (437) (630) Payment of mortgage fee (1,102) -- Payments on advances from affiliates (189) (545) Repayment of mortgage note payable (40,296) (10,577) Proceeds from refinance of mortgage 40,500 12,000 Net cash used in financing activities (2,658) (120) Net increase (decrease) in cash and cash equivalents 1,083 (1,250) Cash and cash equivalents at beginning of year 1,557 2,807 Cash and cash equivalents at end of year $ 2,640 $ 1,557 Supplemental disclosure of cash flow information: Cash paid for interest $ 5,457 $ 4,156 Interest transferred to principal $ 1,335 $ -- See Accompanying Notes to Consolidated Financial Statements
INVESTORS FIRST-STAGED EQUITY L.P. Notes to Consolidated Financial Statements December 31, 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: Investors First-Staged Equity L.P. (the "Partnership") was organized in May 1985, and began operations on October 2, 1985. The Restated Limited Partnership Agreement provides for VMS Realty Investment (formerly known as VMS Realty Partners) to be the General Partner and for the admittance of Limited Partners through the sale of up to 23,220 Limited Partnership Units at $3,000 for each unit. The Partnership has collected capital contributions totaling $48,802,000 representing 16,267 Units outstanding. The Partnership currently owns and operates two residential properties and an office center in California. Effective January 1, 1986, VMS Realty Investment assigned its interest in future profits, losses, operating cash flow and liquidation proceeds of the Partnership to VMS Realty Investment II, which subsequently became the General Partner. VMS Realty Investment II is a general partnership formed to be the sole general partner of the Partnership and has the same constituent partners as VMS Realty Investment, its predecessor. Effective January 1, 1987, VMS Realty Investment II assigned its beneficial interest in the Partnership to VMS Realty Investment. Effective January 2, 1998, the current General Partner was replaced by MAERIL, Inc., an affiliate of Insignia Financial Group, Inc. ("Insignia"). MAERIL is a Delaware corporation, formed in March 1994, for the purpose of serving as general partner of various Partnerships. MAE GP Corporation ("MAE GP") is the sole stockholder of MAERIL and Metropolitan Asset Enhancement, L.P. ("MAE") is the sole stockholder of MAE GP Corporation. Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT") which is an affiliate of Insignia. Thus, the General Partner is now a wholly-owned subsidiary of IPT. Basis of Consolidation: The accompanying consolidated financial statements of the Partnership include its 99% limited partnership interests in Serramonte, LP, VMS Apartments Portfolio II and VMS Apartments Portfolio III. The Partnership may remove the General Partner of Serramonte, LP, VMS Apartments Portfolio II and VMS Apartments Portfolio III; therefore, the partnerships are controlled and consolidated by the Partnership. All significant interpartnership balances have been eliminated. Cash and Cash Equivalents: Cash and cash equivalents includes cash on hand and in banks, money market funds and certificates of deposit with original maturities of less that ninety days. At certain times the amount of cash deposited at a bank may exceed the limit on insured deposits. Restricted Escrows: Capital Improvement Reserve - In connection with the refinancing of Serramonte Plaza, Richardson Highlands and Rivercrest Village in 1997, approximately $835,000 of the proceeds were designated as a repair escrow and capital improvement escrow for the funding of immediately required capital improvements and repairs as noted in the loan documents. At December 31, 1997, approximately $369,000 remain in the accounts. Replacement Reserve - In connection with the refinancing of Richardson Highlands and Rivercrest Village in 1997, monthly deposits of approximately $11,000 are required each month during the term of the loan. The December 31, 1997 replacement reserve balance of approximately $397,000 relates to old mortgage notes. Reimbursements to the Partnership of this amount is expected in 1998. Depreciation: Depreciation is computed using the following methods and estimated useful lives: GAAP BASIS TAX BASIS Lives Lives Method (Years) Method (Years) Buildings and improvements: Commercial Straight-line 20-25 Straight-line 18, 19, 31.5 (ACRS & MACRS) and 39 Residential Straight-line 17-25 175% Declining 18, 19 and Balance (ACRS, 27.5 MACRS) Personal Property 150% Declining 5 & 7 150% Declining 5 & 7 Balance Balance (ACRS, and MACRS) Investment Properties: Investment properties are stated at cost. Acquisition fees are capitalized as a cost of real estate. The Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. No adjustments for impairment of value were necessary for the years ended December 31, 1997 or 1996. Loan Costs: Loan costs, included in other assets on the balance sheet, of approximately $1,083,000 are being amortized on a straight-line basis over the lives of the related loans. Current accumulated amortization is approximately $26,000 and is also included in other assets on the balance sheet. Amortization of loan costs is included in interest expense in the accompanying statements of operations. Lease Commissions: Lease commissions of approximately $280,000, less accumulated amortization of approximately $137,000, are being amortized using the straight-line method over the term of the respective leases. Tenant Security Deposits: The Partnership requires security deposits from all apartment lessees for the duration of the lease and such deposits are included in receivables and deposits. The security deposits are refunded when the tenant vacates, provided the tenant has not damaged its space and is current on its rental payments. Fair Value of Financial Instruments: The Partnership believes that the carrying amount of its financial instruments (except for long term debt) approximates their fair value due to the short term maturity of these instruments. The fair value of the Partnership's long term debt, after discounting the scheduled loan payments at an estimated borrowing rate currently available to the Partnership, approximates its carrying value. Leases: The Partnership generally leases apartment units at Rivercrest Village and Richardson Highlands for twelve-month terms or less. The Partnership leases certain commercial space at Serramonte Plaza to tenants under various lease terms. For leases with fixed rental increases, rents are recognized on a straight-line basis over the terms of the lease. This straight-line basis recognized approximately $234,000 more in rental income than was collected in 1997 and prior years. This amount will be collected in future years as cash collections under the terms of the leases exceed the straight-line basis of revenue recognition. Use of Estimates: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Certain reclassifications have been made to the 1996 balances to conform to the 1997 presentation. NOTE B - RESTATED LIMITED PARTNERSHIP AGREEMENT The Partnership was organized in May 1985, and commenced operations on October 2, 1985. The General Partner is VMS Realty Investment II. Pursuant to the terms in the Agreement, net operating profits or losses and operating cash flow beginning October 2, 1985, are allocated 1% to the General Partner and 99% to the Limited Partners. The allocation of profits and losses to and among the Limited Partners is subject to certain special allocations as described in the Agreement. In general, net proceeds from any sale or refinancing of the properties will be allocated 85% to the Limited Partners and 15% to the General Partner, after the Limited Partners have received an amount equal to their original capital contributions and a cumulative 6% per annum, noncompounded, return on their adjusted capital contributions from such proceeds. The net profit of the Partnership from any sale or refinancing of the properties shall be allocated (with ordinary income being allocated first) as follows: (i) first, an amount equal to the aggregate deficit balances of the Partners' capital accounts shall be allocated to each Partner that has a deficit capital account balance in the same ratio as the deficit balance of such Partner's capital account bears to the aggregate of the deficit balance of all Partners' capital accounts; (ii) second, to the Limited Partners in an amount equal to the excess of their adjusted capital contribution over the balance of their respective capital accounts after taking into account the allocation provided for in subparagraph (i) above; (iii) third, to the Limited Partners in an amount equal to any unpaid preferred cumulative return; (iv) fourth, to the General Partner in an amount equal to the excess of its adjusted capital contribution over its capital account balance; and (v) thereafter, 85% to the Limited Partners and 15% to the General Partner. The net loss to the Partnership from any sale or other disposition of the properties shall be allocated as follows: (i) first, in an amount equal to the aggregate positive balances in the partners' capital accounts, to each partner in the same ratio as the positive balance in such partner's capital account bears to the aggregate of all such partners' positive capital accounts; and (ii) thereafter, 99% to the Limited Partners and 1% to the General Partner. NOTE C - MORTGAGE NOTES PAYABLE (dollar amounts in thousands) Principal Monthly Principal Balance At Payment Stated Balance December 31, Including Interest Maturity Due At Property 1997 Interest Rate Date Maturity Rivercrest Village 1st mortgage $11,600 $ 80 7.35% 01/01/08 $10,053 2nd mortgage 3,620 (1) 10.0% 01/15/00 3,620 Richardson Highlands 1st mortgage 16,900 116 7.33% 01/01/05 15,502 2nd mortgage 1,867 (1) 10.0% 01/15/00 1,867 Serramonte Plaza 1st mortgage 11,943 98 8.67% 07/01/04 10,721 $45,930 (1) Interest only payments at a 7% rate are made to the extent of surplus cash. All first mortgage agreements include non-recourse provisions which limit the lenders' remedies in the event of default to the specific properties collateralizing each loan. The second mortgage agreements are collateralized by all the Partnership's interests in the sub-tier partnerships that own the related properties. In June 1997, the Partnership refinanced the mortgage indebtedness encumbering Serramonte Plaza. The previous mortgage note of approximately $7,365,000 was to be repaid from loan proceeds received from the refinancing. The new mortgage debt of $12,000,000 carries a stated interest rate of 8.67%, with a balloon payment due July 1, 2004. An extraordinary loss on early extinguishment of debt of approximately $1,348,000 was realized during the second quarter of 1997 due to the payment of approximately $1,102,000 in early payment mortgage fees and a loss of approximately $246,000 on the write-off of unamortized loan costs. In conjunction with the refinancing, a capital improvement reserve of approximately $500,000 was established and approximately $371,000 in loan costs were incurred. In October 1990, the Partnership defaulted on the Richardson Highlands and Rivercrest Village subordinate notes payable (the second mortgage loans) due to the failure to make the required monthly debt service payments. The Partnership and the lender finalized an agreement on June 22, 1994, retroactive to July 1, 1993, to restructure the debt held on Richardson Highlands and Rivercrest Village. The junior lien mortgages were restructured to mature on January 15, 2000, and provide for a 10% interest rate (with a 7% pay rate), based on the "Agreed Valuation Amount", as defined in the restructure agreement. Interest payments are payable from surplus cash. The Agreed Valuation Amounts for Richardson Highlands and Rivercrest Village were approximately $7,268,000 and $7,110,000, respectively. A note face amount of $8,126,000 for Richardson Highlands and $8,417,000 for Rivercrest Village was payable upon maturity. The agreement also allowed the lender to receive fifty percent of any net proceeds from the sale or refinancing of the properties after the payment of all mortgage notes payable and subordinated debt. Prior to the restructuring of the loans, interest accrued under the terms of the original subordinate notes payable. This accrued interest of $1,732,000 for Richardson Highlands and $2,327,000 for Rivercrest Village was added to the carrying amount of the loans at the date of restructure. The debt restructurings were accounted for as a modification of terms in which total future cash payments under the restructured loans exceeded the carrying values of the loans as of the date of restructure. Consequently, the carrying amounts of the loans were not changed and no gains were recognized on the restructurings. Interest accrued at an effective interest rate of 6.14% for Richardson Highlands and 4.37% for Rivercrest Village to equate the present values of the total future cash payments under the new terms with the carrying amounts of the loans at the date of restructure. During 1995 and 1996, the Partnership was in default of the provisions of these restructured subordinate loans as a result of not paying the scheduled interest payments. Subsequently, during the fourth quarter of 1996, the Partnership disbursed approximately $1,290,000 and $678,000 from available cash at Richardson Highlands and Rivercrest Village, respectively, which was applied to the accrued interest related to the subordinate notes payable. These payments effectively cured the default. Excess proceeds from the 1997 refinancing of the first mortgages on Richardson Highlands and Rivercrest Village (as discussed below) were used to make payments of approximately $8,250,000 and $8,000,000, respectively, on the properties second mortgages. At December 31, 1997, the total estimated future cash payments are less than the recorded balance. Therefore, in compliance with Financial Accounting Standards 15, the Partnership reduced the carrying balance to the estimated future cash payments of $1,867,000 (Richardson Highlands) and $3,620,000 (Rivercrest Village), recognizing an extraordinary gain of approximately $1,887,000 on the partial extinguishment of debt. At December 31, 1997, the Agreed Valuation Amounts are $864,000 for Richardson Highlands and $1,934,000 for Rivercrest Village. The Note Face Amounts are $1,722,000 for Richardson Highlands and $3,241,000 for Rivercrest Village. On December 31, 1997, the Richardson Highlands' first mortgage and Rivercrest Village's first mortgage were refinanced by Lehman Brothers Holdings, Inc. ("LBHI") with the outstanding principal balance being increased to $16,900,000 and $11,600,000, respectively. The old mortgage notes in the amount of $6,182,000 and $6,137,000 were repaid from loan proceeds received from the refinancing. The new Richardson Highlands' mortgage note carries a stated interest rate of 7.326%, with a balloon payment due January, 1, 2005, and requires monthly principal and interest payments. The new Rivercrest Village's mortgage note carries a stated interest rate of 7.348%, with a balloon payment due January 1, 2008, and requires monthly principal and interest payments. An extraordinary loss on early extinguishment of debt of approximately $32,000 on Richardson Highlands and $19,000 on Rivercrest Village was realized during the fourth quarter of 1997 due to prepayment penalties. In conjunction with the refinancing, a Repair Escrow of approximately $145,000 for Richardson Highlands and $190,000 for Rivercrest Village was established and loan costs of approximately $412,000 for Richardson Highlands and $299,000 for Rivercrest Village were incurred. Scheduled principal payments of mortgage notes payable subsequent to December 31, 1997, are as follows (dollar amount in thousands): 1998 $ 394 1999 450 2000 5,973 2001 526 2002 568 Thereafter 38,019 $45,930 NOTE D - INCOME TAXES (dollar amounts in thousands, except unit data) The Partnership has received a ruling from the Internal Revenue Service that it will be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the consolidated financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners. The following is a reconciliation of reported net income (loss) and Federal taxable income (loss): 1997 1996 Net income (loss) as reported $ 1,102 $ (2,118) Add (deduct) Sale of property 86 -- Debt forgiveness 524 -- Depreciation differences 44 (467) Interest on advances from affiliates -- (258) Deferred expense (234) (382) Other 490 (190) Federal taxable (loss) income $ 2,102 $ (3,415) Federal taxable (loss) income per limited partnership unit $ 122.45 $(207.83) The following is a reconciliation between the partnership's reported amounts and Federal tax basis of net assets and liabilities as of December 31, 1997: Net deficit as reported $(17,948) Land and buildings 6,336 Accumulated depreciation (10,281) Syndication 6,832 Debt forgiveness 524 Accrued liabilities (234) Other 79 Net deficit - Federal tax basis $(14,692) NOTE E - NOTE RECEIVABLE During 1990, Serramonte Plaza advanced $305,000 for tenant improvements to one of its tenants as provided for in the related lease documents. The note bears interest at 12% per annum and is to be repaid over the remaining term of the lease through monthly additional rent payments of approximately $5,000 from October 1990 through May 1999. The outstanding balance of the note receivable was $75,000 at December 31, 1997, and is included in receivables and deposits. NOTE F - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES The Partnership has no employees and is dependent on the General Partner or its affiliates for the management and administration of all partnership activities. The General Partner or its affiliates may be reimbursed for direct expenses relating to the Partnership's administration and other costs charged on behalf of the Partnership. Effective January 2, 1998, the current General Partner was replaced by MAERIL, Inc., an affiliate of Insignia Financial Group, Inc. ("Insignia"). The Partnership has engaged affiliates of Insignia to provide day-to-day management of the Partnership's properties. These affiliates received approximately $390,000 and $385,000 of such fees during 1997 and 1996, respectively. An affiliate of Insignia also provided partnership administration and management services for the Partnership in 1997 and 1996. Reimbursements for direct expenses relating to these services totaled approximately $793,000 (including approximately $506,000 relating to the refinancing of all of the properties, approximately $143,000 relating to the sale of property (see Note H), and $4,000 of construction service fees) for 1997 and $153,000 for 1996. Approximately $82,000 of accrued expense reimbursements which had been accruing since 1994 were paid in 1997. Also, on December 31, 1997 an affiliate of Insignia acquired all rights in the Partnership's Subordinated Notes for $250,000. NOTE G - OPERATING LEASES (dollar amounts in thousands) The Partnership receives rental income from commercial leases under operating leases with various terms. Minimum future rentals under operating leases with terms of one year or more for the Partnership as of December 31, 1997, are as follows: 1998 $2,243 1999 1,764 2000 1,495 2001 1,268 2002 957 Thereafter 1,796 $9,523 NOTE H - SALE OF PROPERTY On April 10, 1997, the Partnership sold three buildings and two parcels of land associated with Serramonte Plaza located in Daly City, California, to an unaffiliated party, Daly City Partners, LLC, a California limited liability company. The property was sold in an effort to maximize the Partnership's return on its investment. The sales price for the three buildings and two parcels of land was approximately $4,778,000 and was determined primarily by reference to appraised values. The sale resulted in net proceeds of approximately $4,360,000, after payment of closing costs, and the gain on the sale amounted to approximately $2,042,000. The proceeds from the sale were used to reduce the mortgage debt secured by Serramonte Plaza. NOTE I- INVESTMENT PROPERTIES AND ACCUMULATED DEPRECIATION (dollar amounts in thousands) Initial Cost To Partnership Buildings, Leasehold Cost interests Capitalized and Related (Written down) Encumbrances Land Personal Subsequent Rivercrest Village Sacramento, CA $15,220 $ 1,230 $15,171 $ 1,687 Richardson Highlands Marin County, CA 18,767 5,196 10,455 1,368 Serramonte Plaza Daly City, CA 11,943 4,272 20,278 (12,085) Totals $45,930 $10,698 $45,904 $ (9,030)
Gross Amount At Which Carried At December 31, 1997 Buildings And Related Personal Description Land Property Total Depreciation Construction Acquired Rivercrest Village $1,231 $16,857 $18,088 $10,882 1975 10/85 Richardson 5,200 11,819 17,019 7,590 1979 10/85 Serramonte Plaza 1,971 10,494 12,465 5,690 1971-1981 10/85 Totals $8,402 $39,170 $47,572 $24,162
The depreciable lives for the buildings and components are 5 to 25 years. The depreciable lives for related personal property are 5 to 7 years. Reconciliation of "Investment Properties and Accumulated Depreciation": Year Ended Year Ended December 31, December 31, 1997 1996 Investment Properties Balance at beginning of year $51,125 $50,932 Property improvements 652 193 Disposition of Property (4,205) -- Balance at End of Year $47,572 $51,125 Accumulated Depreciation Balance at beginning of year $24,213 $22,306 Additions charged to expense 1,844 1,907 Disposition of property (1,895) -- Balance at End of Year $24,162 $24,213 The aggregate cost of the real estate for Federal income tax purposes at December 31, 1997 and 1996, is $53,908,000 and $58,797,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 1997 and 1996, is $34,443,000 and $35,960,000, respectively. NOTE J - HUD CONTINGENCIES The Office of the Inspector General (OIG) for the Department of Housing and Urban Development (HUD) has completed an audit of the books and records of VMS Realty Management, Inc. relative to seven HUD projects which VMS Realty Management, Inc. managed from 1987 to 1991, the years which were the subject of the OIG audit. The OIG concluded that VMS Realty Management, Inc. did not comply with the terms and conditions for the HUD Regulatory Agreements and applicable HUD regulations and instructions relating to the financial and general management practices for six of the seven HUD projects reviewed. The Partnership, VMS Realty Management, Inc. and HUD entered into a Settlement Agreement dated December 9, 1996, related to the appropriateness of certain Richardson Highlands and Rivercrest Village disbursements totaling approximately $2,168,000 and $1,608,000, respectively, made during the years 1987 through 1991. The Settlement Agreement provided an aggregate payment of $550,000 to the Federal government, $391,000 of which was paid from available funds of Richardson Highlands and the remainder of the settlement payment of $159,000 was paid by entities other than the Partnership and its subpartnerships. NOTE K- LEGAL PROCEEDINGS The Registrant is unaware of any pending or outstanding litigation that is not of a routine nature. The General Partner of the Registrant believes that all such pending or outstanding litigation will be resolved without a material adverse effect upon the business, financial condition, or operations of the Partnership. NOTE L - SUBSEQUENT EVENTS On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The General Partner of the Partnership at December 31, 1997, was VMS Realty Investment II, an Illinois General Partnership. VMS Realty Partners ("VMS"), an affiliate of the General Partner, assisted the General Partner in the management and control of the Venture's affairs through November 17, 1993, and Strategic Realty Advisors, Inc. ("SRA"), also an affiliate of the General Partner, replaced VMS in assisting the General Partner effective November 18, 1993. VMS Realty Partners is an Illinois general partnership whose partners are Van Kampen/Morris/Stone, Inc. (100% owned by Robert D. Van Kampen, Peter R. Morris and Joel A. Stone), Residential Equities, Ltd. (100% owned by Mr. Morris), XCC Investment Corporation (a subsidiary of Xerox Credit Corporation) and Brewster Realty, Inc. (100% owned by Messrs. Van Kampen and Stone). A substantial number of the officers of VMS are also officers of entities affiliated with VMS. The principal executive officers of VMS are the following: Joel A. Stone ............. President and Chief Executive Officer and Member of the Executive Committee Peter R. Morris ........... Member of the Executive Committee Robert D. Van Kampen ...... Member of the Executive Committee Stuart Ross ............... Member of the Executive Committee The principal executive officers of SRA are the following: Joel A. Stone ............. President and Chief Executive Officer Richard A. Berman ........... Senior Vice President/Secretary Thomas A. Gatti ............. Senior Vice President JOEL A. STONE, age 53, is President and Chief Executive Officer of Strategic Realty Advisors, Inc., since November 1993. From the inception in 1981 of VMS Realty Partners, he held the positions of President and then Chief Executive Officer. Mr. Stone began his career as an Internal Revenue Agent and worked as a certified public accountant and an attorney specializing in taxation and real estate law. In 1972, Mr. Stone co-founded the certified public accounting firm formerly known as Moss, Stone and Gurdak. In 1979, Mr. Stone joined the Van Kampen group of companies, a privately held business engaged in investment banking and in real estate activities. He served as Senior Vice President of Van Kampen Merritt, Inc. until its sale to Xerox Corporation in 1984. An alumnus of DePaul University, Mr. Stone earned a Bachelor of Science degree in Accounting in 1966 and a Juris Doctorate in 1970. Mr. Stone is a member of the Illinois Bar and a certified public accountant. PETER R. MORRIS, age 48, is a member of the Executive Committee of VMS, and is one of the three individuals owning the entities that own VMS. From July 1970 to June 1973, Mr. Morris was employed by Continental Wingate Company, Inc., a firm engaged in the development of inner city housing projects, in the capacities of Vice President/Finance, Director/Consulting Division and Executive Assistant to the President. He has published a book and numerous articles relating to real estate development and syndication. Mr. Morris has been involved in the real estate and finance business with Messrs. Van Kampen and Stone since 1977. He received a Bachelor of Arts degree (summa cum laude) from Princeton University in 1971 and a Juris Doctorate (cum laude) from Harvard Law School in 1975. ROBERT D. VAN KAMPEN, age 59, is a member of the Executive Committee of VMS and is one of the three individuals owning the entities that own VMS. Mr. Van Kampen has been involved in various facets of the municipal and corporate bond business for over 20 years. In 1967, he co-founded the company now known as Van Kampen Merritt, Inc., which specializes in municipal bonds and acts as a sponsor of unit investment trusts. The firm was sold to Xerox Corporation in January 1984. Mr. Van Kampen is a general partner of Van Kampen Enterprises. Mr. Van Kampen received his Bachelor of Science degree from Wheaton College in 1960. STUART ROSS, age 61, is a member of the Executive Committee of VMS. He is an executive vice president of Xerox Corporation and chairman and chief executive officer of Xerox Financial Services, Inc., a wholly owned subsidiary. Mr. Ross joined Xerox in 1966 and has held a series of financial management positions. He assumed his current position in May 1990. Prior to Xerox, Mr. Ross was a financial representative for The Macmillan Publishing Company from 1963 to 1966, and a public accountant for Harris, Kerr, Forster & Company from 1958 to 1963. Mr. Ross is a director of Crum and Forster, Inc. and Ekco Group, Inc., and a trustee of the State University of New York at Purchase. He received a bachelor of science degree in accounting from New York University in 1958 and a master of business administrative degree from the City College of New York in 1966. Mr. Ross is a certified public accountant. RICHARD A. BERMAN, age 46, is a Senior Vice President and General Counsel of Strategic Realty Advisors, Inc. From 1986 through 1993, Mr. Berman was employed by VMS Realty Partners and was First Vice President and Corporate Counsel. Prior to joining VMS Realty Partners, Mr. Berman was a partner in the law firm of Gottlieb and Schwartz with his practice concentrated in corporate and real estate law. He received a Juris Doctorate from Northwestern University School of Law (Cum laude, 1976) and a Bachelor of Arts degree from the University of Illinois (high honors, 1973). Mr. Berman is a member of the Illinois Bar. THOMAS A. GATTI, age 41, is Senior Vice President - Partnership Accounting of Strategic Realty Advisors, Inc., effective November 18, 1993. Prior to this time, Mr. Gatti was First Vice President - Partnership Accounting with VMS Realty Partners, where he was employed since January, 1982. Prior to joining VMS Realty Partners, he was with Coopers & Lybrand. Mr. Gatti received a Bachelor of Science in Accounting from DePaul University in 1978. Mr. Gatti is a Certified Public Accountant. ITEM 10. EXECUTIVE COMPENSATION None of the directors and officers of the General Partner received any remuneration from the Partnership. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) No person owns of record or is known by the Registrant to own beneficially more than 5% of the outstanding Limited Partnership Units of the Partnership as of December 31, 1997 and as of the date of this filing. (b) No officers of the General Partner or its affiliates own any Limited Partnership Units in the Partnership. No officer of the General Partner or its affiliates possesses a right to acquire a beneficial ownership of Limited Partnership Units of the Partnership. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Neither the General Partner nor its affiliates are prohibited from providing services to, and otherwise dealing or doing business with, persons who deal with the Partnership. However, no rebates or "concessions" may be received by the General Partner or any such affiliates of the General Partner, nor may the General Partner or any such affiliates participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the Restated Limited Partnership Agreement. The Partnership may borrow or enter into other transactions with an affiliate; provided, however, that such borrowings and other transactions will be conducted by the General Partner on terms which are not less favorable to the Partnership than those available from others. See Section Q of the Restated Limited Partnership Agreement on pages A-16 to A-20 of the Prospectus which is incorporated by reference. Upon the sale or refinancing of a real estate investment purchased by the Partnership, provided that the Limited Partners have first recovered their adjusted capital contributions together with their preferred cumulative return, and that the General Partner or its affiliates have rendered such services, the General Partner will receive real estate brokerage commissions in an amount equal to the lesser of: (a) 3% of the sales or refinancing proceeds of the property or (b) 1/2 of the competitive real estate commission. Such real estate brokerage commissions will be paid directly by the Partnership except that the General Partner may receive such real estate brokerage commissions from the buyers of properties from the Partnership. In no event, however, will the aggregate real estate brokerage commissions paid to the General Partner from all sources in connection with the sale or refinancing of properties by the Partnership exceed 3% of the sales or refinancing proceeds of the properties sold or refinanced. In the event an unaffiliated real estate broker assists in any such sale or refinancing the total of all fees paid to all parties for such services shall not exceed 6% of the purchase price (or refinancing proceeds) of the property. Real estate brokerage commissions paid to the General Partner by buyers of properties from the Partnership are taken into account by buyers in determining the purchase price of properties so that, in effect, the Partnership, as seller, bears such commissions as a reduction in the sales prices of properties. The Partnership has no employees and is dependent on the General Partner or its affiliates for the management and administration of all partnership activities. The General Partner or its affiliates may be reimbursed for direct expenses relating to the Partnership's administration and other costs charged on behalf of the Partnership. Effective January 2, 1998, the current General Partner was replaced by MAERIL, Inc., an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged into Insignia Properties Trust ("IPT") which is an affiliate of Insignia. Thus, the General Partner is now a wholly-owned subsidiary of IPT. On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in Insignia Properties Trust, with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in the third quarter of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control the General Partner of the Partnership. The Partnership has engaged affiliates of Insignia to provide day-to-day management of the Partnership's properties. These affiliates received approximately $390,000 and $385,000 of such fees during 1997 and 1996, respectively. An affiliate of Insignia also provided partnership administration and management services for the Partnership in 1997 and 1996. Reimbursements for direct expenses relating to these services totaled approximately $793,000 (including approximately $506,000 relating to the refinancing of all of the properties, approximately $143,000 relating to the sale of property, and $4,000 of construction service fees) for 1997 and $153,000 for 1996. Approximately $82,000 of accrued expense reimbursements which had been accruing since 1994 were paid in 1997. Also, on December 31, 1997 an affiliate of Insignia acquired all rights in the Partnership's Subordinated Notes for $250,000. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. (b) Reports on Form 8-K filed during the fourth quarter of 1997: None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INVESTORS FIRST-STAGED EQUITY L.P. (Registrant) By: VMS Realty Investment II, its General Partner By: JAS Realty Corporation Date: April 2, 1998 By: /s/Joel A. Stone Joel A. Stone, President Date: April 2, 1998 By: /s/Thomas A. Gatti Thomas A. Gatti, Senior Vice President and Principal Accounting Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the date indicated. /s/Joel A. Stone President Joel A. Stone /s/Thomas A. Gatti Senior Vice President and Thomas A. Gatti Principal Accounting Officer EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 3 The Partnership Agreement is incorporated by reference to the Form 10-K dated December 31, 1987 (file number 0- 14470). 10A Assignment and Assumption Agreement dated May 23, 1994 between the Federal Deposit Insurance Corporation, VMS Apartment Portfolio Associates I, VMS Apartment Portfolio Associates, Ltd., and Investors First-Staged Equity L.P. related to East Bluff Apartments is incorporated by reference to the Form 10-QSB dated June 30, 1994. 10B Contracts related to debt restructure: a) Restated note dated July 1, 1993 between VMS Apartment Portfolio Associates Ltd. and the Federal Deposit Insurance Corporation related to Rivercrest Village is incorporated by reference to the Form 10-QSB dated June 30, 1994. b) Modification of Security Agreement between Investors First-Staged Equity, L.P., VMS Apartment Portfolio Associates, Ltd., and the Federal Deposit Insurance Corporation dated July 1, 1993 related to Rivercrest Village is incorporated by reference to the Form 10-QSB dated June 30, 1994. 10C Contracts related to debt restructure: a) Restated note dated July 1, 1993 between VMS Apartment Portfolio Associates Ltd. and the Federal Deposit Insurance Corporation related to Richardson Highlands is incorporated by reference to the Form 10-QSB dated June 30, 1994. b) Modification of Security Agreement between Investors First-Staged Equity, L.P., VMS Apartment Portfolio Associates, Ltd., and the Federal Deposit Insurance Corporation dated July 1, 1993 related to Richardson Highlands is incorporated by reference to the Form 10- QSB dated June 30, 1994. 10D Contracts related to sale of buildings and land at Serramonte Plaza: a) CONTRACT OF SALE executed August 28, 1996, made and entered into by and between Serramonte Plaza, a California limited partnership, and Daly City Partners, LLC, a California limited liability company. b) FIRST AMENDMENT TO CONTRACT OF SALE entered into effective as of September 27, 1996, by and between Serramonte Plaza, a California limited partnership, and Daly City Partners, LLC, a California limited liability company. c) SECOND AMENDMENT TO CONTRACT OF SALE entered into effective as of October 7, 1996, by and between Serramonte Plaza, a California limited partnership, and Daly City Partners, LLC, a California limited liability company. d) THIRD AMENDMENT TO CONTRACT OF SALE entered into effective as of October 14, 1996, by and between Serramonte Plaza, a California limited partnership, and Daly City Partners, LLC, a California limited liability company. e) FOURTH AMENDMENT TO CONTRACT OF SALE entered into effective as of November 1996, by and between Serramonte Plaza, a California limited partnership, and Daly City Partners, LLC, a California limited liability company. f) FIFTH AMENDMENT TO CONTRACT OF SALE entered into effective as of January 1997, by and between Serramonte Plaza, a California limited partnership, and Daly City Partners, LLC, a California limited liability company. g) SIXTH AMENDMENT TO CONTRACT OF SALE entered into effective as of March 20, 1997, by and between Serramonte Plaza, a California limited partnership, and Daly City Partners, LLC, a California limited liability company. h) ASSIGNMENT AND ASSUMPTION OF LEASES. i) BLANKET CONVEYANCE, BILL OF SALE AND ASSIGNMENT. 10E Contracts related to debt refinancing of Rivercrest Apartments: a) Promissory note dated December 31, 1997 between VMS Apartment Portfolio Associates III and Lehman Brothers Holdings, Inc. b) Deed of Trust, Security Agreement, Fixture Filing and Assignment of Leases and Rents by VMS Apartment Portfolio Associates III to Commonwealth Land Title Insurance Company for the benefit of Lehman Brothers Holdings, Inc. dated December 31, 1997. c) Absolute Assignment of Leases and Rents by VMS Apartment Portfolio Associates III to Lehman Brothers Holdings, Inc. dated December 31, 1997. 10F Contracts related to debt refinancing of Richardson Highlands Apartments. a) Promissory note dated December 31, 1997 between VMS Apartment Portfolio Associates II and Lehman Brothers Holdings, Inc. b) Deed of Trust, Security Agreement, Fixture Filing and Assignment of Leases and Rents by VMS Apartment Portfolio Associates II to Commonwealth Land Title Insurance Company for the benefit of Lehman Brothers Holdings, Inc. dated December 31, 1997. c) Absolute Assignment of Leases and Rents by VMS Apartment Portfolio Associates II to Lehman Brothers Holdings, Inc. dated December 31, 1997. 27 Financial Data Schedule EX-27 2
5 This schedule contains summary financial information extracted from Investors First-Staged Equity, L.P. 1997 Year-End 10-KSB and is qualified in its entirety by reference to such 10-KSB filing. 0000768834 INVESTORS FIRST-STAGED EQUITY, L.P. 1,000 12-MOS DEC-31-1997 DEC-31-1997 2,640 0 0 0 0 0 47,572 (24,162) 29,029 0 45,930 0 0 0 (17,948) 29,029 0 9,835 0 0 9,221 0 3,884 0 0 0 0 0 0 1,102 67.07 0 Registrant has an unclassified balance sheet. Multiplier is 1.
EX-10.EA 3 PROMISSORY NOTE $11,600,000 New York, New York As of December 31, 1997 FOR VALUE RECEIVED VMS APARTMENT PORTFOLIO ASSOCIATES III, a California general partnership, having an address at c/o Insignia Financial Group, Inc., One Insignia Financial Plaza, Greenville, South Carolina 29601 (hereinafter referred to as "Borrower"), promises to pay to the order of LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, having an address at Three World Financial Center, 200 Vesey Street, New York, New York 10285 (hereinafter referred to as "Lender"), or at such other place as the holder hereof may from time to time designate in writing, the principal sum of ELEVEN MILLION SIX HUNDRED THOUSAND AND 00/100 Dollars ($11,600,000), in lawful money of the United States of America with interest thereon to be computed from the date of this Note at the Applicable Interest Rate (hereinafter defined), and to be paid as hereinafter provided. A. PAYMENT TERMS Borrower shall pay to Lender: (i) a payment of interest only on the date hereof; (ii) a constant payment of $79,904.97 (the "Monthly Payment") on February 1, 1998 and on the first day of each calendar month (the "Monthly Payment Date") thereafter to and including the first day of December, 2007; and (iii) the balance of the principal sum then outstanding and all interest thereon shall be due and payable on the first day of January, 2008 (the "Maturity Date"). Each of such payments shall be applied as follows: (i) First to the payment of interest computed at the Applicable Interest Rate; and (ii) The balance applied toward the reduction of the principal sum. B. INTEREST The term "Applicable Interest Rate" as used in this Note shall mean 7.348% per annum. Interest on the principal sum of this Note shall be calculated by multiplying the actual number of days elapsed in the period for which interest is being calculated by a daily rate based on a 360-day year. C. DEFAULT AND ACCELERATION The whole of the principal sum of this Note, together with all interest accrued and unpaid thereon and all other sums due under the Security Instrument (hereinafter defined) and this Note (all such sums hereinafter collectively referred to as the "Debt") shall without notice become immediately due and payable at the option of Lender if any payment required in this Note is not paid within ten (10) days after written notice from the Lender notifying Borrower that the same is due or on the happening of any other default, after the expiration of any applicable notice and grace periods, herein or under the terms of the Security Instrument (hereinafter collectively an "Event of Default"). All of the terms, covenants and conditions contained in the Security Instrument and the Other Security Documents (hereinafter defined) are hereby made part of this Note to the same extent and with the same force as if they were fully set forth herein. In the event that it should become necessary to employ counsel to collect the Debt or to protect, sell or foreclose the security hereof, Borrower also agrees to pay reasonable attorney's fees for the services of such counsel whether or not suit be brought. D. PREPAYMENT Borrower shall not have the right or privilege to prepay all or any portion of the unpaid principal balance of this Note until December 31, 2001. Beginning January 1, 2002, provided no Event of Default exists, the principal balance of this Note may be prepaid, in whole but not in part, upon: (i) not less than 30 days and not more than 45 days prior written notice (the "Prepayment Notice") to Lender specifying the scheduled payment date on which prepayment is to be made (the "Prepayment Date"); (ii) payment of all accrued and unpaid interest on the outstanding principal balance of this Note to and including the Prepayment Date together with a payment of all interest which would have accrued on the principal balance of this Note to and including the first day of the calendar month immediately following the Prepayment Date, if such prepayment occurs on a date which is not the first day of a calendar month (the "Shortfall Interest Payment"); (iii) payment of all other sums then due under this Note, the Security Instrument and the Other Security Documents and (iv) if the Prepayment Date occurs prior to the date which is six months prior to the Maturity Date payment of a prepayment consideration (the "Prepayment Consideration") in an amount equal to the greater of: (A) one (1%) percent of the principal amount of this Note being prepaid; and (B) the present value of a series of payments each equal to the Payment Differential (hereinafter defined) and payable on each monthly payment date over the remaining original term of this Note and on the Maturity Date discounted at the Reinvestment Yield (hereinafter defined) for the number of months remaining from the Prepayment Date to each such monthly payment date and the Maturity Date. The term "Reinvestment Yield" as used herein shall be equal to the lesser of (a) the yield on the U.S. Treasury issue (primary issue) with a maturity date closest to the Maturity Date, or (b) the yield on the U.S. Treasury issue (primary issue) with a term equal to the remaining average life of the Debt, with each such yield being based on the bid price for such issue as published in The Wall Street Journal on the date that is 14 days prior to the Prepayment Date set forth in the Prepayment Notice (or, if such bid price is not published on that date, the next preceding date on which such bid price is so published) and converted to a monthly compounded nominal yield. The term "Payment Differential" as used herein shall be equal to (x) the Applicable Interest Rate minus the Reinvestment Yield, divided by (y) 12 and multiplied by (z) the principal sum outstanding on such Prepayment Date after application of the Constant Monthly Payment (if any) due on such Prepayment Date, provided that the Payment Differential shall in no event be less than zero. In no event, however, shall Lender be required to reinvest any prepayment proceeds in U.S. Treasury obligations or otherwise. Lender shall notify Borrower of the amount, and the basis of determination, of the required Prepayment Consideration. If a Prepayment Notice is given by Borrower to Lender pursuant to this Article D, the principal balance of this Note and the other sums required under this Article D shall be due and payable on the Prepayment Date. Lender shall not be obligated to accept any prepayment of the principal balance of this Note unless it is accompanied by all sums due in connection therewith. Notwithstanding anything contained herein to the contrary, provided no Event of Default exists, no Prepayment Consideration shall be due in connection with a complete or partial prepayment resulting from the application of insurance proceeds or condemnation awards pursuant to paragraphs 3 and 6 of the Security Instrument. In the event of any permitted partial prepayment of the principal balance of this Note, the amount of principal prepaid (but not including any Prepayment Consideration or interest) shall be applied to the principal last due under this Note and shall not release Borrower from the obligation to pay the Constant Monthly Payments next becoming due under this Note and the Constant Monthly Payment shall not be adjusted or recalculated as a result of such partial prepayment. If a Default Prepayment (defined herein) occurs prior to the date which is six months prior to the Maturity Date, Borrower shall pay to Lender the entire Debt, including, without limitation, the Prepayment Consideration. For purposes of this Note, the term "Default Prepayment" shall mean a prepayment of the principal amount of this Note made during the continuance of any Event of Default or after an acceleration of the Maturity Date under any circumstances, including, without limitation, a prepayment occurring in connection with reinstatement of the Security Instrument provided by statute under foreclosure proceedings or exercise of a power of sale, any statutory right of redemption exercised by Borrower or any other party having a statutory right to redeem or prevent foreclosure, any sale in foreclosure or under exercise of a power of sale or otherwise. Notwithstanding any provision of this Article D to the contrary, Lender may require Borrower, in lieu of a prepayment as contemplated in the first paragraph of this Article D, to deliver to Lender the Defeasance Collateral (hereinafter defined) in the manner contemplated herein. After Lender's receipt of the Prepayment Notice, Lender shall, if it so elects, advise Borrower that, in lieu of a prepayment, the Defeasance Collateral shall be required, in which event Borrower shall be entitled to a release of the Property (hereinafter defined) from the lien of the Security Instrument and the Other Security Documents upon satisfaction of the following: I. Lender shall have received written confirmation from the rating agencies that have rated the REMIC "real estate mortgage investment conduit" (defined in Section 860D of the Internal Revenue Code of 1986, as amended from time to time or any successor statute (the "Code")) ("REMIC") related to the Securities (as defined in the Security Instrument) that such substitution of Defeasance Collateral will not result in a downgrade, withdrawal or qualification of the ratings then assigned to any of the Securities; provided, however, that in the event that Lender or its agent is unable to obtain such confirmation, the Lender or its agent shall so advise Borrower and Borrower will then be subject to the other provisions of this Article D set forth above; II. all accrued and unpaid interest and all other sums due under this Note, the Security Instrument and other Security Documents up to the date of the delivery of the Defeasance Collateral (the "Release Date"), including, without limitation, all costs and expenses incurred by Lender or its agents in connection with such release (including, without limitation, the review of the proposed Defeasance Collateral and the preparation of the Defeasance Security Agreement (as hereinafter defined) and the related documentation), shall be fully paid on or before the Release Date; and III. Borrower shall have delivered to Lender on or before the Release Date: (a) a pledge and security agreement, in form and substance satisfactory to Lender in its sole discretion, creating a first priority security interest in favor of Lender in the Defeasance Collateral (the "Defeasance Security Agreement"), which shall provide, among other things, that any excess received by Lender from the Defeasance Collateral over the amount payable by Borrower hereunder shall be refunded to Borrower promptly following each Monthly Payment Date and the Maturity Date; (b) direct, non-callable obligations of the United States of America (the "US Obligations") that provide for payments prior, but as close as possible, to all successive Monthly Payment Dates occurring after the Release Date and the Maturity Date, with each such payment being equal to or greater than the amount of the corresponding Constant Monthly Payment required to be paid under this Note for the balance of the term hereof and the amount required to be paid on the Maturity Date (the "Defeasance Collateral"), each of which shall be duly endorsed by the holder thereof as directed by Lender or accompanied by a written instrument of transfer in form and substance wholly satisfactory to Lender (including, without limitation, such instrument as may be required by the depository institution holding such securities or the issuer thereof, as the case may be, to effectuate book-entry transfers and pledges through the book-entry facilities of such institution) in order to perfect upon the delivery of the Defeasance Security Agreement the first priority security interest therein in favor of the Lender in conformity with all applicable state and federal laws governing the granting of such security interests; Borrower shall authorize and direct that the payments received from the U.S. Obligations shall be made directly to Lender or Lender's designee and applied to satisfy the Obligations of Borrower under this Note; (c) evidence reasonably satisfactory to Lender that title to the Release Property has been transferred to an entity other than Borrower. (d) Lender shall have received an opinion of Borrower's counsel, dated as of the Release Date, in form reasonably satisfactory to Lender stating, among other things, that (A) the Defeasance Collateral and the U.S. Obligations have been duly and validly assigned and delivered to Lender and Lender has a valid, perfected, first priority lien and security interest in the Defeasance Collateral delivered by Borrower, (B) the Defeasance Collateral has been validly assigned to the REMIC, (C) the Defeasance has been effected in accordance with the requirements of Treasury Regulation 1.860(g)-2(a)(8) (as such regulation may be amended or substituted from time to time) and will not be treated as an exchange pursuant to Section 1001 of the Code and (D) the tax qualification and status of the REMIC will not be adversely affected or impaired as a result of the Defeasance. (e) a certificate by Borrower's independent public accountant certifying that all of the requirements set forth in Clause I and II above and this Clause III have been fully satisfied; and (f) such other certificates, documents or instruments as Lender may reasonably require. Notwithstanding the foregoing, no such Release shall be made, given or be deemed effective under this Article D until the first day after expiration of the period during which the delivery to Lender of the Defeasance Collateral in connection therewith is subject to avoidance and recovery as a preferential transfer under 11 U.S.C. Section 547 in the event of a bankruptcy of the delivering person or entity without such avoidance and recovery (which day shall be identified in writing by Borrower at any time that Borrower delivers the Defeasance Collateral to Lender), unless Lender receives, at the time of such delivery, an opinion of counsel to the effect that such delivery of the Defeasance Collateral would not be avoided and recovered as a preferential transfer under 11 U.S.C. Section547 in the event of the filing of a bankruptcy petition in respect of the conveying or delivering person or entity. Upon compliance with the foregoing requirements relating to the delivery of the Defeasance Collateral, the Property shall be released from the lien of the Security Instrument and the Other Security Documents and the Defeasance Collateral shall constitute collateral which shall secure this Note and the Debt. Lender will, at Borrower's expenses, execute and deliver any agreements reasonably requested by Borrower to release the lien of the Security Instrument from the Property. Upon the release by the Lender in accordance with this Article D, Borrower shall have no further right to prepay this Note pursuant to the other provisions of this Article D or otherwise. E. DEFAULT INTEREST Borrower does hereby agree that upon the occurrence of an Event of Default or upon the failure of Borrower to pay the Debt in full on the Maturity Date, Lender shall be entitled to receive and Borrower shall pay interest ("Default Interest") on the entire unpaid principal sum at the rate of (i) the greater of (a) two percent (2%) over the Prime Rate (hereinafter defined), as such Prime Rate shall change from time to time or (b) five percent (5%) over the Applicable Interest Rate then in effect or (ii) the maximum rate of interest which Borrower may by law pay, whichever is lower, to be computed from the occurrence of the Event of Default until the actual receipt and collection of the Debt (the "Default Interest Rate"). This charge shall be added to the Debt, and shall be deemed secured by the Security Instrument. This clause, however, shall not be construed as an agreement or privilege to extend the date of the payment of the Debt, nor as a waiver of any other right or remedy accruing to Lender by reason of the occurrence of any Event of Default. The term "Prime Rate" as used in this Note shall mean the daily "prime rate" published in The Wall Street Journal from the date of the Event of Default, as such "prime rate" shall change from time to time. In the event The Wall Street Journal ceases to publish the "prime rate" then Lender shall select an equivalent publication which publishes such "prime rate"; and in the event such prime rates are no longer generally published or are limited, regulated or administered by a governmental or quasi-governmental body, then Lender shall select a comparable interest rate index. F. SECURITY This Note is secured by the Security Instrument and the Other Security Documents. The term "Security Instrument" as used in this Note shall mean the Deed of Trust and Security Agreement dated as of the date hereof in the principal sum of $11,600,000.00 given by Borrower to Lender encumbering the fee estate of Borrower in certain premises located in Sacramento County, State of California and other property, as more particularly described therein and intended to be duly recorded in said County. The term "Other Security Documents" as used in this Note shall mean all and any of the documents other than this Note or the Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender, which wholly or partially secure or guarantee payment of this Note. Whenever used, the singular number shall include the plural, the plural the singular, and the words "Lender" and "Borrower" shall include their respective successors, assigns, heirs, executors and administrators. G. SAVINGS CLAUSE This Note is subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the principal balance due hereunder at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay. If by the terms of this Note, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of such maximum rate, the Applicable Interest Rate shall be deemed to be immediately reduced to such maximum rate and all previous payments in excess of the maximum rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder. H. LATE CHARGE If any sum payable under this Note is not received by Lender within five (5) days of the date on which it is due, without taking into account or including within said five (5) day period any applicable notice or grace period, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid sum or the maximum amount permitted by applicable law to defray the expenses incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment and such amount shall be secured by the Security Instrument and the Other Security Documents. Nothing contained herein is intended to affect the rights of Lender in and to any Default Interest due to Lender pursuant to the provisions of paragraph E hereof entitled "Default Interest". I. MISCELLANEOUS This Note may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. If Borrower consists of more than one person or party, the obligations and liabilities of each such person or party shall be joint and several. The foregoing sentence, however, is not intended to affect the limited liability of any limited partner or stockholder of Borrower afforded by applicable partnership or corporate law. Borrower and all others who may become liable for the payment of all or any part of the Debt do hereby severally waive presentment and demand for payment, notice of dishonor, protest and notice of protest and non-payment. No release of any security for the Debt or extension of time for payment of this Note or any installment hereof, and no alteration, amendment or waiver of any provision of this Note, the Security Instrument or the Other Security Documents made by agreement between Lender and any other person or party shall release, modify, amend, waive, extend, change, discharge, terminate or affect the liability of Borrower, and any other who may become liable for the payment of all or any part of the Debt, under this Note, the Security Instrument or the Other Security Documents. Borrower (and the undersigned representative of Borrower, if any) represents that Borrower has full power, authority and legal right to execute and deliver this Note, the Security Instrument and the Other Security Documents and that this Note, the Security Instrument and the Other Security Documents constitute valid and binding obligations of Borrower. This Note shall be governed and construed in accordance with the laws of the State of New York and the applicable laws of the United States of America. J. EXCULPATION Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in this Note or the Security Instrument by any action or proceeding wherein a money judgment shall be sought against Borrower or any general or limited partner or member of Borrower (hereinafter collectively referred to as the "Exculpated Parties"), except that Lender may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Lender to enforce and realize upon this Note, the Security Instrument, the Other Security Documents, and the interest in the Property, the Rents (as defined in the Security Instrument) and any other collateral given to Lender created by this Note, the Security Instrument and the Other Security Documents; provided, however, that any judgment in any such action or proceeding shall be enforceable against the Exculpated Parties only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender. Lender, by accepting this Note and the Security Instrument, agrees that it shall not sue for, seek or demand any deficiency judgment against the Exculpated Parties in any such action or proceeding, under or by reason of or under or in connection with the Security Instrument, the Other Security Documents or this Note. The provisions of this paragraph shall not, however, (i) constitute a waiver, release or impairment of any obligation evidenced or secured by the Security Instrument, the Other Security Documents or this Note; (ii) impair the right of Lender to name Borrower as a party defendant in any action or suit for judicial foreclosure and sale under the Security Instrument; (iii) affect the validity or enforceability of any guaranty made in connection with the Security Instrument, this Note, or the Other Security Documents; (iv) impair the right of Lender to obtain the appointment of a receiver upon the occurrence and continuance of an Event of Default; (v) impair the enforcement of the Assignment of Leases and Rents dated the date hereof given by Borrower to Lender executed in connection herewith; (vi) impair the right of Lender to bring suit with respect to fraud or intentional misrepresentation by Borrower, the Exculpated Parties or any other person or entity in connection with the Security Instrument, this Note or the Other Security Documents; (vii) impair the right of Lender to obtain the Rents received by any of the Exculpated Parties after the occurrence and continuance of an Event of Default; (viii) impair the right of Lender to bring suit with respect to the Exculpated Parties' misappropriation of tenant security deposits or Rents collected in advance; (ix) impair the right of Lender to obtain insurance proceeds or condemnation awards due to Lender under the Security Instrument; (x) impair the right of Lender to enforce the provisions of sub- paragraphs 36(g) through 36(k), inclusive and paragraphs 34 and 35 of the Security Instrument against the Borrower (excluding the general and limited partners or members of Borrower); or (xi) impair the right of Lender to recover any part of the Debt from the Borrower (excluding the general and limited partners or members of Borrower) following the breach of any covenant contained in paragraphs 9 or 55 of the Security Instrument. THIS NOTE, AND THE OTHER SECURITY DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN LENDER, BORROWER AND THE OTHER RESPECTIVE PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ARTICLE K: CALIFORNIA PROVISIONS (a) In the event of any inconsistencies between the terms and conditions of this Article K and any other Articles in this Note, the terms and conditions of this Article K shall control and be binding. (b) The following paragraphs are hereby added immediately following the Article D entitled "Prepayment": (c) Article H hereof, entitled "Late Charge", is deleted in its entirety and the following is substituted therefor: Borrower acknowledges that late payment to Lender will cause Lender to incur costs not contemplated herein. Such costs include, without limitation, processing and accounting costs. Therefore, if any payment due under this Note is not received by Lender before the tenth (10th) day after the date on which it is due, Borrower shall pay to Lender as a late charge a sum equal to the lesser of five percent (5%) of the overdue amount or the maximum amount permitted by applicable law to defray such costs. Such amount shall be secured by the Security Instrument and the Other Security Documents. Borrower further acknowledges that this late charge represents a reasonable sum considering all of the circumstances existing on the date hereof and represents a fair and reasonable time of the costs that Lender will incur by reason of late payment. Borrower agrees that proof of actual damages would be costly or inconvenient. Acceptance of any late charge shall not constitute a waiver of the default with respect to the overdue amount and shall not prevent Lender from exercising any of the other rights and remedies available to Lender. IN WITNESS WHEREOF, Borrower has duly executed this Note the day and year first above written. VMS APARTMENT PORTFOLIO ASSOCIATES III, a California general partnership By: GP SERVICES XIX, INC., a South Carolina corporation, its general partner By: /s/ Leigh A. Watters Name: Leigh A. Watters Title: Vice President This instrument prepared by: Mitchell G. Williams, Esq. Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 EX-10.EB 4 RECORD AND RETURN TO: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attention: Carson M. Leonard, Esq. Counsel's File No.: 16248-00328 DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING and ASSIGNMENT OF LEASES AND RENTS VMS APARTMENT PORTFOLIO ASSOCIATES III, a California general partnership (Trustor) to COMMONWEALTH LAND TITLE INSURANCE COMPANY, (Trustee) for the benefit of LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC. a Delaware corporation (Lender) Dated:As of December 31, 1997 Location: Rivercrest Apartments Sacramento, California Sacramento County THIS DEED OF TRUST AND SECURITY AGREEMENT (the "Security Instrument"), is made as of the 31st day of December, 1997, by VMS APARTMENT PORTFOLIO ASSOCIATES III, a California general partnership, having an address c/o Insignia Financial Group, Inc., One Insignia Financial Plaza, Greenville, South Carolina 29601, as grantor ("Borrower"), to Commonwealth Land Title Insurance Company, having an address at 877 Ygnacio Valley Road #100, Walnut Creek, California 94596, as trustee ("Trustee"), for the benefit of LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, having an address at Three World Financial Center, 200 Vesey Street, New York, New York 10285, as beneficiary ("Lender"). W I T N E S E T H : To secure the payment of an indebtedness in the principal sum of ELEVEN MILLION SIX HUNDRED THOUSAND AND 00/100 DOLLARS ($11,600,000.00), lawful money of the United States of America, to be paid with interest according to a certain note dated the date hereof made by Borrower to Lender (the note, together with all extensions, renewals or modifications thereof being hereinafter collectively called the "Note") (said indebtedness, interest and all other sums due hereunder and under the Note being collectively called the "Debt"), Borrower has given, granted, bargained, sold, aliened, enfeoffed, conveyed, confirmed, pledged, assigned, warranted and hypothecated and by these presents does give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, assign, warrant, set over and hypothecate unto Trustee, its successors and assigns, for the benefit of Lender with power of sale and right of entry and possession, and grants a security interest in, the real property described in the Exhibit A attached hereto (the "Premises"); TOGETHER WITH: all right, title, interest and estate of Borrower now owned, or hereafter acquired, in and to the buildings, structures, fixtures, additions, enlargements, extensions, modifications, repairs, replacements and improvements now or hereafter located thereon (the "Improvements") and the following property, rights, interests and estates (the foregoing fee and leasehold estates, as the case may be, in the Premises, the Improvements together with the following property, rights, interests and estates being hereinafter collectively referred to as the "Property"): (a) all easements, rights-of-way, strips and gores of land, streets, ways, alleys, passages, sewer rights, water, water courses, water rights and powers, air rights and development rights, and all estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances of any nature whatsoever, in any way belonging, relating or pertaining to the Premises and/or the Improvements, and the reversion and reversions, remainder and remainders, and all land lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining the Premises, to the center line thereof and all the estates, rights, titles, interests, dower and rights of dower, curtesy and rights of curtesy, property, possession, claim and demand whatsoever, both at law and in equity, of Borrower of, in and to the Premises and/or Improvements, and every part and parcel thereof, with the appurtenances thereto; (b) all machinery, equipment, fixtures (including but not limited to all heating, air conditioning, plumbing, lighting, communications and elevator fixtures) and other property of every kind and nature whatsoever owned by Borrower, or in which Borrower has or shall have an interest, now or hereafter located upon the Premises and the Improvements, or appurtenant thereto, and usable in connection with the present or future management, maintenance operation and occupancy of the Premises and the Improvements and all building equipment, materials and supplies of any nature whatsoever owned by Borrower, or in which Borrower has or shall have an interest, now or hereafter located upon the Premises and the Improvements, or appurtenant thereto, or usable in connection with the present or future management, maintenance operation and occupancy of the Premises and the Improvements (hereinafter collectively called the "Equipment"), and the right, title and interest of Borrower in and to any of the Equipment which may be subject to any security interests, as defined in the Uniform Commercial Code, as adopted and enacted by the state or states where any of the Property is located (the "Uniform Commercial Code"), superior in lien to the lien of this Security Instrument; (c) all awards or payments, including interest thereon, which may heretofore and hereafter be made with respect to the Property, whether from the exercise of the right of eminent domain (including but not limited to any transfer made in lieu of or in anticipation of the exercise of said right), or for a change of grade, or for any other injury to or decrease in the value of the Property; (d) all leases and other agreements affecting the use, enjoyment or occupancy of the Premises and the Improvements heretofore or hereafter entered into (the "Leases") and all right, title and interest of Borrower, its successors and assigns therein and thereunder, including, without limitation, cash or securities deposited thereunder to secure the performance by the lessees of their obligations thereunder and all rents, additional rents, revenues, issues and profits (including all oil and gas or other mineral royalties and bonuses) from the Premises and the Improvements (the "Rents") and all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the Debt; (e) all proceeds of and any unearned premiums on any insurance policies covering the Property, including, without limitation, the right to receive and apply the proceeds of any insurance, judgments, or settlements made in lieu thereof, for damage to the Property; (f) the right, in the name and on behalf of Borrower, to appear in and defend any action or proceeding brought with respect to the Property and to commence any action or proceeding to protect the interest of Lender in the Property; (g) all contract rights, with respect to, or which may in any way pertain to, the Premises or the business of the Borrower, including, without limitation, all refunds, rebates, security deposits, or other expectancy under or from any such account or contract right; (h) all general intangibles with respect to, or which may in any way pertain to, the Premises or the business of the Borrower, including without limitation, any trade names, or other names under or by which the Premises may at any time be operated or known, the good will of the Borrower in connection therewith and the right of the Borrower to carry on business under any or all such name or names and any variant or variants thereof, insofar as the same may be transferable by the Borrower without breach of any agreement pursuant to which the Borrower may have obtained its right to use such name or names, and any and all trademarks, prints, labels, advertising concepts and literature; TO HAVE AND TO HOLD the above granted and described Property unto the Trustee, and the successors and assigns of Trustee, forever; IN TRUST, FOR THE USE, BENEFIT AND BEHOOF OF LENDER, WITH POWER OF SALE, to secure the payment to Lender of the Debt at the time and in the manner provided for its payment in the Note and in this Security Instrument; PROVIDED, HOWEVER, these presents are upon the express condition that, if Borrower shall well and truly pay to Lender the Debt at the time and in the manner provided in the Note and this Security Instrument and shall well and truly abide by and comply with each and every covenant and condition set forth herein and in the Note, these presents and the estate hereby granted shall cease, terminate and be void; AND Borrower represents and warrants to and covenants and agrees with Lender as follows: PROVISIONS OF GENERAL APPLICATION 1. Payment of Debt and Incorporation of Covenants, Conditions and Agreements. Borrower will pay the Debt at the time and in the manner provided in the Note and in this Security Instrument. All the covenants, conditions and agreements contained in (a) the Note and (b) all and any of the documents other than the Note or this Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender, which wholly or partially secure or guaranty payment of the Note including but not limited to the Assignment of Leases and Rents (the "Assignment of Rents") between Borrower, as assignor and Lender, as assignee (collectively, the "Other Security Documents"), are hereby made a part of this Security Instrument to the same extent and with the same force as if fully set forth herein. 2. Warranty of Title. Borrower warrants that Borrower has good title to the Property and has the right to mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, assign and hypothecate and grant a security interest in the same and that Borrower possesses an unencumbered fee estate in the Premises and the Improvements and that it owns the Property free and clear of all liens, encumbrances and charges whatsoever except for those exceptions shown in the title insurance policy insuring the lien of this Security Instrument. Borrower shall forever warrant, defend and preserve such title and the validity and priority of the lien of this Security Instrument and shall forever warrant and defend the same to Lender against the claims of all persons whomsoever. 3. Insurance. (a) Borrower will keep the Property insured against loss or damage by fire, flood and such other hazards, risks and matters, as Lender may from time to time reasonably require, including without limitation, rental value insurance against the abatement in rent or business interruption insurance for at least twelve (12) months and general public liability in an amount not less than $1,000,000.00, including excess liability coverage and umbrella liability insurance. Borrower shall pay the premiums for such insurance (the "Insurance Premiums") as the same become due and payable. All policies of insurance (the "Policies") shall (i) be issued under forms acceptable to Lender (containing the standard New York mortgagee non-contribution clause naming the Lender as the insured mortgagee and the person to which all payments made by the Qualified Insurer (hereinafter defined) shall be paid); (ii) provide for at least thirty (30) days prior written notice to the Lender of any cancellation, reduction in an amount or change in insurance coverage; (iii) contain a replacement cost endorsement for 100% of all replacement costs relating to the Improvements (without deduction for depreciation); (iv) contain an "enforcement" or "Law and Ordinance" endorsement in form and substance satisfactory to Lender; and (v) be issued by insurers qualified under the laws of the State in which the Property is located, duly authorized and licensed to transact insurance business in such State and reflecting a claims-paying ability of A or better as determined by Standard & Poors' Corporation ("S&P"), Duff and Phelps Credit Rating Co. ("Duff"), if rated by Duff, Fitch Investors Service, Inc. ("Fitch"), if rated by Fitch, and a claims paying ability of A2 as determined by Moody's Investors Service, Inc. ("Moody's"), if rated by Moody's (each such insurer hereinafter referred to as a "Qualified Insurer", collectively "Qualified Insurers"). Notwithstanding the foregoing, Travelers/Aetna Casualty and Surety ("Aetna") is an acceptable insurance company to Lender provided that if Aetna has a senior unsecured debt rating of less than A by each of the Rating Agencies (hereinafter defined), then such insurer shall be replaced with a Qualified Insurer or Qualified Insurers within thirty (30) days after written notice by the Lender of the reduction of such rating. Such insurance shall not be invalidated due to the use or occupancy of the Property for purposes more hazardous than are permitted by the policy. The maximum amount deductible permitted under each insurance policy shall be such as is customarily carried by owners or managing agents operating first class multi-family residences of similar type and size of the Property of similar type, size and quality to the Property as applicable. Borrower shall deliver the Policies, or duplicate originals of the same, to Lender. Not later than forty five (45) days prior to the expiration date of each of the Policies, Borrower will deliver evidence satisfactory to Lender of the renewal of each of the Policies. The Borrower shall not insure the Property under any insurance policy other than as expressly set forth herein. (b) If the Property shall be damaged or destroyed, in whole or in part, by fire or other casualty, Borrower shall give prompt notice thereof to Lender. The net amount of all insurance proceeds received by Lender with respect to such damage or destruction, shall be held in a segregated account (the "Net Proceeds Account") and invested in an Eligible Investment (hereinafter defined). Lender shall be entitled to deduct from such insurance proceeds all of its out-of- pocket administrative costs and expenses reasonably incurred in connection with the investing and collection of such insurance proceeds, and the balance if any, (the "Net Proceeds") shall be disbursed by Lender in accordance with the terms and conditions set forth herein to pay for the costs and expenses of the Restoration (hereinafter defined) provided (i) no Event of Default has occurred and remains uncured under this Security Instrument, the Note or any of the Other Security Documents, (ii) Borrower proceeds promptly after the insurance claims are settled with the restoration, replacement, rebuilding or repair of the Property as nearly as possible to the condition the Property was in immediately prior to such fire or other casualty (the "Restoration"), (iii) the Restoration shall be done in compliance with all applicable laws, rules and regulations, and, following the Restoration, the Property shall be permitted under all applicable zoning laws to be used for, and shall continue to be used for, all purposes associated with multi-family residences, (iv) a set of the plans and specifications in connection with the Restoration shall be submitted to Lender and shall be reasonably acceptable to Lender in all respects, (v) all costs and reasonable expenses incurred by Lender in connection with making the Net Proceeds available for the Restoration of the Property including, without limitation, counsel fees and inspecting engineer fees incurred by Lender, shall be paid by Borrower, (vi) rental loss insurance is available to offset fully any abatement of rent to which any tenant of the Property may be entitled or any rent loss arising out of the cancellation of any Lease as a result of the casualty, throughout the Restoration and a reasonable lease-up period following the Restoration, and (vii) in Lender's judgment, the Restoration must be able to be completed within one (1) year after the loss and at least one (1) year prior to the Maturity Date of the Note. The term "Eligible Investment" shall mean any investment approved by Lender in its sole discretion. (c) The Net Proceeds shall be held in trust in the Net Proceeds Account. The Net Proceeds shall be paid by Lender (or by a disbursing agent ("Depository") selected by Lender), to, or as directed by, Borrower from time to time during the course of the Restoration, upon receipt of evidence, and certification from Borrower, satisfactory to Lender, that (i) all materials installed and work and labor performed (except to the extent they are to be paid for out of the requested payment) in connection with the Restoration have been paid for in full, (ii) no notices of intention, mechanics' or other liens or encumbrances on the Property arising out of the Restoration exist, and (iii) the balance of the Net Proceeds plus the balance of any deficiency deposits given by Borrower to Lender or Depository pursuant to the provisions of this paragraph hereinafter set forth shall be sufficient to pay in full the balance of the cost of the Restoration. Borrower shall pay all fees and expenses of the Depository in connection with the above. (d) Notwithstanding anything to the contrary contained herein, if the Net Proceeds shall be less than $50,000.00, only one disbursement shall be required upon the completion of the Restoration to the satisfaction of Lender. If the Net Proceeds shall be $50,000.00 or more, Lender shall disburse the Net Proceeds as provided above, however, in no event shall Lender be required to disburse such Net Proceeds, or any portion thereof, more often then once every thirty (30) days. If at any time the Net Proceeds, or the undisbursed balance thereof, shall not, be sufficient to pay in full the balance of the cost of the Restoration, Borrower shall deposit the deficiency with Lender or Depositary before any further disbursement of the Net Proceeds shall be made. (e) Any amount of the Net Proceeds received by Lender and not required to be disbursed for the Restoration pursuant to the provisions of this paragraph hereinabove set forth shall be retained and applied by Lender toward the payment of the Debt whether or not then due and payable in such priority and proportions as Lender in its discretion shall deem proper. Upon the receipt and retention by Lender of such insurance proceeds, the lien of this Security Instrument shall be reduced only by the amount thereof received and retained by Lender and actually applied by Lender in reduction of the Debt. (f) Notwithstanding anything to the contrary contained herein, Lender shall not be obligated to make the Net Proceeds available for Restoration of the Property unless the principal balance of the Note following the completion of the Restoration (assuming the amount of Net Proceeds received by Lender in excess of the cost of the Restoration (as estimated by Lender) is applied to the prepayment of the Note) will be in an amount sufficient to cause (i) the Debt Service Coverage Ratio (hereinafter defined) applicable to the Property immediately following the Restoration to be not less than 1.20 to 1.0 and (ii) in the event of any Restoration involving Net Proceeds of more than $250,000.00, the ratio of (a) the then outstanding principal balance of the Note to (b) the appraised value of the Property after completion of the Restoration (as determined by an independent third-party appraiser holding an MAI designation and having a national practice and at least ten (10) years real estate experience appraising properties of a similar nature and type as the Property) to be equal to or less than the Minimum Loan to Value Ratio (hereinafter defined). The term "Minimum Loan to Value Ratio" means a ratio, expressed as a percentage, equal to the lesser of (i) 80% or (ii) the ratio of (a) the then outstanding principal balance of the Note to (b) the appraised value of the Property on the date hereof. The fee for such appraisal shall be paid for by Borrower. 4. Payment of Taxes, etc. Borrower shall pay all taxes, assessments, water rates and sewer rents, now or hereafter levied or assessed or imposed against the Property or any part thereof (the "Taxes") and all ground rents, maintenance charges, other governmental impositions, and other charges, including without limitation vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Premises, now or hereafter levied or assessed or imposed against the Property or any part thereof (the "Other Charges") as same become due and payable. Upon written request from Lender, Borrower will deliver to Lender evidence satisfactory to Lender that the Taxes and Other Charges have been so paid or are not then delinquent. Borrower shall not suffer and shall promptly cause to be paid and discharged any lien or charge whatsoever which may be or become a lien or charge against the Property, and shall promptly pay for all utility services provided to the Property. Borrower shall furnish to Lender receipts for the payment of the Taxes, Other Charges and said utility services prior to the date the same shall become delinquent. Notwithstanding the above, after prior written notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any of the Taxes, provided that (i) no Event of Default under the Note or this Security Instrument shall have occurred and be continuing, (ii) Borrower is permitted to do so under the provisions of any mortgage or deed of trust or deed to secure debt superior or junior in lien to this Security Instrument, (iii) such proceeding shall suspend the collection of the Taxes from Borrower and from the Property, (iv) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder, (v) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, canceled or lost, (vi) Borrower shall have set aside adequate reserves for the payment of the Taxes, together with all interest and penalties thereon, and (vii) Borrower shall have furnished such security as may be reasonably required in the proceeding, or as may be requested by Lender to insure the payment of any such Taxes, together with all interest and penalties thereon. 5. Escrow Fund. Upon (i) the occurrence of an Event of Default (hereinafter defined), and for so long as such Event of Default shall be continuing, or (ii) the transfer of the Property to any entity in accordance with the terms of paragraph 9(c) hereof, Borrower shall pay to Lender upon request on the fifteenth day of each calendar month thereafter (a) one-twelfth of an amount which would be sufficient to pay the Taxes payable, or estimated by Lender to be payable, during the next ensuing twelve (12) months and (b) one- twelfth of an amount which would be sufficient to pay the Insurance Premiums due for the renewal of the coverage afforded by the Policies upon the expiration thereof (the amounts set forth in (a) and (b) above hereinafter called the "Escrow Fund"). The Escrow Fund and the payments of interest or principal or both, payable pursuant to the Note shall be added together and shall be paid as an aggregate sum by Borrower to Lender. Borrower hereby pledges to Lender any and all monies now or hereafter deposited in the Escrow Fund as additional security for the payment of the Debt. Lender will apply the Escrow Fund to payments of Taxes and Insurance Premiums required to be made by Borrower pursuant to paragraphs 3 and 4 hereof. If the amount of the Escrow Fund shall exceed the amounts due for Taxes and Insurance Premiums pursuant to paragraphs 3 and 4 hereof, Lender shall credit such excess against future payments to be made to the Escrow Fund. In allocating such excess, Lender may deal with the person shown on the records of Lender to be the owner of the Property. If the Escrow Fund is not sufficient to pay the items set forth in (a) and (b) above, Borrower shall promptly pay to Lender, upon demand, an amount which Lender shall estimate as sufficient to make up the deficiency. Lender may apply any sums then present in the Escrow Fund to the payment of the following items in any order in its uncontrolled discretion: (I) Taxes and Other Charges; (ii) Insurance Premiums; (iii) Interest on the unpaid principal balance of the Note; (iv) Amortization of the unpaid principal balance of the Note; (v) All other sums payable pursuant to the Note, this Security Instrument and the Other Security Documents, including without limitation advances made by Lender pursuant to the terms of this Security Instrument. Until expended or applied as above provided, any amounts in the Escrow Fund shall constitute additional security for the Debt. The Escrow Fund shall not constitute a trust fund and may be commingled with other monies held by Lender. No earnings or interest on the Escrow Fund shall be payable to Borrower, except after repayment in full of the Debt. 6. Condemnation. (a) Borrower shall give Lender prompt notice of the actual or threatened commencement of any condemnation or eminent domain proceeding and shall deliver to Lender copies of any and all papers served in connection with such proceedings. If less than 25% of the land constituting the Property is taken, then the net amount of all awards and payments received by Lender with respect to such taking shall be held in a segregated account (the "Net Awards Account") and invested in an Eligible Investment. Lender shall be entitled to deduct from the condemnation award all of its administrative costs and expenses incurred in connection with investing and collecting such condemnation award and the balance, if any, (hereinafter referred to as the "Net Award"), will be disbursed by Lender to pay for the costs and expenses of the Condemnation Restoration (hereinafter defined), provided (i) Borrower is not in default under this Security Instrument, the Note or any of the Other Security Documents, (ii) Borrower proceeds promptly after the making of any award of payment for such taking with the restoration, replacement, rebuilding or repair of the Property as nearly as possible to the condition the Property was in immediately prior to such taking (the "Condemnation Restoration"), (iii) the Condemnation Restoration shall be done in compliance with all applicable laws, rules and regulations, and, following the Condemnation Restoration, the Property shall be permitted under all applicable zoning laws to be used for, and shall continue to be used for, all purposes associated with multi-family residences, (iv) a set of plans and specifications in connection with the Condemnation Restoration shall be submitted to Lender and shall be satisfactory to Lender in all respects, (v) Borrower shall have reimbursed Lender for all costs and expenses incurred by Lender in connection with making the Net Award available for the Condemnation Restoration of the Property, including, without limitation, counsel fees, inspecting engineer fees and appraisal fees incurred by Lender, (vi) rental loss proceeds are available to offset in full any loss in rents throughout the Condemnation Restoration and a reasonable lease-up period following the completion of the Condemnation Restoration, and (vii) in the opinion of Lender the Condemnation Restoration of the Property can be completed within one (1) year after the taking and at least one (1) year prior to the maturity date of the Note. (b) The Net Award shall be held in trust by Lender in the Net Awards Account and shall be paid by Lender or a Depository designated by Lender to, or as directed by, Borrower from time to time during the course of the Condemnation Restoration, upon receipt of evidence satisfactory to Lender, that (i) all materials installed and work and labor performed (except to the extent they are to be paid for out of the requested payment) in connection with the Condemnation Restoration have been paid for in full, (ii) there exist no notices of intention, mechanics' or other liens or encumbrances on the Property arising out of the Condemnation Restoration, and (iii) the balance of the Net Award plus the balance of any deficiency deposits given by Borrower to Lender or Depositary pursuant to the provisions of this paragraph hereinafter set forth shall be sufficient to pay in full the balance of the cost of the Condemnation Restoration. (c) Notwithstanding anything to the contrary contained herein, Lender shall not be obligated to make the Net Award available for the Condemnation Restoration of the Property unless the principal balance of the Note after the completion of the Condemnation Restoration (assuming the amount of the Net Award received by Lender in excess of the cost of the Condemnation Restoration as estimated by Lender is applied to the prepayment of the Note) will be sufficient to cause (i) the Debt Service Coverage Ratio applicable to the Property immediately following the Condemnation Restoration to be not less than 1.2 to 1.0 and (ii) in the event of any Condemnation Restoration involving Net Award of more than $250,000.00, the ratio of (a) the then outstanding principal balance of the Note to (b) the appraised value of the Property after completion of the Condemnation Restoration (as determined by an independent third-party appraiser holding an MAI designation and having a national practice and at least ten (10) years real estate experience appraising properties of a similar nature and type as the Property) to be equal to or less than the Minimum Loan to Value Ratio. (d) Notwithstanding anything to the contrary contained herein, if the Net Award shall be less than $50,000.00, only one such disbursement shall be required upon the completion of the Condemnation Restoration to the satisfaction of Lender. If the Net Award shall be $50,000.00 or more, Lender shall disburse the Net Award as provided above, however, in no event shall Lender be required to disburse such Net Award, or any portion thereof, more often than once every thirty (30) days. If at any time the Net Award, or the undisbursed balance thereof, shall not, in the opinion of Lender, be sufficient to pay in full the balance of the cost of Condemnation Restoration, Borrower shall deposit such deficiency with Lender or Depository before any further disbursement of the Net Award shall be made. (e) Notwithstanding anything to the contrary contained herein, any taking by any public or quasi public authority through eminent domain or otherwise (including but not limited to any transfer made in lieu of or in anticipation of the exercise of such taking), Borrower shall continue to pay the Debt at the time and in the manner provided for in the Note and in this Security Instrument and the Debt shall not be reduced until any award or payment therefor shall have been actually received and applied in accordance with this paragraph 6. Lender shall not be limited to the interest paid on the award by the condemning authority but shall be entitled to receive out of the award interest at the rate or rates provided herein and in the Note. (f) Any amount of the Net Award received by Lender and not required to be disbursed for the Condemnation Restoration pursuant to the provisions of this paragraph hereinabove set forth may be retained and applied by Lender to the discharge of the Debt, whether or not then due and payable, in such priority and proportions as Lender in its discretion shall deem proper. If the Property is sold through foreclosure or otherwise prior to the receipt by Lender of such award or payment, Lender shall have the right, whether or not a deficiency judgment on the Note shall have been sought, recovered or denied, to receive such award or payment or a portion thereof sufficient to pay the Debt, whichever is less. Borrower shall file and prosecute its claim or claims for any such award or payment in good faith and with due diligence and cause the same to be collected and paid over to Lender, and Borrower hereby irrevocably authorizes and empowers Lender, in the name of Borrower or otherwise, to collect and receipt for any such award or payment and to file and prosecute such claim or claims, and although it is hereby expressly agreed that the same shall not be necessary in any event, Borrower shall upon demand of Lender make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning any such award or payment to Lender, free and clear of any encumbrances of any kind or nature whatsoever. 7. Leases and Rents. (a) Trustee and Lender are hereby granted and assigned by Borrower the right to enter the Property for the purpose of enforcing its interest in the Leases and the Rents, this Security Instrument constituting a present, absolute assignment of the Leases and the Rents. Nevertheless, subject to the terms of this paragraph 7, Lender grants to Borrower a revocable license to operate and manage the Property and to collect the Rents. Borrower shall hold the Rents, or a portion thereof sufficient to discharge all current sums due on the Debt, for use in the payment of such sums. Upon or at any time after an Event of Default, the license granted to Borrower herein may be revoked by Lender, and Lender or Trustee may enter upon the Property, and collect, retain and apply the Rents toward payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. (b) All Leases shall be written on the standard form of lease which has been approved by Lender. Upon written request from Lender, Borrower shall furnish Lender with executed copies of all Leases and all modifications thereto as soon as may be practicable. No material changes may be made to the Lender- approved standard forms except as may be required by applicable law. In addition, all renewals of Leases and all proposed leases shall provide for rental rates comparable to existing local market rates and shall be arms-length transactions. Borrower shall not enter into any lease having a term of more than three (3) years. All Leases shall provide that they are subordinate to this Security Instrument and that the lessee agrees to attorn to Lender. Borrower (i) shall observe and perform all the obligations imposed upon the lessor under the Leases and shall not do or permit to be done anything to impair the value of the Leases as security for the Debt; (ii) shall enforce all of the terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed; (iii) shall not collect any of the Rents more than one (1) month in advance; (iv) shall not execute any other assignment of lessor's interest in the Leases or the Rents; (v) shall not materially alter, modify or change the terms of the Leases, or cancel or terminate the Leases or accept a surrender thereof or convey or transfer or suffer or permit a conveyance or transfer of the Premises or of any interest therein so as to effect a merger of the estates and rights of, or a termination or diminution of the obligations of, lessees thereunder, except that Borrower may terminate any Lease in exercising its rights as landlord thereunder upon a default by the tenant under said Lease; (vi) shall not alter, modify or change the terms of any guaranty of the Leases or cancel or terminate such guaranty; (vii) shall not consent to any assignment of or subletting under the Leases not in accordance with their terms; and (viii) shall execute and deliver all such further assurances, confirmations and assignments in connection with the Property as Lender shall from time to time require. 8. Maintenance of Property. (a) Borrower shall cause the Property to be maintained in a good and safe condition and repair. The Improvements and the Equipment shall not be removed, demolished or materially altered (except for normal replacement of the Equipment). Borrower shall promptly comply with all laws, orders and ordinances affecting the Property, or the use thereof. Borrower shall promptly repair, replace or rebuild any part of the Property which may be destroyed by any casualty, or become damaged, worn or dilapidated or which may be affected by any proceeding of the character referred to in paragraph 6 hereof and shall complete and pay for any structure at any time in the process of construction or repair on the Premises. Borrower shall not initiate, join in, acquiesce in, or consent to any change in any private restrictive covenant, zoning law or other public or private restriction, limiting or otherwise changing the uses which may be made of the Property or any part thereof. If under applicable zoning provisions the use of all or any portion of the Property is or shall become a nonconforming use, Borrower will not cause or permit such nonconforming use to be discontinued or abandoned without the express written consent of Lender. (b) Borrower hereby represents that all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Property and with respect to the use and occupancy of the same, including but not limited to, certificates of occupancy and fire underwriter certificates, have been made by or obtained from the appropriate governmental authorities. Borrower hereby represents, warrants and covenants that it has obtained and will maintain all permits and licenses required to operate the Property as a multi- family residential development. Borrower has and shall continue to comply in all material respects with and make all payments required under all laws, ordinances, regulations, covenants, conditions and restrictions now or hereafter affecting the Property or any part thereof or the business or the activity conducted thereon. Borrower will not commit, suffer, permit or allow any act to be done in or upon the Property in violation of any law, ordinance or regulation. Borrower is in material compliance and shall continue to comply in all material respects with all existing and future requirements of all governmental authorities having jurisdiction over the Property. 9. Transfer or Encumbrance of the Property. (a) Borrower acknowledges that Lender has examined and relied on the creditworthiness of Borrower and the experience of Borrower in owning properties such as the Property in agreeing to make the loan secured hereby, and that Lender will continue to rely on Borrower's ownership of the Property as a means of maintaining the value of the Property as security for repayment of the Debt. Borrower acknowledges that Lender has a valid interest in maintaining the value of the Property so as to ensure that, should Borrower default in the repayment of the Debt, Lender can recover the Debt by a sale of the Property. Except as otherwise provided in subparagraph 9(c) hereof, Borrower shall not sell, convey, alien, mortgage, encumber, pledge or otherwise transfer the Property or any part thereof, or permit the Property or any part thereof to be sold, conveyed, aliened, mortgaged, encumbered, pledged or otherwise transferred. (b) A sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer within the meaning of this paragraph 9 shall be deemed to include (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the Property for other than actual occupancy by a space tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower's right, title and interest in and to any Leases or any Rents; (iii) if Borrower or any general partner of Borrower is a corporation, the voluntary or involuntary sale, conveyance or transfer of such corporation's stock or the creation or issuance of new stock by which an aggregate of more than 49% of such corporation's stock shall be vested in a party or parties who are not now stockholders, except for any sale, conveyance or transfer of such corporation's stock to an Affiliate provided Lender shall have received prior written notice of such transfer; (iv) if Borrower or any general partner or managing member of Borrower is a limited or general partnership or joint venture, the change, removal or resignation of a general partner or managing partner or the transfer of the partnership interest of any general partner or managing partner, except for any transfer of such partnership interest to an Affiliate, and excluding the removal or resignation of any non Affiliate or non managing general partner where the managing general partner shall remain following such removal or resignation, provided, in either case, Lender shall have received prior written notice of such transfer resignation or removal; (v) if Borrower or any Guarantor or any general partner or managing member of Borrower or any Guarantor is a limited liability company, the change, removal or resignation of the managing member of such company, or the transfer or pledge of the membership interest of the managing member of such company or any profits or proceeds relating to such membership interest or the transfer of more than 49% in the aggregate of any membership interests in such company whether in one transfer or a series of transfers, except for any transfer of membership interests to an Affiliate, provided Lender shall have received prior written notice of such transfer, resignation or removal; (vi) any transfer of any interest by the Manager (hereinafter defined) other than as permitted under paragraph 53; and (vii) any transfer of the beneficial interest of any Borrower in any trust holding legal title to the Property. (c) Notwithstanding anything to the contrary contained herein: (i) Upon sixty (60) days prior written notice to Lender, the Borrower shall have the limited right to transfer legal title to the Property to a Single Purpose Entity Transferee (hereinafter defined) provided (a) such Single Purpose Entity Transferee assumes all of the obligations of the Borrower under this Security Instrument, the Note and the Other Security Documents in a manner satisfactory to Lender in all respects, including, without limitation, by entering into an assumption agreement with Borrower and Lender in form and substance reasonably satisfactory to Lender (an "Assumption Agreement"), (b) the Single Purpose Entity Transferee shall have been newly formed exclusively and solely for the purpose of owning and operating the Property and shall have been engaged in no other business activities prior to the transfer of title to such Single Purpose Entity Transferee and must be a "United States person" as defined by Section 7701(a)(30) of the United States Internal Revenue Code of 1986, as amended, (c) the Single Purpose Entity Transferee or the management agent it employs to manage the Property shall have Adequate Real Estate Experience (hereinafter defined), (d) the Single Purpose Entity Transferee shall deliver to Lender evidence of the fulfillment of the requirements of subsection (b) above, (e) the Single Purpose Entity Transferee shall deliver any and all organizational documentation requested by Lender, which documentation shall be reasonably satisfactory to Lender in all respects, and shall deliver an opinion of counsel of the Single Purpose Entity Transferee covering the Assumption Agreement in form and substance similar to the due execution, delivery and enforcement opinions delivered by counsel to Borrower in connection with the execution of this Security Instrument, (f) the Single Purpose Entity Transferee shall deliver any certificates and opinions of counsel, enter into agreements and covenants, or cause each of its general partners (or any other principal thereof) to deliver certificates, enter into agreements and covenants, which certificates, agreements, opinions of counsel and covenants shall be similar in nature to those delivered, executed and made by Borrower or any general partner of Borrower in connection with the execution of this Security Instrument or the Securitization (hereinafter defined) relating to the single purpose nature of the Single Purpose Entity Transferee or otherwise, and (g) Borrower shall deliver, at its sole cost and expense, an endorsement to the existing title policy insuring the Security Instrument as modified by the Assumption Agreement as a valid first lien on the Property, naming the Single Purpose Entity Transferee as owner of the fee estate of the Property, which endorsement shall insure that, as of the date of the recording of the Assumption Agreement, the Property shall not be subject to any additional exceptions or liens other than those contained in the original title policy insuring the lien of this Security Instrument and delivered in connection with the execution of this Security Instrument. Any and all reasonable costs incurred in connection with the above (including Lender's counsel's fees and disbursements and expenses and all recording fees, mortgage or intangible taxes, and title insurance premiums), shall be paid by Borrower. Lender shall respond to Borrower's request to transfer legal title to the Property within thirty (30) days of delivery of all of the information required by subsections (a)-(g) above. The failure of Lender to respond to such request shall not be deemed consent to the transfer. For purposes of this Security Instrument, the term "Adequate Real Estate Experience" shall mean an entity which manages first class multi-family residences of a type and size similar to the Property, and which manages in the aggregate no less than 1,000 residential units at the time of such transfer. The term "Single Purpose Entity Transferee" shall mean an entity that: A. shall not own any asset other than the Property; B. shall not engage in any business other than those necessary for the ownership, management or operation of the Property and any such business transactions with any general partner, principal or affiliate of the Single Purpose Entity Transferee or any affiliate of the general partner of the Single Purpose Entity Transferee shall be entered into upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than an affiliate of the Single Purpose Entity Transferee or the general partner or an affiliate of the general partner of the Single Purpose Entity Transferee; C. shall not incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than the Debt, any Affiliate Advance (hereinafter defined), and the Subordinate Debt ("Subordinate Debt"), as defined in that certain Subordination Agreement dated as of the date hereof between Lender and IFSE Holding Co., L.L.C.; D. shall not make any loans or advances to any third party (including any affiliates of such Single Purpose Entity Transferee or the general partner or managing member or an affiliate of the general partner or managing member of such Single Purpose Entity Transferee); E. shall be solvent and pay its debts from its assets as the same become due; F. shall do or cause to be done all things necessary to preserve its existence, and shall not amend, modify or otherwise change its partnership certificate, partnership agreement, articles of incorporation or by-laws in a manner which adversely affects such Single Purpose Entity Transferee's existence as a single purpose entity; G. shall maintain books and records and bank accounts separate from those of its affiliates, including its general partners; H. shall be, and at all times shall hold itself out to the public as, a legal entity separate and distinct from any other entity (including any affiliate thereof, including the general partner or any affiliate of the general partner of such Single Purpose Entity Transferee); I. shall file its own tax returns; J. shall maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations; K. shall not seek the dissolution or winding up, in whole or in part, of the Single Purpose Entity Transferee or voluntarily file, or consent to the filing of, a petition for bankruptcy, reorganization, assignment for the benefit of creditors or similar proceeding; and L. shall not commingle its funds or other assets with any other person or entity. The term "Affiliate Advance" shall mean and be limited to a payment made by an Affiliate to a third party on behalf of Borrower, the repayment of which remains an unsecured obligation of the Borrower, provided: (i) such payment shall have been made by the Affiliate to enable the Borrower to pay for its ordinary and customary operating expenses or property or capital expense (exclusive of any payments of debt service under any loan made to Borrower, including, without limitation, the Debt secured by this Security Instrument), (ii) upon an Event of Default under the Note, this Security Instrument or the Other Security Documents, no payments of or accrual of interest or principal shall be made or required on or before the repayment of all sums due under the Note, this Security Instrument or the Other Security Documents, and (iii) the obligation of Borrower, whether written or otherwise, shall be (a) subordinate in lien and payment to the Debt, (b) non-defaultable and non-callable upon a default (monetary or nonmonetary) or otherwise, prior to one year and a day from the repayment of all sums due under the Note, this Security Instrument or the Other Security Documents and (c) unsecured obligation of Borrower at all times. (ii) [INTENTIONALLY OMITTED] (iii) Borrower may sell, convey or transfer stock, partnership or membership interest as described in subsections 9(b)(iii), (iv) and (v) hereof in the Borrower or a general partner or managing member of Borrower (but not by any subsequent Single Purpose Entity Transferee), provided that: 1. No Event of Default shall have occurred and be continuing; 2. The Single Purpose Entity Transferee shall be a person, firm or corporation whose character, financial strength, stability and experience shall be similar to the existing Borrower and any general partner of Borrower as of the date hereof and otherwise reasonably satisfactory to Lender; 3. The Single Purpose Entity Transferee shall deliver such organizational documentation and other material necessary to establish the transfer; and 4. The Single Purpose Entity Transferee shall pay the costs and expenses of Lender and Lender's counsel incurred in connection with the review and approval of such stock, partnership or membership transfer. The term "Affiliate" shall mean a corporation or other entity which shall (i) control, (ii) be controlled by, or (iii) be under common control with either Borrower, any general partner of Borrower, Insignia Financial Group, Inc. or a corporation or other entity that would be considered an affiliate of Borrower or Insignia Financial Group, Inc. under the regulations promulgated by the United States Securities and Exchange Commission. The term "Debt Service Coverage Ratio" shall mean the ratio of (a) the NOI (hereinafter defined) produced by the operation of the Property during the twelve (12) calendar month period immediately preceding the calculation to (b) the projected aggregate payments of interest and principal due under this Security Instrument and the Note and any other subordinate loans affecting the Property for the twelve (12) calendar month period immediately following the calculation. The term "Expenses" shall mean the aggregate of the following items: (a) real estate taxes, general and special assessments or similar charges; (b) sales, use and personal property taxes; (c) management fees and disbursements; (d) wages, salaries, pension costs and all fringe and other employee-related benefits and expenses; (e) insurance premiums; (f) cost of utilities, and all other administrative, management, ownership, operating, leasing and maintenance expenses, excluding depreciation and other non-cash expenses incurred in connection with the operation of the Property; (g) cost of necessary repair or replacement of existing improvements on the Property with repairs or replacements of like kind and quantity or such kind or quality which is necessary to maintain the Property to the same standards as competitive rental properties of similar size and location of the Property; and (h) the cost of such other maintenance materials, HVAC repairs, parts and supplies, other decorating supplies, floor covering repairs, other decorating contracts, drapes and equipment. The Expenses shall be based on the above-described items actually incurred by Borrower during the period for which the calculation is being made. The term "NOI" shall mean the gross income derived from the operation of the Property, less Expenses. NOI shall include only Rents, and such other income, including any rent loss or business interruption insurance proceeds, vending income, pet charges, late fees, forfeited security deposits and other miscellaneous tenant charges, which are actually received during the period for which the NOI is being calculated. NOI shall be calculated on a cash basis in accordance with customary accounting principles applicable to real estate. The term "general partner" shall include the sole member or the managing member of Borrower or a general partner of Borrower if Borrower or any general partner of Borrower is a limited liability company. (d) Lender reserves the right to condition the consent required hereunder upon such other conditions as Lender shall determine in its reasonable discretion to be in the interest of Lender. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon Borrower's sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property in violation of this Security Instrument without Lender's consent. This provision shall apply to every sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property regardless of whether voluntary or not, or whether or not Lender has consented to any previous sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property. 10. Estoppel Certificates. (a) After request by Lender, Borrower, within ten (10) days, shall furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the amount of the original principal amount of the Note, (ii) the unpaid principal amount of the Note, (iii) the rate of interest of the Note, (iv) the date installments of interest and/or principal were last paid, (v) any offsets or defenses to the payment of the Debt, if any, and (vi) that the Note and this Security Instrument are valid, legal and binding obliga- tions and have not been modified or if modified, giving particulars of such modification. 11. Changes in the Laws Regarding Taxation. If any law is enacted or adopted or amended after the date of this Security Instrument which deducts the Debt from the value of the Property for the purpose of taxation or which imposes a tax, either directly or indirectly, on the Debt or Lender's interest in the Property, Borrower will pay such tax, with interest and penalties thereon, if any. In the event Lender is advised by counsel chosen by it that the payment of such tax or interest and penalties by Borrower would be unlawful or taxable to Lender or unenforceable or provide the basis for a defense of usury, then in any such event, Lender shall have the option, by written notice of not less than ninety (90) days, to declare the Debt immediately due and payable. 12. No Credits on Account of the Debt. Borrower will not claim or demand or be entitled to any credit or credits on account of the Debt for any part of the Taxes or Other Charges assessed against the Property, or any part thereof, and no deduction shall otherwise be made or claimed from the assessed value of the Property, or any part thereof, for real estate tax purposes by reason of this Security Instrument or the Debt. In the event such claim, credit or deduction shall be required by law, Lender shall have the option, by written notice of not less than ninety (90) days, to declare the Debt immediately due and payable. 13. Documentary Stamps. If at any time the United States of America, any State thereof or any subdivision of any such State shall require revenue or other stamps to be affixed to the Note or this Security Instrument, or impose any other tax or charge on the same, Borrower will pay for the same, with interest and penalties thereon, if any. 14. Usury Laws. This Security Instrument and the Note are subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the Debt at a rate which could subject the holder of the Note to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay. If by the terms of this Security Instrument or the Note, Borrower is at any time required or obligated to pay interest on the Debt at a rate in excess of such maximum rate, the rate of interest under the same shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Note. 15. Books and Records. Borrower shall keep adequate books and records of account which accurately reflect the operations of, and income and expenses attributable to, the Property and furnish to Lender the following statements, all of which shall be in form and substance acceptable to Lender: (i) a quarterly and annual, or as more frequently requested by Lender or by the rating agencies in connection with securities issued in connection with the loan secured hereby, occupancy statement listing each and every Lease, identifying the leased premises, names of all tenants, monthly rental and all other charges payable under the Lease, date to which paid, date of occupancy, date of expiration, any and every special provision, concession or inducement granted to tenants and such other information as is reasonably requested by Lender, signed, dated and certified as true and accurate by the general partner of Borrower and Borrower; (ii) an annual operating statement of the operation of the Property in a form pre-approved by Lender and otherwise satisfactory to Lender, showing in reasonable detail total revenues received and total expenses, prepared and certified by the general partner of Borrower and Borrower; (iii) an annual balance sheet and profit and loss statement of Borrower, prepared and certified by the general partner of Borrower and Borrower within ninety (90) days after the close of each fiscal year; and (iv) such annual and monthly (including, without limitation, with respect to the Reserve Account and the Capital Improvements Account) balance sheets and profit and loss statements and other financial statements as may, from time to time, be required by Lender. 16. Performance of Other Agreements. Borrower shall observe and perform each and every term to be observed or performed by Borrower pursuant to the terms of any agreement or recorded instrument affecting or pertaining to the Property. 17. Further Acts, etc. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, require, for the better assuring, conveying, assigning, transferring, and confirming unto Lender the property and rights hereby mortgaged, given, granted, bargained, sold, aliened, enfeoffed, conveyed, confirmed, pledged, assigned and hypothecated or intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out the intention or facilitating the performance of the terms of this Security Instrument or for filing, registering or recording this Security Instrument. Borrower on demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower or without the signature of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or other instruments, to evidence more effectively the security interest of Lender in the Property. Borrower grants to Lender an irrevocable power of attorney coupled with an interest for the purpose of perfecting any and all rights and remedies available to Lender at law and in equity pursuant to the terms of the Note, this Security Instrument or the Other Security Documents, including without limitation such rights and remedies available to Lender pursuant to this paragraph 17. 18. Recording of Security Instrument, etc. Borrower forthwith upon the execution and delivery of this Security Instrument and thereafter, from time to time, will cause this Security Instrument, and any security instrument creating a lien or security interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien or security interest hereof upon, and the interest of Lender in, the Property. Borrower will pay all filing, registration or recording fees, and all expenses incident to the preparation, execution and acknowledgment of this Security Instrument, any mortgage supplemental hereto, any security instrument with respect to the Property and any instrument of further assurance, and all federal, state, county and municipal, taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of this Security Instrument, any mortgage supplemental hereto, any security instrument with respect to the Property or any instrument of further assurance, except where prohibited by law so to do. Borrower shall hold harmless and indemnify Lender, its successors and assigns, against any liability incurred by reason of the imposition of any tax on the making and recording of this Security Instrument. 19. Prepayment. If permitted by the Note, the Debt may be prepaid in accordance with the terms thereof. 20. Events of Default. The Lender may declare the Debt immediately due and payable upon any one or more of the following events ("Event of Default"): (a) if any portion of the Debt is not paid within ten (10) days after written notice is delivered by the Lender notifying Borrower that the same is overdue; (b) except as otherwise provided in paragraph 4 hereof, if any of the Taxes or Other Charges is not paid when the same is due and payable; (c) if the Policies are not kept in full force and effect, or if the Policies (or duplicate originals thereof) are not delivered to Lender upon request; (d) if Borrower violates or does not comply with any of the provi- sions of paragraphs 7, 9, 34, 35 or 55 hereof; (e) if any representation or warranty of Borrower made herein or in any certificate, report, financial statement or other instrument or document furnished to Lender shall have been false or misleading in any material respect when made; (f) if Borrower shall make an assignment for the benefit of creditors or if Borrower shall generally not be paying its debts as they become due; (g) if a receiver, liquidator or trustee of Borrower shall be appointed or if Borrower shall be adjudicated a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Borrower or if any proceeding for the dissolution or liquidation of Borrower shall be instituted; however, if such appointment, adjudica- tion, petition or proceeding was involuntary and not consented to by Borrower, upon the same not being discharged, stayed or dismissed within ninety (90) days; (h) [INTENTIONALLY OMITTED] (i) if Borrower shall be in default under any other mortgage or security agreement covering any part of the Property whether it be superior or junior in lien to this Security Instrument; (j) if the Property becomes subject to any mechanic's, materialman's or other lien other than a lien for local real estate taxes and assessments not then due and payable and such lien shall remain undischarged of record (by payment, bonding or otherwise) on the earlier of (i) forty-five (45) days after Borrower shall have notice (written or oral) of such lien or (ii) following a judgment in favor of the holder of such lien, one week prior to the date on which such lien may be foreclosed; (k) if Borrower fails to cure promptly any violations of laws or ordinances affecting or which may be interpreted to affect the Property; provided, however, after prior written notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the validity or application of any building, fire or zoning law or ordinance affecting the Property provided that (i) no other Event of Default exists under the Note, this Security Instrument, or the Other Security Documents, (ii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder, (iii) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, canceled or lost, and (iv) if by the terms of such law or ordinance, compliance therewith pending the prosecution of any such proceeding may legally be delayed without incurring any lien, charge or liability of any kind against the Property, or any part thereof, and without subjecting the Borrower or the Lender to any liability, civil or criminal, for failure to comply therewith; or (l) if Borrower shall continue to be in default under any of the other terms, covenants or conditions of the Note, this Security Instrument or the Other Security Documents for five (5) days after notice from Lender in the case of any default which can be cured by the payment of a sum of money or for thirty (30) days after notice from Lender in the case of any other default, provided that if such default cannot reasonably be cured within such thirty (30) day period and Borrower shall have commenced to cure such default within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for so long as it shall require Borrower in the exercise of due diligence to cure such default, it being agreed that no such extension shall be for a period in excess of ninety (90) days. 21. Remedies of Lender/Application of Proceeds. (a) Upon the occurrence of an Event of Default, (a) Borrower will pay, from the date of that Event of Default, interest on the unpaid principal balance of the Note at the rate of (i) the greater of (A) five percent (5%) over the Applicable Interest Rate (as defined in the Note) due under the Note and (B) two percent (2%) over the Prime Rate (hereinafter defined) as the same shall change from time to time or (ii) at the maximum interest rate which Borrower may by law pay, whichever is lower, (the "Default Rate") and (b) Lender shall have the right to exercise any and all rights and remedies available at law and in equity. The term "Prime Rate" shall mean the daily "Prime Rate" published in The Wall Street Journal from the date of the default, as such "Prime Rate" shall change from time to time. In the event The Wall Street Journal ceases to publish the prime rate or in the event such prime rates are no longer generally published or are limited, regulated or administered by a governmental or quasi-governmental body, a comparable interest rate index shall be substituted therefor by Lender. (b) The purchase money, proceeds and avails of any disposition of the Property, or any part thereof, pursuant to paragraph 22 of this Security Instrument or any other sums collected by Lender pursuant to the Note, this Security Instrument or the Other Security Documents, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. 22. Sale of Property. (a) If this Security Instrument is foreclosed or if the Property is sold pursuant to the exercise of a power of sale, the Property, or any interest therein, may at the discretion of Lender, be sold in one or more parcels or in several interests or portions and in any order or manner. (b) In addition, Borrower hereby vests Lender with full power and authority, upon the happening of an Event of Default, at Lender's option, to declare the entire Debt to be immediately due and payable, and at Lender's option, to take possession of the Property if and to the extent allowed by law, and to sell the Property to the highest bidder at public auction in front of the courthouse door in the county or counties, as may be required, where the Property is located, either in person or by auctioneer, after having first given notice of the time, place and terms of sale, together with a description of the property to be sold, by publication once a week for four (4) successive weeks prior to said sale in some newspaper published in said county or counties, as may be required, and, upon payment of the purchase money, Lender or any person conducting the sale for Lender is authorized to execute to the purchaser at said sale a deed to the Property so purchased. Lender may bid at said sale and purchase the Property, or any part thereof, if the highest bidder therefor. At the foreclosure sale the Property may be offered for sale and sold as a whole without first offering it in any other manner or may be offered for sale and sold in any other manner as Lender may elect. The proceeds of any foreclosure sale pursuant to this paragraph shall be applied first, to the payment of the costs of said sale, including reasonable attorney's and auctioneer's fees; second, to the payment of the Debt hereby secured, whether due or not, with the unpaid interest thereon to the date of sale, and any amount that may be due Lender by virtue of any of the special liens or agreements herein contained; and, third, the balance, if any, to be paid over to Borrower, or as may otherwise be provided by law. 23. Right to Cure Defaults. Upon the occurrence of any Event of Default, if Borrower fails to make any payment or perform any act as herein provided Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder, make or do the same in such manner and to such extent as Lender may deem necessary to protect the security hereof. Lender is authorized to enter upon the Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Property or to foreclose this Security Instrument or collect the Debt, and the cost and expense thereof (including reasonable attorneys' fees to the extent permitted by law), with interest as provided in this paragraph 23, shall constitute a portion of the Debt and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender in remedying such Event of Default or in appearing in, defending, or bringing any such action or proceeding shall bear interest at the Default Rate, for the period after notice from Lender that such cost or expense was incurred to the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by this Security Instrument and the Other Security Documents and shall be immediately due and payable upon demand by Lender therefor. 24. Late Payment Charge. If any portion of the Debt is not received by Lender within five (5) days of the date on which it is due without taking into account any applicable notice or grace period, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid portion of the Debt or the maximum amount permitted by applicable law, to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment, and such amount shall be secured by this Security Instrument and the Other Security Documents. 25. Prepayment After Event of Default. If following the occurrence of any Event of Default, Borrower shall tender payment of an amount sufficient to satisfy the Debt in whole or in part at any time prior to a foreclosure sale of the Property, or a sale of the Property pursuant to the exercise of a power of sale, such tender shall be deemed to be a voluntary prepayment of the principal balance of the Note and Borrower shall, in addition to the entire Debt, also pay to Lender a sum equal to the interest which would have accrued on the principal balance of the Note at the Applicable Interest Rate as defined in the Note from the date of such tender to the earlier of (i) the Maturity Date as defined in the Note or to (ii) the first day of the period during which prepayment of the principal balance of the Note would have been permitted together with a prepayment consideration equal to the prepayment consideration which would have been payable as of the first day of the period during which prepayment would have been permitted. If at the time of such tender prepayment of the principal balance of the Note is permitted, such tender by Borrower shall be deemed to be a voluntary prepayment of the principal balance of the Note, and Borrower shall, in addition to the entire Debt, also pay to Lender the applicable prepayment consideration specified in the Note and this Security Instrument, if any. 26. Right of Entry. Lender and its agents shall have the right to enter and inspect the Property at all reasonable times. 27. Appointment of Receiver. The holder of this Security Instrument, upon the occurrence of an Event of Default or in any action to foreclose this Security Instrument or upon the actual or threatened waste to any part of the Property, shall be entitled to the appointment of a receiver without notice and without regard to the value of the Property as security for the Debt, or the solvency or insolvency of any person liable for the payment of the Debt. 28. Reasonable Use and Occupancy. In addition to the rights which Lender may have herein, upon the occurrence of any Event of Default, Lender, at its option, may require Borrower to pay monthly in advance to Lender, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupation of such part of the Property as may be occupied by Borrower or may require Borrower to vacate and surrender possession of the Property to Lender or to such receiver and, in default thereof, Borrower may be evicted by summary proceedings or otherwise. 29. Security Agreement. This Security Instrument is both a real property deed of trust and a "security agreement" within the meaning of the Uniform Commercial Code. The Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of Borrower in the Property. Borrower by executing and delivering this Security Instrument has granted and hereby grants to Lender, as security for the Debt, a security interest in the Property to the full extent that the Property may be subject to the Uniform Commercial Code (said portion of the Property so subject to the Uniform Commercial Code being called in this paragraph 29 the "Collateral"). If an Event of Default shall occur, Lender and Trustee, in addition to any other rights and remedies which they may have, shall have and may exercise immediately and without demand, any and all rights and remedies granted to a secured party upon default under the Uniform Commercial Code, including, without limiting the generality of the foregoing, the right to take possession of the Collateral or any part thereof, and to take such other measures as Lender may deem necessary for the care, protection and preservation of the Collateral. Upon request or demand of Lender or Trustee, Borrower shall at its expense assemble the Collateral and make it available to Lender and Trustee at a convenient place acceptable to Lender. Borrower shall pay to Lender and Trustee on demand any and all reasonable expenses, including legal expenses and attorneys' fees, incurred or paid by Lender and Trustee in protecting the interest in the Collateral and in enforcing the rights hereunder with respect to the Collateral. Any notice of sale, disposition or other intended action by Lender or Trustee with respect to the Collateral sent to Borrower in accordance with the provisions hereof at least five (5) days prior to such action, shall constitute commercially reasonable notice to Borrower unless otherwise required by law. The proceeds of any disposition of the Collateral, or any part thereof, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. 30. Actions and Proceedings. Lender or Trustee has the right to appear in and defend any action or proceeding brought with respect to the Property and to bring any action or proceeding, in the name and on behalf of Borrower, which Lender, in its discretion, decides should be brought to protect their interest in the Property. Lender shall, at its option, be subrogated to the lien of any deed of trust, mortgage or other security instrument discharged in whole or in part by the Debt, and any such subrogation rights shall constitute additional security for the payment of the Debt. 31. Waivers. Borrower hereby waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Lender, and waives trial by jury in any action or proceeding brought by either party hereto against the other or in any coun- terclaim asserted by Lender against Borrower, or in any matters whatsoever arising out of or in any way connected with this Security Instrument, the Note, any of the Other Security Documents or the Debt. 32. Recovery of Sums Required To Be Paid. Lender shall have the right from time to time to take action to recover any sum or sums which constitute a part of the Debt as the same become due, without regard to whether or not the balance of the Debt shall be due, and without prejudice to the right of Lender or Trustee thereafter to bring an action of foreclosure, or to sell the Property pursuant to the exercise of a power of sale, or to bring any other action, for a default or defaults by Borrower existing at the time such earlier action was commenced. 33. Marshalling and Other Matters. Borrower hereby waives, to the extent permitted by law, the benefit of all appraisement, valuation, stay, extension, reinstatement and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale hereunder of the Property or any part thereof or any interest therein. Further, Borrower hereby expressly waives any and all rights of redemption from sale under any order or decree of foreclosure of this Security Instrument on behalf of Borrower, and on behalf of each and every person acquiring any interest in or title to the Property subsequent to the date of this Security Instrument and on behalf of all persons to the extent permitted by applicable law. 34. Hazardous Materials. Borrower represents and warrants that, except as otherwise disclosed in that certain environmental report delivered by Borrower to Lender in connection with the origination of this Security Instrument (the "Environmental Report"), to the best of Borrower's knowledge, after due inquiry and investigation, (a) there are no Hazardous Materials (hereinafter defined) on the Property, except those in compliance with all applicable federal, state and local laws, ordinances, rules and regulations, and (b) no owner or occupant nor, to the best of Borrower's knowledge, any prior owner or occupant of the Property has received any notice or advice from any governmental agency or any source whatsoever with respect to Hazardous Materials on, from or affecting the Property. Borrower covenants that the Property shall be kept free of Hazardous Materials, and neither Borrower nor any occupant of the Property shall use, transport, store, dispose of or in any manner deal with Hazardous Materials on the Property, except in compliance with all applicable federal, state and local laws, ordinances, rules and regulations. Borrower shall comply with, and ensure compliance by all occupants of the Property with, all applicable federal, state and local laws, ordinances, rules and regulations, and shall keep the Property free and clear of any liens imposed pursuant to such laws, ordinances, rules or regulations. At any time after the occurrence of an Event of Default and the continuance thereof, Lender may enter upon the Property and conduct such environmental tests and studies as Lender shall require. The cost and expense of such tests and studies shall be borne by Borrower and such amounts shall be secured by this Security Instrument. In the event that Borrower receives any notice or advice from any governmental agency or any source whatsoever with respect to Hazardous Materials on, from or affecting the Property, Borrower shall immediately notify Lender. Borrower shall conduct and complete all investigations, studies, sampling, and testing, and all remedial actions neces- sary to clean up and remove all Hazardous Materials from the Property in accor- dance with all applicable federal, state, and local laws, ordinances, rules and regulations. The term "Hazardous Materials" as used in this Security Instrument shall include, without limitation, gasoline, petroleum products, explosives, radioactive materials, polychlorinated biphenyls or related or similar materials, or any other substance or material defined as a hazardous or toxic substance or material by any federal, state or local law, ordinance, rule, or regulation, but excluding Asbestos, as defined in paragraph 35 hereof. The obligations and liabilities of Borrower under this paragraph 34 shall survive any entry of a judgment of foreclosure, the sale of the Property pursuant to the exercise of a power of sale, or the delivery of a deed in lieu of foreclosure of this Security Instrument. 35. Asbestos. Borrower represents and warrants that, except as otherwise disclosed in the Environmental Report, to the best of Borrower's knowledge, after due inquiry and investigation, there is no asbestos or material containing asbestos ("Asbestos") on the Property, and that no owner or occupant nor to the best of Borrower's knowledge, any prior owner or occupant of the Property has received any notice or advice from any governmental agency or any source whatsoever with respect to Asbestos on, affecting or installed on the Property. Borrower covenants that, except as otherwise disclosed in the Environmental Report, the Property shall be kept free of Asbestos, and neither Borrower nor any occupant of the Property shall install, or permit to be installed, Asbestos on the Property. Borrower shall comply with, and ensure compliance by all occupants of the Property with, all applicable federal, state and local laws, ordinances, rules and regulations with respect to Asbestos, and shall keep the Property free and clear of any liens imposed pursuant to such laws, ordinances, rules or regulations. In the event that Borrower receives any notice or advice from any governmental agency or any source whatsoever with respect to Asbestos on, affecting or installed on the Property, Borrower shall immediately notify Lender. Borrower shall conduct and complete all investigations, studies, sampling, and testing, and all remedial actions necessary to manage and remove all Asbestos from the Property in accordance with all applicable federal, state and local laws, ordinances, rules and regulations. The obligations and liabilities of Borrower under this paragraph 35 shall survive any entry of a judgment of foreclosure, the sale of the Property pursuant to the exercise of a power of sale, or delivery of a deed in lieu of foreclosure of this Security Instrument. 36. Indemnification. Borrower shall protect, defend, indemnify and save harmless Lender from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation reasonable attorneys' fees and expenses), imposed upon or incurred by or asserted against Lender (except any liability, obligation, claim, damage, penalty, cause of action, cost or expense imposed upon or incurred by Lender by reason of the gross negligence or willful misconduct of Lender) by reason of (a) ownership of this Security Instrument, the Property or any interest therein arising pursuant to the terms of this Security Instrument or receipt of any Rents; (b) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (c) any use, nonuse or condition in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (d) any failure on the part of Borrower to perform or comply with any of the terms of this Security Instrument; (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof; (f) the failure of any person to file timely with the Internal Revenue Service an accurate Form 1099-B, Statement for Recipients of Proceeds from Real Estate, Broker and Barter Exchange Transactions, which may be required in connection with this Security Instrument, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which this Security Instrument is made; (g) the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release, or threatened release of any Hazardous Materials on, from, or affecting the Property or any other property or the presence of Asbestos on the Property; (h) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials or Asbestos; (i) any lawsuit brought or threatened, settlement reached, or government order relating to such Hazardous Materials or Asbestos; (j) the failure of Borrower to comply with the terms of the O&M Plan (hereinafter defined); or (k) any violation of laws, orders, regulations, requirements, or demands of government authorities, which are based upon or in any way related to such Hazardous Materials or Asbestos including, without limitation, the costs and expenses of any remedial action required by such governmental authorities, attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses. Any amounts payable to Lender by reason of the application of this paragraph 36 shall be secured by this Security Instrument and shall become immediately due and payable upon demand and shall bear interest at the Default Rate commencing on the tenth (10th) day following such demand until paid. The obligations and liabilities of Borrower under this paragraph 36 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or delivery of a deed in lieu of foreclosure of this Security Instrument. 37. Notices. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged on a Business Day (or if not on a Business Day, such notice will be deemed given on the next Business Day) by the recipient thereof, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository, postage prepaid, return receipt requested, addressed as follows: If to Borrower: VMS Apartment Portfolio Associates, III c/o Insignia Financial Group, Inc. One Insignia Financial Plaza Greenville, South Carolina 29602 Facsimile: (864) 239-1096 With a copy to: Insignia Financial Group, Inc. One Insignia Financial Plaza Greenville, South Carolina 29601 Attention: John Lines Facsimile: (864) 239-1096 If to Lender: Lehman Brothers Holdings Inc. Three World Financial Center 200 Vesey Street New York, New York 10285 Attention: Manager, Commercial Contract Finance Facsimile: (212) 528-6014 With a copy to: Thacher Proffitt & Wood 2 World Trade Center/40th Floor New York, New York 10048 Attention: Mitchell G. Williams Facsimile: (212) 912-7751 If to Trustee: Commonwealth Land Title Insurance Company 877 Ygnacio Valley Road, #100 Walnut Creek, California 94596 Attention: Jack Babcock Facsimile: 38. Authority. (a) Borrower (and the undersigned representative of Borrower, if any) has full power, authority and legal right to execute this Security Instrument, and to mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, hypothecate, assign and grant a security interest in the Property pursuant to the terms hereof and to keep and observe all of the terms of this Security Instrument on Borrower's part to be performed. (b) Borrower represents and warrants that Borrower is not a "foreign person" within the meaning of 1445(f)(3) of the Internal Revenue Code of 1986, as amended and the related Treasury Department regulations, including temporary regulations. 39. Waiver of Notice. Borrower shall not be entitled to any notices of any nature whatsoever from Lender and Trustee except with respect to matters for which this Security Instrument specifically and expressly provides for the giving of notice by Lender or Trustee to Borrower and except with respect to matters for which Lender or Trustee is required by applicable law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender or Trustee with respect to any matter for which this Security Instrument does not specifically and expressly provide for the giving of notice by Lender or Trustee to Borrower. 40. Remedies of Borrower. In the event that a claim or adjudication is made that Lender has acted unreasonably or unreasonably delayed acting in any case where by law or under the Note, this Security Instrument or the Other Security Documents, it has an obligation to act reasonably or promptly, Lender shall not be liable for any monetary damages, and Borrower's remedies shall be limited to injunctive relief or declaratory judgment. 41. Sole Discretion of Lender. Wherever pursuant to this Security Instrument, Lender exercises any right given to it to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to approve or disapprove or to decide that arrangements or terms are satis- factory or not satisfactory shall be in the sole discretion of Lender, except as may be otherwise expressly and specifically provided herein. 42. Non-Waiver. The failure of Lender or Trustee to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Security Instrument. Borrower shall not be relieved of Borrower's obligations hereunder by reason of (a) the failure of Lender or Trustee to comply with any request of Borrower or Guarantors to take any action to foreclose this Security Instrument or otherwise enforce any of the provisions hereof or of the Note or the Other Security Documents, (b) the release, regardless of consideration, of the whole or any part of the Property, or of any person liable for the Debt or any portion thereof, or (c) any agreement or stipulation by Lender extending the time of payment or otherwise modifying or supplementing the terms of the Note, this Security Instrument or the Other Security Documents. Lender may resort for the payment of the Debt to any other security held by Lender in such order and manner as Lender, in its discretion, may elect. Lender or Trustee may take action to recover the Debt, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Lender or Trustee thereafter to foreclose this Security Instrument. The rights and remedies of Lender and Trustee under this Security Instrument shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Lender or Trustee shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. Lender and Trustee shall not be limited exclusively to the rights and remedies herein stated but shall be entitled to every right and remedy now or hereafter afforded at law or in equity. 43. No Oral Change. This Security Instrument, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 44. Liability. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. The foregoing sentence, however, is not intended to affect the limited liability of any limited partner or stockholder or member of Borrower afforded by applicable partnership or corporate law. This Security Instrument shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. 45. Inapplicable Provisions. If any term, covenant or condition of the Note or this Security Instrument is held to be invalid, illegal or unenforceable in any respect, the Note and this Security Instrument shall be construed without such provision. 46. Headings, etc. The headings and captions of various paragraphs of this Security Instrument are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 47. Duplicate Originals. This Security Instrument may be executed in any number of duplicate originals and each such duplicate original shall be deemed to be an original. 48. Definitions. Unless the context clearly indicates a contrary intent or unless otherwise specifically provided herein, words used in this Security Instrument may be used interchangeably in singular or plural form and the word "Borrower" shall mean "each Borrower and any subsequent owner or owners of the Property or any part thereof or any interest therein," the word "Lender" shall mean "Lender and any subsequent holder of the Note," the word "Trustee" shall mean "Trustee and any subsequent holder of this Security Instrument," the word "Note" shall mean "the Note and any other evidence of indebtedness secured by this Security Instrument," the word "person" shall include an individual, corporation, partnership, trust, unincorporated association, government, governmental authority, and any other entity, and the words "Property" shall include any portion of the Property and any interest therein. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 49. CHOICE OF LAW. THIS SECURITY INSTRUMENT SHALL BE DEEMED TO BE A CONTRACT ENTERED INTO PURSUANT TO THE LAWS OF THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, PROVIDED HOWEVER, THAT WITH RESPECT TO THE ATTACHMENT, CREATION, PERFECTION, PRIORITY AND ENFORCEMENT OF THE LIEN OF THIS SECURITY INSTRUMENT, THE LAWS OF THE STATE WHERE THE PROPERTY IS LOCATED SHALL APPLY. 50. Exculpation. Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note or this Security Instrument by any action or proceeding wherein a money judgment shall be sought against Borrower or any general or limited partner or member of Borrower (hereafter collectively referred to as the "Exculpated Parties"), except that Lender may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Lender to enforce and realize upon this Security Instrument, the Other Security Documents, and the interest in the Property, the Rents and any other collateral given to Lender created by this Security Instrument and the Other Security Documents; provided, however, that any judgment in any such action or proceeding shall be enforceable against the Exculpated Parties only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender. Lender, by accepting the Note and this Security Instrument, agrees that it shall not sue for, seek or demand any deficiency judgment against the Exculpated Parties in any such action or proceeding, under or by reason of or in connection with the Note, the Other Security Documents or this Security Instrument. The provisions of this paragraph shall not, however, (i) constitute a waiver, release or impairment of any obligation evidenced or secured by the Note, the Other Security Documents or this Security Instrument; (ii) impair the right of Lender to name Borrower as a party defendant in any action or suit for judicial foreclosure and sale under this Security Instrument; (iii) affect the validity or enforceability of any guaranty made in connection with the Note, this Security Instrument, or the Other Security Documents; (iv) impair the right of Lender to obtain the appointment of a receiver; (v) impair the enforcement of the Assignment of Leases and Rents executed in connection herewith; (vi) impair the right of Lender to bring suit with respect to fraud or intentional misrepresentation by the Exculpated Parties or any other person or entity in connection with the Note, this Security Instrument or the Other Security Documents; (vii) impair the right of Lender to obtain the Rents received, and not applied to the operating expenses of the Property, by any of the Exculpated Parties after the occurrence of an Event of Default; (viii) impair the right of Lender to bring suit with respect to the Exculpated Parties' misappropriation of tenant security deposits or Rents collected in advance; (ix) impair the right of Lender to obtain insurance proceeds or condemnation awards due to Lender under this Security Instrument; (x) impair the right of Lender to enforce the provisions of sub-paragraphs 36(g) through 36 (k), inclusive and paragraphs 34 and 35 of this Security Instrument against the Borrower (excluding any general or limited partner or member thereof); or (xi) impair the right of Lender to recover any part of the Debt from the Borrower (excluding the general and limited partners and members of Borrower), following the breach of any covenant contained in paragraph 9 or 55 hereof. 51. Intentionally Deleted. 52. Operations and Maintenance Plan. If required by Lender, Borrower shall within thirty (30) days of the date hereof deliver to Lender an operation and maintenance plan (the "O&M Plan") with respect to the maintenance or removal of any asbestos, lead based paint, hazardous and toxic wastes and substances, PCB's and storage tanks on the Property, which O&M Plan shall appoint an "Program Manager" in charge of managing all asbestos-related activities on the Property. Borrower shall (i) diligently perform and observe all of the terms, covenants and conditions of the O&M Plan on the part of Borrower to be performed and observed to the end that all things shall be done which are necessary to keep unimpaired the rights of Borrower under the O&M Plan and (ii) promptly notify Lender of the giving of any notice to Borrower of any default by the Program Manager in the performance or observance of any of the terms, covenants or conditions of the O&M Plan on the part of the Program Manager to be performed and observed and deliver to Lender a true copy of each such notice. Lender shall have the right to approve any O&M Plan which may affect the Property. Lender's requirement that Borrower develop and comply with the O&M Plan shall not be deemed to constitute a waiver or a modification of any of Borrower's covenants and agreements with respect to paragraphs 34 or 35 hereof. 53. Management Agreements. The Improvements have been operated under the terms and conditions of that certain management agreement entered into between Borrower and the manager (the "Manager") set forth therein delivered to, and approved by, Lender (hereinafter, together with any renewals or replacements thereof, being referred to as the "Management Agreement"). Borrower acknowledges that Lender has examined and relied on the Manager's experience in operating properties such as the Property in agreeing to make the loan secured hereby, and that Lender will continue to rely on the Manager's management of the Property as a means of maintaining the value of the Property as security for repayment of the Debt. Borrower shall (i) diligently perform and observe all of the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed and observed to the end that all things shall be done which are necessary to keep unimpaired the rights of Borrower under the Management Agreement and (ii) promptly notify Lender of the giving of any notice to Borrower of any default by Borrower in the performance or observance of any of the terms, covenants or conditions of the Management Agreement on the part of Borrower to be performed and observed and deliver to Lender a true copy of each such notice. Borrower shall not surrender the Management Agreement, consent to the assignment by the Manager of its rights and obligations under the Management Agreement, or terminate or cancel the Management Agreement or modify, change, supplement, alter or amend the Management Agreement, in any respect, either orally or in writing, and Borrower hereby assigns to Lender as further security for the payment of the Debt and for the performance and observance of the terms, covenants and conditions of this Security Instrument, all the rights, privileges and prerogatives of Borrower to surrender the Management Agreement or to terminate, cancel, modify, change, supplement, alter or amend the Management Agreement in any respect, and any such surrender of the Management Agreement or termination, cancellation, modification, change, supplement, alteration or amendment of the Management Agreement without the prior consent of Lender shall be void and of no force and effect, provided, however, that this provision shall not limit the Manager's right to assign any or the Borrower's right to consent to any assignment by Manager of any revenues deriving from the Management Agreement. If Borrower shall default in the performance or observance of any material term, covenant or condition of the Management Agreement on the part of Borrower to be performed or observed, then, without limiting the generality of the other provisions of this Security Instrument, and without waiving or releasing Borrower from any of its obligations hereunder, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act or take any action as may be appropriate to cause all the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed or observed to be promptly performed or observed on behalf of Borrower, to the end that the rights of Borrower in, to and under the Management Agreement shall be kept unimpaired and free from default. Lender and any person designated by Lender shall have, and are hereby granted, the right to enter upon the Property at any time and from time to time for the purpose of taking any such action. If the Manager under the Management Agreement shall deliver to Lender a copy of any notice sent to Borrower of default under the Management Agreement, such notice shall constitute full protection to Lender for any action taken or omitted to be taken by Lender in good faith, in reliance thereon. Borrower shall, from time to time, use its best efforts to obtain from the Manager under the Management Agreement such certificates of estoppel with respect to compliance by Borrower with the terms of the Management Agreement as may be requested by Lender. Borrower shall exercise each individual option, if any, to extend or renew the term of the Management Agreement upon demand by Lender made at any time within one (1) year of the last day upon which any such option may be exercised, and Borrower hereby expressly authorizes and appoints Lender its attorney-in-fact to exercise any such option in the name of and upon behalf of Borrower, which power of attorney shall be irrevocable and shall be deemed to be coupled with an interest. Notwithstanding anything to the contrary contained herein, Borrower may replace the Manager or accept the resignation of the Manager or consent to a transfer by the Manager, provided: (1) No Event of Default shall have occurred and be continuing; (2) the new manager or holder of the stock or partnership interest shall be a person, firm or corporation whose character, financial strength, stability and experience shall be similar to the existing Manager and otherwise have Adequate Real Estate Experience; (3) the new manager shall deliver all organizational documentation and other materials evidencing its Adequate Real Estate Experience and otherwise be acceptable to Lender; (4) the Borrower shall pay the reasonable costs and expenses of Lender and Lender's counsel incurred in connection with the review and approval of such new manager; and (5) the terms of any new management agreement affecting the Property must be acceptable to Lender in all respects, provided, however, if the terms and conditions of the new management agreement shall be substantially similar to the Management Agreement and the management fee due thereunder is no greater than the fee provided in the Management Agreement, such new management agreement shall be deemed acceptable to Lender. 54. Rating Agencies. The term "Rating Agencies" shall mean any nationally recognized rating agency(s) sought by Lender to obtain ratings with respect to this Security Instrument or the Securitization (hereinafter defined). Lender intends to, but is not required to, either (i) deposit this Security Instrument, the Note and the Other Security Documents in a trust in exchange for the issuance, to or at the direction of the Lender, of multiple classes of mortgage pass-through certificates or other securities evidencing the entire beneficial ownership interest in such trust or (ii) issue multiple classes of bonds (also, "Securities") representing non-recourse obligations secured by this Security Instrument, the Note and the Other Security Documents (the "Securities"). An election will be made under the federal tax code to treat this Security Instrument, the Note and the Other Security Documents and the related assets as one or more real estate mortgage investment conduits. The Securities may be sold either in a public offering or a private placement. The foregoing events and all matters incidental thereto are herein referred to as the "Securitization". 55. Single Purpose Entity. Borrower covenants and agrees that it has not and shall not: (a) engage in any business or activity other than the ownership, operation and maintenance of the Property and activities incidental thereto; (b) acquire or own any material assets other than (i) the Property, and (ii) such incidental Personal Property as may be necessary for the operation of the Property; (c) merge into or consolidate with any person or entity or dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure, without in each case Lender's consent; (d) fail to preserve its existence as an entity duly organized, validly existing and in good standing (if applicable) under the laws of the jurisdiction of its organization or formation, or without the prior written consent of Lender, amend, modify, terminate or fail to comply with the provisions of Borrower's partnership agreement, articles or certificate of incorporation or similar organizational documents, as the case may be, as same may be further amended or supplemented, if such amendment, modification, termination or failure to comply would adversely affect the ability of Borrower to perform its obligations hereunder, under the Note or under the Other Security Documents; (e) own any subsidiary or make any investment in, any person or entity without the consent of Lender; (f) commingle its assets with the assets of any of its general partners, affiliates, members, principals or of any other person or entity; (g) incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than the Debt, except with respect to trade payables in the ordinary course of its business of owning and operating the Property, provided that such debt is paid when due, and any Affiliate Advance or the Subordinate Debt; (h) fail to maintain its records, books of account and bank accounts separate and apart from those of the general partners, principals, members and affiliates of Borrower, the affiliates of a general partner or member of Borrower, and any other person or entity; (i) enter into any contract or agreement with any general partner, principal, member or affiliate of Borrower, Guarantor or Indemnitor, or any general partner, principal, member or affiliate thereof, except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than any general partner, principal, member or affiliate of Borrower, Guarantor or Indemnitor, or any general partner, principal, member or affiliate thereof; (j) seek the dissolution or winding up in whole, or in part, of Borrower; (k) maintain its assets in such a manner that it will be costly or difficult to segregate, ascertain or identify its individual assets from those of any general partner, principal, member or affiliate of Borrower, or any general partner, principal, member or affiliate thereof or any other person; (l) hold itself out to be responsible for the debts of another person; (m) make any loans or advances to any third party, including any general partner, principal, member or affiliate of Borrower, or any general partner, principal, member or affiliate thereof; (n) fail either to hold itself out to the public as a legal entity separate and distinct from any other entity or person or to conduct its business solely in its own name in order not (i) to mislead others as to the identity with which such other party is transacting business, or (ii) to suggest that Borrower is responsible for the debts of any third party (including any general partner, principal, member or affiliate of Borrower, or any general partner, principal, member or affiliate thereof); (o) fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations; or (p) file or consent to the filing of any petition, either voluntary or involuntary, to take advantage of any applicable insolvency, bankruptcy, liquidation or reorganization statute, or make an assignment for the benefit of creditors. The covenants set forth in (a) through (p) above shall apply to the corporate general partner of Borrower (the "Controlling Party") provided that all references to "Property" set forth above shall, with respect to the Controlling Party, be deemed to refer to its general partnership interest in Borrower. 56. Concerning the Trustee. Trustee shall be under no duty to take any action hereunder except as expressly required hereunder or by law, or to perform any act which would involve Trustee in any expense or liability or to institute or defend any suit in respect hereof, unless properly indemnified to Trustee's reasonable satisfaction. Trustee, by acceptance of this Security Instrument, covenants to perform and fulfill the trusts herein created, being liable, however, only for willful negligence or misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by Trustee in accordance with the terms hereof. Trustee may resign at any time upon giving thirty (30) days' notice to Borrower and to Lender. Lender may remove Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, or inability to act of Trustee, or in its sole discretion for any reason whatsoever Lender may, without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee, by an instrument recorded wherever this Security Instrument is recorded and all powers, rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall not be required to give bond for the faithful performance of the duties of Trustee hereunder unless required by Lender. The procedure provided for in this paragraph for substitution of Trustee shall be in addition to and not in exclusion of any other provisions for substitution, by law or otherwise. 57. Trustee's Fees. Borrower shall pay all costs, fees and expenses incurred by Trustee and Trustee's agents and counsel in connection with the performance by Trustee of Trustee's duties hereunder and all such costs, fees and expenses shall be secured by this Security Instrument. 58. Certain Rights. With the approval of Lender, Trustee shall have the right to take any and all of the following actions: (i) to select, employ, and advise with counsel (who may be, but need not be, counsel for Lender) upon any matters arising hereunder, including the preparation, execution, and interpretation of the Note, this Security Instrument or the Other Security Documents, and shall be fully protected in relying as to legal matters on the advice of counsel, (ii) to execute any of the trusts and powers hereof and to perform any duty hereunder either directly or through his/her agents or attorneys, (iii) to select and employ, in and about the execution of his/her duties hereunder, suitable accountants, engineers and other experts, agents and attorneys-in-fact, either corporate or individual, not regularly in the employ of Trustee, and Trustee shall not be answerable for any act, default, negligence, or misconduct of any such accountant, engineer or other expert, agent or attorney-in-fact, if selected with reasonable area, or for any error of judgment or act done by Trustee in good faith, or be otherwise responsible or accountable under any circumstances whatsoever, except for Trustee's gross negligence or bad faith, and (iv) any and all other lawful action as Lender may instruct Trustee to take to protect or enforce Lender's rights hereunder. Trustee shall not be personally liable in case of entry by Trustee, or anyone entering by virtue of the powers herein granted to Trustee, upon the Property for debts contracted for or liability or damages incurred in the management or operation of the Property. Trustee shall have the right to rely on any instrument, document, or signature authorizing or supporting an action taken or proposed to be taken by Trustee hereunder, believed by Trustee in good faith to be genuine. Trustee shall be entitled to reimbursement for actual expenses incurred by Trustee in the performance of Trustee's duties hereunder and to reasonable compensation for such of Trustee's services hereunder as shall be rendered. 59. Retention of Money. All moneys received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by applicable law) and Trustee shall be under no liability for interest on any moneys received by Trustee hereunder. 60. Perfection of Appointment. Should any deed, conveyance, or instrument of any nature be required from Borrower by any Trustee or substitute trustee to more fully and certainly vest in and confirm to the Trustee or substitute trustee such estates rights, powers, and duties, then, upon request by the Trustee or substitute trustee, any and all such deeds, conveyances and instruments shall be made, executed, acknowledged, and delivered and shall be caused to be recorded and/or filed by Borrower. 61. Succession Instruments. Any substitute trustee appointed pursuant to any of the provisions hereof shall, without any further act, deed, or conveyance, become vested with all the estates, properties, rights, powers, and trusts of its or his/her predecessor in the rights hereunder with like effect as if originally named as Trustee herein; but nevertheless, upon the written request of Lender or of the substitute trustee, the Trustee ceasing to act shall execute and deliver any instrument transferring to such substitute trustee, upon the trusts herein expressed, all the estates, properties, rights, powers, and trusts of the Trustee so ceasing to act, and shall duly assign, transfer and deliver any of the property and moneys held by such Trustee to the substitute trustee so appointed in the Trustee's place. 62. California Provisions. (a) In the event of any inconsistencies between the terms and conditions of this Section 62 of this Security Instrument and any other terms of this Security Instrument, the terms and conditions of this Section 62 shall control and be binding. (b) The word "grantor" is hereby deleted wherever it appears in this Security Instrument and the word "Trustor" is substituted therefor. (c) The paragraphs beginning "PROVIDED, HOWEVER" appearing at the end of the Section of this Security Agreement entitled "Creation of Lien and Grant of Security" is hereby deleted in its entirety and the following paragraph is substituted therefor: PROVIDED, HOWEVER, upon written request of Lender stating that all sums secured hereby have been paid, that Borrower has well and truly abided by and complied with each and every covenant and condition set forth herein and in the Note, and upon the surrendering of this Security Instrument and the Note to Trustee for cancellation and retention and upon payment by Borrower of Trustee's fees, Trustee shall reconvey to Borrower, or to the person or persons legally entitled thereto, without warranty, any portion of the estate hereby granted and then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee in any reconveyance may be described as "the person or persons legally entitled thereto. (d) The first sentence of Section 29 is hereby deleted and the following is substituted therefor: This Security Instrument is both a real property deed of trust and a "security agreement" within the meaning of the Uniform Commercial Code and is being recorded as a fixture filing. With respect to said fixture filing, (i) the debtor is Borrower, and Borrower's name and address appear in the first paragraph of this Security Instrument, and (ii) the secured party is Lender, and Lender's name and address appear in the first paragraph of the Security Instrument. The Mortgaged Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of Borrower in the Mortgaged Property, including, but not limited to, the Leases and Rents and all proceeds thereof and all fixtures. (e) Borrower expressly agrees that upon a violation of Section 9 of this Security Agreement by Borrower and acceleration of the principal balance of the Note because of such violation, Borrower will pay all sums required to be paid in connection with a prepayment, if any, as described in the Note, herein imposed on prepayment after an Event of Default and acceleration of the principal balance. Borrower expressly acknowledges that Borrower has received adequate consideration for the foregoing agreement. (f) POWER OF SALE. After an Event of Default, the Lender, its successors and assigns, may elect to cause the Mortgaged Property or any part thereof to be sold as follows: (1) Lender may proceed as if all of the Mortgaged Property were real property, in accordance with subparagraph (d) below, or Lender may elect to treat any of the Mortgaged Property which consists of a right in action or which is property that can be severed from the Land without causing structural damage thereto as if the same were personal property, and dispose of the same in accordance with subparagraph (3) below, separate and apart from the sale of real property, the remainder of the Mortgaged Property being treated as real property. (2) Lender may cause any such sale or other disposition to be conducted immediately following the expiration of any grace period, if any, herein provided (or immediately upon the expiration of any redemption period required by law) or Lender may delay any such sale or other disposition for such period of time as Lender deems to be in its best interest. Should Lender desire that more than one such sale or other disposition be conducted, Lender may at its option, cause the same to be conducted simultaneously, or successively on the same day, or at such different days or times and in such order as Lender may deem to be in its best interest. (3) Should Lender elect to cause any of the Mortgaged Property to be disposed of as personal property as permitted by subparagraph (1) above, it may dispose of any part hereof in any manner now or hereafter permitted by Article 9 of the Uniform Commercial Code or in accordance with any other remedy provided by law. Both Borrower and Lender shall be eligible to purchase any part or all of such property at any such disposition. Any such disposition may be either public or private as Lender may so elect, subject to the provisions of the Uniform Commercial Code. Lender shall give Borrower at least five (5) days' prior written notice of the time and place of any public sale or other disposition of such property or of the time at or after which any private sale or any other intended disposition is to be made, and if such notice is sent to Borrower as provided in subparagraph (11) hereof, it shall constitute reasonable notice to Borrower. (4) Should Lender elect to sell the Mortgaged Property which is real property or which Lender has elected to treat as real property, upon such election Lender or Trustee shall give such Notice of Default and Election to Sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such Notice of Sale as may then be required by law, Trustee, at the time and place specified in the Notice of Sale, shall sell such Mortgaged Property, or any portion thereof specified by Lender, at public auction to the highest bidder for cash in lawful money of the United States, subject, however, to the provisions of subparagraph (9) hereof. Trustee for good cause may, and upon request of Lender shall, from time to time, postpone the sale by public announcement thereof at the time and place noticed therefor. If the Mortgaged Property consists of several lots or parcels, Lender may designate the order in which such lots or parcels shall be offered for sale or sold. Any person, including Borrower, Trustee or Lender, may purchase at the sale. Upon any sale Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied, whereupon such purchaser or purchasers shall be let into immediate possession. (5) In the event of a sale or other disposition of any such property, or any part thereof, and the execution of a deed or other conveyance, pursuant thereto, the recitals therein of facts, such as a default, the giving of notice of default and notice of sale, demand that such sale should be made, postponement of sale, terms of sale, sale, purchaser, payment of purchase money, and any other fact affecting the regularity or validity of such sale or disposition, shall be conclusive proof of the truth of such facts; and any such deed of conveyance shall be conclusive against all persons as to such facts recited therein. (6) Lender and/or Trustee shall apply the proceeds of any sale or disposition hereunder to payment of the following: (A) the expenses of such sale or disposition together with Trustee's fees and reasonable attorneys' fees, and the actual cost of publishing, recording, mailing and posting notice; (B) the cost of any search and/or other evidence of title procured in connection therewith and transfer tax on any deed or conveyance; (C) all sums expended under the terms hereof, not then repaid, with accrued interest in the amount provided herein; (D) all other sums secured hereby; and (E) the remainder if any to the person or persons legally entitled thereto. (7) The acknowledgment of the receipt of the purchase money, contained in any deed or conveyance executed as aforesaid, shall be sufficient discharge from all obligations to see to the proper application of the consideration therefor. (8) Borrower hereby expressly waives any right which it may have to direct the order in which any of the Mortgaged Property shall be sold in the event of any sale or sales pursuant hereto. (9) Upon any sale of the Mortgaged Property, whether made under a power of sale herein granted or pursuant to judicial proceedings, if the holder of the Note is a purchaser at such sale, it shall be entitled to use and apply all or any portion of the indebtedness then secured hereby for or in settlement or payment of all or any portion of the purchase price of the property purchased, and, in such case, this Security Instrument, the Note and documents evidencing expenditures secured hereby shall be presented to the person conducting the sale in order that the amount of said indebtedness so used or applied may be credited thereon as having been paid. (10) No remedy herein conferred upon or reserved to Trustee or Lender is intended to be exclusive of any other remedy herein or by law provided, but each shall be cumula- tive and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by this instrument to Trustee or Lender, or to which either of them may be otherwise entitled, may be exercised from time to time and as often as may be deemed expedient by Trustee or Lender, and either of them may pursue inconsistent remedies. If there exists additional security for the performance of the obligations secured hereby, the holder of the Note, at its sole option and without limiting or affecting any rights or remedies hereunder, may exercise any of the rights and remedies to which it may be entitled hereunder either concurrently with whatever other rights it may have in connection with such other security or in such order as it may determine. (11) Borrower hereby requests that every notice of default and every notice of sale be given in accordance with the provisions of Section 37 hereof except as otherwise required by statute. Borrower may, from time to time, change the address to which notice of default and sale hereunder shall be sent by both filing a request therefor, in the manner provided by the California Civil Code, Section 2924b, and sending a copy of such request to Lender, its successors or assigns in accordance with the provisions of Section 37 hereof. (g) Trustee accepts the trust created by this Security Instrument when this Security Instrument, duly executed and acknowledged, is made a public record as provided by law. (h) Trustee is not obligated to notify any party hereto of pending sale under any other deed of trust or of any action or proceeding in which Borrower, Lender or Trustee shall be a party, unless brought by Trustee. (i) Trustee shall be under no duty to take any action hereunder except as expressly required hereunder or by law, or to perform any act which would involve Trustee in any expense or liability or to institute or defend any suit in respect hereof, unless properly indemnified to Trustee's reasonable satisfaction. Trustee, by acceptance of this Security Instrument, covenants to perform and fulfill the trusts herein created, being liable, however, only for gross negligence or willful misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by Trustee in accordance with the terms hereof. Trustee may resign at any time upon giving thirty (30) days' notice to Borrower and to Lender. Lender may remove Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, or inability to act of Trustee, or in its sole discretion for any reason whatsoever Lender may, without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee, by an instrument recorded wherever this Security Instrument is recorded and all powers, rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall not be required to give bond for the faithful performance of the duties of Trustee hereunder unless required by Lender. The procedure provided for in this paragraph for substitution of Trustee shall be in addition to and not in exclusion of any other provisions for substitution, by law or otherwise. (j) Trustee shall be entitled to reasonable compensation for all services rendered or expenses incurred in the administration or execution of the trusts hereby created and Borrower hereby agrees to pay same. Trustee and Lender shall be indemnified, held harmless and reimbursed by Borrower for any liability, damage or expense, including attorneys' fees and amounts paid in settlement, which they or either of them may incur or sustain in the execution of this trust or in the doing of any act which they, or either of them, are required or permitted to do by the terms hereof or by law. (k) Lender may substitute the Trustee hereunder in any manner now or hereafter provided by law, or in lieu thereof Lender may from time to time, by an instrument in writing, substitute a successor or successors to any Trustee named herein or acting hereunder, which instrument, executed and acknowledged by Lender and recorded in the Office of the Recorder of Los Angeles County, shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall thereupon and without conveyance from the predecessor Trustee, succeed to all its title, estate, rights, powers and duties. Such instrument must contain the name of the original Borrower, Trustee and Lender hereunder, the book and page where this Security Instrument is recorded, and the name and address of the new Trustee. (l) Section 49 entitled "CHOICE OF LAW" is hereby deleted in its entirety and, subject to the exculpations contained in this Security Instrument, the following is substituted therefor: THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS SECURITY INSTRUMENT SHALL BE GOVERNED BY, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS-OF-LAW RULES AND PRINCIPALS OF SUCH STATE (EXCEPT FOR SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW OF NEW YORK). BORROWER AND LENDER FURTHER ACKNOWLEDGE, AGREE AND STIPULATE THAT THE STATE OF NEW YORK HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES INVOLVED IN THIS SECURITY INSTRUMENT. NOTWITHSTANDING THE FOREGOING, THE PARTIES FURTHER AGREE THAT: (1) THE PROCEDURES GOVERNING THE ENFORCEMENT BY LENDER AND TRUSTEE OF PROVISIONAL REMEDIES AGAINST BORROWER DIRECTLY RELATING TO THE MORTGAGED PROPERTY ENCUMBERED HEREBY, INCLUDING, BY WAY OF ILLUSTRATION BUT NOT LIMITATION, ANY SUCH ACTIONS FOR REPLEVIN, FOR CLAIM AND DELIVERY OF Mortgaged Property, OR FOR THE APPOINTMENT OF A RECEIVER, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA; AND (2) CALIFORNIA LAW SHALL APPLY TO THE EXTENT, BUT ONLY TO THE EXTENT, NECESSARY IN ORDER TO CREATE, PERFECT AND FORECLOSE THE SECURITY INTERESTS, LIENS AND ASSIGNMENTS OF RENTS AND LEASES ARISING UNDER THIS SECURITY INSTRUMENT; PROVIDED, HOWEVER, THAT NOTHING IN THIS SECTION SHALL IN ANY EVENT BE CONSTRUED TO PROVIDE THAT THE SUBSTANTIVE LAW OF THE STATE OF CALIFORNIA SHALL APPLY TO THE OBLIGATIONS AND INDEBTEDNESS SECURED BY THIS SECURITY INSTRUMENT, WHICH ARE AND SHALL CONTINUE TO BE GOVERNED BY THE SUBSTANTIVE LAW OF THE STATE OF NEW YORK, IN SUCH CONNECTION, THE PARTIES FURTHER AGREE THAT: (A) LENDER MAY ENFORCE ITS RIGHTS UNDER THE LOAN DOCUMENTS (INCLUDING WITHOUT LIMITATION ITS RIGHT TO SUE BORROWER TO COLLECT ANY OUTSTANDING INDEBTEDNESS OR TO OBTAIN A JUDGMENT AGAINST BORROWER IN CALIFORNIA, NEW YORK OR OTHER STATES FOR ANY DEFICIENCY PRIOR TO OR FOLLOWING FORECLOSURE) IN ACCORDANCE WITH NEW YORK LAW, AND IF LENDER OBTAINS A DEFICIENCY JUDGMENT IN A STATE OTHER THAN IN CALIFORNIA, THEN LENDER SHALL HAVE THE RIGHT TO ENFORCE SUCH JUDGMENT IN CALIFORNIA, AS WELL AS IN OTHER STATES; (B) CALIFORNIA'S USURY LAWS AND ANTIDEFICIENCY, ONE-ACTION AND SECURITY-FIRST RULES (INCLUDING WITHOUT LIMITATION CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580A, 580b, 580c, 580d, AND 726) ARE INAPPLICABLE TO THE OBLIGATIONS AND INDEBTEDNESS SECURED BY THIS SECURITY INSTRUMENT AND TO THE ENFORCEMENT OR REALIZATION BY LENDER OF ITS RIGHTS AND REMEDIES RELATING THERETO; AND (C) SECTION 726 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE SHALL NOT APPLY (A) TO PREVENT OR LIMIT EXERCISE OR ENFORCEMENT OF ANY OTHER RIGHTS OR REMEDIES OF LENDER (INCLUDING WITHOUT LIMITATION LENDER'S RIGHT TO OBTAIN A DEFICIENCY JUDGMENT) EITHER PRIOR TO OR FOLLOWING FORECLOSURE OR (B) TO PREVENT OR LIMIT LENDER'S RIGHT TO FORECLOSE JUDICIALLY OR NONJUDICIALLY FOLLOWING ANY EXERCISE OR ENFORCEMENT OF ANY OTHER RIGHTS OR REMEDIES OF LENDER. (m) The term "Controlling Party" as used in section 55 shall mean GP Services XIX, Inc. IN WITNESS WHEREOF, this Security Instrument has been executed by Borrower the day and year first above written. VMS APARTMENT PORTFOLIO ASSOCIATES III, a California general partnership By: GP SERVICES XIX, INC., a South Carolina corporation, its general partner By: /s/ Leigh A. Watters Name: Leigh A. Watters Title: Vice President This instrument prepared by: Mitchell G. Williams, Esq. Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 ACKNOWLEDGMENT STATE OF New York ) ) COUNTY OF New York ) I, the undersigned, a Notary Public of the County and State aforesaid, certify that Leigh A. Watters, who is known to me, acknowledged before me that he is Vice President, of GP Services XIX, Inc., a South Carolina corporation, that by authority duly given and as the act of the corporation in its capacity as a general partner in and on behalf of VMS Apartment Portfolio Associates III, a California general partnership, signed the foregoing conveyance, and that being informed of the contents of the conveyance he in his capacity as such officer of the Corporation, executed the same voluntarily on behalf of the Partnership on the day the same bears date. Given under my hand this the 31st day of December, 1997. /s/ Lucesita A. Lombillo Notary Public Name: Lucesita A. Lombillo Notary Public, State of New York No. 31-5066748 Qualified in Queens County Commission Expires September 30, 1998 EXHIBIT A Legal Description EX-10.EC 5 RECORD AND RETURN TO: Thacher Proffitt & Wood 2 World Trade Center New York, New York 10048 Attention: Carson M. Leonard Counsel File No. 16248-00328 ABSOLUTE ASSIGNMENT OF LEASES AND RENTS VMS APARTMENT PORTFOLIO ASSOCIATES III, a California general partnership (Assignor) to LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., as assignee (Assignee) Dated: As of December 31, 1997 Location: Rivercrest Apartments Sacramento, California Sacramento County THIS ABSOLUTE ASSIGNMENT OF LEASES AND RENTS ("Assignment") made as of the 31st day of December, 1997, by VMS APARTMENT PORTFOLIO ASSOCIATES III, a California partnership, as assignor, having an address at c/o Insignia Financial Group, Inc., One Insignia Financial Plaza, Greenville, South Carolina 29601 ("Borrower") to LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, as assignee, having an address at Three World Financial Center, 200 Vesey Street, New York, New York 10285 ("Lender"). RECITALS: Borrower by its promissory note of even date herewith given to Lender is indebted to Lender in the principal sum of $11,600,000 in lawful money of the United States of America (together with all extensions, renewals, modifications, substitutions and amendments thereof, the "Note"), with interest from the date thereof at the rates set forth in the Note, principal and interest to be payable in accordance with the terms and conditions provided in the Note. Borrower desires to secure the payment of the Debt (defined below) and the performance of all of its obligations under the Note and the Other Obligations as defined in Article 2 of the Security Instrument (defined below). 1. ASSIGNMENT 1.1 PROPERTY ASSIGNED. Borrower hereby absolutely and unconditionally assigns and grants to Lender the following property, rights, interests and estates, now owned, or hereafter acquired by Borrower: (a) Leases. All existing and future leases affecting the use, enjoyment, or occupancy of all or any part of that certain lot or piece of land, more particularly described in Exhibit A annexed hereto and made a part hereof, together with the buildings, structures, fixtures, additions, enlargements, extensions, modifications, repairs, replacements and improvements now or hereafter located thereon (collectively, the "Property") and the right, title and interest of Borrower, its successors and assigns, therein and thereunder. (b) Other Leases and Agreements. All other leases and other agreements, whether or not in writing, affecting the use, enjoyment or occupancy of the Property or any portion thereof now or hereafter made, whether made before or after the filing by or against Borrower of any petition for relief under 11 U.S.C. Section101 et seq., as the same may be amended from time to time (the "Bankruptcy Code") together with any extension, renewal or replacement of the same, this Assignment of other present and future leases and present and future agreements being effective without further or supplemental assignment. The leases described in Subsection 1.1(a) and the leases and other agreements described in this Subsection 1.1(b), together with all other present and future leases and present and future agreements and any extension or renewal of the same are collectively referred to as the "Leases". (c) Rents. All rents, additional rents, revenues, income, issues and profits arising from the Leases and renewals and replacements thereof and any cash or security deposited in connection therewith and together with all rents, revenues, income, issues and profits (including all oil and gas or other mineral royalties and bonuses) from the use, enjoyment and occupancy of the Property whether paid or accruing before or after the filing by or against Borrower of any petition for relief under the Bankruptcy Code (collectively, the "Rents"). (d) Bankruptcy Claims. All of Borrower's claims and rights (the "Bankruptcy Claims") to the payment of damages arising from any rejection by a lessee of any Lease under the Bankruptcy Code, 11 U.S.C. Section101 et seq., as the same may be amended (the "Bankruptcy Code"). (e) Lease Guaranties. All of Borrower's right, title and interest in and claims under any and all lease guaranties, letters of credit and any other credit support given by any guarantor in connection with any of the Leases (individually, a "Lease Guarantor", collectively, the "Lease Guarantors") to Borrower (individually, a "Lease Guaranty", collectively, the "Lease Guaranties"). (f) Proceeds. All proceeds from the sale or other disposition of the Leases, the Rents, the Lease Guaranties and the Bankruptcy Claims. (g) Other. All rights, powers, privileges, options and other benefits of Borrower as lessor under the Leases and beneficiary under the Lease Guaranties, including without limitation the immediate and continuing right to make claim for, receive, collect and receipt for all Rents payable or receivable under the Leases and all sums payable under the Lease Guaranties or pursuant thereto (and to apply the same to the payment of the Debt or the Other Obligations), and to do all other things which Borrower or any lessor is or may become entitled to do under the Leases or the Lease Guaranties. (h) Entry. The right, at Lender's option, upon revocation of the license granted herein, to enter upon the Property in person, by agent or by court-appointed receiver, to collect the Rents. (i) Power of Attorney. Borrower's irrevocable power of attorney, coupled with an interest, to take any and all of the actions set forth in Section 3.1 of this Assignment and any or all other actions designated by Lender for the proper management and preservation of the Property. (j) Other Rights and Agreements. Any and all other rights of Borrower in and to the items set forth in subsections (a) through (i) above, and all amendments, modifications, replacements, renewals and substitutions thereof. 1.2 CONSIDERATION. This Assignment is made in consideration of that certain loan made by Lender to Borrower evidenced by the Note and secured by that certain mortgage and security agreement, deed of trust and security agreement, deed to secure debt and security agreement or similar real estate security instrument given by Borrower to or for the benefit of Lender, dated the date hereof covering the Property and intended to be duly recorded (the "Security Instrument"). The principal sum, interest and all other sums due and payable under the Note, the Security Instrument, this Assignment and the Other Security Documents (defined below) are collectively referred to as the "Debt". The documents other than this Assignment, the Note or the Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender which wholly or partially secure or guarantee payment of the Debt are referred to herein as the "Other Security Documents". 2. TERMS OF ASSIGNMENT 2.1 PRESENT ASSIGNMENT AND LICENSE BACK. It is intended by Borrower that this Assignment constitute a present, absolute assignment of the Leases, Rents, Lease Guaranties and Bankruptcy Claims, and not an assignment for additional security only. Nevertheless, subject to the terms of this Section 2.1, Lender grants to Borrower a revocable license to collect and receive the Rents and other sums due under the Lease Guaranties. Borrower shall hold the Rents and all sums received pursuant to any Lease Guaranty, or a portion thereof sufficient to discharge all current sums due on the Debt, in trust for the benefit of Lender for use in the payment of such sums. 2.2 NOTICE TO LESSEES. Borrower hereby agrees to authorize and direct the lessees named in the Leases or any other or future lessees or occupants of the Property and all Lease Guarantors to pay over to Lender or to such other party as Lender directs all Rents and all sums due under any Lease Guaranties upon receipt from Lender of written notice to the effect that Lender is then the holder of the Security Instrument and that a Default (defined below) exists, and to continue so to do until otherwise notified by Lender. 2.3 INCORPORATION BY REFERENCE. All representations, warranties, covenants, conditions and agreements contained in the Security Instrument as same may be modified, renewed, substituted or extended are hereby made a part of this Assignment to the same extent and with the same force as if fully set forth herein. 3. REMEDIES 3.1 REMEDIES OF LENDER. Upon or at any time after the occurrence of a default under this Assignment or an Event of Default (as defined in the Security Instrument) (a "Default"), the license granted to Borrower in Section 2.1 of this Assignment shall automatically be revoked, and Lender shall immediately be entitled to possession of all Rents and sums due under any Lease Guaranties, whether or not Lender enters upon or takes control of the Property. In addition, Lender may, at its option, without waiving such Default, without notice and without regard to the adequacy of the security for the Debt, either in person or by agent, nominee or attorney, with or without bringing any action or proceeding, or by a receiver appointed by a court, dispossess Borrower and its agents and servants from the Property, without liability for trespass, damages or otherwise and exclude Borrower and its agents or servants wholly therefrom, and take possession of the Property and all books, records and accounts relating thereto and have, hold, manage, lease and operate the Property on such terms and for such period of time as Lender may deem proper and either with or without taking possession of the Property in its own name, demand, sue for or otherwise collect and receive all Rents and sums due under all Lease Guaranties, including those past due and unpaid with full power to make from time to time all alterations, renovations, repairs or replacements thereto or thereof as may seem proper to Lender and may apply the Rents and sums received pursuant to any Lease Guaranties to the payment of the following in such order and proportion as Lender in its sole discretion may determine, any law, custom or use to the contrary notwithstanding: (a) all expenses of managing and securing the Property, including, without being limited thereto, the salaries, fees and wages of a managing agent and such other employees or agents as Lender may deem necessary or desirable and all expenses of operating and maintaining the Property, including, without being limited thereto, all taxes, charges, claims, assessments, water charges, sewer rents and any other liens, and premiums for all insurance which Lender may deem necessary or desirable, and the cost of all alterations, renovations, repairs or replacements, and all expenses incident to taking and retaining possession of the Property; and (b) the Debt, together with all costs and reasonable attorneys' fees. In addition, upon the occurrence of a Default, Lender, at its option, may (1) complete any construction on the Property in such manner and form as Lender deems advisable, (2) exercise all rights and powers of Borrower, including, without limitation, the right to negotiate, execute, cancel, enforce or modify Leases, obtain and evict tenants, and demand, sue for, collect and receive all Rents from the Property and all sums due under any Lease Guaranties, (3) either require Borrower to pay monthly in advance to Lender, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupancy of such part of the Property as may be in possession of Borrower or (4) require Borrower to vacate and surrender possession of the Property to Lender or to such receiver and, in default thereof, Borrower may be evicted by summary proceedings or otherwise. 3.2 OTHER REMEDIES. Nothing contained in this Assignment and no act done or omitted by Lender pursuant to the power and rights granted to Lender hereunder shall be deemed to be a waiver by Lender of its rights and remedies under the Note, the Security Instrument, or the Other Security Documents and this Assignment is made and accepted without prejudice to any of the rights and remedies possessed by Lender under the terms thereof. The right of Lender to collect the Debt and to enforce any other security therefor held by it may be exercised by Lender either prior to, simultaneously with, or subsequent to any action taken by it hereunder. Borrower hereby absolutely, unconditionally and irrevocably waives any and all rights to assert any setoff, counterclaim or crossclaim of any nature whatsoever with respect to the obligations of Borrower under this Assignment, the Note, the Security Instrument, the Other Security Documents or otherwise with respect to the loan secured hereby in any action or proceeding brought by Lender to collect same, or any portion thereof, or to enforce and realize upon the lien and security interest created by this Assignment, the Note, the Security Instrument, or any of the Other Security Documents (provided, however, that the foregoing shall not be deemed a waiver of Borrower's right to assert any compulsory counterclaim if such counterclaim is compelled under local law or rule of procedure, nor shall the foregoing be deemed a waiver of Borrower's right to assert any claim which would constitute a defense, setoff, counterclaim or crossclaim of any nature whatsoever against Lender in any separate action or proceeding). 3.3 OTHER SECURITY. Lender may take or release other security for the payment of the Debt, may release any party primarily or secondarily liable therefor and may apply any other security held by it to the reduction or satisfaction of the Debt without prejudice to any of its rights under this Assignment. 3.4 NON-WAIVER. The exercise by Lender of the option granted it in Section 3.1 of this Assignment and the collection of the Rents and sums due under the Lease Guaranties and the application thereof as herein provided shall not be considered a waiver of any default by Borrower under the Note, the Security Instrument, the Leases, this Assignment or the Other Security Documents. The failure of Lender to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Assignment. Borrower shall not be relieved of Borrower's obligations hereunder by reason of (a) the failure of Lender to comply with any request of Borrower or any other party to take any action to enforce any of the provisions hereof or of the Security Instrument, the Note or the Other Security Documents, (b) the release regardless of consideration, of the whole or any part of the Property, or (c) any agreement or stipulation by Lender extending the time of payment or otherwise modifying or supplementing the terms of this Assignment, the Note, the Security Instrument or the Other Security Documents. Lender may resort for the payment of the Debt to any other security held by Lender in such order and manner as Lender, in its discretion, may elect. Lender may take any action to recover the Debt, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Lender thereafter to enforce its rights under this Assignment. The rights of Lender under this Assignment shall be separate, distinct, nonexclusive and cumulative, shall be in addition to any other remedies to which Lender is entitled under the law, and none shall be given effect to the exclusion of the others. No act of Lender shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. 3.5 BANKRUPTCY. (a) Upon or at any time after the occurrence of a Default, Lender shall have the right to proceed in its own name or in the name of Borrower in respect of any claim, suit, action or proceeding relating to the rejection of any Lease, including, without limitation, the right to file and prosecute, to the exclusion of Borrower, any proofs of claim, complaints, motions, applications, notices and other documents, in any case in respect of the lessee under such Lease under the Bankruptcy Code. (b) If there shall be filed by or against Borrower a petition under the Bankruptcy Code, and Borrower, as lessor under any Lease, shall determine to reject such Lease pursuant to Section 365(a) of the Bankruptcy Code, then Borrower shall give Lender not less than ten (10) days' prior notice of the date on which Borrower shall apply to the bankruptcy court for authority to reject the Lease. Lender shall have the right, but not the obligation, to serve upon Borrower within such ten-day period a notice stating that (i) Lender demands that Borrower assume and assign the Lease to Lender pursuant to Section 365 of the Bankruptcy Code and (ii) Lender covenants to cure or provide adequate assurance of future performance under the Lease. If Lender serves upon Borrower the notice described in the preceding sentence, Borrower shall not seek to reject the Lease and shall comply with the demand provided for in clause (i) of the preceding sentence within thirty (30) days after the notice shall have been given, subject to the performance by Lender of the covenant provided for in clause (ii) of the preceding sentence. 4. NO LIABILITY, FURTHER ASSURANCES 4.1 NO LIABILITY OF LENDER. This Assignment shall not be construed to bind Lender to the performance of any of the covenants, conditions or provisions contained in any Lease or Lease Guaranty or otherwise impose any obligation upon Lender. Lender shall not be liable for any loss sustained by Borrower resulting from Lender's failure to let the Property after a Default or from any other act or omission of Lender in managing the Property after a Default unless such loss is caused by the willful misconduct and bad faith of Lender. Lender shall not be obligated to perform or discharge any obligation, duty or liability under the Leases or any Lease Guaranties or under or by reason of this Assignment and Borrower shall, and hereby agrees, to indemnify Lender for, and to hold Lender harmless from, any and all liability, loss or damage which may or might be incurred under the Leases, any Lease Guaranties or under or by reason of this Assignment and from any and all claims and demands whatsoever, including the defense of any such claims or demands which may be asserted against Lender by reason of any alleged obligations and undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in the Leases or any Lease Guaranties. Should Lender incur any such liability, the amount thereof, including costs, expenses and reasonable attorneys' fees, shall be secured by this Assignment and by the Security Instrument and the Other Security Documents and Borrower shall reimburse Lender therefor immediately upon demand and upon the failure of Borrower so to do Lender may, at its option, declare all sums secured by this Assignment and by the Security Instrument and the Other Security Documents immediately due and payable. This Assignment shall not operate to place any obligation or liability for the control, care, management or repair of the Property upon Lender, nor for the carrying out of any of the terms and conditions of the Leases or any Lease Guaranties; nor shall it operate to make Lender responsible or liable for any waste committed on the Property by the tenants or any other parties, or for any dangerous or defective condition of the Property, including without limitation the presence of any Hazardous Substances (as defined in the Security Instrument), or for any negligence in the management, upkeep, repair or control of the Property resulting in loss or injury or death to any tenant, licensee, employee or stranger. 4.2 NO MORTGAGEE IN POSSESSION. Nothing herein contained shall be construed as constituting Lender a "mortgagee in possession" in the absence of the taking of actual possession of the Property by Lender. In the exercise of the powers herein granted Lender, no liability shall be asserted or enforced against Lender, all such liability being expressly waived and released by Borrower. 4.3 FURTHER ASSURANCES. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, conveyances, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, require for the better assuring, conveying, assigning, transferring and confirming unto Lender the property and rights hereby assigned or intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out the intention or facilitating the performance of the terms of this Assignment or for filing, registering or recording this Assignment and, on demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien and security interest hereof in and upon the Leases. 5. MISCELLANEOUS PROVISIONS 5.1 CONFLICT OF TERMS. In case of any conflict between the terms of this Assignment and the terms of the Security Instrument, the terms of the Security Instrument shall prevail. 5.2 NO ORAL CHANGE. This Assignment and any provisions hereof may not be modified, amended, waived, extended, changed, discharged or terminated orally, or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom the enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 5.3 CERTAIN DEFINITIONS. Unless the context clearly indicates a contrary intent or unless otherwise specifically provided herein, words used in this Assignment may be used interchangeably in singular or plural form and the word "Borrower " shall mean "each Borrower and any subsequent owner or owners of the Property or any part thereof or interest therein," the word "Lender" shall mean "Lender and any subsequent holder of the Note," the word "Note" shall mean "the Note and any other evidence of indebtedness secured by the Security Instrument," the word "person" shall include an individual, corporation, partnership, trust, unincorporated association, government, governmental authority, and any other entity, the word "Property" shall include any portion of the Property and any interest therein, the phrases "attorneys' fees", "legal fees" and "counsel fees" shall include any and all attorneys', paralegal and law clerk fees and disbursements, including, but not limited to, fees and disbursements at the pre-trial, trial and appellate levels incurred or paid by Lender in protecting its interest in the Property, the Leases and the Rents and enforcing its rights hereunder, and the word "Debt" shall mean the principal balance of the Note with interest thereon as provided in the Note and the Security Instrument and all other sums due pursuant to the Note, the Security Instrument, this Assignment and the Other Security Documents; whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 5.4 AUTHORITY. Borrower represents and warrants that it has full power and authority to execute and deliver this Assignment and the execution and delivery of this Assignment has been duly authorized and does not conflict with or constitute a default under any law, judicial order or other agreement affecting Borrower or the Property. 5.5 INAPPLICABLE PROVISIONS. If any term, covenant or condition of this Assignment is held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 5.6 DUPLICATE ORIGINALS; COUNTERPARTS. This Assignment may be executed in any number of duplicate originals and each such duplicate original shall be deemed to be an original. This Assignment may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Assignment. The failure of any party hereto to execute this Assignment, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 5.7 CHOICE OF LAW. This Assignment shall be governed, construed, applied and enforced in accordance with the laws of the state in which the Property is located and the applicable laws of the United States of America. 5.8 TERMINATION OF ASSIGNMENT. Upon payment in full of the Debt and the delivery and recording of a satisfaction or discharge of Security Instrument duly executed by Lender, this Assignment shall become and be void and of no effect. 5.9 NOTICES. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed to Borrower or Lender at their addresses set forth in the Security Instrument or addressed as such party may from time to time designate by written notice to the other parties. For purposes of this Section 5.9, the term "Business Day" shall mean a day on which commercial banks are not authorized or required by law to close in New York, New York. Either party by notice to the other may designate additional or different addresses for subsequent notices or communications. 5.10 WAIVER OF TRIAL BY JURY. BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO THE LOAN EVIDENCED BY THE NOTE, THE APPLICATION FOR THE LOAN EVIDENCED BY THE NOTE, THIS ASSIGNMENT, THE NOTE, THE SECURITY INSTRUMENT OR THE OTHER SECURITY DOCUMENTS OR ANY ACTS OR OMISSIONS OF LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN CONNECTION THEREWITH. 5.11 SUBMISSION TO JURISDICTION. With respect to any claim or action arising hereunder, Borrower (a) irrevocably submits to the nonexclusive jurisdiction of the courts of the State in which the Property is located, the State of New York and the United States District Court located in the Borough of Manhattan in New York, New York and the county in which the Property is located, and appellate courts from any thereof, and (b) irrevocably waives any objection which it may have at any time to the laying on venue of any suit, action or proceeding arising out of or relating to this Assignment brought in any such court, irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 5.12 LIABILITY. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Assignment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. 5.13 HEADINGS, ETC. The headings and captions of various paragraphs of this Assignment are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 5.14 NUMBER AND GENDER. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 5.15 SOLE DISCRETION OF LENDER. Wherever pursuant to this Assignment (a) Lender exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Lender, or (c) any other decision or determination is to be made by Lender, the decision of Lender to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by Lender, shall be in the sole and absolute discretion of Lender and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. 5.16 COSTS AND EXPENSES OF BORROWER. Wherever pursuant to this Assignment it is provided that Borrower pay any costs and expenses, such costs and expenses shall include, but not be limited to, legal fees and disbursements of Lender, whether of retained firms, the reimbursement of the expenses for in-house staff or otherwise. 5.17 EXCULPATION. Borrower's obligations under this Assignment are subject to the provisions of paragraph 55 of the Security Instrument, and such provisions are incorporated herein by reference. 6. SPECIAL CALIFORNIA PROVISIONS 6.1 INCONSISTENCIES. In the event of any inconsistencies between the terms and conditions of this Article 6 and any other terms of this Assignment, the terms and conditions of this Article 6 shall control and be binding. 6.2 Section 1.2 is renamed "THE LOAN". The words "This Assignment is made in consideration of that certain loan made by Lender to Borrower evidenced by the Note and" are deleted from the first sentence of Section 1.2 and replaced with the words "The Note is". 6.3 The word "other" is hereby deleted from Section 3.2 entitled "OTHER REMEDIES" and Section 3.3 entitled "OTHER SECURITY" wherever it shall appear in the body of such paragraphs, except where it is capitalized and used in a defined term. 6.4 Section 5.7 Entitled "CHOICE OF LAW" is hereby deleted in its entirety and the following is substituted therefor: THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS ASSIGNMENT SHALL BE GOVERNED BY, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS-OF-LAW RULES AND PRINCIPALS OF SUCH STATE (EXCEPT SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW). ASSIGNOR AND ASSIGNEE FURTHER ACKNOWLEDGE, AGREE AND STIPULATE THAT THE STATE OF NEW YORK HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES INVOLVED IN THIS TRANSACTION AND TO THE UNDERLYING TRANSACTIONS SECURED BY THIS ASSIGNMENT. NOTWITHSTANDING THE FOREGOING, THE PARTIES FURTHER AGREE THAT: (a) THE PROCEDURES GOVERNING THE ENFORCEMENT BY BENEFICIARY AND TRUSTEE OF PROVISIONAL REMEDIES AGAINST ASSIGNOR DIRECTLY RELATING TO THE PROPERTY ENCUMBERED HEREBY, INCLUDING, BY WAY OF ILLUSTRATION BUT NOT LIMITATION, ANY SUCH ACTIONS FOR REPLEVIN, FOR CLAIM AND DELIVERY OF PROPERTY, OR FOR THE APPOINTMENT OF A RECEIVER, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA; AND (b) CALIFORNIA LAW SHALL APPLY TO THE EXTENT, BUT ONLY TO THE EXTENT, NECESSARY IN ORDER TO CREATE, PERFECT AND FORECLOSE THE SECURITY INTERESTS AND ASSIGNMENT OF RENTS AND LEASES ARISING UNDER THIS ASSIGNMENT; PROVIDED, HOWEVER, THAT NOTHING IN THIS SECTION SHALL IN ANY EVENT BE CONSTRUED TO PROVIDE THAT THE SUBSTANTIVE LAW OF THE STATE OF CALIFORNIA SHALL APPLY TO THE OBLIGATIONS AND INDEBTEDNESS SECURED BY THIS ASSIGNMENT, WHICH ARE AND SHALL CONTINUE TO BE GOVERNED BY THE SUBSTANTIVE LAW OF THE STATE OF NEW YORK. 6.5 The words "additional security" are hereby deleted whenever they shall appear in this Assignment. THIS ASSIGNMENT, together with the covenants and warranties therein contained, shall inure to the benefit of Lender and any subsequent holder of the Security Instrument and shall be binding upon Borrower, its heirs, executors, administrators, successors and assigns and any subsequent owner of the Property. IN WITNESS WHEREOF, Borrower has executed this instrument as of the day and year first above written. VMS APARTMENT PORTFOLIO ASSOCIATES III, a California general partnership By: G P SERVICES XIX, INC., a South Carolina corporation, its general partner By: /s/ Leigh A. Watters Name: Leigh A. Watters Title: Vice President ACKNOWLEDGEMENT STATE OF New York ) ) COUNTY OF New York ) I, the undersigned, a Notary Public of the County and State aforesaid, certify that Leigh A. Watters, who is known to me, acknowledged before me that he is Vice President, of GP Services XIX, Inc., a South Carolina corporation, that by authority duly given and as the act of the corporation in its capacity as a general partner in and on behalf of VMS Apartment Portfolio Associates III, a California general partnership, signed the foregoing conveyance, and that being informed of the contents of the conveyance he in his capacity as such officer of the Corporation, executed the same voluntarily on behalf of the Partnership on the day the same bears date. Given under my hand this the 31st day of December, 1997. /s/ Lucesita A. Lombillo Notary Public Name: Lucesita A. Lombillo Notary Public, State of New York No. 31-5066748 Qualified in Queens County Commisson Expires Septemer 30, 1998 EXHIBIT A Legal Description of Property EX-10.FA 6 PROMISSORY NOTE $16,900,000.00 New York, New York As of December 31, 1997 FOR VALUE RECEIVED VMS APARTMENT PORTFOLIO ASSOCIATES II, a California general partnership, having an address at c/o Insignia Financial Group, Inc., One Insignia Financial Plaza, Greenville, South Carolina 29601 (hereinafter referred to as "Borrower"), promises to pay to the order of LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, having an address at Three World Financial Center, 200 Vesey Street, New York, New York 10285 (hereinafter referred to as "Lender"), or at such other place as the holder hereof may from time to time designate in writing, the principal sum of SIXTEEN MILLION NINE HUNDRED THOUSAND AND 00/100 Dollars ($16,900,000.00), in lawful money of the United States of America with interest thereon to be computed from the date of this Note at the Applicable Interest Rate (hereinafter defined), and to be paid as hereinafter provided. A. PAYMENT TERMS Borrower shall pay to Lender: (i) a payment of interest only on the date hereof; (ii) a constant payment of $116,160.25 (the "Monthly Payment") on February 1, 1998 and on the first day of each calendar month (the "Monthly Payment Date") thereafter to and including the first day of December, 2004; and (iii)the balance of the principal sum then outstanding and all interest thereon shall be due and payable on the first day of January, 2005 (the "Maturity Date"). Each of such payments shall be applied as follows: (i) First to the payment of interest computed at the Applicable Interest Rate; and (ii) The balance applied toward the reduction of the principal sum. B. INTEREST The term "Applicable Interest Rate" as used in this Note shall mean 7.326% per annum. Interest on the principal sum of this Note shall be calculated by multiplying the actual number of days elapsed in the period for which interest is being calculated by a daily rate based on a 360-day year. C. DEFAULT AND ACCELERATION The whole of the principal sum of this Note, together with all interest accrued and unpaid thereon and all other sums due under the Security Instrument (hereinafter defined) and this Note (all such sums hereinafter collectively referred to as the "Debt") shall without notice become immediately due and payable at the option of Lender if any payment required in this Note is not paid within ten (10) days after written notice from the Lender notifying Borrower that the same is due or on the happening of any other default, after the expiration of any applicable notice and grace periods, herein or under the terms of the Security Instrument (hereinafter collectively an "Event of Default"). All of the terms, covenants and conditions contained in the Security Instrument and the Other Security Documents (hereinafter defined) are hereby made part of this Note to the same extent and with the same force as if they were fully set forth herein. In the event that it should become necessary to employ counsel to collect the Debt or to protect, sell or foreclose the security hereof, Borrower also agrees to pay reasonable attorney's fees for the services of such counsel whether or not suit be brought. D. PREPAYMENT Borrower shall not have the right or privilege to prepay all or any portion of the unpaid principal balance of this Note until December 31, 2000. Beginning January 1, 2001, provided no Event of Default exists, the principal balance of this Note may be prepaid, in whole but not in part, upon: (i) not less than 30 days and not more than 45 days prior written notice (the "Prepayment Notice") to Lender specifying the scheduled payment date on which prepayment is to be made (the "Prepayment Date"); (ii) payment of all accrued and unpaid interest on the outstanding principal balance of this Note to and including the Prepayment Date together with a payment of all interest which would have accrued on the principal balance of this Note to and including the first day of the calendar month immediately following the Prepayment Date, if such prepayment occurs on a date which is not the first day of a calendar month (the "Shortfall Interest Payment"); (iii) payment of all other sums then due under this Note, the Security Instrument and the Other Security Documents and (iv) if the Prepayment Date occurs prior to the date which is six months prior to the Maturity Date payment of a prepayment consideration (the "Prepayment Consideration") in an amount equal to the greater of: (A) one (1%) percent of the principal amount of this Note being prepaid; and (B) the present value of a series of payments each equal to the Payment Differential (hereinafter defined) and payable on each monthly payment date over the remaining original term of this Note and on the Maturity Date discounted at the Reinvestment Yield (hereinafter defined) for the number of months remaining from the Prepayment Date to each such monthly payment date and the Maturity Date. The term "Reinvestment Yield" as used herein shall be equal to the lesser of (a) the yield on the U.S. Treasury issue (primary issue) with a maturity date closest to the Maturity Date, or (b) the yield on the U.S. Treasury issue (primary issue) with a term equal to the remaining average life of the Debt, with each such yield being based on the bid price for such issue as published in The Wall Street Journal on the date that is 14 days prior to the Prepayment Date set forth in the Prepayment Notice (or, if such bid price is not published on that date, the next preceding date on which such bid price is so published) and converted to a monthly compounded nominal yield. The term "Payment Differential" as used herein shall be equal to (x) the Applicable Interest Rate minus the Reinvestment Yield, divided by (y) 12 and multiplied by (z) the principal sum outstanding on such Prepayment Date after application of the Constant Monthly Payment (if any) due on such Prepayment Date, provided that the Payment Differential shall in no event be less than zero. In no event, however, shall Lender be required to reinvest any prepayment proceeds in U.S. Treasury obligations or otherwise. Lender shall notify Borrower of the amount, and the basis of determination, of the required Prepayment Consideration. If a Prepayment Notice is given by Borrower to Lender pursuant to this Article D, the principal balance of this Note and the other sums required under this Article D shall be due and payable on the Prepayment Date. Lender shall not be obligated to accept any prepayment of the principal balance of this Note unless it is accompanied by all sums due in connection therewith. Notwithstanding anything contained herein to the contrary, provided no Event of Default exists, no Prepayment Consideration shall be due in connection with a complete or partial prepayment resulting from the application of insurance proceeds or condemnation awards pursuant to paragraphs 3 and 6 of the Security Instrument. In the event of any permitted partial prepayment of the principal balance of this Note, the amount of principal prepaid (but not including any Prepayment Consideration or interest) shall be applied to the principal last due under this Note and shall not release Borrower from the obligation to pay the Constant Monthly Payments next becoming due under this Note and the Constant Monthly Payment shall not be adjusted or recalculated as a result of such partial prepayment. If a Default Prepayment (defined herein) occurs prior to the date which is six months prior to the Maturity Date, Borrower shall pay to Lender the entire Debt, including, without limitation, the Prepayment Consideration. For purposes of this Note, the term "Default Prepayment" shall mean a prepayment of the principal amount of this Note made during the continuance of any Event of Default or after an acceleration of the Maturity Date under any circumstances, including, without limitation, a prepayment occurring in connection with reinstatement of the Security Instrument provided by statute under foreclosure proceedings or exercise of a power of sale, any statutory right of redemption exercised by Borrower or any other party having a statutory right to redeem or prevent foreclosure, any sale in foreclosure or under exercise of a power of sale or otherwise. Notwithstanding any provision of this Article D to the contrary, Lender may require Borrower, in lieu of a prepayment as contemplated in the first paragraph of this Article D, to deliver to Lender the Defeasance Collateral (hereinafter defined) in the manner contemplated herein. After Lender's receipt of the Prepayment Notice, Lender shall, if it so elects, advise Borrower that, in lieu of a prepayment, the Defeasance Collateral shall be required, in which event Borrower shall be entitled to a release of the Property (hereinafter defined) from the lien of the Security Instrument and the Other Security Documents upon satisfaction of the following: I. Lender shall have received written confirmation from the rating agencies that have rated the REMIC "real estate mortgage investment conduit" (defined in Section 860D of the Internal Revenue Code of 1986, as amended from time to time or any successor statute (the "Code")) ("REMIC") related to the Securities (as defined in the Security Instrument) that such substitution of Defeasance Collateral will not result in a downgrade, withdrawal or qualification of the ratings then assigned to any of the Securities; provided, however, that in the event that Lender or its agent is unable to obtain such confirmation, the Lender or its agent shall so advise Borrower and Borrower will then be subject to the other provisions of this Article D set forth above; II. all accrued and unpaid interest and all other sums due under this Note, the Security Instrument and other Security Documents up to the date of the delivery of the Defeasance Collateral (the "Release Date"), including, without limitation, all costs and expenses incurred by Lender or its agents in connection with such release (including, without limitation, the review of the proposed Defeasance Collateral and the preparation of the Defeasance Security Agreement (as hereinafter defined) and the related documentation), shall be fully paid on or before the Release Date; and III. Borrower shall have delivered to Lender on or before the Release Date: (a) a pledge and security agreement, in form and substance satisfactory to Lender in its sole discretion, creating a first priority security interest in favor of Lender in the Defeasance Collateral (the "Defeasance Security Agreement"), which shall provide, among other things, that any excess received by Lender from the Defeasance Collateral over the amount payable by Borrower hereunder shall be refunded to Borrower promptly following each Monthly Payment Date and the Maturity Date; (b) direct, non-callable obligations of the United States of America (the "US Obligations") that provide for payments prior, but as close as possible, to all successive Monthly Payment Dates occurring after the Release Date and the Maturity Date, with each such payment being equal to or greater than the amount of the corresponding Constant Monthly Payment required to be paid under this Note for the balance of the term hereof and the amount required to be paid on the Maturity Date (the "Defeasance Collateral"), each of which shall be duly endorsed by the holder thereof as directed by Lender or accompanied by a written instrument of transfer in form and substance wholly satisfactory to Lender (including, without limitation, such instrument as may be required by the depository institution holding such securities or the issuer thereof, as the case may be, to effectuate book-entry transfers and pledges through the book-entry facilities of such institution) in order to perfect upon the delivery of the Defeasance Security Agreement the first priority security interest therein in favor of the Lender in conformity with all applicable state and federal laws governing the granting of such security interests; Borrower shall authorize and direct that the payments received from the U.S. Obligations shall be made directly to Lender or Lender's designee and applied to satisfy the Obligations of Borrower under this Note; (c) evidence reasonably satisfactory to Lender that title to the Release Property has been transferred to an entity other than Borrower. (d) Lender shall have received an opinion of Borrower's counsel, dated as of the Release Date, in form reasonably satisfactory to Lender stating, among other things, that (A) the Defeasance Collateral and the U.S. Obligations have been duly and validly assigned and delivered to Lender and Lender has a valid, perfected, first priority lien and security interest in the Defeasance Collateral delivered by Borrower, (B) the Defeasance Collateral has been validly assigned to the REMIC, (C) the Defeasance has been effected in accordance with the requirements of Treasury Regulation 1.860(g)-2(a)(8) (as such regulation may be amended or substituted from time to time) and will not be treated as an exchange pursuant to Section 1001 of the Code and (D) the tax qualification and status of the REMIC will not be adversely affected or impaired as a result of the Defeasance. (e) a certificate by Borrower's independent public accountant certifying that all of the requirements set forth in Clause I and II above and this Clause III have been fully satisfied; and (f) such other certificates, documents or instruments as Lender may reasonably require. Notwithstanding the foregoing, no such Release shall be made, given or be deemed effective under this Article D until the first day after expiration of the period during which the delivery to Lender of the Defeasance Collateral in connection therewith is subject to avoidance and recovery as a preferential transfer under 11 U.S.C. Section 547 in the event of a bankruptcy of the delivering person or entity without such avoidance and recovery (which day shall be identified in writing by Borrower at any time that Borrower delivers the Defeasance Collateral to Lender), unless Lender receives, at the time of such delivery, an opinion of counsel to the effect that such delivery of the Defeasance Collateral would not be avoided and recovered as a preferential transfer under 11 U.S.C. Section547 in the event of the filing of a bankruptcy petition in respect of the conveying or delivering person or entity. Upon compliance with the foregoing requirements relating to the delivery of the Defeasance Collateral, the Property shall be released from the lien of the Security Instrument and the Other Security Documents and the Defeasance Collateral shall constitute collateral which shall secure this Note and the Debt. Lender will, at Borrower's expenses, execute and deliver any agreements reasonably requested by Borrower to release the lien of the Security Instrument from the Property. Upon the release by the Lender in accordance with this Article D, Borrower shall have no further right to prepay this Note pursuant to the other provisions of this Article D or otherwise. E. DEFAULT INTEREST Borrower does hereby agree that upon the occurrence of an Event of Default or upon the failure of Borrower to pay the Debt in full on the Maturity Date, Lender shall be entitled to receive and Borrower shall pay interest ("Default Interest") on the entire unpaid principal sum at the rate of (i) the greater of (a) two percent (2%) over the Prime Rate (hereinafter defined), as such Prime Rate shall change from time to time or (b) five percent (5%) over the Applicable Interest Rate then in effect or (ii) the maximum rate of interest which Borrower may by law pay, whichever is lower, to be computed from the occurrence of the Event of Default until the actual receipt and collection of the Debt (the "Default Interest Rate"). This charge shall be added to the Debt, and shall be deemed secured by the Security Instrument. This clause, however, shall not be construed as an agreement or privilege to extend the date of the payment of the Debt, nor as a waiver of any other right or remedy accruing to Lender by reason of the occurrence of any Event of Default. The term "Prime Rate" as used in this Note shall mean the daily "prime rate" published in The Wall Street Journal from the date of the Event of Default, as such "prime rate" shall change from time to time. In the event The Wall Street Journal ceases to publish the "prime rate" then Lender shall select an equivalent publication which publishes such "prime rate"; and in the event such prime rates are no longer generally published or are limited, regulated or administered by a governmental or quasi-governmental body, then Lender shall select a comparable interest rate index. F. SECURITY This Note is secured by the Security Instrument and the Other Security Documents. The term "Security Instrument" as used in this Note shall mean the Deed of Trust and Security Agreement dated as of the date hereof in the principal sum of $16,900,000.00 given by Borrower to Lender encumbering the fee estate of Borrower in certain premises located in Marin County, State of California and other property, as more particularly described therein and intended to be duly recorded in said County. The term "Other Security Documents" as used in this Note shall mean all and any of the documents other than this Note or the Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender, which wholly or partially secure or guarantee payment of this Note. Whenever used, the singular number shall include the plural, the plural the singular, and the words "Lender" and "Borrower" shall include their respective successors, assigns, heirs, executors and administrators. G. SAVINGS CLAUSE This Note is subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the principal balance due hereunder at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay. If by the terms of this Note, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of such maximum rate, the Applicable Interest Rate shall be deemed to be immediately reduced to such maximum rate and all previous payments in excess of the maximum rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder. H. LATE CHARGE If any sum payable under this Note is not received by Lender within five (5) days of the date on which it is due, without taking into account or including within said five (5) day period any applicable notice or grace period, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid sum or the maximum amount permitted by applicable law to defray the expenses incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment and such amount shall be secured by the Security Instrument and the Other Security Documents. Nothing contained herein is intended to affect the rights of Lender in and to any Default Interest due to Lender pursuant to the provisions of paragraph E hereof entitled "Default Interest". I. MISCELLANEOUS This Note may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. If Borrower consists of more than one person or party, the obligations and liabilities of each such person or party shall be joint and several. The foregoing sentence, however, is not intended to affect the limited liability of any limited partner or stockholder of Borrower afforded by applicable partnership or corporate law. Borrower and all others who may become liable for the payment of all or any part of the Debt do hereby severally waive presentment and demand for payment, notice of dishonor, protest and notice of protest and non-payment. No release of any security for the Debt or extension of time for payment of this Note or any installment hereof, and no alteration, amendment or waiver of any provision of this Note, the Security Instrument or the Other Security Documents made by agreement between Lender and any other person or party shall release, modify, amend, waive, extend, change, discharge, terminate or affect the liability of Borrower, and any other who may become liable for the payment of all or any part of the Debt, under this Note, the Security Instrument or the Other Security Documents. Borrower (and the undersigned representative of Borrower, if any) represents that Borrower has full power, authority and legal right to execute and deliver this Note, the Security Instrument and the Other Security Documents and that this Note, the Security Instrument and the Other Security Documents constitute valid and binding obligations of Borrower. This Note shall be governed and construed in accordance with the laws of the State of New York and the applicable laws of the United States of America. J. EXCULPATION Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in this Note or the Security Instrument by any action or proceeding wherein a money judgment shall be sought against Borrower or any general or limited partner or member of Borrower (hereinafter collectively referred to as the "Exculpated Parties"), except that Lender may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Lender to enforce and realize upon this Note, the Security Instrument, the Other Security Documents, and the interest in the Property, the Rents (as defined in the Security Instrument) and any other collateral given to Lender created by this Note, the Security Instrument and the Other Security Documents; provided, however, that any judgment in any such action or proceeding shall be enforceable against the Exculpated Parties only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender. Lender, by accepting this Note and the Security Instrument, agrees that it shall not sue for, seek or demand any deficiency judgment against the Exculpated Parties in any such action or proceeding, under or by reason of or under or in connection with the Security Instrument, the Other Security Documents or this Note. The provisions of this paragraph shall not, however, (i) constitute a waiver, release or impairment of any obligation evidenced or secured by the Security Instrument, the Other Security Documents or this Note; (ii) impair the right of Lender to name Borrower as a party defendant in any action or suit for judicial foreclosure and sale under the Security Instrument; (iii) affect the validity or enforceability of any guaranty made in connection with the Security Instrument, this Note, or the Other Security Documents; (iv) impair the right of Lender to obtain the appointment of a receiver upon the occurrence and continuance of an Event of Default; (v) impair the enforcement of the Assignment of Leases and Rents dated the date hereof given by Borrower to Lender executed in connection herewith; (vi) impair the right of Lender to bring suit with respect to fraud or intentional misrepresentation by Borrower, the Exculpated Parties or any other person or entity in connection with the Security Instrument, this Note or the Other Security Documents; (vii) impair the right of Lender to obtain the Rents received by any of the Exculpated Parties after the occurrence and continuance of an Event of Default; (viii) impair the right of Lender to bring suit with respect to the Exculpated Parties' misappropriation of tenant security deposits or Rents collected in advance; (ix) impair the right of Lender to obtain insurance proceeds or condemnation awards due to Lender under the Security Instrument; (x) impair the right of Lender to enforce the provisions of sub- paragraphs 36(g) through 36(k), inclusive and paragraphs 34 and 35 of the Security Instrument against the Borrower (excluding the general and limited partners or members of Borrower); or (xi) impair the right of Lender to recover any part of the Debt from the Borrower (excluding the general and limited partners or members of Borrower) following the breach of any covenant contained in paragraphs 9 or 55 of the Security Instrument. THIS NOTE, AND THE OTHER SECURITY DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN LENDER, BORROWER AND THE OTHER RESPECTIVE PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ARTICLE K: CALIFORNIA PROVISIONS (a) In the event of any inconsistencies between the terms and conditions of this Article K and any other Articles in this Note, the terms and conditions of this Article K shall control and be binding. (b) The following paragraphs are hereby added immediately following the Article D entitled "Prepayment": (c) Article H hereof, entitled "Late Charge", is deleted in its entirety and the following is substituted therefor: Borrower acknowledges that late payment to Lender will cause Lender to incur costs not contemplated herein. Such costs include, without limitation, processing and accounting costs. Therefore, if any payment due under this Note is not received by Lender before the tenth (10th) day after the date on which it is due, Borrower shall pay to Lender as a late charge a sum equal to the lesser of five percent (5%) of the overdue amount or the maximum amount permitted by applicable law to defray such costs. Such amount shall be secured by the Security Instrument and the Other Security Documents. Borrower further acknowledges that this late charge represents a reasonable sum considering all of the circumstances existing on the date hereof and represents a fair and reasonable time of the costs that Lender will incur by reason of late payment. Borrower agrees that proof of actual damages would be costly or inconvenient. Acceptance of any late charge shall not constitute a waiver of the default with respect to the overdue amount and shall not prevent Lender from exercising any of the other rights and remedies available to Lender. IN WITNESS WHEREOF, Borrower has duly executed this Note the day and year first above written. VMS APARTMENT PORTFOLIO ASSOCIATES II, a California general partnership By: GP SERVICES XIX, INC., a South Carolina corporation, its general partner By:/s/ Leigh A. Watters Name: Leigh A. Watters Title: Vice President This instrument prepared by: Mitchell G. Williams, Esq. Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 EX-10.FB 7 RECORD AND RETURN TO: Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 Attention: Carson M. Leonard, Esq. Counsel's File No.: 16248-328 DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING and ASSIGNMENT OF LEASES AND RENTS VMS APARTMENT PORTFOLIO ASSOCIATES II, a California general partnership (Trustor) to COMMONWEALTH LAND TITLE INSURANCE COMPANY, (Trustee) for the benefit of LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC. a Delaware corporation (Lender) Dated:As of December 31, 1997 Location: Richardson Highlands Apartments Marin City, California Marin County THIS DEED OF TRUST AND SECURITY AGREEMENT (the "Security Instrument"), is made as of the 31st day of December, 1997, by VMS APARTMENT PORTFOLIO ASSOCIATES II, a California general partnership, having an address c/o Insignia Financial Group, Inc., One Insignia Financial Plaza, Greenville, South Carolina 29601, as grantor ("Borrower"), to COMMONWEALTH LAND TITLE INSURANCE COMPANY, having an address at 877 Ygnacio Valley Road #100, Walnut Creek, California 94596, as trustee ("Trustee"), for the benefit of LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, having an address at Three World Financial Center, 200 Vesey Street, New York, New York 10285, as beneficiary ("Lender"). W I T N E S E T H : To secure the payment of an indebtedness in the principal sum of SIXTEEN MILLION NINE HUNDRED THOUSAND AND 00/100 DOLLARS ($16,900,000.00), lawful money of the United States of America, to be paid with interest according to a certain note dated the date hereof made by Borrower to Lender (the note, together with all extensions, renewals or modifications thereof being hereinafter collectively called the "Note") (said indebtedness, interest and all other sums due hereunder and under the Note being collectively called the "Debt"), Borrower has given, granted, bargained, sold, aliened, enfeoffed, conveyed, confirmed, pledged, assigned, warranted and hypothecated and by these presents does give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, assign, warrant, set over and hypothecate unto Trustee, its successors and assigns, for the benefit of Lender with power of sale and right of entry and possession, and grants a security interest in, the real property described in the Exhibit A attached hereto (the "Premises"); TOGETHER WITH: all right, title, interest and estate of Borrower now owned, or hereafter acquired, in and to the buildings, structures, fixtures, additions, enlargements, extensions, modifications, repairs, replacements and improvements now or hereafter located thereon (the "Improvements") and the following property, rights, interests and estates (the foregoing fee and leasehold estates, as the case may be, in the Premises, the Improvements together with the following property, rights, interests and estates being hereinafter collectively referred to as the "Property"): (a) all easements, rights-of-way, strips and gores of land, streets, ways, alleys, passages, sewer rights, water, water courses, water rights and powers, air rights and development rights, and all estates, rights, titles, interests, privileges, liberties, tenements, hereditaments and appurtenances of any nature whatsoever, in any way belonging, relating or pertaining to the Premises and/or the Improvements, and the reversion and reversions, remainder and remainders, and all land lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining the Premises, to the center line thereof and all the estates, rights, titles, interests, dower and rights of dower, curtesy and rights of curtesy, property, possession, claim and demand whatsoever, both at law and in equity, of Borrower of, in and to the Premises and/or Improvements, and every part and parcel thereof, with the appurtenances thereto; (b) all machinery, equipment, fixtures (including but not limited to all heating, air conditioning, plumbing, lighting, communications and elevator fixtures) and other property of every kind and nature whatsoever owned by Borrower, or in which Borrower has or shall have an interest, now or hereafter located upon the Premises and the Improvements, or appurtenant thereto, and usable in connection with the present or future management, maintenance operation and occupancy of the Premises and the Improvements and all building equipment, materials and supplies of any nature whatsoever owned by Borrower, or in which Borrower has or shall have an interest, now or hereafter located upon the Premises and the Improvements, or appurtenant thereto, or usable in connection with the present or future management, maintenance operation and occupancy of the Premises and the Improvements (hereinafter collectively called the "Equipment"), and the right, title and interest of Borrower in and to any of the Equipment which may be subject to any security interests, as defined in the Uniform Commercial Code, as adopted and enacted by the state or states where any of the Property is located (the "Uniform Commercial Code"), superior in lien to the lien of this Security Instrument; (c) all awards or payments, including interest thereon, which may heretofore and hereafter be made with respect to the Property, whether from the exercise of the right of eminent domain (including but not limited to any transfer made in lieu of or in anticipation of the exercise of said right), or for a change of grade, or for any other injury to or decrease in the value of the Property; (d) all leases and other agreements affecting the use, enjoyment or occupancy of the Premises and the Improvements heretofore or hereafter entered into (the "Leases") and all right, title and interest of Borrower, its successors and assigns therein and thereunder, including, without limitation, cash or securities deposited thereunder to secure the performance by the lessees of their obligations thereunder and all rents, additional rents, revenues, issues and profits (including all oil and gas or other mineral royalties and bonuses) from the Premises and the Improvements (the "Rents") and all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the Debt; (e) all proceeds of and any unearned premiums on any insurance policies covering the Property, including, without limitation, the right to receive and apply the proceeds of any insurance, judgments, or settlements made in lieu thereof, for damage to the Property; (f) the right, in the name and on behalf of Borrower, to appear in and defend any action or proceeding brought with respect to the Property and to commence any action or proceeding to protect the interest of Lender in the Property; (g) all contract rights, with respect to, or which may in any way pertain to, the Premises or the business of the Borrower, including, without limitation, all refunds, rebates, security deposits, or other expectancy under or from any such account or contract right; (h) all general intangibles with respect to, or which may in any way pertain to, the Premises or the business of the Borrower, including without limitation, any trade names, or other names under or by which the Premises may at any time be operated or known, the good will of the Borrower in connection therewith and the right of the Borrower to carry on business under any or all such name or names and any variant or variants thereof, insofar as the same may be transferable by the Borrower without breach of any agreement pursuant to which the Borrower may have obtained its right to use such name or names, and any and all trademarks, prints, labels, advertising concepts and literature; TO HAVE AND TO HOLD the above granted and described Property unto the Trustee, and the successors and assigns of Trustee, forever; IN TRUST, FOR THE USE, BENEFIT AND BEHOOF OF LENDER, WITH POWER OF SALE, to secure the payment to Lender of the Debt at the time and in the manner provided for its payment in the Note and in this Security Instrument; PROVIDED, HOWEVER, these presents are upon the express condition that, if Borrower shall well and truly pay to Lender the Debt at the time and in the manner provided in the Note and this Security Instrument and shall well and truly abide by and comply with each and every covenant and condition set forth herein and in the Note, these presents and the estate hereby granted shall cease, terminate and be void; AND Borrower represents and warrants to and covenants and agrees with Lender as follows: PROVISIONS OF GENERAL APPLICATION 1. Payment of Debt and Incorporation of Covenants, Conditions and Agreements. Borrower will pay the Debt at the time and in the manner provided in the Note and in this Security Instrument. All the covenants, conditions and agreements contained in (a) the Note and (b) all and any of the documents other than the Note or this Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender, which wholly or partially secure or guaranty payment of the Note including but not limited to the Assignment of Leases and Rents (the "Assignment of Rents") between Borrower, as assignor and Lender, as assignee (collectively, the "Other Security Documents"), are hereby made a part of this Security Instrument to the same extent and with the same force as if fully set forth herein. 2. Warranty of Title. Borrower warrants that Borrower has good title to the Property and has the right to mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, assign and hypothecate and grant a security interest in the same and that Borrower possesses an unencumbered fee estate in the Premises and the Improvements and that it owns the Property free and clear of all liens, encumbrances and charges whatsoever except for those exceptions shown in the title insurance policy insuring the lien of this Security Instrument. Borrower shall forever warrant, defend and preserve such title and the validity and priority of the lien of this Security Instrument and shall forever warrant and defend the same to Lender against the claims of all persons whomsoever. 3. Insurance. (a) Borrower will keep the Property insured against loss or damage by fire, flood and such other hazards, risks and matters, as Lender may from time to time reasonably require, including without limitation, rental value insurance against the abatement in rent or business interruption insurance for at least twelve (12) months and general public liability in an amount not less than $1,000,000.00, including excess liability coverage and umbrella liability insurance. Borrower shall pay the premiums for such insurance (the "Insurance Premiums") as the same become due and payable. All policies of insurance (the "Policies") shall (i) be issued under forms acceptable to Lender (containing the standard New York mortgagee non-contribution clause naming the Lender as the insured mortgagee and the person to which all payments made by the Qualified Insurer (hereinafter defined) shall be paid); (ii) provide for at least thirty (30) days prior written notice to the Lender of any cancellation, reduction in an amount or change in insurance coverage; (iii) contain a replacement cost endorsement for 100% of all replacement costs relating to the Improvements (without deduction for depreciation); (iv) contain an "enforcement" or "Law and Ordinance" endorsement in form and substance satisfactory to Lender; and (v) be issued by insurers qualified under the laws of the State in which the Property is located, duly authorized and licensed to transact insurance business in such State and reflecting a claims-paying ability of A or better as determined by Standard & Poors' Corporation ("S&P"), Duff and Phelps Credit Rating Co. ("Duff"), if rated by Duff, Fitch Investors Service, Inc. ("Fitch"), if rated by Fitch, and a claims paying ability of A2 as determined by Moody's Investors Service, Inc. ("Moody's"), if rated by Moody's (each such insurer hereinafter referred to as a "Qualified Insurer", collectively "Qualified Insurers"). Notwithstanding the foregoing, Travelers/Aetna Casualty and Surety ("Aetna") is an acceptable insurance company to Lender provided that if Aetna has a senior unsecured debt rating of less than A by each of the Rating Agencies (hereinafter defined), then such insurer shall be replaced with a Qualified Insurer or Qualified Insurers within thirty (30) days after written notice by the Lender of the reduction of such rating. Such insurance shall not be invalidated due to the use or occupancy of the Property for purposes more hazardous than are permitted by the policy. The maximum amount deductible permitted under each insurance policy shall be such as is customarily carried by owners or managing agents operating first class multi-family residences of similar type and size of the Property of similar type, size and quality to the Property as applicable. Borrower shall deliver the Policies, or duplicate originals of the same, to Lender. Not later than forty five (45) days prior to the expiration date of each of the Policies, Borrower will deliver evidence satisfactory to Lender of the renewal of each of the Policies. The Borrower shall not insure the Property under any insurance policy other than as expressly set forth herein. (b) If the Property shall be damaged or destroyed, in whole or in part, by fire or other casualty, Borrower shall give prompt notice thereof to Lender. The net amount of all insurance proceeds received by Lender with respect to such damage or destruction, shall be held in a segregated account (the "Net Proceeds Account") and invested in an Eligible Investment (hereinafter defined). Lender shall be entitled to deduct from such insurance proceeds all of its out-of- pocket administrative costs and expenses reasonably incurred in connection with the investing and collection of such insurance proceeds, and the balance if any, (the "Net Proceeds") shall be disbursed by Lender in accordance with the terms and conditions set forth herein to pay for the costs and expenses of the Restoration (hereinafter defined) provided (i) no Event of Default has occurred and remains uncured under this Security Instrument, the Note or any of the Other Security Documents, (ii) Borrower proceeds promptly after the insurance claims are settled with the restoration, replacement, rebuilding or repair of the Property as nearly as possible to the condition the Property was in immediately prior to such fire or other casualty (the "Restoration"), (iii) the Restoration shall be done in compliance with all applicable laws, rules and regulations, and, following the Restoration, the Property shall be permitted under all applicable zoning laws to be used for, and shall continue to be used for, all purposes associated with multi-family residences, (iv) a set of the plans and specifications in connection with the Restoration shall be submitted to Lender and shall be reasonably acceptable to Lender in all respects, (v) all costs and reasonable expenses incurred by Lender in connection with making the Net Proceeds available for the Restoration of the Property including, without limitation, counsel fees and inspecting engineer fees incurred by Lender, shall be paid by Borrower, (vi) rental loss insurance is available to offset fully any abatement of rent to which any tenant of the Property may be entitled or any rent loss arising out of the cancellation of any Lease as a result of the casualty, throughout the Restoration and a reasonable lease-up period following the Restoration, and (vii) in Lender's judgment, the Restoration must be able to be completed within one (1) year after the loss and at least one (1) year prior to the Maturity Date of the Note. The term "Eligible Investment" shall mean any investment approved by Lender in its sole discretion. (c) The Net Proceeds shall be held in trust in the Net Proceeds Account. The Net Proceeds shall be paid by Lender (or by a disbursing agent ("Depository") selected by Lender), to, or as directed by, Borrower from time to time during the course of the Restoration, upon receipt of evidence, and certification from Borrower, satisfactory to Lender, that (i) all materials installed and work and labor performed (except to the extent they are to be paid for out of the requested payment) in connection with the Restoration have been paid for in full, (ii) no notices of intention, mechanics' or other liens or encumbrances on the Property arising out of the Restoration exist, and (iii) the balance of the Net Proceeds plus the balance of any deficiency deposits given by Borrower to Lender or Depository pursuant to the provisions of this paragraph hereinafter set forth shall be sufficient to pay in full the balance of the cost of the Restoration. Borrower shall pay all fees and expenses of the Depository in connection with the above. (d) Notwithstanding anything to the contrary contained herein, if the Net Proceeds shall be less than $50,000.00, only one disbursement shall be required upon the completion of the Restoration to the satisfaction of Lender. If the Net Proceeds shall be $50,000.00 or more, Lender shall disburse the Net Proceeds as provided above, however, in no event shall Lender be required to disburse such Net Proceeds, or any portion thereof, more often then once every thirty (30) days. If at any time the Net Proceeds, or the undisbursed balance thereof, shall not, be sufficient to pay in full the balance of the cost of the Restoration, Borrower shall deposit the deficiency with Lender or Depositary before any further disbursement of the Net Proceeds shall be made. (e) Any amount of the Net Proceeds received by Lender and not required to be disbursed for the Restoration pursuant to the provisions of this paragraph hereinabove set forth shall be retained and applied by Lender toward the payment of the Debt whether or not then due and payable in such priority and proportions as Lender in its discretion shall deem proper. Upon the receipt and retention by Lender of such insurance proceeds, the lien of this Security Instrument shall be reduced only by the amount thereof received and retained by Lender and actually applied by Lender in reduction of the Debt. (f) Notwithstanding anything to the contrary contained herein, Lender shall not be obligated to make the Net Proceeds available for Restoration of the Property unless the principal balance of the Note following the completion of the Restoration (assuming the amount of Net Proceeds received by Lender in excess of the cost of the Restoration (as estimated by Lender) is applied to the prepayment of the Note) will be in an amount sufficient to cause (i) the Debt Service Coverage Ratio (hereinafter defined) applicable to the Property immediately following the Restoration to be not less than 1.20 to 1.0 and (ii) in the event of any Restoration involving Net Proceeds of more than $250,000.00, the ratio of (a) the then outstanding principal balance of the Note to (b) the appraised value of the Property after completion of the Restoration (as determined by an independent third-party appraiser holding an MAI designation and having a national practice and at least ten (10) years real estate experience appraising properties of a similar nature and type as the Property) to be equal to or less than the Minimum Loan to Value Ratio (hereinafter defined). The term "Minimum Loan to Value Ratio" means a ratio, expressed as a percentage, equal to the lesser of (i) 80% or (ii) the ratio of (a) the then outstanding principal balance of the Note to (b) the appraised value of the Property on the date hereof. The fee for such appraisal shall be paid for by Borrower. 4. Payment of Taxes, etc. Borrower shall pay all taxes, assessments, water rates and sewer rents, now or hereafter levied or assessed or imposed against the Property or any part thereof (the "Taxes") and all ground rents, maintenance charges, other governmental impositions, and other charges, including without limitation vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Premises, now or hereafter levied or assessed or imposed against the Property or any part thereof (the "Other Charges") as same become due and payable. Upon written request from Lender, Borrower will deliver to Lender evidence satisfactory to Lender that the Taxes and Other Charges have been so paid or are not then delinquent. Borrower shall not suffer and shall promptly cause to be paid and discharged any lien or charge whatsoever which may be or become a lien or charge against the Property, and shall promptly pay for all utility services provided to the Property. Borrower shall furnish to Lender receipts for the payment of the Taxes, Other Charges and said utility services prior to the date the same shall become delinquent. Notwithstanding the above, after prior written notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any of the Taxes, provided that (i) no Event of Default under the Note or this Security Instrument shall have occurred and be continuing, (ii) Borrower is permitted to do so under the provisions of any mortgage or deed of trust or deed to secure debt superior or junior in lien to this Security Instrument, (iii) such proceeding shall suspend the collection of the Taxes from Borrower and from the Property, (iv) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder, (v) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, canceled or lost, (vi) Borrower shall have set aside adequate reserves for the payment of the Taxes, together with all interest and penalties thereon, and (vii) Borrower shall have furnished such security as may be reasonably required in the proceeding, or as may be requested by Lender to insure the payment of any such Taxes, together with all interest and penalties thereon. 5. Escrow Fund. Upon (i) the occurrence of an Event of Default (hereinafter defined), and for so long as such Event of Default shall be continuing, or (ii) the transfer of the Property to any entity in accordance with the terms of paragraph 9(c) hereof, Borrower shall pay to Lender upon request on the fifteenth day of each calendar month thereafter (a) one-twelfth of an amount which would be sufficient to pay the Taxes payable, or estimated by Lender to be payable, during the next ensuing twelve (12) months and (b) one- twelfth of an amount which would be sufficient to pay the Insurance Premiums due for the renewal of the coverage afforded by the Policies upon the expiration thereof (the amounts set forth in (a) and (b) above hereinafter called the "Escrow Fund"). The Escrow Fund and the payments of interest or principal or both, payable pursuant to the Note shall be added together and shall be paid as an aggregate sum by Borrower to Lender. Borrower hereby pledges to Lender any and all monies now or hereafter deposited in the Escrow Fund as additional security for the payment of the Debt. Lender will apply the Escrow Fund to payments of Taxes and Insurance Premiums required to be made by Borrower pursuant to paragraphs 3 and 4 hereof. If the amount of the Escrow Fund shall exceed the amounts due for Taxes and Insurance Premiums pursuant to paragraphs 3 and 4 hereof, Lender shall credit such excess against future payments to be made to the Escrow Fund. In allocating such excess, Lender may deal with the person shown on the records of Lender to be the owner of the Property. If the Escrow Fund is not sufficient to pay the items set forth in (a) and (b) above, Borrower shall promptly pay to Lender, upon demand, an amount which Lender shall estimate as sufficient to make up the deficiency. Lender may apply any sums then present in the Escrow Fund to the payment of the following items in any order in its uncontrolled discretion: (i) Taxes and Other Charges; (ii) Insurance Premiums; (iii) Interest on the unpaid principal balance of the Note; (iv) Amortization of the unpaid principal balance of the Note; (v) All other sums payable pursuant to the Note, this Security Instrument and the Other Security Documents, including without limitation advances made by Lender pursuant to the terms of this Security Instrument. Until expended or applied as above provided, any amounts in the Escrow Fund shall constitute additional security for the Debt. The Escrow Fund shall not constitute a trust fund and may be commingled with other monies held by Lender. No earnings or interest on the Escrow Fund shall be payable to Borrower, except after repayment in full of the Debt. 6. Condemnation. (a) Borrower shall give Lender prompt notice of the actual or threatened commencement of any condemnation or eminent domain proceeding and shall deliver to Lender copies of any and all papers served in connection with such proceedings. If less than 25% of the land constituting the Property is taken, then the net amount of all awards and payments received by Lender with respect to such taking shall be held in a segregated account (the "Net Awards Account") and invested in an Eligible Investment. Lender shall be entitled to deduct from the condemnation award all of its administrative costs and expenses incurred in connection with investing and collecting such condemnation award and the balance, if any, (hereinafter referred to as the "Net Award"), will be disbursed by Lender to pay for the costs and expenses of the Condemnation Restoration (hereinafter defined), provided (i) Borrower is not in default under this Security Instrument, the Note or any of the Other Security Documents, (ii) Borrower proceeds promptly after the making of any award of payment for such taking with the restoration, replacement, rebuilding or repair of the Property as nearly as possible to the condition the Property was in immediately prior to such taking (the "Condemnation Restoration"), (iii) the Condemnation Restoration shall be done in compliance with all applicable laws, rules and regulations, and, following the Condemnation Restoration, the Property shall be permitted under all applicable zoning laws to be used for, and shall continue to be used for, all purposes associated with multi-family residences, (iv) a set of plans and specifications in connection with the Condemnation Restoration shall be submitted to Lender and shall be satisfactory to Lender in all respects, (v) Borrower shall have reimbursed Lender for all costs and expenses incurred by Lender in connection with making the Net Award available for the Condemnation Restoration of the Property, including, without limitation, counsel fees, inspecting engineer fees and appraisal fees incurred by Lender, (vi) rental loss proceeds are available to offset in full any loss in rents throughout the Condemnation Restoration and a reasonable lease-up period following the completion of the Condemnation Restoration, and (vii) in the opinion of Lender the Condemnation Restoration of the Property can be completed within one (1) year after the taking and at least one (1) year prior to the maturity date of the Note. (b) The Net Award shall be held in trust by Lender in the Net Awards Account and shall be paid by Lender or a Depository designated by Lender to, or as directed by, Borrower from time to time during the course of the Condemnation Restoration, upon receipt of evidence satisfactory to Lender, that (i) all materials installed and work and labor performed (except to the extent they are to be paid for out of the requested payment) in connection with the Condemnation Restoration have been paid for in full, (ii) there exist no notices of intention, mechanics' or other liens or encumbrances on the Property arising out of the Condemnation Restoration, and (iii) the balance of the Net Award plus the balance of any deficiency deposits given by Borrower to Lender or Depositary pursuant to the provisions of this paragraph hereinafter set forth shall be sufficient to pay in full the balance of the cost of the Condemnation Restoration. (c) Notwithstanding anything to the contrary contained herein, Lender shall not be obligated to make the Net Award available for the Condemnation Restoration of the Property unless the principal balance of the Note after the completion of the Condemnation Restoration (assuming the amount of the Net Award received by Lender in excess of the cost of the Condemnation Restoration as estimated by Lender is applied to the prepayment of the Note) will be sufficient to cause (i) the Debt Service Coverage Ratio applicable to the Property immediately following the Condemnation Restoration to be not less than 1.2 to 1.0 and (ii) in the event of any Condemnation Restoration involving Net Award of more than $250,000.00, the ratio of (a) the then outstanding principal balance of the Note to (b) the appraised value of the Property after completion of the Condemnation Restoration (as determined by an independent third-party appraiser holding an MAI designation and having a national practice and at least ten (10) years real estate experience appraising properties of a similar nature and type as the Property) to be equal to or less than the Minimum Loan to Value Ratio. (d) Notwithstanding anything to the contrary contained herein, if the Net Award shall be less than $50,000.00, only one such disbursement shall be required upon the completion of the Condemnation Restoration to the satisfaction of Lender. If the Net Award shall be $50,000.00 or more, Lender shall disburse the Net Award as provided above, however, in no event shall Lender be required to disburse such Net Award, or any portion thereof, more often than once every thirty (30) days. If at any time the Net Award, or the undisbursed balance thereof, shall not, in the opinion of Lender, be sufficient to pay in full the balance of the cost of Condemnation Restoration, Borrower shall deposit such deficiency with Lender or Depository before any further disbursement of the Net Award shall be made. (e) Notwithstanding anything to the contrary contained herein, any taking by any public or quasi public authority through eminent domain or otherwise (including but not limited to any transfer made in lieu of or in anticipation of the exercise of such taking), Borrower shall continue to pay the Debt at the time and in the manner provided for in the Note and in this Security Instrument and the Debt shall not be reduced until any award or payment therefor shall have been actually received and applied in accordance with this paragraph 6. Lender shall not be limited to the interest paid on the award by the condemning authority but shall be entitled to receive out of the award interest at the rate or rates provided herein and in the Note. (f) Any amount of the Net Award received by Lender and not required to be disbursed for the Condemnation Restoration pursuant to the provisions of this paragraph hereinabove set forth may be retained and applied by Lender to the discharge of the Debt, whether or not then due and payable, in such priority and proportions as Lender in its discretion shall deem proper. If the Property is sold through foreclosure or otherwise prior to the receipt by Lender of such award or payment, Lender shall have the right, whether or not a deficiency judgment on the Note shall have been sought, recovered or denied, to receive such award or payment or a portion thereof sufficient to pay the Debt, whichever is less. Borrower shall file and prosecute its claim or claims for any such award or payment in good faith and with due diligence and cause the same to be collected and paid over to Lender, and Borrower hereby irrevocably authorizes and empowers Lender, in the name of Borrower or otherwise, to collect and receipt for any such award or payment and to file and prosecute such claim or claims, and although it is hereby expressly agreed that the same shall not be necessary in any event, Borrower shall upon demand of Lender make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning any such award or payment to Lender, free and clear of any encumbrances of any kind or nature whatsoever. 7. Leases and Rents. (a) Trustee and Lender are hereby granted and assigned by Borrower the right to enter the Property for the purpose of enforcing its interest in the Leases and the Rents, this Security Instrument constituting a present, absolute assignment of the Leases and the Rents. Nevertheless, subject to the terms of this paragraph 7, Lender grants to Borrower a revocable license to operate and manage the Property and to collect the Rents. Borrower shall hold the Rents, or a portion thereof sufficient to discharge all current sums due on the Debt, for use in the payment of such sums. Upon or at any time after an Event of Default, the license granted to Borrower herein may be revoked by Lender, and Lender or Trustee may enter upon the Property, and collect, retain and apply the Rents toward payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. (b) All Leases shall be written on the standard form of lease which has been approved by Lender. Upon written request from Lender, Borrower shall furnish Lender with executed copies of all Leases and all modifications thereto as soon as may be practicable. No material changes may be made to the Lender- approved standard forms except as may be required by applicable law. In addition, all renewals of Leases and all proposed leases shall provide for rental rates comparable to existing local market rates and shall be arms-length transactions. Borrower shall not enter into any lease having a term of more than three (3) years. All Leases shall provide that they are subordinate to this Security Instrument and that the lessee agrees to attorn to Lender. Borrower (i) shall observe and perform all the obligations imposed upon the lessor under the Leases and shall not do or permit to be done anything to impair the value of the Leases as security for the Debt; (ii) shall enforce all of the terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed; (iii) shall not collect any of the Rents more than one (1) month in advance; (iv) shall not execute any other assignment of lessor's interest in the Leases or the Rents; (v) shall not materially alter, modify or change the terms of the Leases, or cancel or terminate the Leases or accept a surrender thereof or convey or transfer or suffer or permit a conveyance or transfer of the Premises or of any interest therein so as to effect a merger of the estates and rights of, or a termination or diminution of the obligations of, lessees thereunder, except that Borrower may terminate any Lease in exercising its rights as landlord thereunder upon a default by the tenant under said Lease; (vi) shall not alter, modify or change the terms of any guaranty of the Leases or cancel or terminate such guaranty; (vii) shall not consent to any assignment of or subletting under the Leases not in accordance with their terms; and (viii) shall execute and deliver all such further assurances, confirmations and assignments in connection with the Property as Lender shall from time to time require. 8. Maintenance of Property. (a) Borrower shall cause the Property to be maintained in a good and safe condition and repair. The Improvements and the Equipment shall not be removed, demolished or materially altered (except for normal replacement of the Equipment). Borrower shall promptly comply with all laws, orders and ordinances affecting the Property, or the use thereof. Borrower shall promptly repair, replace or rebuild any part of the Property which may be destroyed by any casualty, or become damaged, worn or dilapidated or which may be affected by any proceeding of the character referred to in paragraph 6 hereof and shall complete and pay for any structure at any time in the process of construction or repair on the Premises. Borrower shall not initiate, join in, acquiesce in, or consent to any change in any private restrictive covenant, zoning law or other public or private restriction, limiting or otherwise changing the uses which may be made of the Property or any part thereof. If under applicable zoning provisions the use of all or any portion of the Property is or shall become a nonconforming use, Borrower will not cause or permit such nonconforming use to be discontinued or abandoned without the express written consent of Lender. (b) Borrower hereby represents that all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Property and with respect to the use and occupancy of the same, including but not limited to, certificates of occupancy and fire underwriter certificates, have been made by or obtained from the appropriate governmental authorities. Borrower hereby represents, warrants and covenants that it has obtained and will maintain all permits and licenses required to operate the Property as a multi- family residential development. Borrower has and shall continue to comply in all material respects with and make all payments required under all laws, ordinances, regulations, covenants, conditions and restrictions now or hereafter affecting the Property or any part thereof or the business or the activity conducted thereon. Borrower will not commit, suffer, permit or allow any act to be done in or upon the Property in violation of any law, ordinance or regulation. Borrower is in material compliance and shall continue to comply in all material respects with all existing and future requirements of all governmental authorities having jurisdiction over the Property. 9. Transfer or Encumbrance of the Property. (a) Borrower acknowledges that Lender has examined and relied on the creditworthiness of Borrower and the experience of Borrower in owning properties such as the Property in agreeing to make the loan secured hereby, and that Lender will continue to rely on Borrower's ownership of the Property as a means of maintaining the value of the Property as security for repayment of the Debt. Borrower acknowledges that Lender has a valid interest in maintaining the value of the Property so as to ensure that, should Borrower default in the repayment of the Debt, Lender can recover the Debt by a sale of the Property. Except as otherwise provided in subparagraph 9(c) hereof, Borrower shall not sell, convey, alien, mortgage, encumber, pledge or otherwise transfer the Property or any part thereof, or permit the Property or any part thereof to be sold, conveyed, aliened, mortgaged, encumbered, pledged or otherwise transferred. (b) A sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer within the meaning of this paragraph 9 shall be deemed to include (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the Property for other than actual occupancy by a space tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower's right, title and interest in and to any Leases or any Rents; (iii) if Borrower or any general partner or managing member of Borrower is a corporation, the voluntary or involuntary sale, conveyance or transfer of such corporation's stock or the creation or issuance of new stock by which an aggregate of more than 49% of such corporation's stock shall be vested in a party or parties who are not now stockholders, except for any sale, conveyance or transfer of such corporation's stock to an Affiliate provided Lender shall have received prior written notice of such transfer; (iv) if Borrower or any general partner or managing member of Borrower is a limited or general partnership or joint venture, the change, removal or resignation of a general partner or managing partner or the transfer of the partnership interest of any general partner or managing partner, except for any transfer of such partnership interest to an Affiliate, and excluding the removal or resignation of any non Affiliate or non managing general partner where the managing general partner shall remain following such removal or resignation, provided, in either case, Lender shall have received prior written notice of such transfer resignation or removal; (v) if Borrower or any Guarantor or any general partner or managing member of Borrower or any Guarantor is a limited liability company, the change, removal or resignation of the managing member of such company, or the transfer or pledge of the membership interest of the managing member of such company or any profits or proceeds relating to such membership interest or the transfer of more than 49% in the aggregate of any membership interests in such company whether in one transfer or a series of transfers, except for any transfer of membership interests to an Affiliate, provided Lender shall have received prior written notice of such transfer, resignation or removal; (vi) any transfer of any interest by the Manager (hereinafter defined) other than as permitted under paragraph 53; and (vii) any transfer of the beneficial interest of any Borrower in any trust holding legal title to the Property. (c) Notwithstanding anything to the contrary contained herein: (i) Upon sixty (60) days prior written notice to Lender, the Borrower shall have the limited right to transfer legal title to the Property to a Single Purpose Entity Transferee (hereinafter defined) provided (a) such Single Purpose Entity Transferee assumes all of the obligations of the Borrower under this Security Instrument, the Note and the Other Security Documents in a manner satisfactory to Lender in all respects, including, without limitation, by entering into an assumption agreement with Borrower and Lender in form and substance reasonably satisfactory to Lender (an "Assumption Agreement"), (b) the Single Purpose Entity Transferee shall have been newly formed exclusively and solely for the purpose of owning and operating the Property and shall have been engaged in no other business activities prior to the transfer of title to such Single Purpose Entity Transferee and must be a "United States person" as defined by Section 7701(a)(30) of the United States Internal Revenue Code of 1986, as amended, (c) the Single Purpose Entity Transferee or the management agent it employs to manage the Property shall have Adequate Real Estate Experience (hereinafter defined), (d) the Single Purpose Entity Transferee shall deliver to Lender evidence of the fulfillment of the requirements of subsection (b) above, (e) the Single Purpose Entity Transferee shall deliver any and all organizational documentation requested by Lender, which documentation shall be reasonably satisfactory to Lender in all respects, and shall deliver an opinion of counsel of the Single Purpose Entity Transferee covering the Assumption Agreement in form and substance similar to the due execution, delivery and enforcement opinions delivered by counsel to Borrower in connection with the execution of this Security Instrument, (f) the Single Purpose Entity Transferee shall deliver any certificates and opinions of counsel, enter into agreements and covenants, or cause each of its general partners (or any other principal thereof) to deliver certificates, enter into agreements and covenants, which certificates, agreements, opinions of counsel and covenants shall be similar in nature to those delivered, executed and made by Borrower or any general partner of Borrower in connection with the execution of this Security Instrument or the Securitization (hereinafter defined) relating to the single purpose nature of the Single Purpose Entity Transferee or otherwise, and (g) Borrower shall deliver, at its sole cost and expense, an endorsement to the existing title policy insuring the Security Instrument as modified by the Assumption Agreement as a valid first lien on the Property, naming the Single Purpose Entity Transferee as owner of the fee estate of the Property, which endorsement shall insure that, as of the date of the recording of the Assumption Agreement, the Property shall not be subject to any additional exceptions or liens other than those contained in the original title policy insuring the lien of this Security Instrument and delivered in connection with the execution of this Security Instrument. Any and all reasonable costs incurred in connection with the above (including Lender's counsel's fees and disbursements and expenses and all recording fees, mortgage or intangible taxes, and title insurance premiums), shall be paid by Borrower. Lender shall respond to Borrower's request to transfer legal title to the Property within thirty (30) days of delivery of all of the information required by subsections (a)-(g) above. The failure of Lender to respond to such request shall not be deemed consent to the transfer. For purposes of this Security Instrument, the term "Adequate Real Estate Experience" shall mean an entity which manages first class multi-family residences of a type and size similar to the Property, and which manages in the aggregate no less than 1,000 residential units at the time of such transfer. The term "Single Purpose Entity Transferee" shall mean an entity that: A. shall not own any asset other than the Property; B. shall not engage in any business other than those necessary for the ownership, management or operation of the Property and any such business transactions with any general partner, principal or affiliate of the Single Purpose Entity Transferee or any affiliate of the general partner of the Single Purpose Entity Transferee shall be entered into upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than an affiliate of the Single Purpose Entity Transferee or the general partner or an affiliate of the general partner of the Single Purpose Entity Transferee; C. shall not incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than the Debt, any Affiliate Advance (hereinafter defined) and the Subordinate Debt (the "Subordinate Debt"), as defined in that certain Subordination Agreement dated as of the date hereof between Lender and IFSE Holding Co., L.L.C.; D. shall not make any loans or advances to any third party (including any affiliates of such Single Purpose Entity Transferee or the general partner or managing member or an affiliate of the general partner or managing member of such Single Purpose Entity Transferee); E. shall be solvent and pay its debts from its assets as the same become due; F. shall do or cause to be done all things necessary to preserve its existence, and shall not amend, modify or otherwise change its partnership certificate, partnership agreement, articles of incorporation or by-laws in a manner which adversely affects such Single Purpose Entity Transferee's existence as a single purpose entity; G. shall maintain books and records and bank accounts separate from those of its affiliates, including its general partners; H. shall be, and at all times shall hold itself out to the public as, a legal entity separate and distinct from any other entity (including any affiliate thereof, including the general partner or any affiliate of the general partner of such Single Purpose Entity Transferee); I. shall file its own tax returns; J. shall maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations; K. shall not seek the dissolution or winding up, in whole or in part, of the Single Purpose Entity Transferee or voluntarily file, or consent to the filing of, a petition for bankruptcy, reorganization, assignment for the benefit of creditors or similar proceeding; and L. shall not commingle its funds or other assets with any other person or entity. The term "Affiliate Advance" shall mean and be limited to a payment made by an Affiliate to a third party on behalf of Borrower, the repayment of which remains an unsecured obligation of the Borrower, provided: (i) such payment shall have been made by the Affiliate to enable the Borrower to pay for its ordinary and customary operating expenses or property or capital expense (exclusive of any payments of debt service under any loan made to Borrower, including, without limitation, the Debt secured by this Security Instrument), (ii) upon an Event of Default under the Note, this Security Instrument or the Other Security Documents, no payments of or accrual of interest or principal shall be made or required on or before the repayment of all sums due under the Note, this Security Instrument or the Other Security Documents, and (iii) the obligation of Borrower, whether written or otherwise, shall be (a) subordinate in lien and payment to the Debt, (b) non-defaultable and non-callable upon a default (monetary or nonmonetary) or otherwise, prior to one year and a day from the repayment of all sums due under the Note, this Security Instrument or the Other Security Documents and (c) unsecured obligation of Borrower at all times. (ii) [INTENTIONALLY OMITTED] (iii) Borrower may sell, convey or transfer stock, partnership or membership interest as described in subsections 9(b)(iii), (iv) and (v) hereof in the Borrower or a general partner or managing member of Borrower (but not by any subsequent Single Purpose Entity Transferee), provided that: 1. No Event of Default shall have occurred and be continuing; 2. The Single Purpose Entity Transferee shall be a person, firm or corporation whose character, financial strength, stability and experience shall be similar to the existing Borrower and any general partner of Borrower as of the date hereof and otherwise reasonably satisfactory to Lender; 3. The Single Purpose Entity Transferee shall deliver such organizational documentation and other material necessary to establish the transfer; and 4. The Single Purpose Entity Transferee shall pay the costs and expenses of Lender and Lender's counsel incurred in connection with the review and approval of such stock, partnership or membership transfer. The term "Affiliate" shall mean a corporation or other entity which shall (i) control, (ii) be controlled by, or (iii) be under common control with either Borrower, any general partner of Borrower, Insignia Financial Group, Inc. or a corporation or other entity that would be considered an affiliate of Borrower or Insignia Financial Group, Inc. under the regulations promulgated by the United States Securities and Exchange Commission. The term "Debt Service Coverage Ratio" shall mean the ratio of (a) the NOI (hereinafter defined) produced by the operation of the Property during the twelve (12) calendar month period immediately preceding the calculation to (b) the projected aggregate payments of interest and principal due under this Security Instrument and the Note and any other subordinate loans affecting the Property for the twelve (12) calendar month period immediately following the calculation. The term "Expenses" shall mean the aggregate of the following items: (a) real estate taxes, general and special assessments or similar charges; (b) sales, use and personal property taxes; (c) management fees and disbursements; (d) wages, salaries, pension costs and all fringe and other employee-related benefits and expenses; (e) insurance premiums; (f) cost of utilities, and all other administrative, management, ownership, operating, leasing and maintenance expenses, excluding depreciation and other non-cash expenses incurred in connection with the operation of the Property; (g) cost of necessary repair or replacement of existing improvements on the Property with repairs or replacements of like kind and quantity or such kind or quality which is necessary to maintain the Property to the same standards as competitive rental properties of similar size and location of the Property; and (h) the cost of such other maintenance materials, HVAC repairs, parts and supplies, other decorating supplies, floor covering repairs, other decorating contracts, drapes and equipment. The Expenses shall be based on the above-described items actually incurred by Borrower during the period for which the calculation is being made. The term "general partner" shall include the sole member or the managing member of Borrower or a general partner of Borrower if Borrower or any general partner of Borrower is a limited liability company. The term "NOI" shall mean the gross income derived from the operation of the Property, less Expenses. NOI shall include only Rents, and such other income, including any rent loss or business interruption insurance proceeds, vending income, pet charges, late fees, forfeited security deposits and other miscellaneous tenant charges, which are actually received during the period for which the NOI is being calculated. NOI shall be calculated on a cash basis in accordance with customary accounting principles applicable to real estate. (d) Lender reserves the right to condition the consent required hereunder upon such other conditions as Lender shall determine in its reasonable discretion to be in the interest of Lender. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon Borrower's sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property in violation of this Security Instrument without Lender's consent. This provision shall apply to every sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property regardless of whether voluntary or not, or whether or not Lender has consented to any previous sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer of the Property. 10. Estoppel Certificates. (a) After request by Lender, Borrower, within ten (10) days, shall furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the amount of the original principal amount of the Note, (ii) the unpaid principal amount of the Note, (iii) the rate of interest of the Note, (iv) the date installments of interest and/or principal were last paid, (v) any offsets or defenses to the payment of the Debt, if any, and (vi) that the Note and this Security Instrument are valid, legal and binding obliga- tions and have not been modified or if modified, giving particulars of such modification. 11. Changes in the Laws Regarding Taxation. If any law is enacted or adopted or amended after the date of this Security Instrument which deducts the Debt from the value of the Property for the purpose of taxation or which imposes a tax, either directly or indirectly, on the Debt or Lender's interest in the Property, Borrower will pay such tax, with interest and penalties thereon, if any. In the event Lender is advised by counsel chosen by it that the payment of such tax or interest and penalties by Borrower would be unlawful or taxable to Lender or unenforceable or provide the basis for a defense of usury, then in any such event, Lender shall have the option, by written notice of not less than ninety (90) days, to declare the Debt immediately due and payable. 12. No Credits on Account of the Debt. Borrower will not claim or demand or be entitled to any credit or credits on account of the Debt for any part of the Taxes or Other Charges assessed against the Property, or any part thereof, and no deduction shall otherwise be made or claimed from the assessed value of the Property, or any part thereof, for real estate tax purposes by reason of this Security Instrument or the Debt. In the event such claim, credit or deduction shall be required by law, Lender shall have the option, by written notice of not less than ninety (90) days, to declare the Debt immediately due and payable. 13. Documentary Stamps. If at any time the United States of America, any State thereof or any subdivision of any such State shall require revenue or other stamps to be affixed to the Note or this Security Instrument, or impose any other tax or charge on the same, Borrower will pay for the same, with interest and penalties thereon, if any. 14. Usury Laws. This Security Instrument and the Note are subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the Debt at a rate which could subject the holder of the Note to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay. If by the terms of this Security Instrument or the Note, Borrower is at any time required or obligated to pay interest on the Debt at a rate in excess of such maximum rate, the rate of interest under the same shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Note. 15. Books and Records. Borrower shall keep adequate books and records of account which accurately reflect the operations of, and income and expenses attributable to, the Property and furnish to Lender the following statements, all of which shall be in form and substance acceptable to Lender: (i) a quarterly and annual, or as more frequently requested by Lender or by the rating agencies in connection with securities issued in connection with the loan secured hereby, occupancy statement listing each and every Lease, identifying the leased premises, names of all tenants, monthly rental and all other charges payable under the Lease, date to which paid, date of occupancy, date of expiration, any and every special provision, concession or inducement granted to tenants and such other information as is reasonably requested by Lender, signed, dated and certified as true and accurate by the general partner of Borrower and Borrower; (ii) an annual operating statement of the operation of the Property in a form pre-approved by Lender and otherwise satisfactory to Lender, showing in reasonable detail total revenues received and total expenses, prepared and certified by the general partner of Borrower and Borrower; (iii) an annual balance sheet and profit and loss statement of Borrower, prepared and certified by the general partner of Borrower and Borrower within ninety (90) days after the close of each fiscal year; and (iv) such annual and monthly (including, without limitation, with respect to the Reserve Account and the Capital Improvements Account) balance sheets and profit and loss statements and other financial statements as may, from time to time, be required by Lender. 16. Performance of Other Agreements. Borrower shall observe and perform each and every term to be observed or performed by Borrower pursuant to the terms of any agreement or recorded instrument affecting or pertaining to the Property. 17. Further Acts, etc. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, require, for the better assuring, conveying, assigning, transferring, and confirming unto Lender the property and rights hereby mortgaged, given, granted, bargained, sold, aliened, enfeoffed, conveyed, confirmed, pledged, assigned and hypothecated or intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out the intention or facilitating the performance of the terms of this Security Instrument or for filing, registering or recording this Security Instrument. Borrower on demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower or without the signature of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or other instruments, to evidence more effectively the security interest of Lender in the Property. Borrower grants to Lender an irrevocable power of attorney coupled with an interest for the purpose of perfecting any and all rights and remedies available to Lender at law and in equity pursuant to the terms of the Note, this Security Instrument or the Other Security Documents, including without limitation such rights and remedies available to Lender pursuant to this paragraph 17. 18. Recording of Security Instrument, etc. Borrower forthwith upon the execution and delivery of this Security Instrument and thereafter, from time to time, will cause this Security Instrument, and any security instrument creating a lien or security interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien or security interest hereof upon, and the interest of Lender in, the Property. Borrower will pay all filing, registration or recording fees, and all expenses incident to the preparation, execution and acknowledgment of this Security Instrument, any mortgage supplemental hereto, any security instrument with respect to the Property and any instrument of further assurance, and all federal, state, county and municipal, taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of this Security Instrument, any mortgage supplemental hereto, any security instrument with respect to the Property or any instrument of further assurance, except where prohibited by law so to do. Borrower shall hold harmless and indemnify Lender, its successors and assigns, against any liability incurred by reason of the imposition of any tax on the making and recording of this Security Instrument. 19. Prepayment. If permitted by the Note, the Debt may be prepaid in accordance with the terms thereof. 20. Events of Default. The Lender may declare the Debt immediately due and payable upon any one or more of the following events ("Event of Default"): (a) if any portion of the Debt is not paid within ten (10) days after written notice is delivered by the Lender notifying Borrower that the same is overdue; (b) except as otherwise provided in paragraph 4 hereof, if any of the Taxes or Other Charges is not paid when the same is due and payable; (c) if the Policies are not kept in full force and effect, or if the Policies (or duplicate originals thereof) are not delivered to Lender upon request; (d) if Borrower violates or does not comply with any of the provi- sions of paragraphs 7, 9, 34, 35 or 55 hereof; (e) if any representation or warranty of Borrower made herein or in any certificate, report, financial statement or other instrument or document furnished to Lender shall have been false or misleading in any material respect when made; (f) if Borrower shall make an assignment for the benefit of creditors or if Borrower shall generally not be paying its debts as they become due; (g) if a receiver, liquidator or trustee of Borrower shall be appointed or if Borrower shall be adjudicated a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Borrower or if any proceeding for the dissolution or liquidation of Borrower shall be instituted; however, if such appointment, adjudica- tion, petition or proceeding was involuntary and not consented to by Borrower, upon the same not being discharged, stayed or dismissed within ninety (90) days; (h) [INTENTIONALLY OMITTED] (i) if Borrower shall be in default under any other mortgage or security agreement covering any part of the Property whether it be superior or junior in lien to this Security Instrument; (j) if the Property becomes subject to any mechanic's, materialman's or other lien other than a lien for local real estate taxes and assessments not then due and payable and such lien shall remain undischarged of record (by payment, bonding or otherwise) on the earlier of (i) forty-five (45) days after Borrower shall have notice (written or oral) of such lien or (ii) following a judgment in favor of the holder of such lien, one week prior to the date on which such lien may be foreclosed; (k) if Borrower fails to cure promptly any violations of laws or ordinances affecting or which may be interpreted to affect the Property; provided, however, after prior written notice to Lender, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the validity or application of any building, fire or zoning law or ordinance affecting the Property provided that (i) no other Event of Default exists under the Note, this Security Instrument, or the Other Security Documents, (ii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower is subject and shall not constitute a default thereunder, (iii) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, canceled or lost, and (iv) if by the terms of such law or ordinance, compliance therewith pending the prosecution of any such proceeding may legally be delayed without incurring any lien, charge or liability of any kind against the Property, or any part thereof, and without subjecting the Borrower or the Lender to any liability, civil or criminal, for failure to comply therewith; or (l) if Borrower shall continue to be in default under any of the other terms, covenants or conditions of the Note, this Security Instrument or the Other Security Documents for five (5) days after notice from Lender in the case of any default which can be cured by the payment of a sum of money or for thirty (30) days after notice from Lender in the case of any other default, provided that if such default cannot reasonably be cured within such thirty (30) day period and Borrower shall have commenced to cure such default within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for so long as it shall require Borrower in the exercise of due diligence to cure such default, it being agreed that no such extension shall be for a period in excess of ninety (90) days. 21. Remedies of Lender/Application of Proceeds. (a) Upon the occurrence of an Event of Default, (a) Borrower will pay, from the date of that Event of Default, interest on the unpaid principal balance of the Note at the rate of (i) the greater of (A) five percent (5%) over the Applicable Interest Rate (as defined in the Note) due under the Note and (B) two percent (2%) over the Prime Rate (hereinafter defined) as the same shall change from time to time or (ii) at the maximum interest rate which Borrower may by law pay, whichever is lower, (the "Default Rate") and (b) Lender shall have the right to exercise any and all rights and remedies available at law and in equity. The term "Prime Rate" shall mean the daily "Prime Rate" published in The Wall Street Journal from the date of the default, as such "Prime Rate" shall change from time to time. In the event The Wall Street Journal ceases to publish the prime rate or in the event such prime rates are no longer generally published or are limited, regulated or administered by a governmental or quasi-governmental body, a comparable interest rate index shall be substituted therefor by Lender. (b) The purchase money, proceeds and avails of any disposition of the Property, or any part thereof, pursuant to paragraph 22 of this Security Instrument or any other sums collected by Lender pursuant to the Note, this Security Instrument or the Other Security Documents, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. 22. Sale of Property. (a) If this Security Instrument is foreclosed or if the Property is sold pursuant to the exercise of a power of sale, the Property, or any interest therein, may at the discretion of Lender, be sold in one or more parcels or in several interests or portions and in any order or manner. (b) In addition, Borrower hereby vests Lender with full power and authority, upon the happening of an Event of Default, at Lender's option, to declare the entire Debt to be immediately due and payable, and at Lender's option, to take possession of the Property if and to the extent allowed by law, and to sell the Property to the highest bidder at public auction in front of the courthouse door in the county or counties, as may be required, where the Property is located, either in person or by auctioneer, after having first given notice of the time, place and terms of sale, together with a description of the property to be sold, by publication once a week for four (4) successive weeks prior to said sale in some newspaper published in said county or counties, as may be required, and, upon payment of the purchase money, Lender or any person conducting the sale for Lender is authorized to execute to the purchaser at said sale a deed to the Property so purchased. Lender may bid at said sale and purchase the Property, or any part thereof, if the highest bidder therefor. At the foreclosure sale the Property may be offered for sale and sold as a whole without first offering it in any other manner or may be offered for sale and sold in any other manner as Lender may elect. The proceeds of any foreclosure sale pursuant to this paragraph shall be applied first, to the payment of the costs of said sale, including reasonable attorney's and auctioneer's fees; second, to the payment of the Debt hereby secured, whether due or not, with the unpaid interest thereon to the date of sale, and any amount that may be due Lender by virtue of any of the special liens or agreements herein contained; and, third, the balance, if any, to be paid over to Borrower, or as may otherwise be provided by law. 23. Right to Cure Defaults. Upon the occurrence of any Event of Default, if Borrower fails to make any payment or perform any act as herein provided Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder, make or do the same in such manner and to such extent as Lender may deem necessary to protect the security hereof. Lender is authorized to enter upon the Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Property or to foreclose this Security Instrument or collect the Debt, and the cost and expense thereof (including reasonable attorneys' fees to the extent permitted by law), with interest as provided in this paragraph 23, shall constitute a portion of the Debt and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender in remedying such Event of Default or in appearing in, defending, or bringing any such action or proceeding shall bear interest at the Default Rate, for the period after notice from Lender that such cost or expense was incurred to the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by this Security Instrument and the Other Security Documents and shall be immediately due and payable upon demand by Lender therefor. 24. Late Payment Charge. If any portion of the Debt is not received by Lender within five (5) days of the date on which it is due without taking into account any applicable notice or grace period, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid portion of the Debt or the maximum amount permitted by applicable law, to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment, and such amount shall be secured by this Security Instrument and the Other Security Documents. 25. Prepayment After Event of Default. If following the occurrence of any Event of Default, Borrower shall tender payment of an amount sufficient to satisfy the Debt in whole or in part at any time prior to a foreclosure sale of the Property, or a sale of the Property pursuant to the exercise of a power of sale, such tender shall be deemed to be a voluntary prepayment of the principal balance of the Note and Borrower shall, in addition to the entire Debt, also pay to Lender a sum equal to the interest which would have accrued on the principal balance of the Note at the Applicable Interest Rate as defined in the Note from the date of such tender to the earlier of (i) the Maturity Date as defined in the Note or to (ii) the first day of the period during which prepayment of the principal balance of the Note would have been permitted together with a prepayment consideration equal to the prepayment consideration which would have been payable as of the first day of the period during which prepayment would have been permitted. If at the time of such tender prepayment of the principal balance of the Note is permitted, such tender by Borrower shall be deemed to be a voluntary prepayment of the principal balance of the Note, and Borrower shall, in addition to the entire Debt, also pay to Lender the applicable prepayment consideration specified in the Note and this Security Instrument, if any. 26. Right of Entry. Lender and its agents shall have the right to enter and inspect the Property at all reasonable times. 27. Appointment of Receiver. The holder of this Security Instrument, upon the occurrence of an Event of Default or in any action to foreclose this Security Instrument or upon the actual or threatened waste to any part of the Property, shall be entitled to the appointment of a receiver without notice and without regard to the value of the Property as security for the Debt, or the solvency or insolvency of any person liable for the payment of the Debt. 28. Reasonable Use and Occupancy. In addition to the rights which Lender may have herein, upon the occurrence of any Event of Default, Lender, at its option, may require Borrower to pay monthly in advance to Lender, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupation of such part of the Property as may be occupied by Borrower or may require Borrower to vacate and surrender possession of the Property to Lender or to such receiver and, in default thereof, Borrower may be evicted by summary proceedings or otherwise. 29. Security Agreement. This Security Instrument is both a real property deed of trust and a "security agreement" within the meaning of the Uniform Commercial Code. The Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of Borrower in the Property. Borrower by executing and delivering this Security Instrument has granted and hereby grants to Lender, as security for the Debt, a security interest in the Property to the full extent that the Property may be subject to the Uniform Commercial Code (said portion of the Property so subject to the Uniform Commercial Code being called in this paragraph 29 the "Collateral"). If an Event of Default shall occur, Lender and Trustee, in addition to any other rights and remedies which they may have, shall have and may exercise immediately and without demand, any and all rights and remedies granted to a secured party upon default under the Uniform Commercial Code, including, without limiting the generality of the foregoing, the right to take possession of the Collateral or any part thereof, and to take such other measures as Lender may deem necessary for the care, protection and preservation of the Collateral. Upon request or demand of Lender or Trustee, Borrower shall at its expense assemble the Collateral and make it available to Lender and Trustee at a convenient place acceptable to Lender. Borrower shall pay to Lender and Trustee on demand any and all reasonable expenses, including legal expenses and attorneys' fees, incurred or paid by Lender and Trustee in protecting the interest in the Collateral and in enforcing the rights hereunder with respect to the Collateral. Any notice of sale, disposition or other intended action by Lender or Trustee with respect to the Collateral sent to Borrower in accordance with the provisions hereof at least five (5) days prior to such action, shall constitute commercially reasonable notice to Borrower unless otherwise required by law. The proceeds of any disposition of the Collateral, or any part thereof, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. 30. Actions and Proceedings. Lender or Trustee has the right to appear in and defend any action or proceeding brought with respect to the Property and to bring any action or proceeding, in the name and on behalf of Borrower, which Lender, in its discretion, decides should be brought to protect their interest in the Property. Lender shall, at its option, be subrogated to the lien of any deed of trust, mortgage or other security instrument discharged in whole or in part by the Debt, and any such subrogation rights shall constitute additional security for the payment of the Debt. 31. Waivers. Borrower hereby waives the right to assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Lender, and waives trial by jury in any action or proceeding brought by either party hereto against the other or in any coun- terclaim asserted by Lender against Borrower, or in any matters whatsoever arising out of or in any way connected with this Security Instrument, the Note, any of the Other Security Documents or the Debt. 32. Recovery of Sums Required To Be Paid. Lender shall have the right from time to time to take action to recover any sum or sums which constitute a part of the Debt as the same become due, without regard to whether or not the balance of the Debt shall be due, and without prejudice to the right of Lender or Trustee thereafter to bring an action of foreclosure, or to sell the Property pursuant to the exercise of a power of sale, or to bring any other action, for a default or defaults by Borrower existing at the time such earlier action was commenced. 33. Marshalling and Other Matters. Borrower hereby waives, to the extent permitted by law, the benefit of all appraisement, valuation, stay, extension, reinstatement and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale hereunder of the Property or any part thereof or any interest therein. Further, Borrower hereby expressly waives any and all rights of redemption from sale under any order or decree of foreclosure of this Security Instrument on behalf of Borrower, and on behalf of each and every person acquiring any interest in or title to the Property subsequent to the date of this Security Instrument and on behalf of all persons to the extent permitted by applicable law. 34. Hazardous Materials. Borrower represents and warrants that, except as otherwise disclosed in that certain environmental report delivered by Borrower to Lender in connection with the origination of this Security Instrument (the "Environmental Report"), to the best of Borrower's knowledge, after due inquiry and investigation, (a) there are no Hazardous Materials (hereinafter defined) on the Property, except those in compliance with all applicable federal, state and local laws, ordinances, rules and regulations, and (b) no owner or occupant nor, to the best of Borrower's knowledge, any prior owner or occupant of the Property has received any notice or advice from any governmental agency or any source whatsoever with respect to Hazardous Materials on, from or affecting the Property. Borrower covenants that the Property shall be kept free of Hazardous Materials, and neither Borrower nor any occupant of the Property shall use, transport, store, dispose of or in any manner deal with Hazardous Materials on the Property, except in compliance with all applicable federal, state and local laws, ordinances, rules and regulations. Borrower shall comply with, and ensure compliance by all occupants of the Property with, all applicable federal, state and local laws, ordinances, rules and regulations, and shall keep the Property free and clear of any liens imposed pursuant to such laws, ordinances, rules or regulations. At any time after the occurrence of an Event of Default and the continuance thereof, Lender may enter upon the Property and conduct such environmental tests and studies as Lender shall require. The cost and expense of such tests and studies shall be borne by Borrower and such amounts shall be secured by this Security Instrument. In the event that Borrower receives any notice or advice from any governmental agency or any source whatsoever with respect to Hazardous Materials on, from or affecting the Property, Borrower shall immediately notify Lender. Borrower shall conduct and complete all investigations, studies, sampling, and testing, and all remedial actions neces- sary to clean up and remove all Hazardous Materials from the Property in accor- dance with all applicable federal, state, and local laws, ordinances, rules and regulations. The term "Hazardous Materials" as used in this Security Instrument shall include, without limitation, gasoline, petroleum products, explosives, radioactive materials, polychlorinated biphenyls or related or similar materials, or any other substance or material defined as a hazardous or toxic substance or material by any federal, state or local law, ordinance, rule, or regulation, but excluding Asbestos, as defined in paragraph 35 hereof. The obligations and liabilities of Borrower under this paragraph 34 shall survive any entry of a judgment of foreclosure, the sale of the Property pursuant to the exercise of a power of sale, or the delivery of a deed in lieu of foreclosure of this Security Instrument. 35. Asbestos. Borrower represents and warrants that, except as otherwise disclosed in the Environmental Report, to the best of Borrower's knowledge, after due inquiry and investigation, there is no asbestos or material containing asbestos ("Asbestos") on the Property, and that no owner or occupant nor to the best of Borrower's knowledge, any prior owner or occupant of the Property has received any notice or advice from any governmental agency or any source whatsoever with respect to Asbestos on, affecting or installed on the Property. Borrower covenants that, except as otherwise disclosed in the Environmental Report, the Property shall be kept free of Asbestos, and neither Borrower nor any occupant of the Property shall install, or permit to be installed, Asbestos on the Property. Borrower shall comply with, and ensure compliance by all occupants of the Property with, all applicable federal, state and local laws, ordinances, rules and regulations with respect to Asbestos, and shall keep the Property free and clear of any liens imposed pursuant to such laws, ordinances, rules or regulations. In the event that Borrower receives any notice or advice from any governmental agency or any source whatsoever with respect to Asbestos on, affecting or installed on the Property, Borrower shall immediately notify Lender. Borrower shall conduct and complete all investigations, studies, sampling, and testing, and all remedial actions necessary to manage and remove all Asbestos from the Property in accordance with all applicable federal, state and local laws, ordinances, rules and regulations. The obligations and liabilities of Borrower under this paragraph 35 shall survive any entry of a judgment of foreclosure, the sale of the Property pursuant to the exercise of a power of sale, or delivery of a deed in lieu of foreclosure of this Security Instrument. 36. Indemnification. Borrower shall protect, defend, indemnify and save harmless Lender from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation reasonable attorneys' fees and expenses), imposed upon or incurred by or asserted against Lender (except any liability, obligation, claim, damage, penalty, cause of action, cost or expense imposed upon or incurred by Lender by reason of the gross negligence or willful misconduct of Lender) by reason of (a) ownership of this Security Instrument, the Property or any interest therein arising pursuant to the terms of this Security Instrument or receipt of any Rents; (b) any accident, injury to or death of persons or loss of or damage to property occurring in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (c) any use, nonuse or condition in, on or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent property or adjacent parking areas, streets or ways; (d) any failure on the part of Borrower to perform or comply with any of the terms of this Security Instrument; (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof; (f) the failure of any person to file timely with the Internal Revenue Service an accurate Form 1099-B, Statement for Recipients of Proceeds from Real Estate, Broker and Barter Exchange Transactions, which may be required in connection with this Security Instrument, or to supply a copy thereof in a timely fashion to the recipient of the proceeds of the transaction in connection with which this Security Instrument is made; (g) the presence, disposal, escape, seepage, leakage, spillage, discharge, emission, release, or threatened release of any Hazardous Materials on, from, or affecting the Property or any other property or the presence of Asbestos on the Property; (h) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials or Asbestos; (i) any lawsuit brought or threatened, settlement reached, or government order relating to such Hazardous Materials or Asbestos; (j) the failure of Borrower to comply with the terms of the O&M Plan (hereinafter defined); or (k) any violation of laws, orders, regulations, requirements, or demands of government authorities, which are based upon or in any way related to such Hazardous Materials or Asbestos including, without limitation, the costs and expenses of any remedial action required by such governmental authorities, attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses. Any amounts payable to Lender by reason of the application of this paragraph 36 shall be secured by this Security Instrument and shall become immediately due and payable upon demand and shall bear interest at the Default Rate commencing on the tenth (10th) day following such demand until paid. The obligations and liabilities of Borrower under this paragraph 36 shall survive any termination, satisfaction, assignment, entry of a judgment of foreclosure or delivery of a deed in lieu of foreclosure of this Security Instrument. 37. Notices. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged on a Business Day (or if not on a Business Day, such notice will be deemed given on the next Business Day) by the recipient thereof, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository, postage prepaid, return receipt requested, addressed as follows: If to Borrower: VMS Apartment Portfolio Associates, II c/o Insignia Financial Group, Inc. One Insignia Financial Plaza Greenville, South Carolina 29601 Facsimile: (864) 239-1096 With a copy to: Insignia Financial Group, Inc. One Insignia Financial Plaza Greenville, South Carolina 29601 Attention: John Lines Facsimile: (864) 239-1096 If to Lender: Lehman Brothers Holdings Inc. Three World Financial Center 200 Vesey Street New York, New York 10285 Attention: Manager, Commercial Contract Finance Facsimile: (212) 528-6014 With a copy to: Thacher Proffitt & Wood 2 World Trade Center/40th Floor New York, New York 10048 Attention: Mitchell G. Williams Facsimile: (212) 912-7751 If to Trustee: Commonwealth Land Title Insurance Company 877 Ygnacio Valley Road #100 Walnut Creek, California 94596 Attention: Jack Babcock Facsimile: 38. Authority. (a) Borrower (and the undersigned representative of Borrower, if any) has full power, authority and legal right to execute this Security Instrument, and to mortgage, give, grant, bargain, sell, alien, enfeoff, convey, confirm, pledge, hypothecate, assign and grant a security interest in the Property pursuant to the terms hereof and to keep and observe all of the terms of this Security Instrument on Borrower's part to be performed. (b) Borrower represents and warrants that Borrower is not a "foreign person" within the meaning of 1445(f)(3) of the Internal Revenue Code of 1986, as amended and the related Treasury Department regulations, including temporary regulations. 39. Waiver of Notice. Borrower shall not be entitled to any notices of any nature whatsoever from Lender and Trustee except with respect to matters for which this Security Instrument specifically and expressly provides for the giving of notice by Lender or Trustee to Borrower and except with respect to matters for which Lender or Trustee is required by applicable law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender or Trustee with respect to any matter for which this Security Instrument does not specifically and expressly provide for the giving of notice by Lender or Trustee to Borrower. 40. Remedies of Borrower. In the event that a claim or adjudication is made that Lender has acted unreasonably or unreasonably delayed acting in any case where by law or under the Note, this Security Instrument or the Other Security Documents, it has an obligation to act reasonably or promptly, Lender shall not be liable for any monetary damages, and Borrower's remedies shall be limited to injunctive relief or declaratory judgment. 41. Sole Discretion of Lender. Wherever pursuant to this Security Instrument, Lender exercises any right given to it to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to approve or disapprove or to decide that arrangements or terms are satis- factory or not satisfactory shall be in the sole discretion of Lender, except as may be otherwise expressly and specifically provided herein. 42. Non-Waiver. The failure of Lender or Trustee to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Security Instrument. Borrower shall not be relieved of Borrower's obligations hereunder by reason of (a) the failure of Lender or Trustee to comply with any request of Borrower or Guarantors to take any action to foreclose this Security Instrument or otherwise enforce any of the provisions hereof or of the Note or the Other Security Documents, (b) the release, regardless of consideration, of the whole or any part of the Property, or of any person liable for the Debt or any portion thereof, or (c) any agreement or stipulation by Lender extending the time of payment or otherwise modifying or supplementing the terms of the Note, this Security Instrument or the Other Security Documents. Lender may resort for the payment of the Debt to any other security held by Lender in such order and manner as Lender, in its discretion, may elect. Lender or Trustee may take action to recover the Debt, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Lender or Trustee thereafter to foreclose this Security Instrument. The rights and remedies of Lender and Trustee under this Security Instrument shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Lender or Trustee shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. Lender and Trustee shall not be limited exclusively to the rights and remedies herein stated but shall be entitled to every right and remedy now or hereafter afforded at law or in equity. 43. No Oral Change. This Security Instrument, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 44. Liability. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. The foregoing sentence, however, is not intended to affect the limited liability of any limited partner or stockholder or member of Borrower afforded by applicable partnership or corporate law. This Security Instrument shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. 45. Inapplicable Provisions. If any term, covenant or condition of the Note or this Security Instrument is held to be invalid, illegal or unenforceable in any respect, the Note and this Security Instrument shall be construed without such provision. 46. Headings, etc. The headings and captions of various paragraphs of this Security Instrument are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 47. Duplicate Originals. This Security Instrument may be executed in any number of duplicate originals and each such duplicate original shall be deemed to be an original. 48. Definitions. Unless the context clearly indicates a contrary intent or unless otherwise specifically provided herein, words used in this Security Instrument may be used interchangeably in singular or plural form and the word "Borrower" shall mean "each Borrower and any subsequent owner or owners of the Property or any part thereof or any interest therein," the word "Lender" shall mean "Lender and any subsequent holder of the Note," the word "Trustee" shall mean "Trustee and any subsequent holder of this Security Instrument," the word "Note" shall mean "the Note and any other evidence of indebtedness secured by this Security Instrument," the word "person" shall include an individual, corporation, partnership, trust, unincorporated association, government, governmental authority, and any other entity, and the words "Property" shall include any portion of the Property and any interest therein. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 49. CHOICE OF LAW. THIS SECURITY INSTRUMENT SHALL BE DEEMED TO BE A CONTRACT ENTERED INTO PURSUANT TO THE LAWS OF THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, PROVIDED HOWEVER, THAT WITH RESPECT TO THE ATTACHMENT, CREATION, PERFECTION, PRIORITY AND ENFORCEMENT OF THE LIEN OF THIS SECURITY INSTRUMENT, THE LAWS OF THE STATE WHERE THE PROPERTY IS LOCATED SHALL APPLY. 50. Exculpation. Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note or this Security Instrument by any action or proceeding wherein a money judgment shall be sought against Borrower or any general or limited partner or member of Borrower (hereafter collectively referred to as the "Exculpated Parties"), except that Lender may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Lender to enforce and realize upon this Security Instrument, the Other Security Documents, and the interest in the Property, the Rents and any other collateral given to Lender created by this Security Instrument and the Other Security Documents; provided, however, that any judgment in any such action or proceeding shall be enforceable against the Exculpated Parties only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender. Lender, by accepting the Note and this Security Instrument, agrees that it shall not sue for, seek or demand any deficiency judgment against the Exculpated Parties in any such action or proceeding, under or by reason of or in connection with the Note, the Other Security Documents or this Security Instrument. The provisions of this paragraph shall not, however, (i) constitute a waiver, release or impairment of any obligation evidenced or secured by the Note, the Other Security Documents or this Security Instrument; (ii) impair the right of Lender to name Borrower as a party defendant in any action or suit for judicial foreclosure and sale under this Security Instrument; (iii) affect the validity or enforceability of any guaranty made in connection with the Note, this Security Instrument, or the Other Security Documents; (iv) impair the right of Lender to obtain the appointment of a receiver; (v) impair the enforcement of the Assignment of Leases and Rents executed in connection herewith; (vi) impair the right of Lender to bring suit with respect to fraud or intentional misrepresentation by the Exculpated Parties or any other person or entity in connection with the Note, this Security Instrument or the Other Security Documents; (vii) impair the right of Lender to obtain the Rents received, and not applied to the operating expenses of the Property, by any of the Exculpated Parties after the occurrence of an Event of Default; (viii) impair the right of Lender to bring suit with respect to the Exculpated Parties' misappropriation of tenant security deposits or Rents collected in advance; (ix) impair the right of Lender to obtain insurance proceeds or condemnation awards due to Lender under this Security Instrument; (x) impair the right of Lender to enforce the provisions of sub-paragraphs 36(g) through 36 (k), inclusive and paragraphs 34 and 35 of this Security Instrument against the Borrower (excluding any general or limited partner or member thereof); or (xi) impair the right of Lender to recover any part of the Debt from the Borrower (excluding the general and limited partners and members of Borrower), following the breach of any covenant contained in paragraph 9 or 55 hereof. 51. Intentionally Deleted. 52. Operations and Maintenance Plan. If required by Lender, Borrower shall within thirty (30) days of the date hereof deliver to Lender an operation and maintenance plan (the "O&M Plan") with respect to the maintenance or removal of any asbestos, lead based paint, hazardous and toxic wastes and substances, PCB's and storage tanks on the Property, which O&M Plan shall appoint an "Program Manager" in charge of managing all asbestos-related activities on the Property. Borrower shall (i) diligently perform and observe all of the terms, covenants and conditions of the O&M Plan on the part of Borrower to be performed and observed to the end that all things shall be done which are necessary to keep unimpaired the rights of Borrower under the O&M Plan and (ii) promptly notify Lender of the giving of any notice to Borrower of any default by the Program Manager in the performance or observance of any of the terms, covenants or conditions of the O&M Plan on the part of the Program Manager to be performed and observed and deliver to Lender a true copy of each such notice. Lender shall have the right to approve any O&M Plan which may affect the Property. Lender's requirement that Borrower develop and comply with the O&M Plan shall not be deemed to constitute a waiver or a modification of any of Borrower's covenants and agreements with respect to paragraphs 34 or 35 hereof. 53. Management Agreements. The Improvements have been operated under the terms and conditions of that certain management agreement entered into between Borrower and the manager (the "Manager") set forth therein delivered to, and approved by, Lender (hereinafter, together with any renewals or replacements thereof, being referred to as the "Management Agreement"). Borrower acknowledges that Lender has examined and relied on the Manager's experience in operating properties such as the Property in agreeing to make the loan secured hereby, and that Lender will continue to rely on the Manager's management of the Property as a means of maintaining the value of the Property as security for repayment of the Debt. Borrower shall (i) diligently perform and observe all of the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed and observed to the end that all things shall be done which are necessary to keep unimpaired the rights of Borrower under the Management Agreement and (ii) promptly notify Lender of the giving of any notice to Borrower of any default by Borrower in the performance or observance of any of the terms, covenants or conditions of the Management Agreement on the part of Borrower to be performed and observed and deliver to Lender a true copy of each such notice. Borrower shall not surrender the Management Agreement, consent to the assignment by the Manager of its rights and obligations under the Management Agreement, or terminate or cancel the Management Agreement or modify, change, supplement, alter or amend the Management Agreement, in any respect, either orally or in writing, and Borrower hereby assigns to Lender as further security for the payment of the Debt and for the performance and observance of the terms, covenants and conditions of this Security Instrument, all the rights, privileges and prerogatives of Borrower to surrender the Management Agreement or to terminate, cancel, modify, change, supplement, alter or amend the Management Agreement in any respect, and any such surrender of the Management Agreement or termination, cancellation, modification, change, supplement, alteration or amendment of the Management Agreement without the prior consent of Lender shall be void and of no force and effect, provided, however, that this provision shall not limit the Manager's right to assign any or the Borrower's right to consent to any assignment by Manager of any revenues deriving from the Management Agreement. If Borrower shall default in the performance or observance of any material term, covenant or condition of the Management Agreement on the part of Borrower to be performed or observed, then, without limiting the generality of the other provisions of this Security Instrument, and without waiving or releasing Borrower from any of its obligations hereunder, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act or take any action as may be appropriate to cause all the terms, covenants and conditions of the Management Agreement on the part of Borrower to be performed or observed to be promptly performed or observed on behalf of Borrower, to the end that the rights of Borrower in, to and under the Management Agreement shall be kept unimpaired and free from default. Lender and any person designated by Lender shall have, and are hereby granted, the right to enter upon the Property at any time and from time to time for the purpose of taking any such action. If the Manager under the Management Agreement shall deliver to Lender a copy of any notice sent to Borrower of default under the Management Agreement, such notice shall constitute full protection to Lender for any action taken or omitted to be taken by Lender in good faith, in reliance thereon. Borrower shall, from time to time, use its best efforts to obtain from the Manager under the Management Agreement such certificates of estoppel with respect to compliance by Borrower with the terms of the Management Agreement as may be requested by Lender. Borrower shall exercise each individual option, if any, to extend or renew the term of the Management Agreement upon demand by Lender made at any time within one (1) year of the last day upon which any such option may be exercised, and Borrower hereby expressly authorizes and appoints Lender its attorney-in-fact to exercise any such option in the name of and upon behalf of Borrower, which power of attorney shall be irrevocable and shall be deemed to be coupled with an interest. Notwithstanding anything to the contrary contained herein, Borrower may replace the Manager or accept the resignation of the Manager or consent to a transfer by the Manager, provided: (1) No Event of Default shall have occurred and be continuing; (2) the new manager or holder of the stock or partnership interest shall be a person, firm or corporation whose character, financial strength, stability and experience shall be similar to the existing Manager and otherwise have Adequate Real Estate Experience; (3) the new manager shall deliver all organizational documentation and other materials evidencing its Adequate Real Estate Experience and otherwise be acceptable to Lender; (4) the Borrower shall pay the reasonable costs and expenses of Lender and Lender's counsel incurred in connection with the review and approval of such new manager; and (5) the terms of any new management agreement affecting the Property must be acceptable to Lender in all respects, provided, however, if the terms and conditions of the new management agreement shall be substantially similar to the Management Agreement and the management fee due thereunder is no greater than the fee provided in the Management Agreement, such new management agreement shall be deemed acceptable to Lender. 54. Rating Agencies. The term "Rating Agencies" shall mean any nationally recognized rating agency(s) sought by Lender to obtain ratings with respect to this Security Instrument or the Securitization (hereinafter defined). Lender intends to, but is not required to, either (i) deposit this Security Instrument, the Note and the Other Security Documents in a trust in exchange for the issuance, to or at the direction of the Lender, of multiple classes of mortgage pass-through certificates or other securities evidencing the entire beneficial ownership interest in such trust or (ii) issue multiple classes of bonds (also, "Securities") representing non-recourse obligations secured by this Security Instrument, the Note and the Other Security Documents (the "Securities"). An election will be made under the federal tax code to treat this Security Instrument, the Note and the Other Security Documents and the related assets as one or more real estate mortgage investment conduits. The Securities may be sold either in a public offering or a private placement. The foregoing events and all matters incidental thereto are herein referred to as the "Securitization". 55. Single Purpose Entity. Borrower covenants and agrees that it has not and shall not: (a) engage in any business or activity other than the ownership, operation and maintenance of the Property and activities incidental thereto; (b) acquire or own any material assets other than (i) the Property, and (ii) such incidental Personal Property as may be necessary for the operation of the Property; (c) merge into or consolidate with any person or entity or dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure, without in each case Lender's consent; (d) fail to preserve its existence as an entity duly organized, validly existing and in good standing (if applicable) under the laws of the jurisdiction of its organization or formation, or without the prior written consent of Lender, amend, modify, terminate or fail to comply with the provisions of Borrower's partnership agreement, articles or certificate of incorporation or similar organizational documents, as the case may be, as same may be further amended or supplemented, if such amendment, modification, termination or failure to comply would adversely affect the ability of Borrower to perform its obligations hereunder, under the Note or under the Other Security Documents; (e) own any subsidiary or make any investment in, any person or entity without the consent of Lender; (f) commingle its assets with the assets of any of its general partners, affiliates, members, principals or of any other person or entity; (g) incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation), other than the Debt, except with respect to trade payables in the ordinary course of its business of owning and operating the Property, provided that such debt is paid when due, and any Affiliate Advance or the Subordinate Debt; (h) fail to maintain its records, books of account and bank accounts separate and apart from those of the general partners, principals, members and affiliates of Borrower, the affiliates of a general partner or member of Borrower, and any other person or entity; (i) enter into any contract or agreement with any general partner, principal, member or affiliate of Borrower, Guarantor or Indemnitor, or any general partner, principal, member or affiliate thereof, except upon terms and conditions that are intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than any general partner, principal, member or affiliate of Borrower, Guarantor or Indemnitor, or any general partner, principal, member or affiliate thereof; (j) seek the dissolution or winding up in whole, or in part, of Borrower; (k) maintain its assets in such a manner that it will be costly or difficult to segregate, ascertain or identify its individual assets from those of any general partner, principal, member or affiliate of Borrower, or any general partner, principal, member or affiliate thereof or any other person; (l) hold itself out to be responsible for the debts of another person; (m) make any loans or advances to any third party, including any general partner, principal, member or affiliate of Borrower, or any general partner, principal, member or affiliate thereof; (n) fail either to hold itself out to the public as a legal entity separate and distinct from any other entity or person or to conduct its business solely in its own name in order not (i) to mislead others as to the identity with which such other party is transacting business, or (ii) to suggest that Borrower is responsible for the debts of any third party (including any general partner, principal, member or affiliate of Borrower, or any general partner, principal, member or affiliate thereof); (o) fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations; or (p) file or consent to the filing of any petition, either voluntary or involuntary, to take advantage of any applicable insolvency, bankruptcy, liquidation or reorganization statute, or make an assignment for the benefit of creditors. The covenants set forth in (a) through (p) above shall apply to the corporate general partner of Borrower (the "Controlling Party") provided that all references to "Property" set forth above shall, with respect to the Controlling Party, be deemed to refer to its general partnership interest in Borrower. 56. Concerning the Trustee. Trustee shall be under no duty to take any action hereunder except as expressly required hereunder or by law, or to perform any act which would involve Trustee in any expense or liability or to institute or defend any suit in respect hereof, unless properly indemnified to Trustee's reasonable satisfaction. Trustee, by acceptance of this Security Instrument, covenants to perform and fulfill the trusts herein created, being liable, however, only for willful negligence or misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by Trustee in accordance with the terms hereof. Trustee may resign at any time upon giving thirty (30) days' notice to Borrower and to Lender. Lender may remove Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, or inability to act of Trustee, or in its sole discretion for any reason whatsoever Lender may, without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee, by an instrument recorded wherever this Security Instrument is recorded and all powers, rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall not be required to give bond for the faithful performance of the duties of Trustee hereunder unless required by Lender. The procedure provided for in this paragraph for substitution of Trustee shall be in addition to and not in exclusion of any other provisions for substitution, by law or otherwise. 57. Trustee's Fees. Borrower shall pay all costs, fees and expenses incurred by Trustee and Trustee's agents and counsel in connection with the performance by Trustee of Trustee's duties hereunder and all such costs, fees and expenses shall be secured by this Security Instrument. 58. Certain Rights. With the approval of Lender, Trustee shall have the right to take any and all of the following actions: (i) to select, employ, and advise with counsel (who may be, but need not be, counsel for Lender) upon any matters arising hereunder, including the preparation, execution, and interpretation of the Note, this Security Instrument or the Other Security Documents, and shall be fully protected in relying as to legal matters on the advice of counsel, (ii) to execute any of the trusts and powers hereof and to perform any duty hereunder either directly or through his/her agents or attorneys, (iii) to select and employ, in and about the execution of his/her duties hereunder, suitable accountants, engineers and other experts, agents and attorneys-in-fact, either corporate or individual, not regularly in the employ of Trustee, and Trustee shall not be answerable for any act, default, negligence, or misconduct of any such accountant, engineer or other expert, agent or attorney-in-fact, if selected with reasonable area, or for any error of judgment or act done by Trustee in good faith, or be otherwise responsible or accountable under any circumstances whatsoever, except for Trustee's gross negligence or bad faith, and (iv) any and all other lawful action as Lender may instruct Trustee to take to protect or enforce Lender's rights hereunder. Trustee shall not be personally liable in case of entry by Trustee, or anyone entering by virtue of the powers herein granted to Trustee, upon the Property for debts contracted for or liability or damages incurred in the management or operation of the Property. Trustee shall have the right to rely on any instrument, document, or signature authorizing or supporting an action taken or proposed to be taken by Trustee hereunder, believed by Trustee in good faith to be genuine. Trustee shall be entitled to reimbursement for actual expenses incurred by Trustee in the performance of Trustee's duties hereunder and to reasonable compensation for such of Trustee's services hereunder as shall be rendered. 59. Retention of Money. All moneys received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by applicable law) and Trustee shall be under no liability for interest on any moneys received by Trustee hereunder. 60. Perfection of Appointment. Should any deed, conveyance, or instrument of any nature be required from Borrower by any Trustee or substitute trustee to more fully and certainly vest in and confirm to the Trustee or substitute trustee such estates rights, powers, and duties, then, upon request by the Trustee or substitute trustee, any and all such deeds, conveyances and instruments shall be made, executed, acknowledged, and delivered and shall be caused to be recorded and/or filed by Borrower. 61. Succession Instruments. Any substitute trustee appointed pursuant to any of the provisions hereof shall, without any further act, deed, or conveyance, become vested with all the estates, properties, rights, powers, and trusts of its or his/her predecessor in the rights hereunder with like effect as if originally named as Trustee herein; but nevertheless, upon the written request of Lender or of the substitute trustee, the Trustee ceasing to act shall execute and deliver any instrument transferring to such substitute trustee, upon the trusts herein expressed, all the estates, properties, rights, powers, and trusts of the Trustee so ceasing to act, and shall duly assign, transfer and deliver any of the property and moneys held by such Trustee to the substitute trustee so appointed in the Trustee's place. 62. California Provisions. (a) In the event of any inconsistencies between the terms and conditions of this Section 62 of this Security Instrument and any other terms of this Security Instrument, the terms and conditions of this Section 62 shall control and be binding. (b) The word "grantor" is hereby deleted wherever it appears in this Security Instrument and the word "Trustor" is substituted therefor. (c) The paragraphs beginning "PROVIDED, HOWEVER" appearing at the end of the Section of this Security Agreement entitled "Creation of Lien and Grant of Security" is hereby deleted in its entirety and the following paragraph is substituted therefor: PROVIDED, HOWEVER, upon written request of Lender stating that all sums secured hereby have been paid, that Borrower has well and truly abided by and complied with each and every covenant and condition set forth herein and in the Note, and upon the surrendering of this Security Instrument and the Note to Trustee for cancellation and retention and upon payment by Borrower of Trustee's fees, Trustee shall reconvey to Borrower, or to the person or persons legally entitled thereto, without warranty, any portion of the estate hereby granted and then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee in any reconveyance may be described as "the person or persons legally entitled thereto. (d) The first sentence of Section 29 is hereby deleted and the following is substituted therefor: This Security Instrument is both a real property deed of trust and a "security agreement" within the meaning of the Uniform Commercial Code and is being recorded as a fixture filing. With respect to said fixture filing, (i) the debtor is Borrower, and Borrower's name and address appear in the first paragraph of this Security Instrument, and (ii) the secured party is Lender, and Lender's name and address appear in the first paragraph of the Security Instrument. The Mortgaged Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of Borrower in the Mortgaged Property, including, but not limited to, the Leases and Rents and all proceeds thereof and all fixtures. (e) Borrower expressly agrees that upon a violation of Section 9 of this Security Agreement by Borrower and acceleration of the principal balance of the Note because of such violation, Borrower will pay all sums required to be paid in connection with a prepayment, if any, as described in the Note, herein imposed on prepayment after an Event of Default and acceleration of the principal balance. Borrower expressly acknowledges that Borrower has received adequate consideration for the foregoing agreement. (f) POWER OF SALE. After an Event of Default, the Lender, its successors and assigns, may elect to cause the Mortgaged Property or any part thereof to be sold as follows: (1) Lender may proceed as if all of the Mortgaged Property were real property, in accordance with subparagraph (d) below, or Lender may elect to treat any of the Mortgaged Property which consists of a right in action or which is property that can be severed from the Land without causing structural damage thereto as if the same were personal property, and dispose of the same in accordance with subparagraph (3) below, separate and apart from the sale of real property, the remainder of the Mortgaged Property being treated as real property. (2) Lender may cause any such sale or other disposition to be conducted immediately following the expiration of any grace period, if any, herein provided (or immediately upon the expiration of any redemption period required by law) or Lender may delay any such sale or other disposition for such period of time as Lender deems to be in its best interest. Should Lender desire that more than one such sale or other disposition be conducted, Lender may at its option, cause the same to be conducted simultaneously, or successively on the same day, or at such different days or times and in such order as Lender may deem to be in its best interest. (3) Should Lender elect to cause any of the Mortgaged Property to be disposed of as personal property as permitted by subparagraph (1) above, it may dispose of any part hereof in any manner now or hereafter permitted by Article 9 of the Uniform Commercial Code or in accordance with any other remedy provided by law. Both Borrower and Lender shall be eligible to purchase any part or all of such property at any such disposition. Any such disposition may be either public or private as Lender may so elect, subject to the provisions of the Uniform Commercial Code. Lender shall give Borrower at least five (5) days' prior written notice of the time and place of any public sale or other disposition of such property or of the time at or after which any private sale or any other intended disposition is to be made, and if such notice is sent to Borrower as provided in subparagraph (11) hereof, it shall constitute reasonable notice to Borrower. (4) Should Lender elect to sell the Mortgaged Property which is real property or which Lender has elected to treat as real property, upon such election Lender or Trustee shall give such Notice of Default and Election to Sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such Notice of Sale as may then be required by law, Trustee, at the time and place specified in the Notice of Sale, shall sell such Mortgaged Property, or any portion thereof specified by Lender, at public auction to the highest bidder for cash in lawful money of the United States, subject, however, to the provisions of subparagraph (9) hereof. Trustee for good cause may, and upon request of Lender shall, from time to time, postpone the sale by public announcement thereof at the time and place noticed therefor. If the Mortgaged Property consists of several lots or parcels, Lender may designate the order in which such lots or parcels shall be offered for sale or sold. Any person, including Borrower, Trustee or Lender, may purchase at the sale. Upon any sale Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied, whereupon such purchaser or purchasers shall be let into immediate possession. (5) In the event of a sale or other disposition of any such property, or any part thereof, and the execution of a deed or other conveyance, pursuant thereto, the recitals therein of facts, such as a default, the giving of notice of default and notice of sale, demand that such sale should be made, postponement of sale, terms of sale, sale, purchaser, payment of purchase money, and any other fact affecting the regularity or validity of such sale or disposition, shall be conclusive proof of the truth of such facts; and any such deed of conveyance shall be conclusive against all persons as to such facts recited therein. (6) Lender and/or Trustee shall apply the proceeds of any sale or disposition hereunder to payment of the following: (A) the expenses of such sale or disposition together with Trustee's fees and reasonable attorneys' fees, and the actual cost of publishing, recording, mailing and posting notice; (B) the cost of any search and/or other evidence of title procured in connection therewith and transfer tax on any deed or conveyance; (C) all sums expended under the terms hereof, not then repaid, with accrued interest in the amount provided herein; (D) all other sums secured hereby; and (E) the remainder if any to the person or persons legally entitled thereto. (7) The acknowledgment of the receipt of the purchase money, contained in any deed or conveyance executed as aforesaid, shall be sufficient discharge from all obligations to see to the proper application of the consideration therefor. (8) Borrower hereby expressly waives any right which it may have to direct the order in which any of the Mortgaged Property shall be sold in the event of any sale or sales pursuant hereto. (9) Upon any sale of the Mortgaged Property, whether made under a power of sale herein granted or pursuant to judicial proceedings, if the holder of the Note is a purchaser at such sale, it shall be entitled to use and apply all or any portion of the indebtedness then secured hereby for or in settlement or payment of all or any portion of the purchase price of the property purchased, and, in such case, this Security Instrument, the Note and documents evidencing expenditures secured hereby shall be presented to the person conducting the sale in order that the amount of said indebtedness so used or applied may be credited thereon as having been paid. (10) No remedy herein conferred upon or reserved to Trustee or Lender is intended to be exclusive of any other remedy herein or by law provided, but each shall be cumula- tive and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by this instrument to Trustee or Lender, or to which either of them may be otherwise entitled, may be exercised from time to time and as often as may be deemed expedient by Trustee or Lender, and either of them may pursue inconsistent remedies. If there exists additional security for the performance of the obligations secured hereby, the holder of the Note, at its sole option and without limiting or affecting any rights or remedies hereunder, may exercise any of the rights and remedies to which it may be entitled hereunder either concurrently with whatever other rights it may have in connection with such other security or in such order as it may determine. (11) Borrower hereby requests that every notice of default and every notice of sale be given in accordance with the provisions of Section 37 hereof except as otherwise required by statute. Borrower may, from time to time, change the address to which notice of default and sale hereunder shall be sent by both filing a request therefor, in the manner provided by the California Civil Code, Section 2924b, and sending a copy of such request to Lender, its successors or assigns in accordance with the provisions of Section 37 hereof. (g) Trustee accepts the trust created by this Security Instrument when this Security Instrument, duly executed and acknowledged, is made a public record as provided by law. (h) Trustee is not obligated to notify any party hereto of pending sale under any other deed of trust or of any action or proceeding in which Borrower, Lender or Trustee shall be a party, unless brought by Trustee. (i) Trustee shall be under no duty to take any action hereunder except as expressly required hereunder or by law, or to perform any act which would involve Trustee in any expense or liability or to institute or defend any suit in respect hereof, unless properly indemnified to Trustee's reasonable satisfaction. Trustee, by acceptance of this Security Instrument, covenants to perform and fulfill the trusts herein created, being liable, however, only for gross negligence or willful misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by Trustee in accordance with the terms hereof. Trustee may resign at any time upon giving thirty (30) days' notice to Borrower and to Lender. Lender may remove Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, or inability to act of Trustee, or in its sole discretion for any reason whatsoever Lender may, without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee, by an instrument recorded wherever this Security Instrument is recorded and all powers, rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall not be required to give bond for the faithful performance of the duties of Trustee hereunder unless required by Lender. The procedure provided for in this paragraph for substitution of Trustee shall be in addition to and not in exclusion of any other provisions for substitution, by law or otherwise. (j) Trustee shall be entitled to reasonable compensation for all servicesrendered or expenses incurred in the administration or execution of the trusts hereby created and Borrower hereby agrees to pay same. Trustee and Lender shall be indemnified, held harmless and reimbursed by Borrower for any liability, damage or expense, including attorneys' fees and amounts paid in settlement, which they or either of them may incur or sustain in the execution of this trust or in the doing of any act which they, or either of them, are required or permitted to do by the terms hereof or by law. (k) Lender may substitute the Trustee hereunder in any manner now or hereafter provided by law, or in lieu thereof Lender may from time to time, by an instrument in writing, substitute a successor or successors to any Trustee named herein or acting hereunder, which instrument, executed and acknowledged by Lender and recorded in the Office of the Recorder of Los Angeles County, shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall thereupon and without conveyance from the predecessor Trustee, succeed to all its title, estate, rights, powers and duties. Such instrument must contain the name of the original Borrower, Trustee and Lender hereunder, the book and page where this Security Instrument is recorded, and the name and address of the new Trustee. (l) Section 49 entitled "CHOICE OF LAW" is hereby deleted in its entirety and, subject to the exculpations contained in this Security Instrument, the following is substituted therefor: THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS SECURITY INSTRUMENT SHALL BE GOVERNED BY, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS-OF-LAW RULES AND PRINCIPALS OF SUCH STATE (EXCEPT FOR SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW OF NEW YORK). BORROWER AND LENDER FURTHER ACKNOWLEDGE, AGREE AND STIPULATE THAT THE STATE OF NEW YORK HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES INVOLVED IN THIS SECURITY INSTRUMENT. NOTWITHSTANDING THE FOREGOING, THE PARTIES FURTHER AGREE THAT: (1) THE PROCEDURES GOVERNING THE ENFORCEMENT BY LENDER AND TRUSTEE OF PROVISIONAL REMEDIES AGAINST BORROWER DIRECTLY RELATING TO THE MORTGAGED PROPERTY ENCUMBERED HEREBY, INCLUDING, BY WAY OF ILLUSTRATION BUT NOT LIMITATION, ANY SUCH ACTIONS FOR REPLEVIN, FOR CLAIM AND DELIVERY OF Mortgaged Property, OR FOR THE APPOINTMENT OF A RECEIVER, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA; AND (2) CALIFORNIA LAW SHALL APPLY TO THE EXTENT, BUT ONLY TO THE EXTENT, NECESSARY IN ORDER TO CREATE, PERFECT AND FORECLOSE THE SECURITY INTERESTS, LIENS AND ASSIGNMENTS OF RENTS AND LEASES ARISING UNDER THIS SECURITY INSTRUMENT; PROVIDED, HOWEVER, THAT NOTHING IN THIS SECTION SHALL IN ANY EVENT BE CONSTRUED TO PROVIDE THAT THE SUBSTANTIVE LAW OF THE STATE OF CALIFORNIA SHALL APPLY TO THE OBLIGATIONS AND INDEBTEDNESS SECURED BY THIS SECURITY INSTRUMENT, WHICH ARE AND SHALL CONTINUE TO BE GOVERNED BY THE SUBSTANTIVE LAW OF THE STATE OF NEW YORK, IN SUCH CONNECTION, THE PARTIES FURTHER AGREE THAT: (A) LENDER MAY ENFORCE ITS RIGHTS UNDER THE LOAN DOCUMENTS (INCLUDING WITHOUT LIMITATION ITS RIGHT TO SUE BORROWER TO COLLECT ANY OUTSTANDING INDEBTEDNESS OR TO OBTAIN A JUDGMENT AGAINST BORROWER IN CALIFORNIA, NEW YORK OR OTHER STATES FOR ANY DEFICIENCY PRIOR TO OR FOLLOWING FORECLOSURE) IN ACCORDANCE WITH NEW YORK LAW, AND IF LENDER OBTAINS A DEFICIENCY JUDGMENT IN A STATE OTHER THAN IN CALIFORNIA, THEN LENDER SHALL HAVE THE RIGHT TO ENFORCE SUCH JUDGMENT IN CALIFORNIA, AS WELL AS IN OTHER STATES; (B) CALIFORNIA'S USURY LAWS AND ANTIDEFICIENCY, ONE-ACTION AND SECURITY-FIRST RULES (INCLUDING WITHOUT LIMITATION CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580A, 580b, 580c, 580d, AND 726) ARE INAPPLICABLE TO THE OBLIGATIONS AND INDEBTEDNESS SECURED BY THIS SECURITY INSTRUMENT AND TO THE ENFORCEMENT OR REALIZATION BY LENDER OF ITS RIGHTS AND REMEDIES RELATING THERETO; AND (C) SECTION 726 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE SHALL NOT APPLY (A) TO PREVENT OR LIMIT EXERCISE OR ENFORCEMENT OF ANY OTHER RIGHTS OR REMEDIES OF LENDER (INCLUDING WITHOUT LIMITATION LENDER'S RIGHT TO OBTAIN A DEFICIENCY JUDGMENT) EITHER PRIOR TO OR FOLLOWING FORECLOSURE OR (B) TO PREVENT OR LIMIT LENDER'S RIGHT TO FORECLOSE JUDICIALLY OR NONJUDICIALLY FOLLOWING ANY EXERCISE OR ENFORCEMENT OF ANY OTHER RIGHTS OR REMEDIES OF LENDER. (m) The term "Controlling Party" as used in section 55 shall mean GP Services XIX, Inc. IN WITNESS WHEREOF, this Security Instrument has been executed by Borrower the day and year first above written. VMS APARTMENT PORTFOLIO ASSOCIATES II, a California general partnership By: GP SERVICES XIX, INC., a South Carolina corporation, its general partner By: /s/ Leigh A. Watters Name: Leigh A. Watters Title: Vice President This instrument prepared by: Mitchell G. Williams, Esq. Thacher Proffitt & Wood Two World Trade Center New York, New York 10048 ACKNOWLEDGEMENT STATE OF New York ) ) COUNTY OF New York ) I, the undersigned, a Notary Public of the County and State aforesaid, certify that Leigh A. Watters, who is known to me, acknowledged before me that he is Vice President, of GP Services XIX, Inc., a South Carolina corporation, that by authority duly given and as the act of the corporation in its capacity as a general partner in and on behalf of VMS Apartment Portfolio Associates II, a California general partnership, signed the foregoing conveyance, and that being informed of the contents of the conveyance he in his capacity as such officer of the Corporation, executed the same voluntarily on behalf of the Partnership on the day the same bears date. Given under my hand this the 31st day of December, 1997. /s/ Lucesita A. Lombillo Notary Public Name:Lucesita A. Lombillo Notary Public, State of New York No. 31-5066748 Qualified in Queens County Commission Expires September 30, 1998 EXHIBIT A Legal Description EX-10.FC 8 RECORD AND RETURN TO: Thacher Proffitt & Wood 2 World Trade Center New York, New York 10048 Attention: Carson M. Leonard Counsel File No. 16248-328 ABSOLUTE ASSIGNMENT OF LEASES AND RENTS VMS APARTMENT PORTFOLIO ASSOCIATES II, a California general partnership (Assignor) to LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., as assignee (Assignee) Dated: As of December 31, 1997 Location: Richardson Highlands Apartments Marin City, California Marin County THIS ABSOLUTE ASSIGNMENT OF LEASES AND RENTS ("Assignment") made as of the 31st day of December, 1997, by VMS APARTMENT PORTFOLIO ASSOCIATES II, a California partnership, as assignor, having an address at c/o Insignia Financial Group, Inc., One Insignia Financial Plaza, Greenville, South Carolina 29601 ("Borrower") to LEHMAN BROTHERS HOLDINGS INC. D/B/A LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, as assignee, having an address at Three World Financial Center, 200 Vesey Street, New York, New York 10285 ("Lender"). RECITALS: Borrower by its promissory note of even date herewith given to Lender is indebted to Lender in the principal sum of $16,900,000 in lawful money of the United States of America (together with all extensions, renewals, modifications, substitutions and amendments thereof, the "Note"), with interest from the date thereof at the rates set forth in the Note, principal and interest to be payable in accordance with the terms and conditions provided in the Note. Borrower desires to secure the payment of the Debt (defined below) and the performance of all of its obligations under the Note and the Other Obligations as defined in Article 2 of the Security Instrument (defined below). 1. ASSIGNMENT 1.1 PROPERTY ASSIGNED. Borrower hereby absolutely and unconditionally assigns and grants to Lender the following property, rights, interests and estates, now owned, or hereafter acquired by Borrower: (a) Leases. All existing and future leases affecting the use, enjoyment, or occupancy of all or any part of that certain lot or piece of land, more particularly described in Exhibit A annexed hereto and made a part hereof, together with the buildings, structures, fixtures, additions, enlargements, extensions, modifications, repairs, replacements and improvements now or hereafter located thereon (collectively, the "Property") and the right, title and interest of Borrower, its successors and assigns, therein and thereunder. (b) Other Leases and Agreements. All other leases and other agreements, whether or not in writing, affecting the use, enjoyment or occupancy of the Property or any portion thereof now or hereafter made, whether made before or after the filing by or against Borrower of any petition for relief under 11 U.S.C. Section101 et seq., as the same may be amended from time to time (the "Bankruptcy Code") together with any extension, renewal or replacement of the same, this Assignment of other present and future leases and present and future agreements being effective without further or supplemental assignment. The leases described in Subsection 1.1(a) and the leases and other agreements described in this Subsection 1.1(b), together with all other present and future leases and present and future agreements and any extension or renewal of the same are collectively referred to as the "Leases". (c) Rents. All rents, additional rents, revenues, income, issues and profits arising from the Leases and renewals and replacements thereof and any cash or security deposited in connection therewith and together with all rents, revenues, income, issues and profits (including all oil and gas or other mineral royalties and bonuses) from the use, enjoyment and occupancy of the Property whether paid or accruing before or after the filing by or against Borrower of any petition for relief under the Bankruptcy Code (collectively, the "Rents"). (d) Bankruptcy Claims. All of Borrower's claims and rights (the "Bankruptcy Claims") to the payment of damages arising from any rejection by a lessee of any Lease under the Bankruptcy Code, 11 U.S.C. Section101 et seq., as the same may be amended (the "Bankruptcy Code"). (e) Lease Guaranties. All of Borrower's right, title and interest in and claims under any and all lease guaranties, letters of credit and any other credit support given by any guarantor in connection with any of the Leases (individually, a "Lease Guarantor", collectively, the "Lease Guarantors") to Borrower (individually, a "Lease Guaranty", collectively, the "Lease Guaranties"). (f) Proceeds. All proceeds from the sale or other disposition of the Leases, the Rents, the Lease Guaranties and the Bankruptcy Claims. (g) Other. All rights, powers, privileges, options and other benefits of Borrower as lessor under the Leases and beneficiary under the Lease Guaranties, including without limitation the immediate and continuing right to make claim for, receive, collect and receipt for all Rents payable or receivable under the Leases and all sums payable under the Lease Guaranties or pursuant thereto (and to apply the same to the payment of the Debt or the Other Obligations), and to do all other things which Borrower or any lessor is or may become entitled to do under the Leases or the Lease Guaranties. (h) Entry. The right, at Lender's option, upon revocation of the license granted herein, to enter upon the Property in person, by agent or by court-appointed receiver, to collect the Rents. (i) Power of Attorney. Borrower's irrevocable power of attorney, coupled with an interest, to take any and all of the actions set forth in Section 3.1 of this Assignment and any or all other actions designated by Lender for the proper management and preservation of the Property. (j) Other Rights and Agreements. Any and all other rights of Borrower in and to the items set forth in subsections (a) through (i) above, and all amendments, modifications, replacements, renewals and substitutions thereof. 1.2 CONSIDERATION. This Assignment is made in consideration of that certain loan made by Lender to Borrower evidenced by the Note and secured by that certain mortgage and security agreement, deed of trust and security agreement, deed to secure debt and security agreement or similar real estate security instrument given by Borrower to or for the benefit of Lender, dated the date hereof covering the Property and intended to be duly recorded (the "Security Instrument"). The principal sum, interest and all other sums due and payable under the Note, the Security Instrument, this Assignment and the Other Security Documents (defined below) are collectively referred to as the "Debt". The documents other than this Assignment, the Note or the Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender which wholly or partially secure or guarantee payment of the Debt are referred to herein as the "Other Security Documents". 2. TERMS OF ASSIGNMENT 2.1 PRESENT ASSIGNMENT AND LICENSE BACK. It is intended by Borrower that this Assignment constitute a present, absolute assignment of the Leases, Rents, Lease Guaranties and Bankruptcy Claims, and not an assignment for additional security only. Nevertheless, subject to the terms of this Section 2.1, Lender grants to Borrower a revocable license to collect and receive the Rents and other sums due under the Lease Guaranties. Borrower shall hold the Rents and all sums received pursuant to any Lease Guaranty, or a portion thereof sufficient to discharge all current sums due on the Debt, in trust for the benefit of Lender for use in the payment of such sums. 2.2 NOTICE TO LESSEES. Borrower hereby agrees to authorize and direct the lessees named in the Leases or any other or future lessees or occupants of the Property and all Lease Guarantors to pay over to Lender or to such other party as Lender directs all Rents and all sums due under any Lease Guaranties upon receipt from Lender of written notice to the effect that Lender is then the holder of the Security Instrument and that a Default (defined below) exists, and to continue so to do until otherwise notified by Lender. 2.3 INCORPORATION BY REFERENCE. All representations, warranties, covenants, conditions and agreements contained in the Security Instrument as same may be modified, renewed, substituted or extended are hereby made a part of this Assignment to the same extent and with the same force as if fully set forth herein. 3. REMEDIES 3.1 REMEDIES OF LENDER. Upon or at any time after the occurrence of a default under this Assignment or an Event of Default (as defined in the Security Instrument) (a "Default"), the license granted to Borrower in Section 2.1 of this Assignment shall automatically be revoked, and Lender shall immediately be entitled to possession of all Rents and sums due under any Lease Guaranties, whether or not Lender enters upon or takes control of the Property. In addition, Lender may, at its option, without waiving such Default, without notice and without regard to the adequacy of the security for the Debt, either in person or by agent, nominee or attorney, with or without bringing any action or proceeding, or by a receiver appointed by a court, dispossess Borrower and its agents and servants from the Property, without liability for trespass, damages or otherwise and exclude Borrower and its agents or servants wholly therefrom, and take possession of the Property and all books, records and accounts relating thereto and have, hold, manage, lease and operate the Property on such terms and for such period of time as Lender may deem proper and either with or without taking possession of the Property in its own name, demand, sue for or otherwise collect and receive all Rents and sums due under all Lease Guaranties, including those past due and unpaid with full power to make from time to time all alterations, renovations, repairs or replacements thereto or thereof as may seem proper to Lender and may apply the Rents and sums received pursuant to any Lease Guaranties to the payment of the following in such order and proportion as Lender in its sole discretion may determine, any law, custom or use to the contrary notwithstanding: (a) all expenses of managing and securing the Property, including, without being limited thereto, the salaries, fees and wages of a managing agent and such other employees or agents as Lender may deem necessary or desirable and all expenses of operating and maintaining the Property, including, without being limited thereto, all taxes, charges, claims, assessments, water charges, sewer rents and any other liens, and premiums for all insurance which Lender may deem necessary or desirable, and the cost of all alterations, renovations, repairs or replacements, and all expenses incident to taking and retaining possession of the Property; and (b) the Debt, together with all costs and reasonable attorneys' fees. In addition, upon the occurrence of a Default, Lender, at its option, may (1) complete any construction on the Property in such manner and form as Lender deems advisable, (2) exercise all rights and powers of Borrower, including, without limitation, the right to negotiate, execute, cancel, enforce or modify Leases, obtain and evict tenants, and demand, sue for, collect and receive all Rents from the Property and all sums due under any Lease Guaranties, (3) either require Borrower to pay monthly in advance to Lender, or any receiver appointed to collect the Rents, the fair and reasonable rental value for the use and occupancy of such part of the Property as may be in possession of Borrower or (4) require Borrower to vacate and surrender possession of the Property to Lender or to such receiver and, in default thereof, Borrower may be evicted by summary proceedings or otherwise. 3.2 OTHER REMEDIES. Nothing contained in this Assignment and no act done or omitted by Lender pursuant to the power and rights granted to Lender hereunder shall be deemed to be a waiver by Lender of its rights and remedies under the Note, the Security Instrument, or the Other Security Documents and this Assignment is made and accepted without prejudice to any of the rights and remedies possessed by Lender under the terms thereof. The right of Lender to collect the Debt and to enforce any other security therefor held by it may be exercised by Lender either prior to, simultaneously with, or subsequent to any action taken by it hereunder. Borrower hereby absolutely, unconditionally and irrevocably waives any and all rights to assert any setoff, counterclaim or crossclaim of any nature whatsoever with respect to the obligations of Borrower under this Assignment, the Note, the Security Instrument, the Other Security Documents or otherwise with respect to the loan secured hereby in any action or proceeding brought by Lender to collect same, or any portion thereof, or to enforce and realize upon the lien and security interest created by this Assignment, the Note, the Security Instrument, or any of the Other Security Documents (provided, however, that the foregoing shall not be deemed a waiver of Borrower's right to assert any compulsory counterclaim if such counterclaim is compelled under local law or rule of procedure, nor shall the foregoing be deemed a waiver of Borrower's right to assert any claim which would constitute a defense, setoff, counterclaim or crossclaim of any nature whatsoever against Lender in any separate action or proceeding). 3.3 OTHER SECURITY. Lender may take or release other security for the payment of the Debt, may release any party primarily or secondarily liable therefor and may apply any other security held by it to the reduction or satisfaction of the Debt without prejudice to any of its rights under this Assignment. 3.4 NON-WAIVER. The exercise by Lender of the option granted it in Section 3.1 of this Assignment and the collection of the Rents and sums due under the Lease Guaranties and the application thereof as herein provided shall not be considered a waiver of any default by Borrower under the Note, the Security Instrument, the Leases, this Assignment or the Other Security Documents. The failure of Lender to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Assignment. Borrower shall not be relieved of Borrower's obligations hereunder by reason of (a) the failure of Lender to comply with any request of Borrower or any other party to take any action to enforce any of the provisions hereof or of the Security Instrument, the Note or the Other Security Documents, (b) the release regardless of consideration, of the whole or any part of the Property, or (c) any agreement or stipulation by Lender extending the time of payment or otherwise modifying or supplementing the terms of this Assignment, the Note, the Security Instrument or the Other Security Documents. Lender may resort for the payment of the Debt to any other security held by Lender in such order and manner as Lender, in its discretion, may elect. Lender may take any action to recover the Debt, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Lender thereafter to enforce its rights under this Assignment. The rights of Lender under this Assignment shall be separate, distinct, nonexclusive and cumulative, shall be in addition to any other remedies to which Lender is entitled under the law, and none shall be given effect to the exclusion of the others. No act of Lender shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. 3.5 BANKRUPTCY. (a) Upon or at any time after the occurrence of a Default, Lender shall have the right to proceed in its own name or in the name of Borrower in respect of any claim, suit, action or proceeding relating to the rejection of any Lease, including, without limitation, the right to file and prosecute, to the exclusion of Borrower, any proofs of claim, complaints, motions, applications, notices and other documents, in any case in respect of the lessee under such Lease under the Bankruptcy Code. (b) If there shall be filed by or against Borrower a petition under the Bankruptcy Code, and Borrower, as lessor under any Lease, shall determine to reject such Lease pursuant to Section 365(a) of the Bankruptcy Code, then Borrower shall give Lender not less than ten (10) days' prior notice of the date on which Borrower shall apply to the bankruptcy court for authority to reject the Lease. Lender shall have the right, but not the obligation, to serve upon Borrower within such ten-day period a notice stating that (i) Lender demands that Borrower assume and assign the Lease to Lender pursuant to Section 365 of the Bankruptcy Code and (ii) Lender covenants to cure or provide adequate assurance of future performance under the Lease. If Lender serves upon Borrower the notice described in the preceding sentence, Borrower shall not seek to reject the Lease and shall comply with the demand provided for in clause (i) of the preceding sentence within thirty (30) days after the notice shall have been given, subject to the performance by Lender of the covenant provided for in clause (ii) of the preceding sentence. 4. NO LIABILITY, FURTHER ASSURANCES 4.1 NO LIABILITY OF LENDER. This Assignment shall not be construed to bind Lender to the performance of any of the covenants, conditions or provisions contained in any Lease or Lease Guaranty or otherwise impose any obligation upon Lender. Lender shall not be liable for any loss sustained by Borrower resulting from Lender's failure to let the Property after a Default or from any other act or omission of Lender in managing the Property after a Default unless such loss is caused by the willful misconduct and bad faith of Lender. Lender shall not be obligated to perform or discharge any obligation, duty or liability under the Leases or any Lease Guaranties or under or by reason of this Assignment and Borrower shall, and hereby agrees, to indemnify Lender for, and to hold Lender harmless from, any and all liability, loss or damage which may or might be incurred under the Leases, any Lease Guaranties or under or by reason of this Assignment and from any and all claims and demands whatsoever, including the defense of any such claims or demands which may be asserted against Lender by reason of any alleged obligations and undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in the Leases or any Lease Guaranties. Should Lender incur any such liability, the amount thereof, including costs, expenses and reasonable attorneys' fees, shall be secured by this Assignment and by the Security Instrument and the Other Security Documents and Borrower shall reimburse Lender therefor immediately upon demand and upon the failure of Borrower so to do Lender may, at its option, declare all sums secured by this Assignment and by the Security Instrument and the Other Security Documents immediately due and payable. This Assignment shall not operate to place any obligation or liability for the control, care, management or repair of the Property upon Lender, nor for the carrying out of any of the terms and conditions of the Leases or any Lease Guaranties; nor shall it operate to make Lender responsible or liable for any waste committed on the Property by the tenants or any other parties, or for any dangerous or defective condition of the Property, including without limitation the presence of any Hazardous Substances (as defined in the Security Instrument), or for any negligence in the management, upkeep, repair or control of the Property resulting in loss or injury or death to any tenant, licensee, employee or stranger. 4.2 NO MORTGAGEE IN POSSESSION. Nothing herein contained shall be construed as constituting Lender a "mortgagee in possession" in the absence of the taking of actual possession of the Property by Lender. In the exercise of the powers herein granted Lender, no liability shall be asserted or enforced against Lender, all such liability being expressly waived and released by Borrower. 4.3 FURTHER ASSURANCES. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, conveyances, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, require for the better assuring, conveying, assigning, transferring and confirming unto Lender the property and rights hereby assigned or intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out the intention or facilitating the performance of the terms of this Assignment or for filing, registering or recording this Assignment and, on demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments, to evidence more effectively the lien and security interest hereof in and upon the Leases. 5. MISCELLANEOUS PROVISIONS 5.1 CONFLICT OF TERMS. In case of any conflict between the terms of this Assignment and the terms of the Security Instrument, the terms of the Security Instrument shall prevail. 5.2 NO ORAL CHANGE. This Assignment and any provisions hereof may not be modified, amended, waived, extended, changed, discharged or terminated orally, or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom the enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 5.3 CERTAIN DEFINITIONS. Unless the context clearly indicates a contrary intent or unless otherwise specifically provided herein, words used in this Assignment may be used interchangeably in singular or plural form and the word "Borrower " shall mean "each Borrower and any subsequent owner or owners of the Property or any part thereof or interest therein," the word "Lender" shall mean "Lender and any subsequent holder of the Note," the word "Note" shall mean "the Note and any other evidence of indebtedness secured by the Security Instrument," the word "person" shall include an individual, corporation, partnership, trust, unincorporated association, government, governmental authority, and any other entity, the word "Property" shall include any portion of the Property and any interest therein, the phrases "attorneys' fees", "legal fees" and "counsel fees" shall include any and all attorneys', paralegal and law clerk fees and disbursements, including, but not limited to, fees and disbursements at the pre-trial, trial and appellate levels incurred or paid by Lender in protecting its interest in the Property, the Leases and the Rents and enforcing its rights hereunder, and the word "Debt" shall mean the principal balance of the Note with interest thereon as provided in the Note and the Security Instrument and all other sums due pursuant to the Note, the Security Instrument, this Assignment and the Other Security Documents; whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 5.4 AUTHORITY. Borrower represents and warrants that it has full power and authority to execute and deliver this Assignment and the execution and delivery of this Assignment has been duly authorized and does not conflict with or constitute a default under any law, judicial order or other agreement affecting Borrower or the Property. 5.5 INAPPLICABLE PROVISIONS. If any term, covenant or condition of this Assignment is held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 5.6 DUPLICATE ORIGINALS; COUNTERPARTS. This Assignment may be executed in any number of duplicate originals and each such duplicate original shall be deemed to be an original. This Assignment may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Assignment. The failure of any party hereto to execute this Assignment, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 5.7 CHOICE OF LAW. This Assignment shall be governed, construed, applied and enforced in accordance with the laws of the state in which the Property is located and the applicable laws of the United States of America. 5.8 TERMINATION OF ASSIGNMENT. Upon payment in full of the Debt and the delivery and recording of a satisfaction or discharge of Security Instrument duly executed by Lender, this Assignment shall become and be void and of no effect. 5.9 NOTICES. All notices or other written communications hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed to Borrower or Lender at their addresses set forth in the Security Instrument or addressed as such party may from time to time designate by written notice to the other parties. For purposes of this Section 5.9, the term "Business Day" shall mean a day on which commercial banks are not authorized or required by law to close in New York, New York. Either party by notice to the other may designate additional or different addresses for subsequent notices or communications. 5.10 WAIVER OF TRIAL BY JURY. BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO THE LOAN EVIDENCED BY THE NOTE, THE APPLICATION FOR THE LOAN EVIDENCED BY THE NOTE, THIS ASSIGNMENT, THE NOTE, THE SECURITY INSTRUMENT OR THE OTHER SECURITY DOCUMENTS OR ANY ACTS OR OMISSIONS OF LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN CONNECTION THEREWITH. 5.11 SUBMISSION TO JURISDICTION. With respect to any claim or action arising hereunder, Borrower (a) irrevocably submits to the nonexclusive jurisdiction of the courts of the State in which the Property is located, the State of New York and the United States District Court located in the Borough of Manhattan in New York, New York and the county in which the Property is located, and appellate courts from any thereof, and (b) irrevocably waives any objection which it may have at any time to the laying on venue of any suit, action or proceeding arising out of or relating to this Assignment brought in any such court, irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 5.12 LIABILITY. If Borrower consists of more than one person, the obligations and liabilities of each such person hereunder shall be joint and several. This Assignment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. 5.13 HEADINGS, ETC. The headings and captions of various paragraphs of this Assignment are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 5.14 NUMBER AND GENDER. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 5.15 SOLE DISCRETION OF LENDER. Wherever pursuant to this Assignment (a) Lender exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Lender, or (c) any other decision or determination is to be made by Lender, the decision of Lender to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by Lender, shall be in the sole and absolute discretion of Lender and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. 5.16 COSTS AND EXPENSES OF BORROWER. Wherever pursuant to this Assignment it is provided that Borrower pay any costs and expenses, such costs and expenses shall include, but not be limited to, legal fees and disbursements of Lender, whether of retained firms, the reimbursement of the expenses for in-house staff or otherwise. 5.17 EXCULPATION. Borrower's obligations under this Assignment are subject to the provisions of paragraph 55 of the Security Instrument, and such provisions are incorporated herein by reference. 6. SPECIAL CALIFORNIA PROVISIONS 6.1 INCONSISTENCIES. In the event of any inconsistencies between the terms and conditions of this Article 6 and any other terms of this Assignment, the terms and conditions of this Article 6 shall control and be binding. 6.2 Section 1.2 is renamed "THE LOAN". The words "This Assignment is made in consideration of that certain loan made by Lender to Borrower evidenced by the Note and" are deleted from the first sentence of Section 1.2 and replaced with the words "The Note is". 6.3 The word "other" is hereby deleted from Section 3.2 entitled "OTHER REMEDIES" and Section 3.3 entitled "OTHER SECURITY" wherever it shall appear in the body of such paragraphs, except where it is capitalized and used in a defined term. 6.4 Section 5.7 Entitled "CHOICE OF LAW" is hereby deleted in its entirety and the following is substituted therefor: THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS ASSIGNMENT SHALL BE GOVERNED BY, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICTS-OF-LAW RULES AND PRINCIPALS OF SUCH STATE (EXCEPT SECTION 5- 1401 OF THE GENERAL OBLIGATIONS LAW). ASSIGNOR AND ASSIGNEE FURTHER ACKNOWLEDGE, AGREE AND STIPULATE THAT THE STATE OF NEW YORK HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES INVOLVED IN THIS TRANSACTION AND TO THE UNDERLYING TRANSACTIONS SECURED BY THIS ASSIGNMENT. NOTWITHSTANDING THE FOREGOING, THE PARTIES FURTHER AGREE THAT: (a) THE PROCEDURES GOVERNING THE ENFORCEMENT BY BENEFICIARY AND TRUSTEE OF PROVISIONAL REMEDIES AGAINST ASSIGNOR DIRECTLY RELATING TO THE PROPERTY ENCUMBERED HEREBY, INCLUDING, BY WAY OF ILLUSTRATION BUT NOT LIMITATION, ANY SUCH ACTIONS FOR REPLEVIN, FOR CLAIM AND DELIVERY OF PROPERTY, OR FOR THE APPOINTMENT OF A RECEIVER, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA; AND (b) CALIFORNIA LAW SHALL APPLY TO THE EXTENT, BUT ONLY TO THE EXTENT, NECESSARY IN ORDER TO CREATE, PERFECT AND FORECLOSE THE SECURITY INTERESTS AND ASSIGNMENT OF RENTS AND LEASES ARISING UNDER THIS ASSIGNMENT; PROVIDED, HOWEVER, THAT NOTHING IN THIS SECTION SHALL IN ANY EVENT BE CONSTRUED TO PROVIDE THAT THE SUBSTANTIVE LAW OF THE STATE OF CALIFORNIA SHALL APPLY TO THE OBLIGATIONS AND INDEBTEDNESS SECURED BY THIS ASSIGNMENT, WHICH ARE AND SHALL CONTINUE TO BE GOVERNED BY THE SUBSTANTIVE LAW OF THE STATE OF NEW YORK. 6.5 The words "additional security" are hereby deleted whenever they shall appear in this Assignment. THIS ASSIGNMENT, together with the covenants and warranties therein contained, shall inure to the benefit of Lender and any subsequent holder of the Security Instrument and shall be binding upon Borrower, its heirs, executors, administrators, successors and assigns and any subsequent owner of the Property. IN WITNESS WHEREOF, Borrower has executed this instrument as of the day and year first above written. VMS APARTMENT PORTFOLIO ASSOCIATES II, a California general partnership By: G P SERVICES XIX, INC., a South Carolina corporation, its general partner By: /s/ Leigh Watters Name: Leigh Watters Title: Vice President ACKNOWLEDGEMENT STATE OF New York ) ) COUNTY OF New York I, the undersigned, a Notary Public of the County and State aforesaid, certify that Leigh A. Watters, who is known to me, acknowledged before me that he is Vice President, of GP Services XIX, Inc., a South Carolina corporation, that by authority duly given and as the act of the corporation in its capacity as a general partner in and on behalf of VMS Apartment Portfolio Associates II, a California general partnership, signed the foregoing conveyance, and that being informed of the contents of the conveyance he in his capacity as such officer of the Corporation, executed the same voluntarily on behalf of the Partnership on the day the same bears date. Given under my hand this the 31st day of December, 1997. /s/ Lucesita A. Lombillo Notary Public Name: Lucesita A. Lombillo Notary Public, State of New York No. 31-5066748 Qualified in Queens County Commission Expires September 30, 1998 EXHIBIT A Legal Description of Property -----END PRIVACY-ENHANCED MESSAGE-----